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CHAPTER III RETENTION OF NET ECONOMIC INTEREST

Article 3 Retainers of material net economic interest

  1. (1)

    The retained material net economic interest shall not be split amongst different types of retainer. The requirement to retain a material net economic interest shall be fulfilled in full by any of the following:

    1. (a)

      the originator or multiple originators;

    2. (b)

      the sponsor or multiple sponsors;

    3. (c)

      the original lender or multiple original lenders.

  2. (2)

    Where the securitised exposures are created by multiple originators, the retention requirement shall be fulfilled by each originator, in relation to the proportion of the total securitised exposures for which it is the originator.

  3. (3)

    Where the securitised exposures are created by multiple original lenders, the retention requirement shall be fulfilled by each original lender, in relation to the proportion of the total securitised exposures for which it is the original lender.

  4. (4)

    By way of derogation from paragraphs 2 and 3, where the securitised exposures are created by multiple originators or multiple original lenders, the retention requirement may be fulfilled in full by a single originator or original lender provided that either of the following conditions are met:

    1. (a)

      the originator or original lender has established and is managing the programme or securitisation scheme;

    2. (b)

      the originator or original lender has established the programme or securitisation scheme and has contributed over 50 % of the total securitised exposures.

  5. (5)

    Where the securitised exposures have been sponsored by multiple sponsors, the retention requirement shall be fulfilled by either:

    1. (a)

      the sponsor whose economic interest is most appropriately aligned with investors as agreed by the multiple sponsors on the basis of objective criteria including the fee structures, the involvement in the establishment and management of the programme or securitisation scheme and exposure to credit risk of the securitisations;

    2. (b)

      by each sponsor proportionately in relation to the number of sponsors.

Article 4 Fulfilment of the retention requirement through a synthetic or contingent form of retention

  1. (1)

    The retention requirement may be fulfilled in a manner equivalent to one of the options set out in the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013 through a synthetic or contingent form of retention where the following conditions are met:

    1. (a)

      the amount retained is at least equal to the requirement under the option to which the synthetic or contingent form of retention can be equated;

    2. (b)

      the retainer has explicitly disclosed that it will retain, on an ongoing basis, a material net economic interest in that manner, including details of the form of retention, the methodology used in its determination and its equivalence to one of those options.

  2. (2)

    Where an entity other than a credit institution as defined in Article 4(1)(1) of Regulation (EU) No 575/2013 acts as a retainer through a synthetic or contingent form of retention, the interest retained on a synthetic or contingent basis shall be fully collateralised in cash and held on a segregated basis as "clients" funds as referred to in rule 7.12.1R of the Client Assets sourcebook.

Article 5 Retention option (a): pro rata retention in each of the tranches sold or transferred to investors

  1. (1)

    A retention of no less than 5 % of the nominal value of each of the tranches sold or transferred as referred to in point (a) of Article 405(1) of the Regulation (EU) No 575/2013 may also be achieved by the following:

    1. (a)

      retention of at least 5 % of the nominal value of each of the securitised exposures, provided that the credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised for the same exposures. In the case of a revolving securitisation, as defined in Article 242(13) of Regulation (EU) No 575/2013, this would occur through retention of the originator's interest assuming the originator's interest was for at least 5 % of the nominal value of each of the securitised exposures and ranked pari passu with or subordinated to the credit risk that has been securitised with respect to those same exposures;

    2. (b)

      the provision, in the context of an ABCP programme, of a liquidity facility which may be senior in the contractual waterfall, where the following conditions are fulfilled:

      1. (i)

        the liquidity facility covers 100 % of the credit risk of the securitised exposures;

      2. (ii)

        the liquidity facility covers the credit risk for as long as the retainer has to retain the economic interest by means of such liquidity facility for the relevant securitisation position;

      3. (iii)

        the liquidity facility is provided by the originator, sponsor or original lender in the securitisation transaction;

      4. (iv)

        the institution becoming exposed to such securitisation has been given access to appropriate information to enable it to verify that points (i), (ii) and (iii) are complied with;

    3. (c)

      retention of a vertical tranche which has a nominal value of no less than 5 % of the total nominal value of all the issued tranches of notes.

Article 6 Retention option (b): retention of the originator's interest for revolving exposures

A retention as referred to in point (b) of Article 405(1) of Regulation (EU) No 575/2013 may be achieved by retaining at least 5 % of the nominal value of each of the securitised exposures, provided that the retained credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised for the same exposures.

Article 7 Retention option (c): retention of randomly selected exposures

  1. (1)

    The pool of at least 100 potentially securitised exposures from which retained and securitised exposures are randomly selected, referred to in point (c) of the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013, shall be sufficiently diverse to avoid the excessive concentration of the retained interest. When preparing for the selection process, the retainer shall take appropriate quantitative and qualitative factors into account in order to ensure that the distinction between retained and securitised exposures is genuinely random. The retainer of randomly selected exposures shall take into consideration, where appropriate, factors such as vintage, product, geography, origination date, maturity date, loan to value ratio, property type, industry sector, and outstanding loan balance when selecting exposures.

  2. (2)

    The retainer shall not designate different individual exposures as retained exposures at different points in time, unless this is necessary to fulfil the retention requirement in relation to a securitisation in which the securitised exposures fluctuate over time, either due to new exposures being added to the securitisation or to changes in the level of the individual securitised exposures.

