Response to consultation on RTS on risk retention
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We would ask confirmation that (i) retention through option 5 p. 1 c) of the Draft Regulatory Technical Standards (the “Draft RTS”) can be implemented through the issuance of a note/instrument constituting a dedicated vertical slice, to be underwritten by the retainer only (and which would be subject to amortisation pari passu with any other classes of notes issued under the transaction) and (ii) if compliance with option 5 p.1 c) would be achieved if the note constituting such dedicated vertical slice would not bear any or some of the transaction costs borne by other classes of notes (which we would assume to be the case, in light of option under article 7 of the Draft RTS).
Reference is made to Articles 5 to 10
Our interpretation - literal and purpose oriented - of the rules on risk retention is that they should not apply to securitisations of non performing exposures. Such conclusion is based on the following considerations: a) risk retention is aimed at avoiding “misalignment incentives that may be embedded in the “originate to distribute” model of some securitisation products” (see IOSCO “Global Development in Securitisation Regulation”, June 2012, page 11; statements in line with the above can be also found in ECB; “The incentive structure of the ‘originate and distribute’ model”, December 2008 page 6; SEC “Skin in the Game: Aligning the Interests of Sponsors and Investors” October 2014; Bank of Italy “Disposizioni di vigilanza per la concessione di finanziamenti da parte di società veicolo per la cartolarizzazione ex legge 130/1999 resoconto della consultazione” May 2015, page 5). In the case of NPLs, the issue of “originate to distribute” seems to be totally immaterial, since: (i) by definition the originator has held the risk in its books (and therefore has not “distributed” it) until the point that it has (normally) suffered a loss as a result of the debtor’s non-performance and (ii) in such transactions the servicing of the securitised portfolio is allocated to a third party servicer appointed by the investors (which, before entering the transaction, perform in-depth due diligences on the portfolio to be securitised); b) the risk retention mechanism is based on the principle that the originator too (in addition to the ABS investors) should suffer a loss if the asset becomes non-performing; but in an NPL deal the originator has typically already suffered a loss (and therefore “paid his price” for an unfortunate origination of the asset) before or at the time the securitisation takes place (in this respect, also consider the following comment); c) the definition of “securitisation” in the CRR makes reference to “[…] a transaction or scheme whereby […] payments […] are dependent upon the performance of the exposures or pool of exposures”: clearly, securitisations carried out on non-performing exposures cannot (by definition) be said to depend on the performance of the underlying exposure, but rather on the effectiveness of the recovery and work out activities of the holder of the assets and its services providers, which is a totally different concept.
Reference is made to Article 5, Article 8 and Article 10 p. 2 lett. b)
This comment is linked to the previous one and it implies that such previous comment is not agreed with.
Risk retention requirements are construed by reference to the “nominal value” of the securitised exposures. In particular, article 10 p. 1 b) of the Draft RTS states that “the calculation of the level of retention shall be based on nominal values and shall not take into account the acquisition price of assets.”
The reference for non performing exposures to “nominal value” without any additional specification or guidance on the meaning of such terms may lead to the unwanted effect of requiring the relevant risk retainer to retain more than the required 5% in the context of securitisations carried out on non performing exposures, due to the gap between the GBV of the securitised exposures and their sale price (i.e. the non-refundable purchase price discount). To avoid such effect, we would suggest that the Draft RTS should include specific guidance on the meaning of “nominal value” for non performing securitised exposures and, in particular, to specify that the “nominal value” shall not refer to the outstanding principal of the securitised non performing exposures but shall be construed by reference to the sale value (which is reflected by the notional amount of the issued notes) of the underlying exposures. E.G.: retention option set by Article 8 p. 2 should be interpreted/drafted so that it would be considered complied with by an originator retaining junior notes in an amount equal to 5% of the aggregate nominal value of the notes issued by the SSPE and not equal to 5% of the nominal value of the underlying exposures. This latter interpretation would in practical terms render securitisation transaction on non performing exposure impossible to realise through the retention option referred to above.
Please note that, in our view the clarification/regulatory choice described above may apply not only to NPL transactions, but also to transactions carried-out on in-bonis assets, as it cannot be ruled out that, following the entry into force of IFRS 9, transactions on performing exposures and providing non-refundable purchase price discounts may be realised: e.g. this may occur with respect to portfolio composed of many stage 2 exposures.
