• Agreement Reached on Form of New EU Securitisation Regulation and on Amendments to the Capital Requirements Regulation
  • July 26, 2017 | Authors: Jeremiah M. Wagner; Merryn Craske; David Quirolo; Stephen Day; Suzanne Bell; Neil Macleod; Nick Shiren; Claire Suzanne Puddicombe
  • Law Firm: Cadwalader, Wickersham & Taft LLP - London Office
  • Introduction

    The EU legislative institutions have now agreed compromise amendments to the proposed EU regulation intended to lay down common rules on securitisation and to create a European framework for “simple, transparent and standardised” (“STS”) securitisation (the “Securitisation Regulation”)[1]. They have also agreed compromise amendments to the proposed regulation amending the Capital Requirements Regulation[2] (the “CRR”), which includes a new hierarchy of approaches for calculating exposures to securitisation transactions and provisions designed to result in the regulatory capital requirements for exposures to STS securitisations being lower than those for non-STS securitisations (the “CRR Amendment Regulation”)[3] (together, the “Regulations”). This memorandum is written on the basis of our understanding of these agreed compromises.


    Since the initial proposals were published nearly two years ago, there has been considerable debate regarding these proposed reforms to the securitisation legislative framework in the EU. This debate became particularly intense in the European Parliament as the political differences in attitudes towards the merits of securitisation in general became increasingly apparent. After nearly six months of discussion between representatives of the EU legislative institutions, agreement has now been reached on the form of the proposed Regulations. The result of these negotiations will be a regime that is much more supportive of the European securitisation market than that which would have arisen from Parliament’s draft of the Securitisation Regulation.

    The Securitisation Regulation

    Legislative Background

    The European Commission[4] published its original proposal for the Securitisation Regulation (the “Commission Proposal”), together with its proposal for the CRR Amendment Regulation, on 30 September 2015. The Presidency of the Council of the European Union published its “Third Compromise Proposal” on 30 November 2015, which included the Council’s proposed amendments to the Commission Proposal. The Council confirmed in early December 2015 that this was its agreed negotiating position (“Council’s Position”).

    The European Parliament then considered the Commission Proposal in its Committee on Economic and Monetary Affairs (“ECON”) throughout 2016. Following much discussion, compromises were agreed and ECON adopted its report, in the form of amendments to the Commission Proposal, in its vote on 8 December 2016 (as discussed in our Clients and Friends Memorandum of that date).[5] The European Parliament’s adopted position was formally published in its Report dated 19 December 2016 (“Parliament’s Position”).


    In the period since the European Parliament adopted its proposed amendments, representatives of Parliament, the Council and the Commission have met on a number of occasions in a process known as trilogue, with a view to negotiating a common position. The trilogue discussions began in January 2017 under the Maltese Presidency of the Council, which lasts for the six month period to 30 June 2017.

    The matters discussed in trilogue consisted of technical drafting points and political issues. Many of the technical points were agreed with little difficulty, but most of the controversial amendments proposed by Parliament were classified as political issues. Significant progress on agreeing these political issues was achieved in the sixth political trilogue that took place on 16 May 2017, but the key compromises were reached in the trilogue on 30 May 2017. There have been further technical meetings since then and the final forms of the proposed Regulations are now emerging, although they have not yet formally been published. This memorandum is written on the basis of our understanding of the compromises agreed in trilogue.

    The European Parliament’s Proposed Amendments

    Parliament’s Position had diverged widely from the Commission Proposal and the Council’s Position. Many MEPs have expressed strong views regarding the securitisation market, for example, the view that issuers tend to make a selection of loans in their favour (so-called “cherry picking”). Many of Parliament’s proposals were viewed as being controversial and potentially damaging to the securitisation markets. The Council and Commission were also strongly opposed to many of Parliament’s proposed amendments. Faced with this opposition, Parliament has compromised on most of its proposed changes.

    Risk Retention

    Minimum Risk Retention Levels

    The most significant and controversial of Parliament’s proposals were those concerning minimum risk retention levels. Parliament proposed that minimum risk retention levels would increase from the current 5% to 10% for each risk retention option (save for the first loss tranche approach, where the minimum would remain at 5%, and the retention of a first loss exposure of every securitised exposure, where the minimum level would be 7.5%). However, Parliament also proposed that the European Banking Authority (“EBA”) and the European Systemic Risk Board (“ESRB”) would be mandated to take a decision on required retention rates of up to 20% in light of market circumstances. Parliament’s proposed amendments also provided that risk retention rates would then be reviewed every two years.

    Parliament’s risk retention proposals were strongly resisted by the Commission and the Council. Both institutions published notes (termed “non-papers”) setting out the reasons why a change in risk retention rates was not justified.

    The Commission stated that there is a wide consensus around the adequacy of the current risk retention framework which was based on international standards. It noted that, in reviews and in three public consultations, EU supervisors had unanimously concluded that the current retention framework should remain unchanged. It quoted the European Central Bank’s conclusion that not only was an increase of the 5% minimum retention rate not warranted, but that: “…a retention rate increase would place European issuers at a disadvantage and very negatively impact the future viability of securitisation in Europe.” In light of these factors, the Commission stated that: “any change to the risk retention framework would thus need to be supported by careful analysis and based on strong evidence supporting the proposed change. Such evidence has not been brought forward.”

    The Council pointed out that the main aim of the Regulation, that of revitalising the EU securitisation market to contribute to improving the financing of the economy, would be undermined by Parliament’s proposals. It emphasised that the proposed initiatives would, for example, have a negative impact on the collateralised loan obligations market, which was important in providing finance to European companies. The Council thought that the proposed amendments would put European securitisation at a competitive disadvantage internationally. The Council also expressed serious reservations regarding the proposals to revisit the rates every two years in the future, which the Council noted would introduce excessive uncertainly into the securitisation market.

    In light of the firm position of the Council and the Commission, Parliament compromised on these points and agreed to the maintenance of the current risk retention level of 5% for each mode of risk retention. This maintenance of the status quo removes a significant potential cause of instability in the European securitisation market and will be welcomed by market participants.