Background

On 12 April 2022, the European Banking Authority (the “EBA”) announced the publication of its final draft regulatory technical standards (“RTS”) specifying risk retention requirements for originators, sponsors and original lenders. Regulation (EU) 2017/2402, as amended (the “Securitization Regulation”), set the requirements relating to the retention of a significant net economic interest in securitisations and empowered the EBA to prepare a draft RTS in this area. There has been a long wait for these final drafts, given that the EBA submitted a first version to the European Commission in July 2018 (the “RT 2018”), then consulted on further changes in June 2021.

The final RTS draft

The final draft of RTS provides details on the following aspects of the risk retention requirement:

1. requirements on the terms of risk management;

2. measuring the level of retention;

3. the prohibition on hedging or selling the retained interest;

4. the storage conditions on a consolidated basis;

5. the conditions for exempting transactions based on a clear, transparent and accessible index;

6. risk retention methods in the event of traditional securitization of non-performing exposures; and

7. the impact of fees paid to the mandate on the effective significant net economic interest.

Changes have been made to the 2018 RTS in order to bring greater consistency with the mandate defined in Article 6 of the Securitization Regulation. The most relevant changes are:

1. In order to align the provisions of the final draft RTS more closely with the mandate of the Securitization Regulation, the specific instances of credit risk exposure of a securitization position by credit derivative counterparties and facility providers of liquidity under former Article 2, and the conditions which the holdings of securitization positions by subsidiaries in third countries had to satisfy under former Article 2 to be considered as not violating the due diligence obligations provided for in Article 5 of the Securitization Regulation have been deleted.

2. Changes have been made to the initial disclosure requirements regarding the level of commitment to retain a significant net economic interest in the securitization (former Article 15). The article and the corresponding recital have been deleted as there is now an overlap with Delegated Regulation (EU) 2020/1224 on publication under Article 7 of the Securitization Regulation. The obligation for the mandate to undertake with the investors to permanently maintain a significant net economic interest in the securitization has been maintained, as this obligation does not appear in the delegated regulation.

3. The final draft of the RTS provides guidance on the prohibition on originators from screening assets, including criteria for determining comparable assets, and guidance for the assessment of the relevant national regulator.

New provisions have been included in the final draft RTS to take account of the EBA’s expanded mandate on risk retention under Article 6 of the Securitization Regulation following amendments made under the legislative measures of the Capital Markets Recovery Package 2021. This includes addressing issues of (i) how to retain risk in traditional non-performing exposures (“NPE”) securitizations, (ii) the impact of fees to be paid to mandates on the risk retention requirement, (iii) the servicer’s expertise in NPE securitizations, (iv) clarification of the synthetic excess spread, (v) retention in re-securitisations, and (vi) own debt securities issued. Key points include:

1. The final RTS draft defined the modalities for applying risk retention options on NPE securitisations, with reference to the net value of non-performing exposures. Alternative options for retaining a net economic interest (Article 6(3)(a) of the Securitization Regulation) should be included in the application of the net worth approach to securitized exposures qualifying as ” non-performing exposures”.

2. RTS’s final draft clarifies the requirements for retainer fees payable to comply with risk retention requirements. The requirements are not limited only to NPE securitisations. The term “agent fees” refers to the manager acting as agent in both NPE and performing securitisations, to the extent applicable. The definition of “fees” is “any remuneration payable to the agent when the agent acts in any additional capacity as service provider for the securitisation”. The term “impact” is defined as “referring to both the amount and structure of the fees payable to the agent where the amount and/or structure of the fees would undermine the ‘effectiveness’ of the risk retention requirement”. . Recital (6) of the RTS Final Draft establishes that the significant net economic interest retained should not be prioritized in terms of cash flow to preferentially benefit from reimbursement or amortization. Given the general principle that service providers are generally paid before the holders of the securitization positions, the fees payable to the agent in its role as service provider of the securitization should not be fixed at an amount or structured in such a way as to affect significant net economic interests. The EBA has also defined criteria for the fees paid in priority. Fees should be set on an arm’s length basis with respect to comparable market transactions and fees should be structured in return for the service concerned without creating a preferential claim on the cash flows of the securitization which would result in a reduction of the retained value the interest.

