The European Banking Authority (“EBA”) published on 12 April 2022 the final draft technical standards on risk retention requirements for securitisations (the “RTS”). This follows last year’s consultation on the proposals (the “Consultation”). To become law, the RTS must be adopted by the European Commission and will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
The RTS largely replicates the Consultation, including provisions regarding the securitization of non-performing exposures, recognizing synthetic excess spread as a form of risk retention and considering allowing re-securitisations for legitimate purposes. However, the following should be particularly noted:
- The EU Securitization Regulation states that an entity should not be considered an originator (for risk retention purposes) where it has been established or operates for the sole purpose of securitizing exposures. The consultation and the RTS provide guidance to consider in determining this, including that “the entity is not relying on exposures to be securitized, interests retained or proposed to be retained in accordance with this Regulation or on any corresponding income from such exposures and interests as its sole or principal source of income”. It had been hoped, and requested by market participants, that the reference to “or predominant” be deleted, but the EBA retained this wording instead. In the EBA’s analysis of the responses to the Consultation, which accompanies the RTS, it explicitly rejects this request. However, in our view, this is not necessarily a requirement that an entity must meet in order to be an originator risk agent, provided there are sufficient other elements that demonstrate that it is a substantive entity.
- The RTS also clarifies the circumstances under which the risk agent entity can transfer or sell the retained interest, so this would now be permitted both in the event of the agent’s insolvency and “where the agent is, for reasons independent of its will and beyond the control of its shareholders, unable to continue to act in this capacity”.
- Certain amendments have also been made to the RTS regarding instances where the fees payable to the risk agent may be interpreted as reducing the interest retained below that required. Overall, the intention here is to remove the vagueness from the language of the Consultation.
- In compliance with the ‘no cherry picking’ provisions of the EU Securitization Regulation, the RTS now stipulates that only assets retained on an originator’s balance sheet which meet the eligibility criteria of the particular securitization should be taken into account. It is also expected that exposures that an originator has contractually committed to securitize will also be excluded.
- In the EBA’s analysis of the responses to the consultation, reference is also made to the receipt of inquiries about whether origination structures apparently akin to CLO conditional sale agreements are permitted for create an initiator who will act as the risk holder. Unsurprisingly, the EBA replied that these issues were outside the mandate of the RTS.