An entity establishes and manages a traditional securitisation, where the entity selects the assets that are purchased directly by the SSPE rather than bought on to the entity’s own balance sheet and subsequently sold in to the SSPE. In addition, the SSPE enters into a conditional sale agreement with the entity referencing a portion of the assets held by the SSPE at origination so that the entity is exposed to the risk of the referenced assets. The entity satisfies the risk retention obligation by retaining not less than 5 % of the nominal value of each of the tranches sold. Under the conditional sale agreement, the entity is obligated to acquire relevant assets from the SSPE if such assets become defaulted assets within a certain number of days (e.g. 15 business days) of the SSPE buying the assets. The obligation of the entity to purchase the assets from the SSPE would be at the same price at which the SSPE purchased such assets. As a result, the entity is exposed to the credit risk of the relevant assets. Further, it is assumed that: (a) the SSPE is not consolidated by the entity for accounting or regulatory purposes; and (b) the entity is neither a credit institution nor an investment firm as defined under Art. 2 point (5) Securitisation Regulation. Art. 2 (3) Securitisation Regulation provides a definition of the term ‘originator’ as an entity which: (a) itself or through related entities, directly or indirectly, was involved in the original agreement which created the […] exposures being securitised; or (b) purchases a third party’s exposures on its own account and then securitises them. Whilst the phrase ‘purchased on its own account’ is not defined in the Securitisation Regulation, the criterion is fulfilled if the entity purchases a portion of the assets onto its balance sheet. However, in the aforementioned example, the assets are not sold from the balance sheet of the entity, but it is exposed to the credit risk of a portion of the assets (the “Referenced Assets”) through the conditional sale agreement the SSPE has entered into with the entity. Therefore, with respect to the credit risk of the assets, the entity is in the same position as if it would have bought the Referenced Assets directly and subsequently after 15 business days sold them to the SSPE (or if it would have bought the Referenced Assets and sold them to the SSPE under a conditional forward sale agreement on the same day on which the entity purchased the Referenced Assets). Hence, the entity, in this example, fulfils the criterion “purchase for own account” due to the conditional sale agreement resulting in the entity being exposed to the credit risk of the Referenced Assets notwithstanding that they have already been sold into the SSPE prior to their securitisation. The entity qualifies as an originator with respect to the Referenced Assets, and so it is an eligible retainer with respect to the securitisation as Article 3(4)(a) of the Commission Delegated Regulation (EU) No 625/2014, stipulates that the retention requirement can be fulfilled in full by a single originator or original lender provided that, inter alia, the originator or original lender has established and is managing the programme or securitisation scheme. Only in cases where the originator does not manage the securitisation scheme, the originator or original lender must have contributed over 50% of the total securitised exposures to be an eligible sole retainer. An originator classification of the entity corresponds to the general market practice currently observed. Market Practice The above construct is commonly used in CLOs to fulfil risk retention where the CLO manager acts as the originator. For CLOs, the CLO manager is the most appropriate entity to fulfil risk retention. This is because CLOs are managed pools and for most CLOs, there is no other party to the CLO which remains constantly active through the life, other than the CLO manager which could be an eligible retention holder. Also since the CLO manager typically establishes the securitisation, and manages the credit risk in the securitisation it is the party which investors would like to see have its interest aligned with their interest, and so the CLO manager (for most CLOs) is the entity best placed to fulfil risk retention. CLOs also typically accumulate assets in open market rather than a single counterparty contributing a large proportion of the assets. The assets in a managed securitisation would keep changing and as a result the entities from which the assets have been purchased at any point in time could also keep changing but the manager of the securitisation is expected to remain unchanged. In terms of the intention of the risk retention rules, for most CLOs the CLO manager’s interests are best aligned to the interests of the investors such that the CLO manager should be considered to be an eligible retainer. Reason for use of Conditional Sale Agreement as opposed to buying the assets and then selling on to the CLO: The loan market is highly inefficient in settlement of trades. It is often the case that trades, in particular loans, can take a long time to settle. Buying the assets on the CLO manager’s balance sheet and then on-selling to the SSPE would generate a large amount of administrative burden and significantly lengthen the time to settle a loan with the SSPE and hence is highly inefficient and undesirable. If the CLO manager buys the assets and then on-sells them, it may be possible to novate the trades such that the counterparty selling the assets to the CLO manager settles directly with the SSPE (if the asset does not default in 15 seasoning period) but such a process would need consent from the counterparty involved and also will again generate additional administrative burden. Often the counterparties would not be willing to novate due to the conditionality involved. The structure described above is the most common risk retention structure in European CLOs and hence this question is likely to be relevant for the majority of the outstanding European CLOs (Outstanding European CLO notional is estimated to be in excess of EUR 135bn notional currently) in addition to other securitisations.