Securitisation: Commission approves Risk Retention RTS
The European Commission finally adopted the regulatory technical standards on risk retention (the Risk Retention RTS) under the EU Securitisation Regulation on 7 July 2023.
These will now be scrutinised by the EU Council and the European Parliament before they are published in the Official Journal (publication is expected in Q4 2023 or in Q1 2024). Until the Risk Retention RTS come into force, the existing CRR RTS (Commission Delegated Regulation (EU) No 625/2014) continue to apply.
This brings the market closer to a conclusion on the longest-running deliverable under the EU Securitisation Regulation. The EBA first published draft risk retention RTS in 2018, but these had not been finalised by 2021 when the 2021 amendments to the EU Securitisation Regulation under the Capital Markets Recovery Package (among other matters) brought risk retention in securitisations of non-performing exposures (NPEs) and the impact of fees paid to the retainer on the effective material net economic interest into scope. The deadline for finalising the RTS was extended as a result to 10 October 2021 and the EBA launched a June 2021 consultation on a fresh set of draft RTS to replace the 2018 draft RTS, and published the final draft Risk Retention RTS in April 2022 (the version approved by the Commission last week).
The Risk Retention RTS cover requirements on the modalities of retaining risk; the measurement of the level of retention; the prohibition on hedging or selling the retained interest; the conditions for retention on a consolidated basis; the conditions for exempting transactions based on a clear, transparent and accessible index; the modalities of retaining risk in case of traditional NPE securitisations; and the impact of fees paid to the retainer on the effective material net economic interest.
Particularly notable points are:
- The sole purpose principles at Article 2(7) set out when an entity will be regarded as established or operating for the sole purpose of securitising exposures. The EBA confirmed in its feedback on its June 2021 consultation that both limbs of those principles should be met for the sole purpose test to be fulfilled. The two limbs remain the same as in April 2022 final draft RTS (save that the reference to “members of the management body” needing to have the necessary experience has been replaced by a reference to “the responsible decision makers”).
- The ability for the servicer to act as risk retainer on an NPE securitisation provided that it meets the expertise requirements set out in Article 19 of the Risk Retention RTS.
- With an NPE securitisation, the ability to calculate the 5% risk retention on the basis of the net value of the underlying NPEs.
- The three exceptions to the prohibition on selling the retained interest (the insolvency of the retainer (carried over from the original October 2021 draft RTS) and the two exceptions added by the EBA its revised draft RTS: the retainer being unable to continue acting as such (due to legal reasons beyond its control and beyond the control of its shareholders), and in the case of retention on a consolidated basis as referred to in Article 14 of the Risk Retention RTS).
To discuss any aspect of the Risk Retention RTS in more detail, please get in touch with your usual contact in our Debt Capital Markets team.