New EU Risk Retention Regulatory Technical Standards Now in Force

The new regulatory technical standards in relation to risk retention under the EU Securitisation Regulation have now come into force. This is a significant development as risk retention is a key aspect of the EU Securitisation Regulation regime and market participants have been waiting for these regulatory technical standards to be finalised for a number of years.

The EU Securitisation Regulation includes certain requirements as to risk retention. In particular, Article 6 of the EU Securitisation Regulation requires the originator, sponsor, or original lender of a securitisation to retain on an ongoing basis a material net economic interest of not less than 5%, using one of five methods.

In addition, certain institutional investors must verify that the risk retention obligations have been complied with, as part of their due diligence obligations under Article 5 of the EU Securitisation Regulation.

Under the EU Securitisation Regulation, regulatory technical standards were required to be prepared in order to set out certain aspects of the risk retention requirements in more detail (the EU Risk Retention RTS). Until then, the previous regulatory technical standards relating to risk retention that were put in place under the EU Capital Requirements Regulation (Chapters I, II and III and Article 22 of Delegated Regulation (EU) No 625/2014) (the CRR RTS) applied to securitisations where the securities were issued, or where the securitisation positions were created, on or after 1 January 2019. However, the CRR RTS did not fully cover all aspects of the risk retention requirements under the EU Securitisation Regulation.

A final draft of the EU Risk Retention RTS was originally published by the European Banking Authority (the EBA) in July 2018, but was not adopted by the European Commission (the Commission). As a result of certain amendments to the EU Securitisation Regulation in March 2021, the 2018 draft of the EU Risk Retention RTS was required to be amended and, after a consultation process, the EBA published a revised final draft of the EU Risk Retention RTS on 12 April 2022. This was adopted by the Commission, with some amendments, on 7 July 2023 (as amended, the 2023 Commission Final Draft RTS).

Following review by the European Parliament and the Council of the European Union, the EU Risk Retention RTS were published (with no material changes from the 2023 Commission Final Draft RTS) in the Official Journal of the European Union on 18 October 2023 as Commission Delegated Regulation (EU) 2023/2175 of 7 July 2023, and came into force 20 days after publication, on 7 November 2023.

THE EU RISK RETENTION RTS

The EU Risk Retention RTS include provisions regarding the following:

• Retention in the event that there is more than one originator, sponsor or original lender, or more than one servicer in a securitisation of non-performing exposures (NPEs)
• Aspects to be taken into account for the purpose of determining that an originator has not been established and does not operate for the sole purpose of securitising exposures, in order to be capable of holding the retained interest (commonly known as the "sole purpose" test)
• Fulfilment of the retention requirement through a synthetic or contingent form of retention
• Further details of how each of the five methods of risk retention can be complied with
• Application of the risk retention requirements in the case of NPE securitisations, in particular the calculation of the retained interest by reference to the net value of the NPEs instead of the nominal value of the securitised exposures
• Measurement of the level of retention, including the use of synthetic excess spread for certain synthetic securitisations
• Prohibitions on hedging or transferring the retained interest, with certain limited exceptions
• Requirements in relation to the allocation of cash flows and losses to the retained interest, and the payment of any fees to the risk retention holder
• Retention requirements in relation to resecuritisations (which are only permitted in certain limited circumstances)
• Additional provisions in relation to the prohibition of adverse selection of assets by originators under Article 6(2) of the EU Securitisation Regulation
• Expertise requirements for a servicer to act as risk retainer in an NPE securitisation

For further information on some of the key changes made in the EU Risk Retention RTS compared with the CRR RTS, please refer to our previous LawFlashes European Banking Authority Publishes Final Draft Regulatory Technical Standards on EU Risk Retention and European Commission Adopts Final Draft Regulatory Technical Standards on EU Risk Retention.

Risk retention representations and undertakings in transaction documents, and disclosure wording in offering documents, will need to reflect the fact that the EU Risk Retention RTS are now in force.

UK RISK RETENTION

The EU Risk Retention RTS will not apply in the United Kingdom, where a new statutory instrument together with rules made by the UK regulators are expected to replace the current securitisation regime.

For further information on the anticipated changes to the UK securitisation regime, please refer to our previous LawFlashes HM Treasury Publishes Near-Final Draft of UK Securitisation Regulations 2023 and FCA Publishes Consultation Paper on Rules Relating to Securitisation.