Commission Delegated Regulation (EU) No 625/2014 of 13 March 2014 supplementing Regulation (EU) No 575/2013

For the purposes of this Regulation the following definitions apply:

(a) ‘retainer’ means the entity acting as originator, sponsor or original lender which retains a net economic interest in the securitisation in accordance with Article 405(1) of Regulation (EU) No 575/2013;

(b) ‘Synthetic form of retention’ means retention of economic interest through the use of derivative instruments;

(c) ‘Contingent form of retention’ means retention of economic interest through the use of guarantees, ►M1 letters of credit** ◄ ** and other similar forms of credit support ensuring an immediate enforcement of the retention;

(d) ‘Vertical tranche’ means a tranche which exposes the holder of the tranche to the credit risk of each issued tranche of the securitisation transaction on a pro-rata basis.

1. Where an institution acts as a credit derivative counterparty or as a counterparty providing the hedge or as a liquidity facility provider with regard to a securitisation transaction, it shall be deemed to become exposed to the credit risk of a securitisation position when the derivative, the hedge or the liquidity facility assumes the credit risk of the securitised exposures or the securitisation positions.

2. For the purposes of Article 405 and 406 of Regulation (EU) No 575/2013, where a liquidity facility complies with the conditions specified in paragraph 2 of Article 255 of Regulation (EU) No 575/2013, the liquidity provider shall not be deemed to become exposed to the credit risk of a securitisation position.

3. In the context of a re-securitisation with more than one level or a securitisation with multiple discrete underlying transactions, an institution shall be deemed to become exposed to the credit risk only of the individual securitisation position or transaction to which it is assuming exposure.

4. Institutions shall not be deemed to be in breach of Article 405 of Regulation (EU) No 575/2013 in accordance with Article 14(2) of Regulation (EU) No 575/2013 on a consolidated basis provided that the following conditions are met:(a) the entity which holds the securitisation positions is established in a third country and is included in the consolidated group in accordance with Article 18 of Regulation (EU) No 575/2013;(b) the securitisation positions are held in the trading book of the entity referred to in point (a) for the purposes of market making activities;(c) the securitisation positions are not material with respect to the overall risk profile of the trading book of the group referred to in point (a) and do not form a disproportionate share of the trading activities of the group.

1. The retained material net economic interest shall not be split amongst different types of retainer. The requirement to retain a material net economic interest shall be fulfilled in full by any of the following:(a) the originator or multiple originators;(b) the sponsor or multiple sponsors;(c) the original lender or multiple original lenders.

2. Where the securitised exposures are created by multiple originators, the retention requirement shall be fulfilled by each originator, in relation to the proportion of the total securitised exposures for which it is the originator.

3. Where the securitised exposures are created by multiple original lenders, the retention requirement shall be fulfilled by each original lender, in relation to the proportion of the total securitised exposures for which it is the original lender.

4. By way of derogation from paragraphs 2 and 3, where the securitised exposures are created by multiple originators or multiple original lenders, the retention requirement may be fulfilled in full by a single originator or original lender provided that either of the following conditions are met:(a) the originator or original lender has established and is managing the programme or securitisation scheme;(b) the originator or original lender has established the programme or securitisation scheme and has contributed over 50 % of the total securitised exposures.

5. Where the securitised exposures have been sponsored by multiple sponsors, the retention requirement shall be fulfilled by either:(a) the sponsor whose economic interest is most appropriately aligned with investors as agreed by the multiple sponsors on the basis of objective criteria including the fee structures, the involvement in the establishment and management of the programme or securitisation scheme and exposure to credit risk of the securitisations;(b) by each sponsor proportionately in relation to the number of sponsors.

1. The retention requirement may be fulfilled in a manner equivalent to one of the options set out in the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013 through a synthetic or contingent form of retention where the following conditions are met:(a) the amount retained is at least equal to the requirement under the option to which the synthetic or contingent form of retention can be equated;(b) the retainer has explicitly disclosed that it will retain, on an ongoing basis, a material net economic interest in that manner, including details of the form of retention, the methodology used in its determination and its equivalence to one of those options.

