The European Banking Authority ("EBA") published final draft regulatory technical standards on risk retention ("Draft Risk Retention RTS"). The Draft Risk Retention RTS is a continuation of the draft regulatory technical standards added to the EBA's Consultation Paper from December 2017 ("2017 Draft RTS"), and was developed in accordance with the European Union regulation on securitization (the "Securitization Regulation"). The Securitization Regulation was intended to establish a European framework for "simple, transparent and standardized" securitization.

In a memorandum, Cadwalader attorneys focused on the primary changes to the 2017 Draft RTS. The 2017 Draft RTS allowed for the retention holder to be changed under certain conditions. The EBA's new draft states that "where insolvency proceedings have been commenced in respect of the retainer or the retainer is, due to the transfer of a direct or indirect holding in the retainer or for legal reasons beyond its control and beyond the control of its shareholders," the remaining retained material net economic interest should be "retained by another complaint entity." The attorneys questioned whether the removal of a collateralized loan obligations manager by investors would be considered a "legal reason beyond its control."

The memorandum includes discussion of the following:

  • "originator" definition for risk retention and the sole purpose test;
  • prohibition of hedging or selling the retained interest and retention financing;
  • jurisdictional scope of the "direct" obligation to comply with the risk retention requirements;
  • selection of assets to be securitized; and
  • consolidated application of the Capital Requirements Regulation and jurisdiction consequences regarding risk retention.

The Draft Risk Retention RTS will be submitted to the European Union, which will then adopt them by way of a delegated EU regulation. The attorneys stressed the importance of the Risk Retention RTS being adopted by the European Commission before their application, starting on January 1, 2019.

The memorandum was authored by Stephen Day, David Quirolo, Nick Shiren, Daniel Tobias, Jeremiah Wagner, Suzanne Bell, Robert Cannon, Assia Damianova, Neil Macleod, Claire Puddicombe and Sabah Nawaz.

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