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CRD IV consultation on securitisation risk retention standards raises questions

 

15 July 2013

The EU Banking Authority (EBA) has published a consultation paper on the draft technical standards to be made under the re-cast risk retention and due diligence requirements included in the European package of legislative provisions known as “CRD IV”.  

Contributed by Nicole Rhodes

While it was hoped that the technical standards would largely replicate the guidance which applies under the risk retention regime under the current EU Capital Requirements Directive, the EBA’s proposals are significantly different and do not carry over certain key provisions from the existing guidance. In particular, the proposed standards do not carry over the current flexibility for a non-originator/sponsor entity to retain the required interest in certain circumstances and/or the clarifications with respect to the pre-2011 securitisations that are subject to the requirements after the end of 2014.

Given that a way forward had been found under the current EU risk retention regime for various transaction types since the requirements were introduced in 2011 (including, most recently, for managed CLOs), and that this level of functionality is due in large part to elements of the current guidance, the consultation paper gives rise to uncertainty for market participants.

The proposals are particularly problematic for transactions which do not fit neatly within the retention template and, based on the seeming lack of protection for outstanding compliant positions, raise already heightened issues for existing securitisations. Given the manner in which the risk retention requirements are framed (ie as requirements which apply directly to EU credit institution investors), the lack of protection in the proposals for existing securitisations has the potential to effectively penalise relevant investors (by restricting the liquidity and, as a result, possibly the valuation of relevant positions).

The deadline for comments to the consultation paper is 22 August 2013. We are assisting the Association of Financial Markets in Europe (AFME) with their response and encourage interested market participants to get involved.

 

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