3. The final RTS draft specifies the standards that the manager of traditional NPE securitisations must meet to show that it has the required expertise in dealing with non-performing exposures. These standards align with the EBA guidelines on the STS criteria for non-ABCP securitisation.

4. RTS’s final draft acknowledges the excess synthetic spread (“HSE”) as a form of compliance with the risk retention requirement by the originator of a synthetic securitization provided that it is subject to a capital requirement under the applicable prudential regulations. Article 6(1) of the Securitization Regulation requires that any form of retention be measured at inception and held continuously thereafter. The exposure value of the ISS should be treated as a net economic interest retained and therefore the corresponding part of the net economic interest provided through the exposure value of the ISS should be determined at origin and the commitment of the SES must be maintained on an ongoing basis. -continuous basis.

5. As a general rule, resecuritisations are prohibited by the Securitization Regulation. The competent authorities may, however, authorize these operations on a case-by-case basis. The final draft RTS specifies how the risk retention requirement applies to these transactions and how this risk retention must be satisfied separately for each of the securitization and resecuritization transactions. It is important to note that RTS’ final draft recognizes an exception to this requirement. Where the originator acting as agent in the first securitisation(s) securitizes exposures or positions held beyond the minimum net economic interest and no further exposure or position is added to the resecuritisation basket, the retention for the first transaction should be considered sufficient.

6. The final draft RTS does not set further risk retention requirements for the securitization of its own liabilities since the EBA considers the existing requirements and guidance to be sufficient. The sellers of a securitization are also the debtors of the securitized own liabilities. Therefore, retaining a net economic interest in the securitization would not strengthen the selling parties’ incentive to remain solvent and avoid default on their liabilities.

In addition, the final RTS includes the technical changes made to the 2018 RTS. Two of these changes may be of particular interest to market participants:

1. The final draft of RTS now provides an exhaustive list of exceptional circumstances in which a change of risk retention holder is permitted (such a change is generally prohibited by Article 6 of the Securitization Regulation). Accordingly, the prohibition on transfer of the retained economic interest will not apply: (a) in the event of the agent’s insolvency; (b) where the nominee is, for legal reasons beyond its control and beyond the control of its shareholders, unable to continue to act in that capacity; or (c) in case of conservation on a consolidated basis in accordance with Article 14 [of the final draft RTS]¹.

2. The definition of originator in the Securitization Regulation clarifies that an entity should not, for the purposes of risk retention, be considered an originator where it has been established or operates for the “sole purpose” of securitizing exhibitions. Article 2(7) of the Final RTS has been amended from the 2018 RTS to modify the factors that should be taken into account in assessing whether such an entity meets the single purpose test.

Next steps

If approved by the European Commission, the final draft RTS will be subject to scrutiny by the European Parliament and the Council before the finalized text can be published in the Official Journal of the EU and enter into force on the twentieth day following . It may be subject to further changes before it is finalized and becomes effective, although this is considered unlikely given the lengthy drafting process.

The British position

Following its exit from the EU and the end of the Brexit transition period at the end of 2020, the United Kingdom applied the “onshore” version of the Securitization Regulation, which includes the same mandate in Article 6 for the development of technical standards on the risk retention requirement. The UK has previously announced that it will come up with its own technical standards in this area, in line with this mandate from the UK Securitization Regulations. It is unclear when these standards will be announced and to what extent there will be a discrepancy between UK standards and RTS developed in the EU.

1 This is a scenario where a lien was held within a consolidated group and the lien must be transferred to an affiliated company to ensure that the lien is retained within that group. band.

Claire Puddicombe, David Quirolo, Nick Shiren and Daniel Tobias also contributed to this article.