EBA and BOE Weigh in on EU Risk Retention

April 08, 2015

The Bank of England (“BOE”) and European Central Bank (the “ECB”) recently published a joint response to the report and short opinion issued late last year by the European Bank Authority (“EBA”) on how to improve the functioning of the securitization markets, including EU risk retention rules.

In general, the BOE and the ECB have agreed with the approach suggested by the EBA, including the EBA’s view that the second limb of the Originator definition (an entity which purchases exposures from third parties for its own account and then securitizes them) should be narrowed to eliminate any loophole and ensure an alignment of interest between investors and sponsors, originators and original lenders. The BOE and ECB also agreed with the EBA’s suggestion that issuers, sponsors and originators should also be responsible for compliance with risk retention rules (the so-called “direct approach”) and not just investors (the “indirect approach”) as under the existing rules.

Although the recommendations of the EBA, the BOE and ECB are not binding, they remain highly persuasive to the European Commission and provide the market with an indication of what the ultimate regulatory position may be should the European Commission elect to adopt these recommendations.

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