Response to consultation on draft RTS specifying the requirements for originators, sponsors, original lenders and servicers relating to risk retention
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(Please see figure 1 in the attached pdf for the proposed amendments of Article 15(2) referred to above.)
Recital 6 can also be amended, as indicated below, to provide examples of services not intended to be captured by the restriction on upfront/guaranteed fees (the language in square brackets to be included only if the restrictions on guaranteed/up-front fees are retained):
(Please see figure 2 in the attached pdf for the proposed amendments of Recital 6 referred to above.)
Rather than implementing the limited amendments above, however, it is our strong view that the proposed prescriptive and inflexible: (i) restrictions on fees that are guaranteed or payable upfront, and (ii) requirements in relation to the meaning of the term “arm’s length”, should be deleted altogether. The current proposals are vague, unhelpful, and would introduce significant uncertainty (for example, the meaning of the phrase “undue preferential claim” is unclear and open to interpretation). Instead, the EBA should have faith in (i) the arm’s-length concept, which is widely employed, and well understood, in contract and legal interpretation; and (ii) the clear statement of principle in Article 15(1) to the effect that: “There shall be no arrangements or embedded mechanisms in the securitisation by virtue of which the retained interest at origination would decline faster than the interest transferred.” Fees that are arm’s-length (on the ordinary meaning of the words) – and therefore not designed to undermine the risk retention – should have no impact on the level of retention required. On this basis, Article 15 could be redrafted as follows:
Fees – preferred proposal:
(Please see figures 3 and 4 in the attached pdf for the proposed redrafting of Article 15 as referred to above and below.)
We note that certain fees are typically paid in priority: this is required by investors and rating agencies in order to ensure that service providers are sufficiently remunerated and incentivised to provide the best service and maximise collections. Priority payment is also the norm for operating expenses which are necessary to ensure the proper operational functioning of the SSPE, such as those associated with: management companies, custodians, account banks, representatives of the noteholders, paying agents, and listing agents. Clarity of the contemplated scope of services would be welcome, as would be a recognition that it is usual for such service providers to be paid at top of the priorities of payment.
The LMA supports the principles-based approach applied to the “sole purpose test” guidance under Article 2(7) of the Draft RTS. It is essential that such guidance can be interpreted sufficiently flexibly so as to allow for appropriate application across the full range of scenarios that may arise, including in the context of existing securitisations in-scope of the Securitisation Regulation that had to comply with the sole purpose test post-1 January 2019 under the transitional provisions and in the absence of the finalised recast retention RTS having to refer, in the first instance, to Article 6(1) of the Securitisation Regulation, the EBA’s final report on the earlier version of the draft RTS of July 2018 and related background materials on the policy behind this test, including the EBA’s report of December 2014.
We note that as mentioned during the public hearing, the EBA’s approach continues to be focused on high-level principles (by broadly being substantially similar to the wording of the earlier version of the draft RTS of July 2018).
We understand that the changes made are not intended to tighten or to broaden the sole purpose test parameters provided in the earlier EBA draft of July 2018, which the LMA support. However, we believe that further improvements could be made to the drafting of the guidance in order to: (i) further clarify that the sole purpose test requires appropriate consideration being given to the relevant principles (i.e. it does not mean that each of the identified principles is given equal weight and fully satisfied in all circumstances); and (ii) more closely track the wording of Article 6(1) of the Securitisation Regulation itself. These improvements will assist with legal certainty, as the current wording is potentially open to interpretation (including a presumably unintentional interpretation which, if followed, would be inconsistent with the text of Article 6(1) of the Securitisation Regulation).
We believe that a minor amendment to the introductory paragraph of Article 2(7) of the Draft RTS and the deletion of the words “or predominant”, as set out below, could achieve this. This will ensure clarity that the interpretation of the guidance should not result in the effective replacement of the test in Article 6(1) of the Securitisation Regulation with a more rigid test. The amended wording makes it clear that each of the principles should be taken into account when assessing whether the sole purpose test is satisfied and allows for adjustments in weighting through the reference to “appropriate consideration”. Such adjustments may be required, for example, where the relevant entity has been established relatively recently and it is intended to operate for purposes consistent with a broader business purpose but it is not possible to point to a material operating history at the time of closing.
We consider the suggested amendments (as per the mark-up of Article 2(7) set out below) to be necessary for sensible application of the guidance, and to ensure that the sole purpose test set out in Article 6(1) of the Securitisation Regulation is not effectively replaced by another test in Article 2(7) of the Draft RTS. Moreover, the revised wording should function to deliver appropriate outcomes under the retention requirements from a policy perspective.
(Please see figure 5 in the attached pdf for the proposed amendments of Article 2(7) as referred to above.)
