The European Commission recently adopted a final draft of the regulatory technical standards in relation to the risk retention requirements under the EU Securitisation Regulation. This is based on the final draft of these regulatory technical standards published by the European Banking Authority in April 2022, with some amendments, and represents an important step towards finalising the EU risk retention regime for securitisations.

BACKGROUND

Article 6 of the EU Securitisation Regulation requires the originator, sponsor or original lender of a securitisation to retain on an ongoing basis a material net economic interest of not less than 5%, using one of five methods.

In addition, certain institutional investors must verify that the risk retention obligations have been complied with as part of their due diligence obligations under Article 5 of the EU Securitisation Regulation.

These risk retention requirements are applicable with respect to securitisations within the scope of, and as defined in, the EU Securitisation Regulation. However, regulatory technical standards (the EU Risk Retention RTS) were required to be prepared in order to set out certain aspects of the risk retention requirements in more detail, and these EU Risk Retention RTS have not yet been finalised.

Until then, the previous regulatory technical standards put in place under the EU Capital Requirements Regulation (the CRR RTS) apply. However, some uncertainty remains as aspects of the risk retention requirements under the EU Securitisation Regulation are not fully covered in the CRR RTS.

A final draft of the EU Risk Retention RTS was originally published by the European Banking Authority (the EBA) in July 2018, but was not adopted by the European Commission (the Commission). Following certain amendments to the EU Securitisation Regulation in March 2021, the 2018 draft of the EU Risk Retention RTS also needed to be amended and, after a consultation process, the EBA published a revised final draft of the EU Risk Retention RTS on 12 April 2022 (the 2022 EBA Final Draft RTS).

While the 2022 EBA Final Draft RTS contained provisions that were largely similar to those included in the CRR RTS, they also contained additional provisions to reflect certain aspects of the EU Securitisation Regulation which were not in the previous regime for securitisations, including the 2021 amendments to the EU Securitisation Regulation. The 2022 EBA Final Draft RTS included the following provisions:

• retention in the event that there is more than one originator, sponsor or original lender, or more than one servicer in a securitisation of non-performing exposures (NPEs);
• details of the “sole purpose” test (as discussed further below);
• fulfilment of the retention requirement through a synthetic or contingent form of retention;
• further details of how each of the five methods of risk retention can be complied with;
• application to NPE securitisations, in particular the calculation of the retained interest and the requirements for a servicer to act as risk retainer;
• measurement of the level of retention, including the use of synthetic excess spread for certain synthetic securitisations;
• a prohibition on transferring or hedging the retained interest, with certain limited exceptions;
• requirements in relation to the allocation of cash flows, and payment of any fees, to the risk retention holder;
• resecuritisations (where permitted); and
• requirements in relation to the prohibition on adverse selection of assets by originators.

For further information on some of the key changes made in the 2022 EBA Final Draft RTS as compared with the CRR RTS, please see our previous LawFlash, European Banking Authority Publishes Final Draft Regulatory Technical Standards on EU Risk Retention.

On 7 July 2023, the Commission adopted the 2022 EBA Final Draft RTS, with some amendments (as amended, the 2023 Commission Final Draft RTS). The 2023 Commission Final Draft RTS will now be reviewed by the European Parliament (the Parliament) and the Council of the European Union (the Council).

THE 2023 COMMISSION FINAL DRAFT RTS

The 2023 Commission Final Draft RTS contain a number of changes from the 2022 EBA Final Draft RTS. However, from our initial review, these changes appear to be primarily aimed at clarifying and improving the original drafting.

Importantly, the Commission has made certain changes to the wording of the “sole purpose” test. The EU Securitisation Regulation requires that, in order to hold the risk retention, an originator should not have been established or operate for the sole purpose of securitising exposures. This requirement was put in place to ensure that an originator holding the risk retention is an entity of substance.

The 2022 EBA Final Draft RTS contained wording setting out the relevant features of this test in detail, focusing on the business and governance of the proposed risk retention holder. While the EU Risk Retention RTS are not yet in force, and no similar requirement was included in the CRR RTS, the draft wording is typically taken as an indication of how the requirement in the EU Securitisation Regulation would be interpreted.

Two changes in the 2023 Commission Final Draft RTS wording are particularly noteworthy. First, while the 2022 EBA Final Draft RTS stated that the various features which were set out with respect to the originator should be “taken into account”, the 2023 Commission Final Draft RTS clarifies that an entity shall not be considered to have been established or operate for the sole purpose of securitising exposures where all of the specified features are present. Second, the wording now says that “the members of the management body” must have the necessary experience to enable the entity to pursue the established business strategy. Previously this requirement referred to “the responsible decision makers”.

The 2023 Commission Final Draft RTS also introduces a new provision which means that securitisations of “own-issued” debt instruments can be considered to satisfy the risk retention requirements without taking any additional action.

UK RISK RETENTION

The EU Risk Retention RTS will not apply in the UK, where a new regulation, together with rules made by the UK regulators, will replace the current securitisation regime. For securitisations involving both EU and UK parties, it will be important to consider carefully the applicable risk retention requirements in each case, taking into account any differences between the two regimes. For further information on the anticipated changes to the UK securitisation regime, please see our LawFlash which discusses the draft Securitisation Regulations 2023 published by HM Treasury on 11 July 2023.

NEXT STEPS

The Parliament and the Council are now expected to review the 2023 Commission Final Draft RTS over a period of at least two months. Once approved, the 2023 Commission Final Draft RTS will be published as a regulation in the Official Journal of the European Union, and that regulation is expected to come into force 20 days from the date of publication.

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