Term and Fundamentals of Securitisation
Securitisation is a complex, legally regulated financing instrument in which illiquid assets (for example, loan receivables or other claims) are converted into tradable securities. This process allows companies, banks, and other institutions to liquidate previously non-tradable claims and make them accessible to the capital market. The legal requirements and frameworks are shaped in particular by European and national regulations.
Legal Foundations of Securitisation
General legal framework
The legal requirements for securitisation are essentially determined by European regulations such as the Securitisation Regulation (Regulation (EU) 2017/2402), as well as supplementary legislation at the national level. The core objective is to ensure transparency, investor protection, and the stability of the financial system. Securitisation is also influenced by banking supervisory law, accounting requirements, and civil law principles in the law of obligations.
European Securitisation Regulation
The Securitisation Regulation, which came into force in January 2019, creates a uniform, harmonized legal framework for securitisation transactions within the European Union. The regulation governs, among other things, requirements for transparency, disclosure obligations, risk management, and specific requirements for so-called STS securitisations (simple, transparent and standardised).
National Law
In Germany and other Member States, there are additional regulations for implementing European requirements, for example in the Securities Trading Act (WpHG), the German Banking Act (KWG), and the Civil Code (BGB). In addition, tax regulations play an important role.
Structure and Process of a Securitisation
Involved Parties
Typically, the following parties are involved in a securitisation:
- Originator: The institution providing the claims (e.g., bank).
- Special Purpose Vehicle (SPV): A legally independent entity that acquires the claims and issues securities based on those assets.
- Investors: Acquire the securities backed by the claims.
- Servicer: Manages the claims on behalf of the special purpose vehicle.
Contractual Foundations
The legal structure regularly includes several contracts:
- Receivables sale agreement (true sale or synthetic sale)
- Trust and collateral agreements
- Terms and conditions for the securities
- Service agreements
- if applicable, payment arrangements and collateral agreements
Particular attention is paid to the legal separation (segregation principle) between the originator and the special purpose vehicle to ensure so-called insolvency remoteness of the transferred claims.
Legal Particularities and Risks in Securitisation
Transfer of Claims
The transfer of claims to the special purpose vehicle usually takes place by way of assignment (cession). Legally, it must be ensured that the assignment is effective, especially taking into account prohibitions on assignment (§ 399 BGB) and any necessary approvals.
Treatment under Insolvency Law
The aim of securitisation is to release the transferred assets from the insolvency estate of the originator. For this, the transfer must be structured to be insolvency-proof (“true sale”). Synthetic securitisations, however, only cover credit risk and not ownership of the assets.
Investor and Creditor Protection
Comprehensive disclosure, risk, and transparency obligations serve to protect the interests of investors. These minimum requirements are stipulated in the Securitisation Regulation and include, in particular, regularly updated information on the structured products and the underlying claims.
Supervisory Requirements
Securitisation is subject to extensive supervisory requirements, particularly by the Federal Financial Supervisory Authority (BaFin) and the European Banking Authority (EBA). Banks, among other things, must allocate capital for securitisation exposures held (Basel III / Basel IV).
Tax Aspects
The treatment under tax law concerns the valuation of the transfer of claims, the taxation of the special purpose vehicle, and potential VAT obligations. Here, the respective national tax laws and jurisprudence are decisive.
Types of Securitisation
True Sale Securitisation
In a true sale securitisation, claims are actually and legally permanently transferred to the SPV, resulting in a complete separation from the originator.
Synthetic Securitisation
In the context of synthetic securitisation, the originator remains the owner of the claims; only the credit risk is transferred to the SPV via credit derivatives.
STS Securitisation
Particular requirements apply to so-called STS securitisations which benefit from regulatory relief due to increased transparency and standardisation. Requirements for this include, among others, standardised structures and clear rules for due diligence.
Requirements for Due Diligence, Transparency, and Disclosure
All parties involved in a securitisation are subject to enhanced due diligence, transparency, and disclosure obligations. The originator and special purpose vehicle must inform investors and supervisory authorities comprehensively about:
- Structure and parties to the securitisation
- Valuation bases of the claims
- Risks and payment flows
- Ongoing performance reports
Compliance with these obligations is a prerequisite for the admissibility and classification of the securitisation as well as for legal investor protection.
Conclusion and Importance of Securitisation in Law
Securitisation represents a centrally regulated instrument for refinancing various claims and financing structures in the European and international capital markets. The comprehensive legal framework creates clear requirements with respect to transparency, risk allocation, and the protection of the parties involved. Besides economic advantages, securitisation also brings legal challenges, especially in the areas of insolvency protection, investor protection, and regulatory compliance.
Frequently Asked Questions
What legal framework applies to securitisation transactions in Germany?
