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The UK and Europe Introduce New Securitisation Rules
Thursday, July 20, 2023

The UK and Europe have released a number of updated requirements for securitisations that, while not effecting material changes, are notable in their scope and number. Below, we give a brief guide to these changes and their implementation schedules.

Final Text of the EU Securitisation Regulation Risk Retention Requirements

Following the publication of the Final Draft Regulatory Technical Standards (the “RTS”) specifying the requirements for originators, sponsors and original lenders in relation to risk retention (see our previous Client and Friends memo from April 2022), on 7 July 2023, the European Commission has endorsed and adopted the final text of the risk retention RTS (the “Final Text”).

As little of substance has changed between the RTS and the Final Text, we thought it helpful to briefly recap on the more substantive elements covered by the RTS:

  1. The application of risk retention options for non-performing exposure (“NPE”) securitisations;
  2. Clarification on how the requirements for the fees payable to the risk retainer comply with risk retention requirements;
  3. Standards for servicers in traditional NPE securitisations;
  4. Rules covering synthetic excess spreads;
  5. Clarification on the risk retention requirement for approved re-securitisations;
  6. An exhaustive list of exceptional circumstances under which a change of risk retention holder is permitted.

Notable changes in the Final Text are:

  1. A revision of the RTS requirement relating to the retention of the first loss tranche of an ABCP programme: the disclosure of ‘appropriate information’ to investors is now the disclosure of “all information necessary” to verify the retention.
  2. Provision that an entity securitising own-issued debt instruments will satisfy retention requirements as long as the underlying assets consist solely of own-issued debt instruments (which may be useful in some real estate/master trust securitisation structures).
  3. Inclusion of a comprehensive list of factors to consider when making a random selection of securitised exposures to retain a material net economic interest under Article 6(3)(c) of the EU Securitisation Regulation 2017 (“EU SecReg”).
  4. Clarificatory changes to the sole purpose test (prohibiting an entity which has been established or operates for the sole purpose of securitising exposures from holding the risk retention as an originator) that are consistent with existing market practices that look at the relevant experience of “members of the management body”.
  5. Clarificatory changes to the rules on retention on a consolidated basis.

The Final Text is subject to review by the EU Council and Parliament, and once approved will come into force 20 days after publication in the Official Journal.

UK’s Treasury Publishes Near-Final Version of The Securitisation Regulations 2023

Originally published as an illustrative version of a statutory instrument as part of the Edinburgh Reforms (see our note from December 2022 for a brief outline), HM Treasury has now published a ‘near-final’ version of The Securitisation Regulations 2023 (“UK SecReg”) along with a Policy Note.

As with EU measures to date, there is little of substance to distinguish this version of the UK SecReg from the existing Financial Services and Markets Act 2000 (Securitisation) Regulations 2018 and the UK SecReg’s Edinburgh predecessor, but those changes that are there do include an amended definition of ‘Institutional Investor’ to include only UK alternative investment fund managers.  Rules relating to: (a) risk retention in NPE securitisations; (b) transfers of the retention; (c) the definitions of public and private securitisations; (d) disclosures for private securitisations; and (e) due diligence requirements for UK institutional investors investing in non-UK securitisations remain to be made by the UK’s Financial Conduct Authority and Prudential Regulatory Authority.

The final version of UK SecReg will be laid before Parliament following Royal Assent of the Financial Services and Markets Bill.

ESMA Updates Q&As

The European Securities and Markets Authority (“ESMA”) has updated its Questions and Answers on the Securitisation Regulation. There are a number of modified responses (including on delegation of reporting, prepayments and shortfalls) and new questions, including on amending transaction documents, self-securitisation, balances, non-payments and underlying exposures.

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