26 July 2023 Jördis Heckt-Harbeck Capital Markets - Debt - Capital Markets - Equity - ESG - Sustainable finance - EU Law - Financial Regulation - Structured Finance

Risk retention requirements for securitisations finally there!

The European Commission has recently published the final text of the long-awaited Delegated Regulation supplementing EU Securitisation Regulation ("SECR") with regulatory technical standards (RTS) specifying in greater detail the risk retention requirements for the parties to a securitisation transaction (the "SECR RTS"). 

In July 2018, the EBA had already published a Final Draft of RTS, which was never adopted by the Commission. The basis for the SECR RTS was the second Final Draft of RTS submitted by the EBA in April 2022, which has been adopted by the Commission with limited changes.

The long legislative process has led to some uncertainty in the market as regards the structuring of risk retention for securitisations under the EU Securitisation Regulation as, until the SECR RTS enter into force, the RTS developed prior to the EU Securitisation Regulation in connection with the risk retention requirements formerly contained in the CRR (Commission Delegated Regulation (EU) No 625/2014) (the "CRR RTS") continue to apply. Therefore, the clarification that the SECR RTS bring is more than welcome as it also addresses certain structures that have developed by and used in the market in the meantime.

Compared to the CRR RTS, our key take-aways with respect to the new SECR RTS are as follows: 

  • Art. 6(1) SECR states that an entity shall not be considered to be an originator for the purpose of risk retention requirements if it was established or operates for the sole purpose of securitising exposures. The SECR RTS further specify the criteria for such a “sole purpose test”. (cf. Art. 2 (7))
  • Retainers are now permitted to hedge or sell the retained net economic interest but only where the hedge or sale is a legitimate and prudent element of credit granting or risk management.
  • As the CRR RTS generally prohibited the change of a retainer, the SECR RTS now explicitly permit such a change under certain exceptional circumstances (e.g. insolvency). (cf. Art. 12)
  • Retaining entities using synthetic (use of derivatives) or contingent (use of credit support) forms of retention have to fully collateralise the retained interest. As the CRR RTS only exempted credit institutions from this cash-collateralisation obligation, SECR RTS now extends this to investment firms as well as insurance and reinsurance undertakings. (cf. Art. 3(2))
  • Synthetic excess spread is expressly recognised as a method of risk retention in synthetic securitisations. (cf. Art. 10)
  • Under the SECR, the relevant date for measuring the level of retention is the "date of origination". This has now been further specified as one of the following: issuance date, date of the signature of the credit protection agreement, date of the agreement on a refundable purchase price discount
  • The SECR RTS now establish standards for the risk retention in NPE securitisations, such as for the calculation of the relevant retention holding or the expertise of servicers involved which can now also meet the retention requirements in traditional NPE securitisations. (cf. Art. 2(1)(d), Art. 2(6))
  • Entities securitising own-issued debt instruments are automatically deemed compliant with the retention requirements as long as the underlying pool consist exclusively of own-issued debt instruments. (cf. Art. 16)
  • It is clarified how the retention requirements are to be met in the case of permitted re-securitisations, where two levels of transactions are involved, and ABCP programmes. It also clarifies that the retranching of securitisation exposures into contiguous tranches should not be considered a re-securitisation for the purposes of the retention requirements. (cf. Art. 17)

Once, EUSR RTS have entered into force (expected in Q4 of this year), the CRR RTS will be repealed.