On January 20, the EBA published a consultation paper (EBA/CP/2016/01) on draft guidelines on implicit support for securitization transactions under Article 248(2) of the Capital Requirements Regulation (Regulation 575/2013) (“CRR”).

Examples of implicit support include the purchase of deteriorating credit risk exposures from the underlying pool, improving the quality of credit enhancements, the sale of discounted credit risk exposures into the pool of securitised credit risk exposures, the purchase of underlying exposures at above market price, ad hoc credit enhancements or an increase in the first loss position according to the deterioration of the underlying exposures. The provision of implicit support undermines the achievement of significant risk transfer, hence, under Article 248 of the CRR, there are restrictions on providing implicit support to securitisations. The draft guidelines recognise the fact that implicit support should not cover support that institutions are contractually obliged to provide. Such explicit support is assessed under guidelines EBA/GL/2014/05 on significant risk transfer.

Originator institutions and sponsor institutions which have failed to comply with the relevant requirements shall, at a minimum, must hold own funds against all of the securitised exposures as if they had not been securitised. Article 248(2) of the CRR sets out a mandate for the EBA to issue guidelines on what constitutes arm’s length conditions and when a transaction is not structured to provide support. A transaction is not considered to provide support if it is executed at arm’s length conditions and is taken into account in the assessment of significant risk transfer.

The draft guidelines include (i) the conditions to be satisfied in order to determine that a relevant transaction is not structured to provide support, depending on whether the relevant transaction is entered into by a sponsor institution or by an originator institution, (ii) an objective test for assessing whether a relevant transaction is entered into at arm’s length terms, (iii) clarifications regarding the notification requirements for relevant transactions and (iv) further guidance on how the conditions for assessing whether a transaction is structured to provide support, including the factors set out in points (a)-(e) of Article 248(1) CRR, should be assessed.

To ensure that the test is applied correctly, the assessment is to be made with due regard to the information available to each of the parties at the time when the transaction is entered into, and not to such information that is available at a later date.

The EBA will hold a public hearing on the draft guidelines on February 18, 2016.