European Commission adopts text of Risk Retention RTS

Last summer, we published an advisory discussing the European Banking Authority's ("EBA") final draft regulatory technical standards on risk retention pursuant to Article 6(7) of the Securitisation Regulation (EU) 2017/2017) (the "Draft RTS ").  It was anticipated at that time that the European Commission would endorse the Draft RTS before the end of 2022.

The European Commission, on 7 July 2023, belatedly endorsed the Draft RTS with some amendments (the "Final RTS").  These amendments principally go to form and clarity and do not substantively alter the rules on risk retention as described in our advisory.  

The most noteworthy amendments are as follows:

  • Sole purpose test - the application 'sole purpose test' has arguably been made more prescriptive. The Draft RTS listed two factors to be "taken into account" in determining whether or not an entity had been established for the sole purpose of securitising exposures (i.e. a broader business strategy and sufficient internal management); whereas the existence of these factors is now determinative under the Final RTS.
  • Own issued debt - reintroduction of the deemed compliance with the retention requirement of securitisations of solely own issued debt (recognising that in such situations the principal obligor will have full alignment of interest with the investor). This provision appeared in the draft text consulted upon by the EBA in June 2021 but did not make it into the Draft RTS.
  • Hedging - clarification that the retained net economic interest may be hedged where the hedge is not against the credit risk or either the retained securitisation positions or the retained exposures.
  • Direct retention - clarification that the retention requirement can be satisfied via direct retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors.

The Final RTS are now subject to review by the European Council and Parliament. Once approved, the Final RTS will enter into force on 20th day following its publication in the Official Journal of the European Union.