Securitisation – EBA consultation on risk retention: summary of key issues
To assist potential participants in the consultation, we set out, below, a summary of the key issues in respect of the Draft RTS as compared to the EBA RTS on risk retention submitted to the European Commission in July 2018.
- NPE securitisations (articles 9 and 19 of the Draft RTS): the Draft RTS specify how to apply the risk retention options on traditional non-performing exposure (NPE) securitisations, with reference to the net value of non-performing exposure. They also set out requirements for a servicer to be considered to have the necessary expertise to act as retainer in traditional NPE securitisations and the criteria that the servicer should meet to be able to demonstrate that they have the required expertise in the servicing of non-performing exposures.
- Excess spread (article 10 of the Draft RTS): the Draft RTS propose that synthetic excess spread should be considered a possible form of compliance with the risk retention requirement by the originator as long as it is subject to a capital requirement by the applicable prudential regulation. Importantly, for the purposes of the retention requirement, only those parts of the exposure value of the synthetic excess spread may be taken into account in the measurement of the net economic interest that are continuously available to cover losses from the day of compliance with the retention requirement until the end of the transaction.
- Impact of fees on the retained net economic interest (article 15 of the Draft RTS): the Draft RTS set out the requirements for the fees payable to the retainer (being any remuneration payable to the retainer where the retainer acts in any additional capacity as service provider to the securitisation) to comply with the risk retention requirements. This is because the fees due to service providers are typically payable in the waterfall on a preferential basis ahead of the interest and amortisation payments due under the securitisation tranches and, depending on the amount and structure of the fees, are considered to have the potential to undermine the effectiveness of the risk retention requirement.
- Securitisation of own liabilities (article 16 of the Draft RTS): the Draft RTS provide that where a securitisation is backed by a pool of underlying exposures comprised exclusively of own debt instruments issued by the issuer or multiple issuers of the securitisation, the retention requirement in article 6(1) of the EU Securitisation Regulation is automatically satisfied. This is because the credit risk of the underlying assets remains with the issuer of the securitisation.
- Resecuritisations (article 17 of the Draft RTS): while the resecuritisations are generally prohibited by the EU Securitisation Regulation, competent authorities may authorise these transactions on a case by case basis. The Draft RTS clarify how the risk retention requirement applies in relation to these transactions and make clear that risk retention must be met separately for each of the securitisation and resecuritisation transactions. As such, generally, the risk retention element of the initial securitisation should not be counted for the purposes of meeting the risk retention requirement in respect of the resecuritisation. However, the Draft RTS recognise an exception to this requirement where the originator/retainer in the first securitisation securitises exposures or positions retained in excess of the minimum net economic interest and no other exposures or positions from third parties are added to the pool of the re-securitisation, in which case the retention on the first transaction should be considered sufficient.
- Cherry picking (article 18 of the Draft RTS): asset selection requirements in article 6(2) of the EU Securitisation Regulation are an integral part of the risk retention framework. These provide that (amongst other things) originators must not select assets to be transferred to a securitisation vehicle with the aim of rendering losses on those assets higher than the losses over the same period on “comparable assets” held on the balance sheet of the originator. The Draft RTS provide useful clarity on, amongst other things, what constitutes a “comparable asset” by providing that, at the time of the selection of the assets to be transferred to the securitisation vehicle, assets held on the balance sheet of the originator shall be deemed comparable where both of the following conditions are met: (i) the expected performance of both the assets to be held on the balance sheet and the assets to be transferred to the securitisation vehicle is determined by similar relevant factors; and (ii) as a result of the similarity referred to in point (i) and on the basis of indications such as past performance or applicable models, it can be reasonably expected that the performance of the assets to be held on the balance sheet would not be significantly better (over the life of the transaction or over 4 years, whichever is shorter) than the performance of the assets to be transferred to the securitisation vehicle.
- Credit derivative counterparties and liquidity facility providers: particular cases of exposure to the credit risk of a securitisation position by credit derivative counterparties, hedging counterparties and liquidity facility providers, and conditions required of holdings of securitisation positions by subsidiaries in third countries, have been removed from the Draft RTS.
- Initial disclosure of the level of the commitment to maintain a material net economic interest in the securitisation: the requirement that the retainer must disclose to investors (within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation) certain information regarding the level of its commitment to maintain a net economic interest in the securitisation has been removed from the Draft RTS.
For more information please read our previous blog, Securitisation – EBA consults on risk retention and HMT consults on the UK Sec Reg.
Please speak to your usual Macfarlanes contact if you have any questions.