B. Prohibition on selling the retained interest – Article 12(3) should track the wording of Recital (10) more closely
Recital (10) helpfully clarifies that it is possible to change the retainer (i) where insolvency proceedings have been commenced in respect of the retainer; or (ii) the retainer is unable to continue acting in that capacity for reasons beyond its control or the control of its shareholders. However, limb (ii) of the recital wording is missing from Article 12(3). Therefore, we propose to amend Article 12(3) as follows to track the wording of Recital (10) more closely:
(Please see figure 6 in the attached pdf for the proposed amendments of Article 12(3) as referred to above.)
C. Consolidated application – clarification for entities other than relevant credit institutions
The Securitisation Regulation (unlike the CRR (and its predecessor CRD2) from which the risk retention requirements originate) is a cross-sectoral regulation. Ability to fulfil the risk retention on a consolidated basis under Article 6(4) of the Securitisation Regulation should also apply to sponsors, originators or original lenders other than credit institutions (as was explicitly stated in paragraph 71 of the CEBS Guidelines to CRD2 Article 122a) and should apply whether or not such entities are established in the EU. This issue should be considered as part of the wider review of the Securitisation Regulation and we would welcome further engagement with the EBA on this and related topics.
We would welcome the opportunity to discuss this response with you and provide a further update of the market in order to highlight how well CLOs have performed through the global financial crisis as well as the Covid-19 pandemic.
If you would like to do so, please contact Nicholas Voisey of the Loan Markets Association (nicholas.voisey@lma.eu.com).
Yours faithfully,
Nicholas Voisey
Managing Director
Loan Market Association
Question 1: Do you agree with the provisions in this Article with respect to the application of the retention options on the NPE securitisations, and the “net value” regime of the NPE securitisations? Are the retention options specified under Articles 4 to 8 sufficiently clear using the net value regime? Are there any other aspects of NPE securitisation and the net value regime that should be clarified in the RTS?
No response. CLOs generally do not include NPE assets.Question 2: Do you agree with the provisions with respect to the synthetic excess spread? Are there any aspects relating to the synthetic excess spread being considered in the measurement of the material net economic interest that should be clarified in these RTS, taking into account that separate RTS will be developed that will determine the exposure value of the synthetic excess spread?
Not applicable as CLOs are typically not synthetic transactions.Question 3: Do you agree with the provisions set out in this Article on fees payable to the retainer?
The LMA is of the view that the final paragraph of Article 15(2) is unclear and can be interpreted very broadly to effectively require that any guaranteed or upfront fees must be deducted from the “material net economic interest” of the retention interest even if such guarantee or upfront fee meets the requirements of Article 15(2). Following the EBA public hearing, we understood that this was not the intention, in particular where a fee is charged on an arm’s length basis and appropriate for the services being provided. Lastly, we do not believe it would make sense to prohibit fees that are guaranteed or payable upfront where the value of such guarantee or fee does not actually depend on the outstanding amount and/or credit quality of the securitised assets over time. The LMA supports the amendments below to Article 15(2) in order to clarify these points:(Please see figure 1 in the attached pdf for the proposed amendments of Article 15(2) referred to above.)
Recital 6 can also be amended, as indicated below, to provide examples of services not intended to be captured by the restriction on upfront/guaranteed fees (the language in square brackets to be included only if the restrictions on guaranteed/up-front fees are retained):
(Please see figure 2 in the attached pdf for the proposed amendments of Recital 6 referred to above.)
Rather than implementing the limited amendments above, however, it is our strong view that the proposed prescriptive and inflexible: (i) restrictions on fees that are guaranteed or payable upfront, and (ii) requirements in relation to the meaning of the term “arm’s length”, should be deleted altogether. The current proposals are vague, unhelpful, and would introduce significant uncertainty (for example, the meaning of the phrase “undue preferential claim” is unclear and open to interpretation). Instead, the EBA should have faith in (i) the arm’s-length concept, which is widely employed, and well understood, in contract and legal interpretation; and (ii) the clear statement of principle in Article 15(1) to the effect that: “There shall be no arrangements or embedded mechanisms in the securitisation by virtue of which the retained interest at origination would decline faster than the interest transferred.” Fees that are arm’s-length (on the ordinary meaning of the words) – and therefore not designed to undermine the risk retention – should have no impact on the level of retention required. On this basis, Article 15 could be redrafted as follows:
Fees – preferred proposal:
(Please see figures 3 and 4 in the attached pdf for the proposed redrafting of Article 15 as referred to above and below.)
We note that certain fees are typically paid in priority: this is required by investors and rating agencies in order to ensure that service providers are sufficiently remunerated and incentivised to provide the best service and maximise collections. Priority payment is also the norm for operating expenses which are necessary to ensure the proper operational functioning of the SSPE, such as those associated with: management companies, custodians, account banks, representatives of the noteholders, paying agents, and listing agents. Clarity of the contemplated scope of services would be welcome, as would be a recognition that it is usual for such service providers to be paid at top of the priorities of payment.
Question 4: Do you agree with the provisions with respect to securitisations of own issued debt instruments?
