After many ups and downs, one might have thought that EU risk retention was done and dusted, but it looks like there may be a few more twists and turns.
On 6 June 2016, the draft Legislative Resolution from the Rapporteur of the European Parliament (the “Parliament”) on the proposal for a regulation of the Parliament and of the Council (the “EU Council”) laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation amending the existing European securitisation legislation was released (the “First Draft Resolution).
The Draft Regulation contains a number of significant and troubling variations from the proposal of the Commission (COM(2015)0472) (the “Commission Proposal”), including:
- 20 Per Cent Risk Retention - The Originator, Sponsor or Original Lender shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 20% or the percentage determined in regulatory technical standards (such RTSs are to cover the possibility of a lower risk retention rate for the securitisation market as a whole or for certain segments). See Amendment 40 to Article 4.
- Originators and Original Lenders may need to be Regulated Entities - Originators, sponsors or original lenders must be a regulated entities such as credit institutions, insurance undertakings and Alternative Investment Funds (as defined in Article 2(4) of Directive 2002/87/EC of the Parliament and the EU Council). This suggests that Originators would need to be regulated in the EU and that many US transactions and some EU transactions might not be feasible under the draft language. See Amendment 28 to Article 2a.
- Investors may need to be Regulated Entities - Investors must be Institutional Investors, which are specific EU regulated entities. It is unclear how limiting potential investors to regulated entities is intended to help restart the securitisation market. See Amendment 28 to Article 2a.
- Special Purpose Entities may not be located in certain Off-Shore Jurisdictions. See Amendment 29.
- Grandfathering Provisions - The Grandfathering provisions remain troubling. See Amendment 100.
- Information on Investors - Information on the investors in a securitisation and their ultimate beneficial owners, the size of their investment and to which tranche of the securitisation it relates (together with other information including, without limitation, a description of priority of payments and information about the credit granting process) (the “Information”) will need to be made available to European Securities and Market Authority. See Amendments 49 – 55 to Article 5.
- Information on Underlying Loans - A data repository will be established where information on the underlying loans or other assets must be provided. The cost of establishment and maintenance of the repository will be borne by originators/sponsors. See Amendment 56 to Article 5.
Whilst the Commission Proposal was intended to help the securitisation market, and generally maintain the status quo with respect to risk retention, some members of Parliament (and other voices) have viewed this as an opportunity to revisit the post-financial crisis regulation, including the risk retention rules. We believe that some of the proposals in the report (notably the 20% risk retention requirement) are likely to cause concern among market participants and have the potential to be disruptive. Unfortunately, the EU risk retention rules have had a tendency to be reviewed and revised since their original implementation and this has played havoc with the certainty that markets need to function properly, reducing the volume of securitisation transactions and reducing liquidity to the markets they serve.
Despite the concerns raised by the First Draft Resolution, we note that we are still at a relatively early stage of the process and are hopeful that a more balanced approach will evolve. We also believe that the EU Council, and others, will resist some of the more alarming proposals.