Response to consultation on RTS on risk retention
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There is a need to clarify Article 3(4) (b) on two points:
First, when considering if the relevant originator has contributed more than 50% of the total assets, rather than referring to “exposure value” here, reference should be made to the “nominal value” of the assets. This is to ensure simplicity and avoid confusion as nominal value is a more straightforward concept compared to exposure value.
Second, in a scenario involving a corporate group where the parent company provides the retention for assets originated by one of the group subsidiaries, we propose to add “directly or indirectly” in the sentence (see below). This is to allow any parent company of a corporate group to provide retention in the form of a subordinated tranche on behalf of their subsidiaries who are the sellers. This would be in line with current market practice for ABCP/trade receivables transactions.
Proposal : “With respect to the proposed clarification of the measurement basis to be used when considering whether the relevant originator has contributed more than 50%, directly or indirectly, of the nominal value ….”
The FBF is preparing a response to this consultation. For the time being it is therefore difficult to take a clear stance and to provide the EBA with specific comments or requirements.
When considering the undrawn amounts in exposures in the form of credit facilities, two situations should be envisaged:
- Case 1: the originator only sells the initial outstanding amounts. Subsequently the new receivables (i.e. later drawings) will be kept by the originator. Then no adjustment of the retention should be required
- Case 2: Upcoming drawings are also securitized. Then the retention must adjust for fluctuations in the outstanding amount and provisions in article 11 should be considered.
According to article 16 (3) originators and sponsors have to prove that they apply rigorous procedures to avoid any biases while selecting assets to be transferred.
It is of upmost importance that they don’t have to explain or justify a higher credit risk observed for transferred assets. Generally speaking, the actual loss rates of two initially similar portfolios randomly selected from a set of comparable assets may significantly differ over time. In those cases where the originator transfers almost all of its pool assets to the SPPE and keeps only a few assets in its balance sheet, observed loss rates are even more likely to diverge. This observation does not call into question the assets selection process.
In cases such as bankruptcy or merger where the change is even unavoidable it could be an impossible task to find a new retainer that fulfils all the provisions of article 17.
The bankruptcy of the retainer will not lead to the early termination of the transaction. Then it makes more sense to find a new retainer even if it does not comply with all the conditions.
Question 1: Do you have any general comments on the draft technical standards?
The FBF considers it is essential that continuity in retention requirements be the main guiding line.There is a need to clarify Article 3(4) (b) on two points:
First, when considering if the relevant originator has contributed more than 50% of the total assets, rather than referring to “exposure value” here, reference should be made to the “nominal value” of the assets. This is to ensure simplicity and avoid confusion as nominal value is a more straightforward concept compared to exposure value.
Second, in a scenario involving a corporate group where the parent company provides the retention for assets originated by one of the group subsidiaries, we propose to add “directly or indirectly” in the sentence (see below). This is to allow any parent company of a corporate group to provide retention in the form of a subordinated tranche on behalf of their subsidiaries who are the sellers. This would be in line with current market practice for ABCP/trade receivables transactions.
Proposal : “With respect to the proposed clarification of the measurement basis to be used when considering whether the relevant originator has contributed more than 50%, directly or indirectly, of the nominal value ….”
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?
In response to its mandates on risk retention laid down in the Securitisation Regulation ESMA launched a public consultation on disclosure requirements, operational standards.The FBF is preparing a response to this consultation. For the time being it is therefore difficult to take a clear stance and to provide the EBA with specific comments or requirements.
Question 3: Do you believe that the provisions in Article 11 of the draft technical standards (relating to the measurement of retention for the undrawn amounts in exposures in the form of credit facilities) are needed?
Article 11 of the draft RTS should be clarified.When considering the undrawn amounts in exposures in the form of credit facilities, two situations should be envisaged:
- Case 1: the originator only sells the initial outstanding amounts. Subsequently the new receivables (i.e. later drawings) will be kept by the originator. Then no adjustment of the retention should be required
- Case 2: Upcoming drawings are also securitized. Then the retention must adjust for fluctuations in the outstanding amount and provisions in article 11 should be considered.
Question 4: Do you consider the provisions of Article 12(3) of the draft technical standards to be useful and how would you see such a transaction working in practice, including following a default by the retainer under the secured funding arrangements?
It is useful to maintain this provision allowing the use of retained exposures or securitization positions as collateral. It should also be clarified that this provision covers repo and extends to securities lending agreements, although the latter may not be used only for funding purposes.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?
The FBF agrees with the provisions of art. 16.According to article 16 (3) originators and sponsors have to prove that they apply rigorous procedures to avoid any biases while selecting assets to be transferred.
It is of upmost importance that they don’t have to explain or justify a higher credit risk observed for transferred assets. Generally speaking, the actual loss rates of two initially similar portfolios randomly selected from a set of comparable assets may significantly differ over time. In those cases where the originator transfers almost all of its pool assets to the SPPE and keeps only a few assets in its balance sheet, observed loss rates are even more likely to diverge. This observation does not call into question the assets selection process.
Question 6: Do you consider that the provisions of Article 17 of the draft technical standards relating to a change of retainer are adequate?
Many situations may entail a change of retainer. The FBF is of the view that article 17 should provide for the necessary flexibility to accommodate different situations.In cases such as bankruptcy or merger where the change is even unavoidable it could be an impossible task to find a new retainer that fulfils all the provisions of article 17.
The bankruptcy of the retainer will not lead to the early termination of the transaction. Then it makes more sense to find a new retainer even if it does not comply with all the conditions.