As a second best alternative, we would suggest to better detail the disclosure requirements necessary to satisfy article 3(6) of the STS Regulation, (a simple reference to the financial statements of the originator may be considered).
Furthermore, in order to avoid possible misinterpretations, we would substitute the wording “bilateral or private transactions” under art. 15 p.3 with a wording referring to “transactions where no prospectus has to be drawn up in compliance with Directive 2003/71 EC” (which would be also consistent with the wording adopted under article 7 of the STS Regulation).
Finally, it would be worth to clarify that no sanctions and/or penalisations in terms of additional RWA would apply (nor on the retainer nor on investors) if the retainer becomes unable to act as such due to insolvency and/or liquidation of the same.
In terms of potential proposals to define what constitutes “significantly lower performance”, the Draft RTS may include specific thresholds of performance and tolerance range for the asset classes to be identified in compliance with articles 112 and 147 of the CRR.
Question 1: Do you have any general comments on the draft technical standards?
Reference is made to Article 5 p. 1 (c)We would ask confirmation that (i) retention through option 5 p. 1 c) of the Draft Regulatory Technical Standards (the “Draft RTS”) can be implemented through the issuance of a note/instrument constituting a dedicated vertical slice, to be underwritten by the retainer only (and which would be subject to amortisation pari passu with any other classes of notes issued under the transaction) and (ii) if compliance with option 5 p.1 c) would be achieved if the note constituting such dedicated vertical slice would not bear any or some of the transaction costs borne by other classes of notes (which we would assume to be the case, in light of option under article 7 of the Draft RTS).
Reference is made to Articles 5 to 10
Our interpretation - literal and purpose oriented - of the rules on risk retention is that they should not apply to securitisations of non performing exposures. Such conclusion is based on the following considerations: a) risk retention is aimed at avoiding “misalignment incentives that may be embedded in the “originate to distribute” model of some securitisation products” (see IOSCO “Global Development in Securitisation Regulation”, June 2012, page 11; statements in line with the above can be also found in ECB; “The incentive structure of the ‘originate and distribute’ model”, December 2008 page 6; SEC “Skin in the Game: Aligning the Interests of Sponsors and Investors” October 2014; Bank of Italy “Disposizioni di vigilanza per la concessione di finanziamenti da parte di società veicolo per la cartolarizzazione ex legge 130/1999 resoconto della consultazione” May 2015, page 5). In the case of NPLs, the issue of “originate to distribute” seems to be totally immaterial, since: (i) by definition the originator has held the risk in its books (and therefore has not “distributed” it) until the point that it has (normally) suffered a loss as a result of the debtor’s non-performance and (ii) in such transactions the servicing of the securitised portfolio is allocated to a third party servicer appointed by the investors (which, before entering the transaction, perform in-depth due diligences on the portfolio to be securitised); b) the risk retention mechanism is based on the principle that the originator too (in addition to the ABS investors) should suffer a loss if the asset becomes non-performing; but in an NPL deal the originator has typically already suffered a loss (and therefore “paid his price” for an unfortunate origination of the asset) before or at the time the securitisation takes place (in this respect, also consider the following comment); c) the definition of “securitisation” in the CRR makes reference to “[…] a transaction or scheme whereby […] payments […] are dependent upon the performance of the exposures or pool of exposures”: clearly, securitisations carried out on non-performing exposures cannot (by definition) be said to depend on the performance of the underlying exposure, but rather on the effectiveness of the recovery and work out activities of the holder of the assets and its services providers, which is a totally different concept.
Reference is made to Article 5, Article 8 and Article 10 p. 2 lett. b)
This comment is linked to the previous one and it implies that such previous comment is not agreed with.
Risk retention requirements are construed by reference to the “nominal value” of the securitised exposures. In particular, article 10 p. 1 b) of the Draft RTS states that “the calculation of the level of retention shall be based on nominal values and shall not take into account the acquisition price of assets.”
The reference for non performing exposures to “nominal value” without any additional specification or guidance on the meaning of such terms may lead to the unwanted effect of requiring the relevant risk retainer to retain more than the required 5% in the context of securitisations carried out on non performing exposures, due to the gap between the GBV of the securitised exposures and their sale price (i.e. the non-refundable purchase price discount). To avoid such effect, we would suggest that the Draft RTS should include specific guidance on the meaning of “nominal value” for non performing securitised exposures and, in particular, to specify that the “nominal value” shall not refer to the outstanding principal of the securitised non performing exposures but shall be construed by reference to the sale value (which is reflected by the notional amount of the issued notes) of the underlying exposures. E.G.: retention option set by Article 8 p. 2 should be interpreted/drafted so that it would be considered complied with by an originator retaining junior notes in an amount equal to 5% of the aggregate nominal value of the notes issued by the SSPE and not equal to 5% of the nominal value of the underlying exposures. This latter interpretation would in practical terms render securitisation transaction on non performing exposure impossible to realise through the retention option referred to above.
