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    EC Rule on OTC Derivative Treatment in Relation to STS Securitizations

    March 27, 2020

    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


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    Effective Date: April 16, 2020

    Keywords: Europe, EU, Banking, Securities, Securitization, STS Securitization, OTC Derivatives, Hedging, EMIR, Initial Margin, Regulation 220/448, EC 

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