EU completes securitisation regulatory ‘jigsaw’ with final risk retention technical standards

The Commission’s adoption means the technical standards (47 page PDF/449KB) move one step closer to the statute book, with a clearer timeline of when they will enter into force. The RTS aim to clarify the requirements on the retention of a material net economic interest in relation to exposures to securitisations as set out in article 6 of the EU Securitisation Regulation, and will replace an earlier set of RTS that were first published in 2014 under the Capital Requirements Regulation (CRR).

Securitisation regulation expert Katie McCaw of Pinsent Masons described this “long-awaited” development as one of the final pieces of the EU securitisation regulatory “jigsaw”.

“The market was in practical compliance with these revised RTS for some time,” she said. “The original RTS of 2014 were written under an earlier version of the securitisation rules which have been amended since then. However, the revised rules were not yet on the EU statute book, and instead were just in final draft form following the EBA’s publication of them.”

The new RTS were published in final form by the European Banking Authority (EBA) in April 2022. Following their adoption by the Commission, there will now be a three-month period for scrutiny by the European Parliament and Council. If there are no objections, the RTS will be published in the Official Journal of the EU and enter into force 20 days after publication – expected by the end of 2023 or first quarter of 2024. The original RTS remain in effect until that time.

“Once the new RTS enter into force, the transitional provisions in the securitisation regime that provide for parts of the original risk retention rules of 2014 to apply will fall away. Having the final RTS on the EU statute book will give securitisation market participants comfort that they are in full compliance with the risk retention rules and guidance under the EU Securitisation Regulation,” she said.

Among the changes from the original RTS are the addition of various new provisions providing clarity around when an entity shall be deemed not to have been established or to operate for the sole purpose of securitising exposures; the circumstances in which the retainer may be changed; adverse selection of assets and the fees paid to a risk retainer. Other changes reflect the amendments made to the Securitisation Regulation in 2021 under the so-called ‘capital markets recovery package’ which created a new framework for synthetic ‘STS’ securitisations and facilitated securitisations of non-performing exposures.

The new RTS, according to the EBA’s statement, are set to address the fundamental issue of the possible misalignment of interests and incentives in securitisation transactions between the investors on the one hand, and the originators, sponsors or original lenders on the other, by ensuring that the latter maintain ‘skin in the game' by retaining a material net economic interest of at least 5% in each securitisation.

The EU’s revised RTS are expected to have a certain level of influence on the development of the risk retention rules under the UK’s new Securitisation Regulation. As the EU’s final draft was published after the end of the Brexit transition period, technically, the original RTS of 2014 will continue to apply under the UK securitisation regime until the UK revokes the EU-derived legislation and technical standards and adopts its own risk retention rules.

“The UK may seek to replicate much of the text of these final RTS under the new UK Securitisation Regulation, which is being taken forward as part of the Edinburgh Reforms and provisions in the new Financial Services and Markets Act,” said McCaw. “However, there are post-Brexit differences in the EU and UK versions of the Securitisation Regulation. That will mean the two sets of risk retention provisions will not be identical.”

Under the Edinburgh Reforms – much of which is underpinned by the UK’s new Financial Services and Markets Act (FSMA) –the Securitisation Regulation is among the first tranche of EU financial services law which will be reviewed and transitioned into the so-called ‘comprehensive FSMA model’, which is the UK’s existing domestic model for financial services regulation. This will see the UK introduce a new UK Securitisation Regulation setting the regulatory framework, with the bulk of the firm-facing requirements being moved into regulators’ rulebooks.