The EBA report on securitisation risk retention, due diligence and disclosure
On, 22 December 2014, the European Banking Authority (EBA) had published an Opinion which constitutes of a series of recommendations for the improvement of the securitisation market. The recommendations made in the Opinion are based on a report which had analysed the compliance by competent authorities with securitisation risk retention, due diligence and disclosure requirements. The report has been developed in accordance with Article 410(1) of the Capital Requirements Regulation (CRR), which requires the EBA to report annually to the European Commission (EU) on the measures taken and compliance by Competent Authorities with Article 405-409 of the CRR. The report has been developed also following a call for advice from the European Commission, which required the EBA to report on the application and effectiveness of the securitisation retention, due diligence and disclosure requirements for investor, sponsor and originator institutions in light of international market developments.
In order to ensure that compliance with securitisation risk retention, disclosure and due diligence requirements has been done EBA in its report has assessed the supervisory measures taken by the Competent Authorities and it is of the opinion that countries with active securitisation are in compliance, thus they hardly any non-compliance has been reported. Further the disclosure norms and due diligence requirements are suitable and safeguard investor protection and financial stability.
Moreover EBA has also reported that the CRR and its various constituents are appropriate, and recommends introducing certain additional safety measures and provisions to strengthen the extant framework.
The EBA’s recommendation that the risk retention rules should be imposed on the originator of the securitisation (direct approach) in addition to the imposition of the rules on the investor (indirect approach) needs particular attention because it aims at removing any uncertainty and increasing the transparency for investors.
The report also highlights that due to the wide scope of the definition ‘originator' in the CRR, most securitisation transactions are structured in such a way that they only meet the requirements of the regulation in letter and not in spirit. The EBA is of the opinion that the definition should be reviewed carefully and narrowed so that it is adopted in spirit and there is no further abuse of the rules.
The report draws attention to the fact that the EU regulations are not in harmony with the international regulations and this difference is a very serious cause of concern for two reason namely
· EU issuers will not benefit from the global securitisation market; and
· EU investors will not have a competitive edge while making global securitisation investments.
Thus CRR rules should be made consistent with the global rules so as to ensure a level playing field for everyone.