Edition 5 of this SCM Briefing outlined a Consultation Paper from the European Banking Authority (EBA) which set out a proposed set of Regulatory Technical Standards (RTS) to underpin the securitisation risk-retention rules set out in (what is now) Articles 405-409 of the Capital Requirements Regulation (CRR). The EBA has now has issued its long-awaited (and in fact, required by the European Commission by 31 December 2013) final draft RTS in this area. The complementary Implementing Technical Standards (ITS) which set out the additional risk-weightings to be applied to exposures that are in breach of the rules, have also been published. The RTS set out guidance on: (i) the requirements upon investing institutions; (ii) the retention requirement and qualifying criteria; (ii) the due diligence requirements; and (iv) the requirements applying to sponsor and originator institutions. On an initial review, the final draft RTS do not differ significantly from the version consulted upon in 2013 (save for the fact they do not contain the EBA's helpful "explanatory boxes" from the earlier paper, some new definitions have been added, and references to the various Articles of the final CRR have changed). However, some additional clarification has been added regarding the retaining entity, explicitly to allow the retention to be fulfilled by: (i) multiple originators, sponsors or original lenders; or (ii) where there are multiple sponsors, the retention should be fulfilled by the sponsor "whose economic interest is most appropriately aligned with investors"; and (iii) notwithstanding situations where there are multiple originators or lenders, the retention may be fulfilled in full by a single one of those originators/lenders in certain circumstances (where the original lender has established and is managing the programme; or where it has established the programme and has contributed over 50% of the total securitised exposures). The guidance on each of the various retention options, the measurement of the level of retention, the prohibition on hedging/selling the retained interest, the due diligence requirement, and requiring originators to use the same underwriting standards for securitised as for non-securitised loans, and disclosure of the retention, remain unchanged from the earlier draft RTS.
The final draft ITS provide that investing banks failing to conduct due diligence on the originator/seller's retention will effectively be subject to an additional 250% risk weight that will increase progressively with subsequent infringements, up to a maximum 1250% risk weighting. Again, the ITS do not differ significantly from the earlier draft, save for some provisions dealing with securitisations issued during the transitional period of 1 January 2011 and 1 January 2014. These transitional provisions may provide some relief from the punitive risk weights for non-compliance, for transactions issued in compliance with the earlier CEBS Guidelines (see below).
The final Draft RTS and ITS will now be submitted to the European Commission, with a view to them taking effect in early 2014 (although we have no indication of the actual date on which they will enter into force as the Commission must approve them first). When finalised by the Commission, the RTS will replace the previous Guidelines on (what was then) Article 122a of the Capital Requirements Directive (that was CRD II) that were produced by the Committee of European Banking Supervisors (CEBS), and will form part of the overall CRD IV / CRR package of legislative measures (although they will not require national implementing measures; they will be directly applicable). There were concerns about the replacement of the CEBS Guidelines when the original drafts (of the RTS in particular) were issued in 2013, since the EBA RTS were more restrictive than the CEBS Guidelines in some important ways, including the clarification that the retention may only be held by one party (originator, sponsor or original lender) and cannot be devolved to a third party, which has been particularly unhelpful for some collateralised loan obligation (CLO) and other transactions (where no sponsor can be identified, or is unable to hold the required 5% retention). These issues may now be sufficiently addressed in the final draft RTS, but it is expected that market participants will want to review the draft RTS in detail and highlight any major concerns.