UK Law and Practice Contributed by: Guy O’Keefe, Richard Jones, Oliver Wicker and Kate Patane, Slaughter and May
4.7 Use of Derivatives Derivatives used in securitisations are regu - lated under the European Market Infrastructure Regulation (EMIR), which is EU law onshored post-Brexit (UK EMIR). These regulations man - date risk mitigation techniques for non-centrally cleared derivatives and reporting of all derivative contracts to trade repositories. The FCA is the primary enforcer of these rules, with the Bank of England also playing a role. In practice, securiti - sation SPEs are treated as non-financial coun - terparties; this means that derivatives regula - tion applicable to securitisations is much lighter than, for example, that applicable in transactions between banks or other financial counterparties. 4.8 Investor Protection The UK Securitisation Regulations Framework and FSMA 2000 protect investors, along with UK MAR, the CRR and Solvency II. The regulations aim to encourage due diligence and monitor - ing, whilst also avoiding insider trading, market manipulation and instability. The FCA and PRA enforce these rules, focusing on transparency, risk retention and due diligence. Breaches can result in sanctions, fines and restrictions on the relevant entities. 4.9 Banks Securitising Financial Assets Please see 4.8 Investor Protection . 4.10 SPEs or Other Entities SPEs established in the UK are registered as companies under the Companies Act 2006, with limited liability. Where it is proposed that securities are issued to the public, the SPE is registered as a public company. Limited liabil - ity companies are often preferred as the form of entity used as SPEs in UK securitisations for several reasons, as follows.
• Limited liability – shareholders of a limited company have limited liability, which means that they are only responsible for the debts of the company up to the amount of unpaid share capital (if any). • Separate legal personality – a limited com - pany is a separate legal entity from its owners and from any other person/entity, and can enter into binding contractual arrangements in its own name. This allows for the assets and liabilities associated with the securitisa - tion to be segregated from the originator, enhancing bankruptcy remoteness. • Ring-fencing of assets – as a separate entity, a limited company’s assets are inherently ring-fenced from the assets/broader business of the originator and servicer. This assists in the structure being bankruptcy-remote. To enhance the above, it is usual for an SPE’s shares to be held on trust, with the trust being in favour of a purpose rather than any individual beneficiaries. The lack of any individuals/entities that can be said to beneficially own or control the SPE enhances its bankruptcy remoteness and separation from the originator’s group. 4.11 Activities Avoided by SPEs or Other Securitisation Entities It is important that an SPE avoids engaging in activities that would classify it as conduct - ing a “regulated activity” under FSMA, such as deposit-taking or providing investment advice or insurance business. This is to maintain its status as a bankruptcy-remote entity and to circum - vent the need for authorisation by the FCA or the PRA. The activities performed by the SPE are determined by its directors, but these are strictly outlined in the transaction documents to ensure compliance with regulations.
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