Please note that, in our view the clarification/regulatory choice described above may apply not only to NPL transactions, but also to transactions carried-out on in-bonis assets, as it cannot be ruled out that, following the entry into force of IFRS 9, transactions on performing exposures and providing non-refundable purchase price discounts may be realised: e.g. this may occur with respect to portfolio composed of many stage 2 exposures.
Question 2: Considering the mandate granted to ESMA in Article [7(3)] of the STS Regulation, do you believe that these technical standards should include disclosure-related provisions relevant to risk retention and, if so, do you agree with the scope of the obligations set out in the draft technical standards?
We agree that the technical standards should include disclosure-related provisions relevant to risk retention; nevertheless, in order to avoid cumbersome (and, in generality of cases, not useful) formalities, we would propose exemptions for the benefit of originators which qualify as “institutions” pursuant to article 4(3) of the CRR, to the requirement of confirmation on how the originator acting as retainer “meets the conditions set out in Article 3(6)”, as set by article 15 p.1 a) of the Draft RST.As a second best alternative, we would suggest to better detail the disclosure requirements necessary to satisfy article 3(6) of the STS Regulation, (a simple reference to the financial statements of the originator may be considered).
Furthermore, in order to avoid possible misinterpretations, we would substitute the wording “bilateral or private transactions” under art. 15 p.3 with a wording referring to “transactions where no prospectus has to be drawn up in compliance with Directive 2003/71 EC” (which would be also consistent with the wording adopted under article 7 of the STS Regulation).
Question 5: Do you believe that the provisions of Article 16 of the draft technical standards relations to assets transferred to the SSPE are adequate?
We would exempt transaction carried out on non-performing exposures from the comparability test provided under Article 16, as such kind of transactions often carried out on non-homogeneous categories of assets and the determination of the boundaries of the transferred Portfolio are agreed between the Originator and the Investor(s) following (burdensome) negotiations. In such scenario, the comparability test of article 16 seems to lose its rational.Question 6: Do you consider that the provisions of Article 17 of the draft technical standards relating to a change of retainer are adequate?
We believe that the provisions of article 17 are a positive innovation compared to the previous RTS. However, we are of the view that also corporate processes such as mergers, transfer of going concerns or other corporate actions as a result of which the business or substantially all assets relating to a business of an entity is transferred to a newly incorporated or an existing entity, should be expressly contemplated in this section as circumstances where a change of retainer is permitted (subject to satisfaction of the other requirements for qualifying as an eligible risk retainer). The rationale for such a change is linked to the fact that the alignment of interests underpinning the risk retention will continue to be guaranteed whenever the corporate process ensures, notwithstanding a transfer, “legal” continuity in the relevant contractual and business relationships. In the absence of an express provision to that effect, we have encountered in the past instances where a specific advice or authorisation needed to be sought from the regulators in the context of merger or acquisition transaction relating to entities who were acting as risk retainers.Finally, it would be worth to clarify that no sanctions and/or penalisations in terms of additional RWA would apply (nor on the retainer nor on investors) if the retainer becomes unable to act as such due to insolvency and/or liquidation of the same.
Question 9: Do you consider that guidance is required on what constitutes a significantly lower performance for the purposes of Article [6(2)] of the STS Regulation and, if so, what would you propose?
We are of the view that the Draft RTS should contain express guidance in defining what constitute a “significantly lower performance”. This would give more legal certainty to originators for two reasons in particular: on the one hand, it would give originators a precise measurement tool to guide pro-actively the selection of the relevant assets to be transferred to SSPE and mitigate or reduce the risk of unintentional breaches; on the other hand, given that a breach of the obligations will lead to the potential application of sanction to the extent there is a “significantly lower performance”, a clear and predefined measure of this parameter would help originators in defending themselves from the application of sanctions.In terms of potential proposals to define what constitutes “significantly lower performance”, the Draft RTS may include specific thresholds of performance and tolerance range for the asset classes to be identified in compliance with articles 112 and 147 of the CRR.