2. Where an entity other than a credit institution as defined in Article 4(1)(1) of Regulation (EU) No 575/2013 acts as a retainer through a synthetic or contingent form of retention, the interest retained on a synthetic or contingent basis shall be fully collateralised in cash and held on a segregated basis as ‘clients’ funds as referred to in Article 13(8) of Directive 2004/39/EC of the European Parliament and of the Council (1).

1. A retention of no less than 5 % of the nominal value of each of the tranches sold or transferred as referred to in point (a) of Article 405(1) of the Regulation (EU) No 575/2013 may also be achieved by the following:(a) retention of at least 5 % of the nominal value of each of the securitised exposures, provided that the credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised for the same exposures. In the case of a revolving securitisation, as defined in Article 242(13) of Regulation (EU) No 575/2013, this would occur through retention of the originator's interest assuming the originator's interest was for at least 5 % of the nominal value of each of the securitised exposures and ranked pari passu with or subordinated to the credit risk that has been securitised with respect to those same exposures;(b) the provision, in the context of an ABCP programme, of a liquidity facility which may be senior in the contractual waterfall, where the following conditions are fulfilled:(i) the liquidity facility covers 100 % of the credit risk of the securitised exposures;(ii) the liquidity facility covers the credit risk for as long as the retainer has to retain the economic interest by means of such liquidity facility for the relevant securitisation position;(iii) the liquidity facility is provided by the originator, sponsor or original lender in the securitisation transaction;(iv) the institution becoming exposed to such securitisation has been given access to appropriate information to enable it to verify that points (i), (ii) and (iii) are complied with;(c) retention of a vertical tranche which has a nominal value of no less than 5 % of the total nominal value of all the issued tranches of notes.

A retention as referred to in point (b) of Article 405(1) of Regulation (EU) No 575/2013 may be achieved by retaining at least 5 % of the nominal value of each of the securitised exposures, provided that the retained credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised for the same exposures.

1. The pool of at least 100 potentially securitised exposures from which retained and securitised exposures are randomly selected, referred to in point (c) of the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013, shall be sufficiently diverse to avoid the excessive concentration of the retained interest. When preparing for the selection process, the retainer shall take appropriate quantitative and qualitative factors into account in order to ensure that the distinction between retained and securitised exposures is genuinely random. The retainer of randomly selected exposures shall take into consideration, where appropriate, factors such as vintage, product, geography, origination date, maturity date, loan to value ratio, property type, industry sector, and outstanding loan balance when selecting exposures.

2. The retainer shall not designate different individual exposures as retained exposures at different points in time, unless this is necessary to fulfil the retention requirement in relation to a securitisation in which the securitised exposures fluctuate over time, either due to new exposures being added to the securitisation or to changes in the level of the individual securitised exposures.

1. The retention of the first loss tranche in accordance with point (d) of the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013 shall be fulfilled by either on-balance sheet or off-balance sheet positions and may also be fulfilled by any of the following:(a) provision of a contingent form of retention as referred to in Article 1(1)(c) or of a liquidity facility in the context of an ABCP programme, which fulfils the following criteria:(i) it covers at least 5 % of the nominal value of the securitised exposures;(ii) it constitutes a first loss position in relation to the securitisation;(iii) it covers the credit risk for the entire duration of the retention commitment;(iv) it is provided by the originator, sponsor or original lender in the securitisation;(v) the institution becoming exposed to such securitisation has been given access to appropriate information to enable it to verify that points (i), (ii), (iii) and (iv) are complied with;(b) overcollateralisation, as a form of credit enhancement, if that overcollateralisation acts as a ‘first loss’ retention of no less than 5 % of the nominal value of the tranches issued by the securitisation.