Article 8 Retention option (d): retention of the first loss tranche

  1. (1)

    The retention of the first loss tranche in accordance with point (d) of the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013 shall be fulfilled by either on-balance sheet or off-balance sheet positions and may also be fulfilled by any of the following:

    1. (a)

      provision of a contingent form of retention as referred to in Article 1(1)(c) or of a liquidity facility in the context of an ABCP programme, which fulfils the following criteria:

      1. (i)

        it covers at least 5 % of the nominal value of the securitised exposures;

      2. (ii)

        it constitutes a first loss position in relation to the securitisation;

      3. (iii)

        it covers the credit risk for the entire duration of the retention commitment;

      4. (iv)

        it is provided by the originator, sponsor or original lender in the securitisation;

      5. (v)

        the institution becoming exposed to such securitisation has been given access to appropriate information to enable it to verify that points (i), (ii), (iii) and (iv) are complied with;

    2. (b)

      overcollateralisation, as a form of credit enhancement, if that overcollateralisation acts as a "first loss" retention of no less than 5 % of the nominal value of the tranches issued by the securitisation.

  2. (2)

    Where the first loss tranche exceeds 5 % of the nominal value of the securitised exposures, it shall be possible for the retainer to only retain a portion of such first loss tranche, where this portion is equivalent to at least 5 % of the nominal value of the securitised exposures.

  3. (3)

    For the fulfilment of the risk retention requirement at a securitisation scheme level institutions shall not take into account the existence of underlying transactions in which the originators or original lenders retain a first loss exposure at the transaction-specific level.

Article 9 Retention option (e): retention of a first loss in every securitised exposure

  1. (1)

    The retention of a first loss exposure at the level of every securitised exposure in accordance with point (e) of the second subparagraph of Article 405(1) shall be applied so that the credit risk retained is always subordinated to the credit risk that has been securitised in relation to those same exposures.

  2. (2)

    The retention referred to in paragraph 1 may be fulfilled by the sale at a discounted value of the underlying exposures by the originator or original lender, where the amount of the discount is not less than 5 % of the nominal value of each exposure and where the discounted sale amount is only refundable to the originator or original lender where it is not absorbed by losses related to the credit risk associated to the securitised exposures.

Article 10 Measurement of the level of retention

  1. (1)

    Where measuring the level of retention of net economic interest, the following criteria shall be applied:

    1. (a)

      origination shall be considered as the time at which the exposures were first securitised;

    2. (b)

      the calculation of the level of retention shall be based on nominal values and the acquisition price of assets shall not be taken into account;

    3. (c)

      "excess spread" as defined in Article 242(1) of Regulation (EU) No 575/2013 shall not be taken into account when measuring the retainer's net economic interest;

    4. (d)

      the same retention option and methodology shall be used to calculate the net economic interest during the life of a securitisation transaction, unless exceptional circumstances require a change and that change is not used as a means to reduce the amount of retained interest.

  2. (2)

    In addition to the criteria set out in paragraph 1, provided that there is no embedded mechanism by which the retained interest at origination would decline faster than the interest transferred, the fulfilment of the retention requirement shall not be deemed to have been affected by the amortisation of the retention via cash flow allocation or through the allocation of losses, which, in effect, reduce the level of retention over time. A retainer shall not be required to constantly replenish or readjust its retained interest to at least 5 % as losses are realised on its exposures or allocated to its retained position.

Article 11 Measurement of retention for the undrawn amounts in exposures in the form of credit facilities

The calculation of the net economic interest to be retained for credit facilities, including credit cards, shall be based only on amounts already drawn, realised or received and shall be adjusted in accordance with changes to those amounts.

Article 12 Prohibition of hedging or selling the retained interest

  1. (1)

    The obligation in the third subparagraph of Article 405(1) of Regulation (EU) No 575/2013 not to subject the retained net economic interest to any credit risk mitigation, short positions, other hedge or sale shall be applied having regard to the purpose of the retention requirement and taking account of the economic substance of the transaction. Hedges of the net economic interest shall not be considered to be a hedge for the purposes of the third subparagraph of Article 405(1) of Regulation (EU) No 575/2013 and may accordingly be permitted only where they do not hedge the retainer against the credit risk of either the retained securitisation positions or the retained exposures.

  2. (2)

    The retainer may use any retained exposures or securitisation positions as collateral for secured funding purposes, as long as such use does not transfer the credit risk of these retained exposures or securitisation positions to a third party.

Article 13 Exemptions to Article 405(1) of Regulation (EU) No 575/2013

The transactions referred to in Article 405(4) of Regulation (EU) No 575/2013 shall include securitisation positions in the correlation trading portfolio which are reference instruments satisfying the criterion in Article 338(1)(b) of Regulation (EU) No 575/2013 or are eligible for inclusion in the correlation trading portfolio.

Article 14 Retention on a consolidated basis

An institution satisfying the retention requirement on the basis of the consolidated situation of the related EU parent credit institution, EU financial holding company, or EU mixed financial holding company in accordance with Article 405(2) of Regulation (EU) No 575/2013 shall, in the case the retainer is no longer included in the scope of supervision on a consolidated basis, ensure that one or more of the remaining entities included in the scope of supervision on a consolidated basis assumes exposure to the securitisation so as to ensure ongoing fulfilment of the requirement.