EC Rule on OTC Derivative Treatment in Relation to STS Securitizations
EC published the Delegated Regulation 2020/448 on the specification of the treatment of over-the-counter (OTC) derivatives in connection with certain simple, transparent, and standardized securitizations for hedging purposes. Regulation 2020/448 amends Regulation 2016/2251 and shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
Article 42(3) of Regulation 2017/2402 amended Article 11(15) of the European Market Infrastructure Regulation or EMIR (648/2012). This amendment was to ensure that, with regard to the margin requirements for non-centrally cleared OTC derivatives, derivatives associated with covered bonds and derivatives associated with securitizations are treated in the same manner. Since Regulation 2016/2251 is based on Article 11(15) of EMIR, this regulation (2016/2251) is also being amended to reflect the amendment made to Article 11(15) of EMIR. Regulation 2016/2251 has been amended to include rules on the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty concluded by a securitization special purpose entity in connection with a securitization. This Regulation is based on the draft regulatory technical standards submitted to EC by EBA, EIOPA, and ESMA.
In Regulation 2016/2251, Article 30a on the treatment of derivatives in connection with securitizations for hedging purposes has been inserted. By way of derogation from Article 2(2) and where the conditions set out in paragraph 2 of Article 30a of Regulation (EU) 2016/2251 are met, counterparties may provide, in their risk management procedures, the following in connection with OTC derivatives contracts that are concluded by a securitization special purpose entity in connection with a securitization as defined in point (1) of Article 2 of Regulation (EU) 2017/2402 and meeting the conditions of Article 4(5) of EMIR:
- That variation margin is not posted by the securitization special purpose entity but is collected from its counterparty in cash and returned to its counterparty when due
- That initial margin is not posted or collected
Paragraph 1 of Article 30a of Regulation (EU) 2016/2251 shall apply where all of the following conditions are met:
- The counterparty to the OTC derivative concluded with the securitization special purpose entity in connection with the securitization ranks at least pari passu with the holders of the most senior securitization note, provided that counterparty is neither the defaulting nor the affected party
- The securitization special purpose entity for the securitization to which the OTC derivatives contract is associated is subject to a level of credit enhancement of the most senior securitization note of at least 2% of the outstanding notes on an ongoing basis
- The netting set does not include OTC derivative contracts unrelated to the securitization
Related Links
Effective Date: April 16, 2020
Keywords: Europe, EU, Banking, Securities, Securitization, STS Securitization, OTC Derivatives, Hedging, EMIR, Initial Margin, Regulation 220/448, EC
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
OSFI Announces Regulatory Adjustments to Support COVID-19 EffortsRelated Articles
FED Revises Capital Planning and Stress Testing Requirements for Banks
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB Releases Results of Bank Lending Survey for Fourth Quarter of 2020
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
MAS Revises Guidelines on Technology Risk Management
MAS revised the guidelines that address technology and cyber risks of financial institutions, in an environment of growing use of cloud technologies, application programming interfaces, and rapid software development.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.