Securitisation Alert - September 2012

1. INTRODUCTION

   On 19 July 2012, the Commission de Surveillance du Secteur Financier ("CSSF") published questions and answers on securitisation matters ("Q&A") on its website1. In these Q&A, which replace the previously used 2007 annual report, the CSSF sets out its prudential supervision practice relating to securitisation vehicles.

   We have attempted to highlight some of the more salient points in the Q&A here-below.

   Please note that the Q&A only apply to authorised securitisation vehicles (see sections 2.3 and 2.4 below for further explanations on authorised securitisation vehicles) under article 19 of the Law of 22 March 2004 on securitisation (as amended) (the "Securitisation Law").

2. QUESTIONS AND ANSWERS OVERVIEW

   2.1. Definition of securitisation

   Securitisation is defined in article 1 (1)2 of the Securitisation Law.

   The Securitisation Law allows the securitisation of any kind of risks inherent to receivables or any other assets, liabilities or activities. Also, any technique for transferring risks is permitted by the Securitisation Law, ranging from a traditional transfer of assets to complex forms of assumption of risks (such as credit derivatives). Owing to this broad definition of securitisation, a wide range of possibilities is open to securitisation vehicles. Based on the legislative history of the Securitisation Law, it is however clear that the main purpose of a securitisation transaction under the Securitisation Law should in principle always be the economic "transformation" of certain risks in securities through the acquisition or assumption of the risks and the issuance of securities.

   The CSSF emphasises that the securitisation vehicles and the transactions contemplated by them have to comply not only with the legal definition of "securitisation", but also with the spirit and purpose of the Securitisation Law. They cannot be used as a means of circumventing the law. In particular, the purpose of creating a Luxembourg securitisation vehicle must not be to avoid the application of stricter prudential rules or to bypass restrictions that may exist for investment in the underlying risks or their distribution.

   2.2. Definition of securitisation vehicle

   Securitisation vehicle (also called "securitisation undertaking") is defined in article 1 (2)3 of the Securitisation Law.

   A securitisation is carried out in two steps: (i) the securitisation vehicle assumes the risks by acquiring the assets from the originator and (ii) the securitisation vehicle issues the securities. In a securitisation transaction, a set of risks is isolated in an ad hoc structure to allow the issuance of securities whose value or yield is linked to these risks. In case of a conventional transaction of one or more claims, this means that the rights of investors depend at any time directly on the value and characteristics of the receivables. However, the Securitisation Law does not require that a securitisation is carried out through one single securitisation vehicle. It may be that the risks are transferred to a vehicle different from the one which is issuing securities, provided that there is an economic interconnection between the securities issued by one vehicle and the risks located in the other vehicle (so called two-tier structure).

   2.3. Regulation of securitisation vehicles

   The Securitisation Law provides that securitisation vehicles that issue securities to the public on a continuous basis ("ASV") must be authorised by the CSSF to be able to operate. If a securitisation vehicle intends to carry out securitisation transactions that are likely to meet cumulatively both criteria, "on a continuous basis" and "to the public", it must first require (meaning before it starts any activity meeting these two criteria) the authorisation of the CSSF (article 19 of the Securitisation Law). The securitisation vehicle has to make this assessment on its own and then contact the CSSF. The CSSF recommends that securitisation vehicles that do not intend to issue securities to the public on a continuous basis specify this in their articles of association.

   2.4. Interpretation of the criteria of "on a continuous basis" and "to the public"

   The issue of securities is deemed to be on a continuous basis if the ASV carries out more than three issues of securities to the public per year. The CSSF clarifies that in case of a multiple compartment securitisation vehicle, the number of issues has to be...