3 minute read | July.11.2023
The European Commission has adopted and published final draft Regulatory Technical Standards (RTS) specifying requirements for originators, sponsors and original lenders in relation to risk retention under the EU Securitisation Regulation.
The standards incorporate limited changes to draft standards the European Banking Authority (EBA) published in April 2022. Some of the principal differences are:
Clarification of the expertise requirement: The Securitisation Regulation prohibits an entity which has been established or operates for the sole purpose of securitising exposures from holding the risk retention as an originator (the "sole purpose test"). Article 2 of the draft RTS specifies the factors to consider when determining whether an entity satisfies the sole purpose test.
The draft standards published by the EBA included a requirement that an originator's "responsible decision-makers" have the necessary experience to enable the entity to pursue its business strategy. The draft RTS adopted by the European Commission instead places that requirement on members of the management body of the originator.
This change emphasises the importance EU regulators place on originators being capable of performing their origination activities independently and making all relevant decisions “in-house."
Detailed factors for random selection of securitised exposures: The EBA draft standards specified that the retainer should weigh quantitative and qualitative factors to ensure random selection to retain a material net economic interest as described in Article 6(3)(c) of the Securitisation Regulation (i.e., by retention of randomly selected exposures equivalent to not less than 5% of the nominal value of the securitised exposures).
The draft RTS adopted by the European Commission includes a comprehensive list of factors to consider when selecting exposures to meet this risk retention requirement, including vintage of origination, maturity date, loan to value ratio, outstanding loan balance and geographical location, among other factors.
Regulators in the UK plan to develop separate technical standards on risk retention in line with the UK's own securitisation regulations. The extent of divergence between the UK standards and the EU's final draft RTS remains to be seen.
The Council of the European Union and the European Parliament will review the European Commission’s draft. Further changes are possible but not expected. Once approved, the RTS will come into force 20 days after its publication in the Official Journal of the European Union, expected later this year.