The UK is taking steps to extend the recognition of securitisations designated as simple, transparent and standardised in the EU for two more years as it works on an equivalence regime for deals from around the world.
The proposed extension was included in a draft law that was published on July 5 and recently picked up by lawyers at Morgan Lewis, who wrote in an update on August 9 that it would be welcomed by market participants.
Securitisations that qualify as STS benefit from favourable capital treatment on bank and insurance company balance sheets, boosting demand for the bonds. The rules were finalised by the EU in 2019, after years of debate.
The framework was copied into UK law when the nation left the EU and has gone through several amendments since the end of the Brexit transition period, including one to allow transactions designated as STS in Europe to qualify automatically as STS in the UK for the entire lifespan of the deal.
Originally, this treatment would apply only to transactions that were designated as STS by the end of this year, but the draft law would extend the cut-off by two years, to the end of 2024.
“It is expected that this will help bridge the gap until an STS equivalence regime can be put in place under the UK Securitisation Regulation,” wrote the Morgan Lewis lawyers.
Equivalence
The EU does not recognise UK STS securitisations under its regime and UK deals lost their STS status in the EU at the end of the Brexit transition period on December 31 2020.
But the UK is embracing a more outward-looking approach, having stated its intention to develop an equivalence regime for overseas securitisations in a Treasury report in December of last year, after finding strong support for the idea among market participants.
The Treasury noted that an equivalence regime could provide UK investors with more choice and that it might lead to reciprocal agreements, which could bolster demand and liquidity for UK issuers. However, it would require equivalent frameworks to be put in place in other countries.