New types of institutional investors will soon fall under the revised and expanded EU risk retention rules that will affect investors' obligations and requirements for new securitizations, including in relation to due diligence and internal monitoring and reporting.
Regulation (EU) 2017/2402 (Securitization Regulation) codifies a general framework for all securitizations and introduces a new securitization framework for “simple, transparent and standardized” securitizations. The Securitization Regulation will apply throughout the European Union (EU) as of January 1, 2019, imposing due diligence, transparency, and risk retention requirements on a broader scope of institutional investors (including undertakings for the collective investments in transferable securities (UCITS) and non-EU alternative investment funds (AIFs)) in securitization positions.
While EU AIF managers (AIFMs) are currently subject to due diligence, monitoring, and internal reporting requirements in relation to securitization positions under the EU Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD), the Securitization Regulation repeals and replaces those provisions by including AIFMs as institutional investors and extending the requirements to non-EU AIFMs that market alternative investment funds in the EU.
Institutional investors will also include UCITS managers, which will be subject to the due diligence, monitoring, and reporting requirements in relation to securitization positions for the first time.
If an institutional investor, such as an AIFM or UCITS manager, delegates responsibility for fulfilling the due diligence, monitoring, and reporting requirements, any sanctions may be imposed on the delegate rather than the institutional investor.
Prior to holding a securitization position, institutional investors will need to verify that
Institutional investors will also need to carry out a risk assessment of the securitization position and underlying exposures, including any structural features that could materially impact the securitization position’s performance (e.g., priorities of payment, credit and liquidity enhancements, market value triggers, and transaction-specific events of default).
Institutional investors holding a securitization position will need to at least
Additionally, the institutional investors will need to establish internal procedures for
The Securitization Regulation requires UCITS management companies and AIFMs that are exposed to a securitization position that no longer meets the requirements of the Securitization Regulation to—in the “best interest of investors” in the UCITS or AIF—“act and take corrective action, if appropriate.”
While “corrective action” is not defined for this purpose, it is clear that such corrective action is not a requirement to sell in all circumstances, as sales of all noncompliant securitization positions may not be in the best interest of investors.
For newly in-scope investors (such as UCITS managers and non-EU AIFMs), practical steps and controls to address these requirements could include
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