2. Where the first loss tranche exceeds 5 % of the nominal value of the securitised exposures, it shall be possible for the retainer to only retain a portion of such first loss tranche, where this portion is equivalent to at least 5 % of the nominal value of the securitised exposures.

3. For the fulfilment of the risk retention requirement at a securitisation scheme level institutions shall not take into account the existence of underlying transactions in which the originators or original lenders retain a first loss exposure at the transaction-specific level.

1. The retention of a first loss exposure at the level of every securitised exposure in accordance with point (e) of the second subparagraph of Article 405(1) shall be applied so that the credit risk retained is always subordinated to the credit risk that has been securitised in relation to those same exposures.

2. The retention referred to in paragraph 1 may be fulfilled by the sale at a discounted value of the underlying exposures by the originator or original lender, where the amount of the discount is not less than 5 % of the nominal value of each exposure and where the discounted sale amount is only refundable to the originator or original lender where it is not absorbed by losses related to the credit risk associated to the securitised exposures.

1. Where measuring the level of retention of net economic interest, the following criteria shall be applied:(a) origination shall be considered as the time at which the exposures were first securitised;(b) the calculation of the level of retention shall be based on nominal values and the acquisition price of assets shall not be taken into account;(c) ‘excess spread’ as defined in Article 242(1) of Regulation (EU) No 575/2013 shall not be taken into account when measuring the retainer's net economic interest;(d) the same retention option and methodology shall be used to calculate the net economic interest during the life of a securitisation transaction, unless exceptional circumstances require a change and that change is not used as a means to reduce the amount of retained interest.

2. In addition to the criteria set out in paragraph 1, provided that there is no embedded mechanism by which the retained interest at origination would decline faster than the interest transferred, the fulfilment of the retention requirement shall not be deemed to have been affected by the amortisation of the retention via cash flow allocation or through the allocation of losses, which, in effect, reduce the level of retention over time. A retainer shall not be required to constantly replenish or readjust its retained interest to at least 5 % as losses are realised on its exposures or allocated to its retained position.

The calculation of the net economic interest to be retained for credit facilities, including credit cards, shall be based only on amounts already drawn, realised or received and shall be adjusted in accordance with changes to those amounts.

1. The obligation in the third subparagraph of Article 405(1) of Regulation (EU) No 575/2013 not to subject the retained net economic interest to any credit risk mitigation, short positions, other hedge or sale shall be applied having regard to the purpose of the retention requirement and taking account of the economic substance of the transaction. Hedges of the net economic interest shall not be considered to be a hedge for the purposes of the third subparagraph of Article 405(1) of Regulation (EU) No 575/2013 and may accordingly be permitted only where they do not hedge the retainer against the credit risk of either the retained securitisation positions or the retained exposures.

2. The retainer may use any retained exposures or securitisation positions as collateral for secured funding purposes, as long as such use does not transfer the credit risk of these retained exposures or securitisation positions to a third party.

The transactions referred to in Article 405(4) of Regulation (EU) No 575/2013 shall include securitisation positions in the correlation trading portfolio which are reference instruments satisfying the criterion in Article 338(1)(b) of Regulation (EU) No 575/2013 or are eligible for inclusion in the correlation trading portfolio.

An institution satisfying the retention requirement on the basis of the consolidated situation of the related EU parent credit institution, EU financial holding company, or EU mixed financial holding company in accordance with Article 405(2) of Regulation (EU) No 575/2013 shall, in the case the retainer is no longer included in the scope of supervision on a consolidated basis, ensure that one or more of the remaining entities included in the scope of supervision on a consolidated basis assumes exposure to the securitisation so as to ensure ongoing fulfilment of the requirement.

1. Where there is no available information on the specific exposures to be securitised, including where exposures accumulate before their securitisation or where they may be substituted into an existing revolving securitisation, an institution is deemed to fulfil its due diligence obligations referred to in Article 406 of Regulation (EU) No 575/2013, for each of its individual securitisation positions, on the basis of the relevant eligibility criteria for such exposures.