Not applicable to CLOs.Question 5: Do you agree with the provisions with respect to resecuritisations?
No comment.Question 6: Do you agree with the provisions in this Article with respect to assets transferred to SSPE? Are there any additional aspects that should be further specified in these RTS, taking into account that no clarification is provided with respect to Recital 11 of the Securitisation Regulation (for example, do you see any specific implications for the securitisations of NPE securitisations and how these should be tackled)?
New Article 18(3) is helpful.Question 7: Do you agree with the provisions set out in this Article with respect to expertise of the servicer of a traditional NPE securitisation?
Not generally applicable to CLO.Question 8: Do you have any comments on the remaining Articles of these draft RTS?
A. Sole purpose test – Article 2(7)The LMA supports the principles-based approach applied to the “sole purpose test” guidance under Article 2(7) of the Draft RTS. It is essential that such guidance can be interpreted sufficiently flexibly so as to allow for appropriate application across the full range of scenarios that may arise, including in the context of existing securitisations in-scope of the Securitisation Regulation that had to comply with the sole purpose test post-1 January 2019 under the transitional provisions and in the absence of the finalised recast retention RTS having to refer, in the first instance, to Article 6(1) of the Securitisation Regulation, the EBA’s final report on the earlier version of the draft RTS of July 2018 and related background materials on the policy behind this test, including the EBA’s report of December 2014.
We note that as mentioned during the public hearing, the EBA’s approach continues to be focused on high-level principles (by broadly being substantially similar to the wording of the earlier version of the draft RTS of July 2018).
We understand that the changes made are not intended to tighten or to broaden the sole purpose test parameters provided in the earlier EBA draft of July 2018, which the LMA support. However, we believe that further improvements could be made to the drafting of the guidance in order to: (i) further clarify that the sole purpose test requires appropriate consideration being given to the relevant principles (i.e. it does not mean that each of the identified principles is given equal weight and fully satisfied in all circumstances); and (ii) more closely track the wording of Article 6(1) of the Securitisation Regulation itself. These improvements will assist with legal certainty, as the current wording is potentially open to interpretation (including a presumably unintentional interpretation which, if followed, would be inconsistent with the text of Article 6(1) of the Securitisation Regulation).
We believe that a minor amendment to the introductory paragraph of Article 2(7) of the Draft RTS and the deletion of the words “or predominant”, as set out below, could achieve this. This will ensure clarity that the interpretation of the guidance should not result in the effective replacement of the test in Article 6(1) of the Securitisation Regulation with a more rigid test. The amended wording makes it clear that each of the principles should be taken into account when assessing whether the sole purpose test is satisfied and allows for adjustments in weighting through the reference to “appropriate consideration”. Such adjustments may be required, for example, where the relevant entity has been established relatively recently and it is intended to operate for purposes consistent with a broader business purpose but it is not possible to point to a material operating history at the time of closing.
We consider the suggested amendments (as per the mark-up of Article 2(7) set out below) to be necessary for sensible application of the guidance, and to ensure that the sole purpose test set out in Article 6(1) of the Securitisation Regulation is not effectively replaced by another test in Article 2(7) of the Draft RTS. Moreover, the revised wording should function to deliver appropriate outcomes under the retention requirements from a policy perspective.
(Please see figure 5 in the attached pdf for the proposed amendments of Article 2(7) as referred to above.)
B. Prohibition on selling the retained interest – Article 12(3) should track the wording of Recital (10) more closely
Recital (10) helpfully clarifies that it is possible to change the retainer (i) where insolvency proceedings have been commenced in respect of the retainer; or (ii) the retainer is unable to continue acting in that capacity for reasons beyond its control or the control of its shareholders. However, limb (ii) of the recital wording is missing from Article 12(3). Therefore, we propose to amend Article 12(3) as follows to track the wording of Recital (10) more closely:
(Please see figure 6 in the attached pdf for the proposed amendments of Article 12(3) as referred to above.)
C. Consolidated application – clarification for entities other than relevant credit institutions
The Securitisation Regulation (unlike the CRR (and its predecessor CRD2) from which the risk retention requirements originate) is a cross-sectoral regulation. Ability to fulfil the risk retention on a consolidated basis under Article 6(4) of the Securitisation Regulation should also apply to sponsors, originators or original lenders other than credit institutions (as was explicitly stated in paragraph 71 of the CEBS Guidelines to CRD2 Article 122a) and should apply whether or not such entities are established in the EU. This issue should be considered as part of the wider review of the Securitisation Regulation and we would welcome further engagement with the EBA on this and related topics.
We would welcome the opportunity to discuss this response with you and provide a further update of the market in order to highlight how well CLOs have performed through the global financial crisis as well as the Covid-19 pandemic.
If you would like to do so, please contact Nicholas Voisey of the Loan Markets Association (nicholas.voisey@lma.eu.com).
Yours faithfully,
Nicholas Voisey
Managing Director
Loan Market Association
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