The European Banking Authority (EBA) published today an Opinion on how to improve the well- functioning of the securitisation market. The Opinion is based on a detailed report, which assesses compliance by Competent Authorities with securitisation risk retention, due diligence and disclosure requirements. While expressing support for the provisions laid down in the Capital Requirements Regulation (CRR), the EBA is making a series of recommendations to ensure increased transparency, legal certainty of compliance with the retention rules as well as prevention of any potential regulatory arbitrage. The report also assesses the application and effectiveness of such requirements in light of the international developments.
The EBA has reviewed the supervisory measures taken by Competent Authorities to ensure compliance with securitisation risk retention, disclosure and due diligence requirements and has highlighted in its report that in most jurisdictions - at least in those countries with an active securitisation market - actions have been taken. The limited number of cases of breaches reported by Competent Authorities is a positive signal in this respect.
Following a comprehensive analysis, the EBA is of the opinion that the retention requirements and its multiple components, namely the type of retainer (originator, original lender or sponsor), the forms of retention used, the level of net economic interest retained, and the assessment of the consolidated situation of the retainer, are appropriate, and recommends to introduce certain additional safeguards and provisions to support the current framework.
In particular, the EBA recommends to implement a complementary ‘direct' approach (where the onus is on the originator, sponsor or original lender) together with the existing ‘indirect' approach (where the onus on the investors) aimed at creating more certainty and transparency for investors.
In addition, the report highlights that as a result of the wide scope of the definition of ‘originator' in the CRR , securitisation transactions may be structured so as to meet the legal requirements of the regulation without, however, following the ‘spirit' of the regulation. The EBA believes that the scope of the originator definition should be narrowed down to ensure that industry participants do not abuse the rules.
Furthermore, the EBA advises that the disclosure requirements are appropriate and fit for purpose to ensure investor protection as well as financial stability and that the due diligence requirements are sufficient and proper.
Finally, when comparing and reviewing the regulations at international level, the EBA observed several differences. The EBA believes that if the EU regime and the foreign legislation are not harmonised, it might drive a real wedge between the global securitisation markets and may further prevent EU issuers from benefitting from global investors base and reduce EU investors' ability to benefit from global securitisation investments. This would reduce the competitiveness of the EU financial industry and its ability to be engaged in the global securitisation market.
The report has been developed in accordance with Article 410(1) of the CRR, which mandates the EBA to report annually to the Commission on the measures taken and compliance by Competent Authorities with Article 405-409 of the CRR.
The report has been developed also following a call for advice from the European Commission, which required the EBA to provide technical advice on the application and effectiveness of the CRR requirements for investor, sponsor and originator institutions in relation to exposures to transferred credit risk in light of international market developments.
The final report has been sent today to the European Commission.