The EC’s revised final draft RTS were published last Friday, 7 July 2023. The European Parliament and the European Council now have three months to object, subject to which the RTS would then be published in the OJEU and become law three weeks later, so that they are not expected to become law before November 2023 at the earliest. These supersede the EBA’s 1 April 2022 final draft RTS, with several relatively minor changes, and a firming up of the interpretation of the “sole purpose” limitation.
Article 6(1) of the Securitisation Regulation states that “an entity shall not be considered to be an originator where the entity has been established or operates for the sole purpose of securitising exposures”, and Article 6(7) requires the EBA to draft RTS “to specify in greater detail the risk-retention requirement”. Article 2(7) of the old EBA draft RTS had been slightly controversial because it had stated that, when deciding whether this limitation applied (so that an originator would be ineligible to hold the risk retention), it should be “taken into account” whether the originator’s “sole or predominant source of revenue” consisted of the exposures being securitised. Did “sole or predominant source of revenue” - improperly - go further than “sole purpose”? The EBA was asked to remove this to avoid any doubt, but it demurred.
Under the EBA draft, one could have reconciled these: the RTS required this to be “taken into account” for the purpose of testing whether the limitation applied, but the sole purpose limitation remained what it said in Article 6(1). The new EC draft does away with this, because the limitation is not longer simply a “take into account” requirement. Now, it says, via an inelegant double negative, that the limitation shall not apply if the originator’s sole or predominant source of revenue does not consist of the exposures being securitised.
Of course, this does not mean that the limitation will necessarily apply if the originator’s sources of revenue do consist predominantly of the exposures being securitised. As drafted, Article 2(7) is a safe harbour, and as a matter of law it cannot change what Article 6(1) says. All the same, it represents official thinking and most originators will not want to leave the safe harbour.
The UK’s FCA and PRA are expected to produce their own standards on risk retention by the end of 2023 via changes to their rulebooks.