2. When outsourcing certain tasks of the process for the fulfilment of the obligations set out in Article 406 of Regulation (EU) No 575/2013, including record keeping, institutions becoming exposed to the risks of a securitisation shall retain full control of that process.

1. The risk characteristics of the individual securitisation position referred to in Article 406(1)(b) of Regulation (EU) No 575/2013 shall include the following most appropriate and material characteristics, such as:(a) tranche seniority level;(b) cash flow profile;(c) any existing rating;(d) historical performance of similar tranches;(e) obligations related to the tranches included in the documentation relating to the securitisation;(f) credit enhancement.

2. The risk characteristics of the exposures underlying the securitisation position referred to in Article 406(1)(c) of Regulation (EU) No 575/2013 shall include the most appropriate and material characteristics, including the performance information referred to in Article 406(2) of Regulation (EU) No 575/2013 in relation to residential mortgage exposures. Institutions shall identify appropriate and comparable metrics for analysing the risk characteristics of other asset classes.

3. Additional structural features as referred to in Article 406(1)(g) of Regulation (EU) No 575/2013 shall include derivative instruments, guarantees, ►M1 letters of credit** ◄ ** and other similar forms of credit support.

Institutions shall review their compliance with Article 406 of Regulation (EU) No 575/2013 after becoming exposed to a securitisation positions at least annually and more frequently, as soon as institutions become aware of a breach of the obligations included in the documentation relating to the securitisation or of a material change in any of the following:

(a) structural features that can materially impact on the performance of the securitisation position;

(b) the risk characteristics of the securitisation positions and of the underlying exposures.

1. The stress tests referred to in the second subparagraph of Article 406(1) of Regulation (EU) No 575/2013, shall include all relevant securitisation positions and shall be incorporated into the stress testing strategies and processes that the institutions carry out in accordance with the internal capital adequacy assessment process specified in Article 73 of the Directive 2013/36/EU of the European Parliament and of the Council (2).

2. In order to fulfil the stress testing requirements referred to in the second subparagraph of Article 406(1) of Regulation (EU) No 575/2013, institutions may make use of comparable financial models developed by third parties, in addition to those developed by ECAIs, provided that they can demonstrate, when requested that they took due care, prior to investing to validate the relevant assumptions in and structuring of the models and to understand methodology, assumptions and results.

3. When conducting the stress tests referred to in Article 406(1) of Regulation (EU) No 575/2013 within an ABCP programme as referred to in Article 242(9) of Regulation (EU) No 575/2013, which is supported by a liquidity facility which fully covers the credit risk of the securitised exposures, institutions may carry out a stress test on the creditworthiness of the liquidity facility provider rather than on the securitised exposures.

1. The holding of a securitisation position in the trading or non-trading book respectively shall not represent a sufficient justification in itself for the application of different policies and procedures or a different intensity of review to fulfil the due diligence obligations referred to in Article 406 of Regulation (EU) No 575/2013. In determining whether different policies and procedures or a different intensity of review shall be applied, all relevant factors materially impacting the risk profile of each of the books and of the relevant securitisation positions shall be considered, including the size of the positions, the impact on the institution's capital base during a period of stress, and the concentration of risk in one specific transaction, issuer, or asset class.

2. Institutions shall ensure that any material change increasing the risk profile of the securitisation positions in their trading book and non-trading book is reflected by an appropriate change in their due diligence procedures as regards those securitisation positions. In this regard, institutions shall identify in their formal trading book and non-trading book policies and procedures the circumstances which would trigger a review of the due diligence obligations.

