The European Commission published the final regulatory technical standards on 13 March 2014 specifying the requirements for investor, sponsor, original lenders and originator institutions relating to exposures to transferred credit risk under Articles 404-410 of the Capital Requirements Regulation (CRR). The final regulatory technical standards (Final RTS) can be found here.

While the European Commission have made a number of changes from the text of the draft regulatory technical standards published by the European Banking Authority on 22 May 2013 (Draft RTS), the majority of the changes are cosmetic, including condensing the draft text, clarifying the language and correcting typos. The substance remains mostly unchanged.

The key changes made in the Final RTS are:

• Article 10 spells out that calculation of the retained portion shall be based on nominal values of the securitised exposures and the acquisition price of the assets shall not be taken into account.
• The Final RTS clarifies in Article 12 that hedging which does not hedge credit risk of the retained securitisation positions/retained exposures shall not be considered a hedge for the purposes of the hedging prohibition. While this is not a substantive change it is a helpful clarification.
• Article 14 has been amended to clarify exactly who can hold the risk retention slice on a consolidated basis, but it does not change our understanding that the retainer must be an EU parent credit institution, EU Financial holding company or EU mixed financial holding company (each as defined in the CRR).
• The provisions relating to positions held in (or which are eligible to be held in) the correlation trading portfolio are amended in Articles 13 and 20. These are now slightly broader and provide more guidance as to compliance with Article 406 of the CRR.
• The provisions in Article 15 relating to outsourcing have been amended so that the express statement "Outsourcing shall not relieve institutions of their obligations to understand and assess the risk of the securitisation positions" has been deleted and replaced with a simple obligation for institutions that outsource their due diligence to "retain full control of that process". This can be read as lowering the obligation on institutions that outsource their due diligence, although we would recommend a cautious approach to outsourcing in any event.
• Previous references to "bond covenants" in Article 16 (previously Article 18) have been broadened to refer to "obligations related to the tranches included in the documentation relating to the securitisation". This appears to mean that investors can take account of the full suite of transaction documents, including covenants given by originators, collateral managers and other transaction parties, as well as those set out in the bond terms and conditions. 
• Article 17 amends the frequency of review of securitisation positions held. Institutions should now review when they become aware of material changes to structure features of a securitisation that can materially impact on its performance, rather than simply upon becoming aware of a material change in the securitisation position's performance. 
• Article 18 changes the requirement of investors to "demonstrate when requested that they took due care" in relation to stress testing, rather than simply taking due care.
• A minimum level of due diligence procedure is created in Article 19 which clarifies that investor institutions shall only change their due diligence procedures if there is an increase in (rather than a change to) the risk profile of the securitisation positions held.
• Article 21 deletes the provision that the obligation to apply the same sound and well-defined criteria for credit granting to exposures to be held and exposures to be securitised does not "prohibit modification of aspects of the underwriting process for specific loan types in order to meet the conditions for sale of such loans to the securitisation". It is not clear what the EBA's intention was in removing this wording; on the face of it this deletion may allow more flexibility to modify underwriting processes, however we would recommend that originators take a cautious approach on this.

As expected, the RTS do not demonstrate any significant changes from the Draft RTS, although there are some helpful clarifications, particularly around the due diligence requirements placed on investors. While the RTS are not yet in force and the European Parliament and Council have the right to raise objections to the RTS, we would not expect any significant changes to be made at this stage, although market practice will continue to develop now that there is some certainty on the risk retention provisions. Investors in securitisations subject to the Capital Requirements Regulation should review the Final RTS carefully to ensure that they understand their due diligence and monitoring obligations prior to becoming exposed to a securitisation.