Securitisation transactions in Germany are subject to a complex interplay of national and European regulations. Central legal sources are in particular the EU Securitisation Regulation (Regulation (EU) 2017/2402 – “Securitisation Regulation”), the German Banking Act (KWG), the German Investment Code (KAGB), as well as various regulatory circulars and announcements of the Federal Financial Supervisory Authority (BaFin). The Securitisation Regulation establishes Europe-wide minimum requirements for transparency, risk retention, due diligence, and structural features of securitisations. Under German law, it must also be examined which property law and law of obligations provisions apply to the true sale transfer of the underlying claims, such as §§ 398 ff. BGB (assignment) and possible insolvency law risks under the Insolvency Code (InsO). Diverse tax aspects must also be considered, such as with respect to VAT, trade tax, real estate transfer tax, and withholding tax.
How is a legal distinction made between “true sale” and “synthetic” securitisations?
Legally, the key distinction is whether the credit risk is transferred through the actual transfer of the economic ownership of the underlying assets to a special purpose vehicle (true sale), or through the conclusion of credit derivatives or guarantees (synthetic). In a true sale, the transfer of property and contractual rights under §§ 398 BGB is key, including review of the validity of the assignment, any prohibitions on assignment (§ 399 BGB), and insolvency law aspects (segregation rights, “bankruptcy remoteness”). Synthetic securitisations, however, are based on derivative instruments (usually credit default swaps) or guarantees, whereby the original claims remain in the originator’s ownership. Legally relevant in this case are, in particular, the structure and effectiveness of the credit derivative agreements, their accounting treatment, and regulatory allocation under KWG and CRR.
What requirements exist regarding disclosure and transparency under the Securitisation Regulation?
The Securitisation Regulation requires comprehensive disclosure obligations towards investors, supervisory authorities, and possibly also the public (transparency register). According to Art. 7 Securitisation Regulation, information on structure, risks, cash flows, and the underlying assets must be provided. Special standardised reporting templates must be used, the content and deadlines of which are specified in delegated regulations. In addition, there are reporting obligations regarding significant events, loan data, and regular investor reports. Non-compliance may result in severe sanctions, invalidity of acquisition, and regulatory consequences, such as for the calculation of regulatory own funds by investors.
How is the risk retention requirement legally structured?
According to Art. 6 of the Securitisation Regulation, originators, sponsors, or original lenders must retain a material net economic interest (“skin in the game”) of at least 5% in the securitised risks on a lasting basis. Legally, it must be examined precisely how the “retention requirement” can be fulfilled (vertical/horizontal tranche, first-loss piece, etc.) and who is required to what extent. Breaching this obligation results in regulatory sanctions and can exclude the eligibility/privileging of the securitisation for banks and insurers. Documentation of the type and scope of risk retention is therefore a central part of the agreement and must be demonstrated in due diligence and reporting.
What legal particularities apply in the event of insolvency of the originator or the special purpose vehicle?
Insolvency remoteness is a central structural objective of every securitisation. Legally, it must be ensured that the transferred assets do not form part of the insolvency estate of the originator in case of insolvency (“segregation principle”, “bankruptcy remoteness”). In Germany, this requires an effective, complete assignment in accordance with § 398 BGB, if necessary supplemented by “true sale” legal opinions. For the special purpose vehicle (SPV), insolvency law provisions regarding segregation (§§ 47, 48 InsO), as well as insolvency filing obligations and creditor protection, must be observed. Furthermore, “claw back” risks under §§ 130-146 InsO (grounds for contestation) must be adequately reviewed and minimised.
What impact do existing contractual restrictions, in particular prohibitions on assignment, have on the transferability of assets?
Prohibitions on assignment pursuant to § 399 BGB can be a legal obstacle in the context of the assignment (cession) of claims. Their effectiveness must be reviewed in light of the relevant contractual clause and § 354a HGB (facilitation for monetary claims in commercial transactions). Breach of an effective prohibition on assignment generally means that the claim cannot be effectively transferred to the SPV – with far-reaching consequences for the structure and value of the securitisation transaction. Legal due diligence and adjustment of contractual agreements (e.g., obtaining debtor consent) are therefore regularly required.
How are securities prospectus and investment product regulations applied to securitisations?
For securitisations, the provisions of the EU Prospectus Regulation (Regulation (EU) 2017/1129) and, where applicable, the German Investment Products Act (VermAnlG), apply when the issued securities are offered to the public. In the case of public placements, a prospectus approved by the authority is usually required, which must contain detailed information about the structure and risks of the securitisation. Here, there are also close links to the disclosure requirements of the Securitisation Regulation. In the case of purely private placements, or where investors qualify as “Qualified Investors” within the meaning of European law, there are certain exemptions from these obligations.
What regulatory requirements and approvals must be observed when conducting a securitisation?
Conducting a securitisation by regulated institutions (banks, insurers) triggers review and notification obligations under the KWG and CRR. In particular, originators must submit all necessary documentation and reports to BaFin and, if applicable, the European Central Bank. Special requirements apply to the transfer of loan receivables in the context of MaRisk, large exposure regulations, and minimum risk management requirements. In individual cases, the structure or business activities of the SPV may trigger a BaFin licensing requirement, for example if the SPV qualifies as a financial services institution. A thorough legal review is therefore indispensable in advance of every securitisation.