Article 406 of the Regulation (EU) No 575/2013 shall be deemed to be complied with where the following conditions are fulfilled:

(a) securitisation positions are either held in the correlation trading portfolio and are reference instruments as referred to in Article 338(1)(b) of that Regulation or are eligible for inclusion in the correlation trading portfolio;

(b) the institution complies with Article 377 of that Regulation with regard to calculating the own funds requirements in relation to its correlation trading portfolio;

(c) the institution's approach to calculating own funds in relation to its trading portfolio results in a comprehensive and thorough understanding of the risk profile of its investment in the securitisation positions;

(d) the institution has implemented formal policies and procedures appropriate to its correlation trading portfolio and commensurate with the risk profile of its investments in the corresponding securitised positions, for analysing and recording the relevant information referred to in Article 406(1) of Regulation (EU) No 575/2013.

1. The fulfilment of the obligation referred to in Article 408 of Regulation (EU) No 575/2013 by originator or sponsor institutions shall not imply that borrower types and loan products must be the same for securitised and non-securitised exposures.

2. Where sponsor and originator institutions have not been engaged in the original credit-granting of exposures to be securitised, or are not active in the credit-granting of the specific types of exposures to be securitised, those institutions shall obtain all the necessary information to assess whether the criteria applied in the credit-granting for those exposures are as sound and well-defined as the criteria applied to non-securitised exposures.

1. The retainer shall, pursuant to Article 409 of Regulation (EU) No 575/2013, disclose to investors at least the following information regarding the level of its commitment to maintain a net economic interest in the securitisation:(a) confirmation of the retainer's identity and of whether it retains as originator, sponsor or original lender;▼M1(b) which of the modalities provided for in points (a), (b), (c), (d) or (e) of the second subparagraph of Article 405(1) of Regulation (EU) No 575/2013 has been applied to retain a net economic interest;▼B(c) any change to the modality to retain a net economic interest as referred to in point (b) in accordance with Article 10(1)(d);(d) confirmation of the level of retention at origination and of the commitment to retain on an on-going basis, which shall relate only to the continuation of fulfilment of the original obligation and shall not require data on the current nominal or market value, or on any impairments or write-downs on the retained interest.

2. Where the exemptions referred to in paragraph 3 or 4 of Article 405 of Regulation (EU) No 575/2013 apply to a securitisation transaction, institutions acting as originator, sponsor or original lender shall disclose information on the applicable exemption to investors.

3. The disclosure referred to in paragraphs 1 and 2 shall be appropriately documented and made publicly available, except in bilateral or private transactions where private disclosure is considered by the parties to be sufficient. The inclusion of a statement on the retention commitment in the prospectus for the securities issued under the securitisation programme shall be considered an appropriate means of fulfilling the requirement.

4. The disclosure shall also be confirmed after origination with the same regularity as the reporting frequency of the transaction, at least annually and in any of the following circumstances:(a) where a breach of the retention commitment referred to in Article 405(1) of Regulation (EU) No 575/2013 occurs;(b) where the performance of the securitisation position or the risk characteristics of the securitisation or of the underlying exposures materially change;(c) following a breach of the obligations included in the documentation relating to the securitisation.

1. Originators, sponsors and original lenders shall ensure that materially relevant data under Article 409 of Regulation (EU) No 575/2013 is readily accessible to investors, without excessive administrative burden.

2. The appropriate disclosure referred to in Article 409 of Regulation (EU) No 575/2013 shall be done at least annually and in the following circumstances:(a) where the performance of the securitisation position or the risk characteristics of the securitisation or of the underlying exposures materially change;▼M1(b) following a breach of the obligations included in the documentation relating to the securitisation.

2a. Materially relevant data on the individual underlying exposures shall, in general, be provided on a loan-by-loan basis; however in certain instances the data provided on an aggregate basis may be sufficient. In assessing whether data provided on an aggregate basis is sufficient, factors to be taken into account shall include the granularity of the underlying pool and whether the management of the exposures in that pool is based on the pool itself or on a loan-by-loan basis.

3. The disclosure requirement shall be subject to any other legal or regulatory requirements applicable to the retainer.

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.