Securitisation remains an important element of efficient and well-functioning credit markets. It provides for diversification of funding sources for larger lenders and efficient, low cost funding for smaller lenders. Securitisation also provides credit institutions, pension funds, investment firms and other market participants with additional investment opportunities across the credit spectrum. In recent years, however, securitisation issuance volume in the EU has not bounced back like it has in the US and Asia. For years, EU politicians and regulators have grappled with how to tighten securitisation regulations without overly hampering the market and foregoing the positive effects that securitisation has on the economy.
Acknowledging these dynamics, the European Parliament, Council and Commission introduced a new regulatory framework for securitisation transactions in the EU with the introduction of the Securitisation Regulation (EU) 2017/2402 ("The Regulation") on 17 January 2018, which includes the concept of simple, transparent and standardised ("STS") securitisation. The Regulation sets out detailed criteria which a transaction must satisfy during its lifetime in order to label itself as STS, as well as a system of supervision to monitor the correct application of those criteria. Transactions that are deemed STS will allow investors to hold less capital against their positions. The Regulation also provides for a set of common requirements for risk retention. The requirements as set out in The Regulation will apply to all European securitisation transactions which issue securities or create new securitisation positions from 1 January 2019.
Whilst there are existing risk retention requirements in place, The Regulation aims to provide further clarity. Key points regarding risk retention include:
- 5% retention requirement remains: There has been no change to the minimum level of material net economic exposure that originators, sponsors or lenders must maintain in the securitisation for the life of the transaction. The net economic interest may not be hedged in any way.
- Direct risk retention requirement and reporting obligations: Whereas previously the onus has been on investors to ensure that risk retention requirements are satisfied, The Regulation now imposes a direct risk retention requirement and reporting obligation on originators, sponsors and lenders.
- Originator exclusion: Under the new risk retention requirements, an originator established or operating for the sole purpose of securitising exposures without a broad business purpose will be excluded from acting as the retainer of risk.
- Exemptions: As is currently the case, securitisations where the underlying assets are obligations of or obligations guaranteed by central governments, central banks, regional governments/local authorities and multilateral development banks are exempt from risk retention requirements.
While there may be questions that arise regarding how The Regulation and the noted risk retention requirements will apply to UK securitisations in the wake of Brexit, the consensus view is, at least in the short-term, the UK is unlikely to deviate from the requirements outlined in The Regulation. However, with the outcome of the recent US court decision that collateral managers for open market CLOs are not subject to the risk retention requirements, the UK regulatory approach may change over the medium-term as the UK tries to remain globally competitive in financial markets.