The European Banking Authority (EBA) followed up with further clarification on its guideline for the application of Article 122a of the Capital Requirements Directive (CRD).
The EBA, which published its guidelines at the end of 2010 said it had received a substantial number of question from the securitization industry requesting clarification and further guidance on how the guidelines should be interpreted.
Article 122a is an amendment to the European CRD that requires European credit institutions that invest in structured finance securities to know what they own. It lays out explicit penalties if a European credit institution does not obtain sufficient data regarding an ABS to satisfy regulators that the buyer fully understands the security.
The clarifications that the EBA recently issued put to rest some ongoing uncertainties around risk retention, particularly for CLO structures and investor due diligence, explained Douglas Long, executive vice president of business development and product strategy at Principia Partners.
"The purpose of these guidelines is to continue to foster coordination amongst local supervisors," said Long. "Clarity was needed regarding risk retention methodologies for CLOs because the guideline’s initial definitions of an originating entity don’t always apply in the case of CLOs."
Long added that, the clarifications also offer some finality to certain questions and reinforce the regulatory position, such that investors, issuers and lawyers can be clear "there is no wiggle room when it comes to disclosure or taking on securitized exposures."
An example of this is the measurement of ‘materiality’ when it comes to an infringement in investment analysis. "The guidance states that no matter where a securitized exposure lies in your business, you have to understand how it affects the business at both a consolidated level and at an individual business line or portfolio level," explained Long.
The EBA also emphasizes that securitized exposures must be understood on a firm wide basis, which Long said has proved to be a challenging aspect of the directive. "Gaining this consolidated view of the structured finance business, with the ability to easily drill down into deals and portfolios is an operational challenge we are seeing at EU banks," he said.
After the first year of implementation the EBA said it will provide an update however according to Long the clarification as they are provide a sound framework for new issuance and boost investor confidence.