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Risk retention spotlight: Draft rules published for AIF managers and UCITS


04 August 2011

The European Securities and Markets Authority (ESMA) published a consultation paper outlining draft technical advice to the EU Commission on implementing measures to be made in connection with the Alternative Investment Fund Managers Directive (AIFMD).  

Amongst other things, the consultation paper includes draft rules with respect to the risk retention and due diligence requirements to be introduced for alternative investment fund (AIF) managers and UCITS seeking to invest in securitisations.

The publication of the proposed implementing rules for AIF managers and UCITS - including, for the first time, sufficient details to assess how such rules may line up (or not) with the risk retention and due diligence requirements which apply under the Capital Requirements Directive (CRD) with respect to EU regulated bank investors - represents a significant development for securitisation market participants. While the ESMA consultation paper refers to the CRD provisions and expressly acknowledges the need to ensure cross-sectoral consistency, there are a number of significant differences in the draft rules as compared to the position under the CRD. If adopted as part of the final rules, these differences may result in compliance challenges for a range of deals (regardless of the jurisdiction of origination), particularly given that the EU risk retention requirements are framed as investor requirements in general and that satisfaction of both the CRD provisions and the AIFMD provisions may be desirable from a general liquidity perspective to ensure that various types of EU regulated entities may invest in the relevant deal.

In particular, the risk retention requirements included in the proposed rules include a number of (unwelcome) surprises when compared to the CRD provisions. For example, the draft implementing rules indicate that it would be necessary for the retained net economic interest to be maintained at a 5% level for the life of the deal (see paragraphs (1) and (3) of Box 35). This is inconsistent with the CRD requirements given that the EBA has interpreted the CRD text in a manner which requires the retained interest to be measured when the assets are first securitised in general and also confirmed that no "top-up" requirement or restriction on the "natural" amortisation of the interest should apply.

In addition, while certain provisions from the CRD text (e.g. the exemptions and the restrictions on transfers and hedges) and from the EBA guidance on such text are carried over into the draft implementing rules, in certain cases the relevant text is only incorporated in part, suggesting that such provisions may not apply equally in respect of the rules to be made for AIF managers and UCITS. For example, the EBA guidance on other eligible retaining entities is only included in part. Moreover, certain key aspects of the EBA guidance are not referred to at all in the draft implementing rules (e.g. the guidance on the retention holding options and the form in which the retained interest may be held). In principle, it would seem that the EBA guidance should apply equally and in full in the context of the rules for AIF managers and UCITS, except where an adjustment is necessary to reflect a specific point of departure related to the nature of such entities. Any other differences will introduce an element of unhelpful uncertainty with respect to the requirements which apply in respect of AIF managers and UCITS and how such requirements should be interpreted as compared to the CRD requirements.

The investor due diligence requirements contemplated by the proposed implementing rules also differ in a number of important respects from the CRD provisions. In particular, the rules would require AIF manager and UCTIS investors to confirm certain matters with respect to the asset underwriting standards and asset and counterparty credit risk management systems of the originator, sponsor or original lender (see Box 36). Oddly, it appears that ESMA has taken the proposed requirements from requirements imposed directly on EU regulated credit institutions in their capacity as originator/credit-grantor under the CRD (i.e. via article 122a(6) and Annex V of the CRD), without acknowledgement of the significant practical constraints on the ability of third party investors to make the necessary assessments and confirmations, of the potential limited relevance of such matters with respect to the specific securitisation position being invested in and/or of the fact that, to the extent that the transaction involves an EU regulated bank originator, such originator will be itself required to comply with the overlapping CRD requirements and to satisfy its national supervisor of this. In this regard, we note that it is not clear that the assessments would be transaction and/or asset-type specific (i.e. it appears that they are intended to relate to the standards and systems of the originator in general) and, given the wide manner in which the requirements are framed, it is not clear that the information required to perform the required assessments would be publicly available (i.e. it is likely that at least a portion of the information would be commercially sensitive and/or subject to data protection or confidentiality restrictions on disclosure).

The deadline for responses on the draft technical advice on the rules for AIF managers and UCITS is 13 September 2011. We encourage interested clients to provide comments on the proposals.


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