Question ID:
2016_2878
Legal Act:
Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic:
Securitisation and Covered Bonds
Article:
405
Paragraph:
1
COM Delegated or Implementing Acts/RTS/ITS/GLs:
Regulation (EU) No 625/2014 - RTS on requirements for investor, sponsor, original lenders and originator institutions of transferred credit risk exposures
Article/Paragraph:
12
Name of institution / submitter:
RCC Studio legale
Country of incorporation / residence:
Italy
Type of submitter:
Law firm
Subject Matter:
Distribution by an originator to its shareholders of a participation instrument the pay out of which is directly linked to the net cash flows under the net economic interest retained
Question:

Would a credit institution acting as originator in relation to a securitisation and holding the net economic interest pursuant to Article 405 CRR be in breach of Article 12 of Regulation (EU) 625/2014 if such credit institution decides to issue to its shareholders, free of charge, a participation instrument the pay out of which is directly linked to the net cash flows under the net economic interest retained by the originator?

Background on the question:

A credit institution is acting as originator in relation to an NPL securitisation and holding the net economic interest pursuant to Article 405 CRR. The Credit institution decides to issue to its shareholders a participation instrument the pay out of which is directly linked to the net cash flows under the net economic interest retained by the originator. The participation instrument is issued free of charge, as a result of a distribution of reserves in kind. The originator will maintain formal legal ownership of the net economic interest and will continue to fulfil all obligations of the originator under Article 405 and following of the CRR – including, without limitation, those set by Article 409 of the CRR.

Date of submission:
25/08/2016
Published as Final Q&A:
17/02/2017
EBA Answer:
For the purposes of this answer, it has been assumed that where it is stated that pay out of the participation instrument is “directly linked” to the net cash flows of the net economic interest retained by the originator, this means that net proceeds of the retained portion are passed on to owners of the participation instrument.
 
According to Article 405(1) of Regulation (EU) No 575/2013 (CRR) an institution, other than when acting as an originator, a sponsor or original lender, shall be exposed to the credit risk of a securitisation position in its trading book or non-trading book only if the originator, sponsor or original lender has explicitly disclosed to the institution that it will retain, on an ongoing basis, a material net economic interest which, in any event, shall not be less than 5 %. The third subparagraph Article 405(1) CRR further provides that the net economic interest, including retained positions, interest or exposures, shall not be subject to any credit risk mitigation or any short positions or any other hedge and shall not be sold.
 
Whether or not the issuance of a participation instrument free of charge constitutes a sale or hedge within the meaning of Article 405(1) CRR, the prohibition in Article 405 CRR applies to any transfer of the material net economic interest. Passing on the net proceeds would mean that the net economic interest is no longer retained, since the originator will be exposed to losses from the retained positions, interest or exposures, but not to the positive cash flows , which are passed on to the shareholders. Accordingly, the contemplated transaction would constitute a transfer which would be prohibited by Article 405 CRR.
Status:
Final Q&A