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CEBS' final guidance on risk retention and due diligence requirements


11 February 2011

On 31 December 2010, the Committee of European Banking Supervisors (CEBS) published its (much anticipated) final guidance and feedback document on securitisation risk retention and due diligence requirements.  

These requirements took effect as part of the EU Capital Requirements Directive (CRD) from the start of this year.

While CEBS made significant strides in interpreting the difficult (and in places deficient) text of the requirements (set out in new article 122a to the CRD), the final guidance did not deliver good news across the board. Below is a summary of five key points to note with respect to the final guidance.

Key points to note

  • Issues under established programmes and conduits form part of an "existing securitisation" - significantly, CEBS clarified the application of article 122a in the context of issuances made from the end of 2010 under established securitisation programmes and schemes. While there were concerns that such issues might be regarded as a "new securitisation issued" (thereby requiring compliance with article 122a from the relevant issue date after 1 January 2011), the final guidance indicates that the key factor in this regard is whether or not the relevant programme or scheme existed prior to the end of 2010 - meaning that article 122a should not apply to post-1 January 2011 issuances under established securitisation programmes and schemes until after the end of 2014 and then only to the extent that new assets are added or substituted after that time (and, on this front, CEBS has indicated that asset substitution due to warranty breach should not be regarded as a relevant trigger).
  • Application to EU banks on a consolidated basis confirmed; unclear flexibility for limited trading book activities - CEBS confirmed that article 122a applies to EU regulated banks on a consolidated basis but allowed some flexibility in the context of certain trading book activities conducted by consolidated entities. While the drafting of the relevant provisions is somewhat unclear, it appears that, in the context of relevant trading book activities undertaken by a consolidated entity, the measures necessary for compliance may be adjusted - such that compliance with the retention and other requirements may not be necessary and no penalties should be applied - if the relevant trading book positions "are not overly material, nor form a disproportionate share of trading activities, provided that there is a thorough understanding of the exposures or positions and that formal policies and procedures have been implemented which are appropriate and commensurate with that entity's and the group's overall risk profile".
  • Entities which may retain the interest; use of originator SPVs - CEBS confirmed that an entity other than an eligible originator, sponsor or original lender may hold the retained interest, including via a special purpose vehicle established to satisfy the originator definition (the so-called "originator SPV"), provided that the retention requirement is "ultimately met by an entity with which alignment of interests is optimally achieved" and that the structure is "not a mechanism for re-distributing the technically "retained" exposure to other investors". CEBS specifically notes that acceptable arrangements would include those involving an originator SPV where the retained interest is ultimately borne by the asset manager in a CLO where such manager is not a bank and there is ongoing management and substitution of exposures or by a subordinated investor involved in the selection of exposures and the structuring of tranches in a CMBS, provided that the retained interest is not sold on to "other third party investors with no involvement in the relevant securitisation, or to other funds managed by the asset manager that structured the relevant securitisation". While the flexibility provided by CEBS is helpful in addressing certain technical issues in respect of the definitions of originator and sponsor, it remains to be seen whether market participants will be able to make the flexibility work as intended and, in the context of arrangements which do not track directly to the examples provided by CEBS, whether investors (or other market participants) will consider themselves able to determine with sufficient certainty that an entity which proposes to hold the interest satisfies the general tests described above.
  • Loan-level information "typically" required but may not be appropriate for "highly granular" deals - there has been considerable debate as to whether investors will require loan-level information to satisfy their due diligence obligations under article 122a. The final guidance indicates that the information to be provided to investors by credit institution originators and sponsors should "typically" be provided on a loan-level basis and notes that, in certain circumstances, this will be "a material necessity for the due diligence process" (the example provided in this regard refers to a non-revolving deal with large concentrations of non-granular exposures). That said, the final guidance further acknowledges that there may be situations where the provision of loan-level data is not appropriate and CEBS indicates that this would be the case, e.g., where the deal involves "a large volume of exposures that are highly granular". This carve-out is likely to prove helpful in the context of deals involving large asset pools (e.g. credit card deals and residential mortgage backed deals), although other initiatives (such as the Bank of England's new transparency requirements and the European Central Bank's new loan-level reporting requirements) are pushing the market towards loan-level disclosure across the board.
  • Exemption for correlation trading portfolios - the final guidance includes further clarification with respect to the exemptions to the retention requirement. In particular, helpful guidance is provided with respect to the exemption for correlation trading portfolios - essentially aligning the exempted arrangements with those referred to in the CRD3 definition of correlation trading portfolio. In addition, CEBS has confirmed that compliance with the CRD3 due diligence provisions which apply to the correlation book will also satisfy the due diligence requirements under article 122a.

We encourage interested clients to get in touch if they have questions about article 122a and/or CEBS' final guidance.


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