Question 1:

Q: Are UCITS currently obliged to comply with the rules on economic retention in securitisations (or skin in the game)?

A: No. UCITS are not currently obliged to comply with the rules on economic retention in securitisations.
The new Article 50(a) of the UCITS Directive was inserted by AIFMD. It provided that in order to ensure cross-sectoral consistency and to remove misalignment between the interest of firms that repackage loans into tradable securities and other financial instruments (originators) and UCITS that invest in those securities or other financial instruments, the Commission was to adopt delegated acts, measures dealing with:

  • the requirements that need to be met by the originator in order for a UCITS to be allowed to invest in securities or other financial instruments of this type issued after 1 January 2011, including requirements that ensure that the originator retains a net economic interest of not less than 5 %;
  • qualitative requirements that must be met by UCITS which invest in those securities or other financial instruments.

The Commission has not adopted such delegated acts to date.

The draft Securitisation Regulation which issued in September 2015 will repeal Article 50a of the UCITS Directive. The explanatory memorandum explains that;

"For UCITS no due diligence rules apply so far: the Commission is however empowered to adopt such rules (Article 50a of the UCITS Directive). It has not done so yet, due to the intention to cover UCITS in this initiative. For that reason, the proposal creates requirements for UCITS."

Under the (draft) Securitisation Regulation UCITS will be obliged to conduct initial due diligence on securitisations and also to establish and implement written policies and procedures for their risk management and recording (which include stress testing and reporting).

The draft Regulation also will also capture AIFMS and Article 17 of AIFMD will be replaced by the Securitisation Regulation.