New risk retention technical standards under the EU Securitisation Regulation set to take effect

The final EU RTS on risk retention for securitisation transactions will take effect on 7 November, following their publication in the Official Journal of the EU. This means that new securitisation transactions will have to, where relevant, make reference to the new technical standards in transaction documentation from that date to ensure practical compliance with the EU risk retention rules. The transitional provisions in the EU Securitisation Regulation that apply the “old” risk retention RTS will fall away on the same date.

Securitisation regulation expert Katie McCaw of Pinsent Masons said: “The finalisation of the new technical standards has been long-awaited, and the industry has been in practical compliance with the substance of the RTS for some time. However, getting them onto the EU statute book in final form is a welcome development.”

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).

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.

While the entry into force of the EU technical standards will provide clarity and comfort to securitisation market participants, McCaw pointed out that the post-Brexit UK securitisation regime is developing in some different directions from its EU counterpart, posing challenges to cross-border deals.

“The UK regulators’ recent consultation papers on the new UK securitisation regime aim to replicate some, but not all, of the aspects of these EU technical standards. For example, the UK’s proposed new rules are not as comprehensive as the EU RTS in relation to the circumstances in which a change of risk retainer is allowed, or in terms of the rules as they apply to the securitisation of non-performing exposures,” said McCaw.

“This reflects the inevitable divergence between the EU and UK regimes post-Brexit. The development of the UK’s new ‘smarter’ regulatory framework also means, for example, technical standards will no longer exist. This has led to compliance challenges for cross-border transactions, which will only become greater as the two regimes continue to part ways in future,” she added.

Currently, both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are carrying out public consultations on proposed changes to regulatory rules that are needed to implement the new UK securitisation regulatory framework in the UK. Both regulators’ target date for the implementation of these changes is the second quarter of 2024, subject to the new UK Securitisation Regulation being in application by then.