The European Commission has adopted and published the final draft risk retention regulatory technical standards (the “Final RTS”). The requirement for this RTS is derived from Article 6(7) of Regulation (EU) 2017/2402 (as amended by Regulation (EU) 2021/557) (the “EUSR”) and specifies in greater detail how the risk retention requirements enshrined in Article 6 should apply. The Final Draft RTS follow in the tracks of a previous draft published in 2018 (the “2018 Draft RTS”).
On 12 April 2022, the European Banking Authority (the “EBA”) announced the publication of its long awaited final draft of the risk retention RTS (the “Final Draft RTS”).
We discussed previously the main highlights of the Final Draft RTS in our Engage article Are we there yet? EBA published final risk retention draft RTS.
Key changes in the Final RTS since publication of the Final Draft RTS
The majority of the changes proposed in the Final RTS are drafting and clarificatory changes but there are a few additional points worth highlighting:
Modifications are made to the description of factors to be applied in defining the pool from which loans will be randomly selected, with some helpful specific (but non-exhaustive) terms set out. An additional factor of “any other factor deemed relevant by the retainer” is also included which may provide some additional flexibility in considering the selection.
A new Article 16 is included providing that, where an entity securitises its own issued debt instruments, including covered bonds, and the underlying exposures of the securitisation comprise exclusively those own-issued debt instruments, the retention requirement shall be considered complied with.
Whilst substantially the same as the Final Draft RTS, clarification is made that the experience of the servicer must be of exposures of a similar nature to those securitised, and that provision is made taking into account confidentiality of obligors.
Sole purpose test. The test has been slightly modified so that (i) “all” of the requirements need to be considered, instead of just “taken into account”; and (ii) necessary experience now relates to the “management body” and not the “responsible decision makers” though this is consistent with other provisions of the Final RTS which relate to the management body.
What happens next and when will the Final Draft RTS be adopted?
The EU Parliament and the Council have between one and six months to object. Once it is clear that the EU Parliament and Council do not object to the RTS, they will be published in the Official Journal and enter into force after 20 days of being published in the Official Journal.
What impact with the Final RTS have on UK securitisation transactions?
As discussed in more detail in our Engage article Are we there yet? EBA published final risk retention draft RTS, the Final RTS will only be directly relevant for transactions subject to the EUSR.
On 11 July 2023, HM Treasury published a near-final version of The Securitisation Regulations 2023, (the “Securitisation SI”) together with an explanatory Policy Note. This was closely followed by draft rules proposed by the FCA and the PRA (respectively the “FCA Rules” and the “PRA Rules” and together the “Rules”), which set out, in more detail, many of the firm-facing requirements and take the place of the EU technical standards.1 The Securitisation SI, when final, will replace the current UK securitisation framework as part of a new regime for the regulation of securitisation in the UK. This is part of HM Treasury’s plan to deliver a Smarter Regulatory Framework for the UK.
The proposed Securitisation SI and the Rules indicate continued alignment with the EU requirements, though the initial drafts follow more closely the 2018 Draft RTS, with some targeted changes. Changes adopted by the PRA and which will align with the final RTS include (i) transferring the risk retention manager on insolvency and where part of a consolidated group; and (ii) and calculation of the risk retention on the transaction price (as opposed to the nominal amount) for NPE securitisations.
The PRA and FCA do not include provision in the current draft Rules (i) allowing eligible servicers to fulfil risk retention requirements in NPE securitisations (which could be similar to the provisions of the Final RTS); (ii) allowing transfer of the retention where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer; or (iii) allowing excess spread as an element of risk retention for synthetics (which could also be similar to the Final Draft RTS).
The FCA and PRA provide clarity with a new Article 5 (2A) which allows originators to transfer assets with a higher than average risk profile subject to clearly communicating this. This is only included in the EU SR as recital 11.
For more details about the proposed changes on risk retention in the UK, please see our Engage article Smarter, not harder - a new securitisation framework for the UK.
What should market participants do now?
Until the final risk retention RTS are published, market participants should consider aligning their transactions to the Final RTS (while maintaining compliance with the CRR RTS) as it is likely now that the Final RTS will proceed to approval. For more information please see our Engage article Are we there yet? EBA published final risk retention draft RTS.
If you have any questions on this topic please speak to your usual Structured Finance contact at Hogan Lovells.
This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.
Authored by Julian Craughan, Tauhid Ijaz and Jane Griffiths.