The European Banking Authority (EBA) has released a Consultation Paper which consults on draft Regulatory Technical Standards (RTSs) to underpin the risk-retention rules set out in Article 394 of the Capital Requirements Regulation (currently Article 122a of the CRD until CRD IV / CRR take effect, when the relevant provision will become Article 405 of the CRR), as mandated by Article 399(2) of the CRR, and create a more uniform application of the rules across EU Member States. The EBA's RTSs specifically cover Articles 394-398 of the CRR, to specify in greater detail: (i) the requirements upon investing institutions; (ii) the retention requirement and qualifying criteria; (iii) the due diligence requirements; and (iv) the requirements applying to sponsor and originator institutions. The draft RTSs set out a short section of explanatory information about each Article of the RTSs, to clarify the EBA's thinking and seek comment on specific questions, particularly about the extent to which the earlier CEBS Guidelines on Article 122a are currently relied upon by transaction parties. Among the guidance provided by the EBA in its draft RTSs is clarification that the retention requirement may only be met by one party (originator, sponsor or original lender) and not split between different parties, or devolved to a third party, as some Member States allow (so, unhelpfully, there is no guidance that would relax or indeed clarify how the rules apply to CLO transactions). In addition, where there are multiple originators, the RTSs specify a range of situations in which the retention requirement can be fulfilled. Also, the EBA also seeks to understand if there are transactions that are unlikely to meet the retention requirement based on the CRR and draft RTSs. Specific guidance on each of the retention options (a) to (e) is provided, with additional guidance for ABCP transactions, and the EBA specifically seeks comment on whether there are other ways to comply with the retention options that should be included in the RTSs. The RTSs clarify that retained exposures may be used as collateral for funding purposes provided the credit risk is not transferred. As to disclosure, the EBA seeks comment on whether loan-level disclosure is appropriate for complying with the due diligence requirements in Article 395 for all asset classes, and whether the information provided in existing templates (e.g. the European Central Bank's loan-level data template) is sufficient. What is interesting is that the draft RTSs differ significantly from the earlier CEBS Guidelines and do not carry over some aspects of the Guidance that the industry had found helpful to date.
The EBA's Consultation Paper also sets out draft Implementing Technical Standards (ITSs) about the convergence of supervisory practices regarding the implementation of additional risk weights, which supervisors are empowered to impose when banks breach the risk-retention rules under Article 394. Investing banks failing to conduct due diligence on the originator/seller's retention will be subject to a 250% additional risk weight that will increase progressively with subsequent infringements (as set out in the CRD), and the ITSs provide specific guidance to supervisors about how and when to apply the additional risk weight, with a set formula provided to calculate an infringing bank's total risk weight. Comments on the Consultation Paper and the RTSs and ITSs are requested by 22 August 2013, and the EBA's final RTSs and ITS must be submitted to the European Commission by 1 January 2014.