Prudential Regulation Authority Rulebook

1

The requirement that the retained material net economic interest shall not be split amongst different types of retainers under Article 6(1)  of Chapter 2 shall be fulfilled by any of the following:

1. (a) the originator or originators;
2. (b) the sponsor or sponsors; or
3. (c) the original lender or original lenders.

2

Where more than one originator is eligible to fulfil the retention requirement each originator shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the originator.

3

Where more than one original lender is eligible to fulfil the retention requirement, each original lender shall fulfil that requirement on a pro rata basis by reference to the securitised exposures for which it is the original lender.

4

By way of derogation from paragraphs 2 and 3, the retention requirement may be fulfilled in full by a single originator or original lender provided that either of the following conditions is met:

1. (a) the originator or original lender has established and is managing the ABCP programme or other securitisation; or
2. (b) the originator or original lender has established the ABCP programme or other securitisation and has contributed over 50% of the total securitised exposures measured by nominal value at origination.

5

Where more than one sponsor is eligible to fulfil the retention requirement, the retention requirement shall be fulfilled by either:

1. (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, but not limited to, the transaction’s fee structure, the sponsor’s involvement in the establishment and management of the ABCP programme or other securitisation and exposure to credit risk of the securitisations; or
2. (b) by each sponsor in proportion to the total number of sponsors.

6

The following must be taken into account when assessing whether an entity has been established or operates for the sole purpose of securitising exposures, as referred to in the fifth sub-paragraph of Article 6(1) of Chapter 2:

1. (a) the entity has a business strategy and the capacity to meet payment obligations consistent with a broader business model and involving material support from capital, assets, fees or other income available to the entity, relying neither on the exposures being securitised, nor on any interests retained or proposed to be retained in accordance with Article 6 of Chapter 2, as well as any corresponding income from such exposures and interests; and
2. (b) the members of the management body have the necessary experience to enable the entity to pursue the established business strategy, as well as adequate corporate governance arrangements.

1

The fulfilment of the retention requirement in a manner equivalent to one of the options set out in Article 6(3) of Chapter 2 through a synthetic form of retention or contingent form of retention, shall meet all of the following conditions:

1. (a) the amount retained is at least equal to the amount required under the option which the synthetic form of retention or contingent form of retention corresponds to; and
2. (b) the retainer has explicitly disclosed in the final offering document, prospectus, transaction summary or overview of the main features of the securitisation that it will retain a material net economic interest in the securitisation through a synthetic form of retention or contingent form of retention on an ongoing basis.

For the purposes of point (b), the retainer shall disclose in the final offering document, prospectus transaction summary or overview of the main features of the securitisation, all the details on the applicable synthetic form of retention or contingent form of retention, including, the methodology used in its determination of the material net interest retained and an explanation on which of the options in Article 6(3) of Chapter 2 the retention is equivalent to.

2

Where an entity other than a CRR firm or a UK Solvency II Firm, retains an economic interest through a synthetic form of retention or contingent form of retention, that interest retained on a synthetic or contingent basis shall be fully collateralised in cash and held on a segregated basis as client money as referred to in CASS 7.12.1R of the FCA Handbook.

1

The retention of not less than 5% of the nominal value of each of the tranches sold or transferred to the investors as referred to in Article 6(3)(a) of Chapter 2 may be complied with through any of the following methods:

1. (a) the retention of not less than 5% of the nominal value of each of the securitised exposures, provided that the retained credit risk ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures;
2. (b) the provision, in the context of an ABCP programme, of a liquidity facility, where the following conditions are met:
   1. (i) the liquidity facility covers 100% of the share of the credit risk of the securitised exposures of the relevant securitisation transaction that is being funded by the respective ABCP programme;
   2. (ii) the liquidity facility covers the credit risk for as long as the retainer has to retain the material net economic interest by means of such liquidity facility for the relevant securitisation transaction;
   3. (iii) the liquidity facility is provided by the originator, sponsor or original lender in the securitisation transaction; and
   4. (iv) the investors becoming exposed to such securitisation have been given access to appropriate information with the initial disclosure to enable them to verify that points (i), (ii) and (iii) are complied with; or
3. (c) the retention of an exposure which exposes its holder to the credit risk of each issued tranche of a securitisation transaction on a pro-rata basis (vertical tranche) of not less than 5% of the total nominal value of each of the issued tranches.

1

The retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures as referred to in point (b) of Article 6(3) of Chapter 2 shall only be considered fulfilled where the retained credit risk of such exposures ranks pari passu with or is subordinated to the credit risk securitised in relation to the same exposures.

1

The pool of at least 100 potentially securitised exposures from which retained non-securitised and securitised exposures are to be randomly selected, as referred to in point (c) of Article 6(3) of Chapter 2, shall be sufficiently diverse to avoid an excessive concentration of the retained interest.

2

When selecting the exposures referred to in paragraph 1, retainers shall take into account quantitative and qualitative factors that are appropriate for the type of securitised exposures to ensure that the distinction between retained non-securitised and securitised exposures is random. For that purpose, and where relevant, retainers shall take into consideration the following factors when selecting exposures:

1. (a) the time of the origination of the loan (vintage);
2. (b) the type of securitised exposures;
3. (c) the geographical location;
4. (d) the origination date;
5. (e) the maturity date;
6. (f) the loan to value ratio;
7. (g) the collateral type;
8. (h) the industry sector;
9. (i) the outstanding loan balance; and
10. (j) any other factor deemed relevant by the retainer.

3

Retainers shall not select different individual exposures at different points in time, except where that may be 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.

4

Where the retainer is the securitisation’s servicer, the selection conducted in accordance with this Article shall not lead to a deterioration in the servicing standards applied by the retainer on the transferred exposures relative to the retained exposures.

1

The retention of the first loss tranche referred to in point (d) of Article 6(3) of Chapter 2 may be fulfilled by holding either on-balance sheet or off-balance sheet positions and by any of the following methods:

1. (a) provision of a contingent form of retention or of a liquidity facility in the context of an ABCP programme, which fulfils all of the following criteria:
   1. (i) the exposure covers at least 5% of the nominal value of the securitised exposures
   2. (ii) the exposure constitutes a first loss position in relation to the securitisation;
   3. (iii) the exposure covers the credit risk for the entire duration of the retention commitment;
   4. (iv) the exposure is provided by the retainer; and
   5. (v) the investors have been given access within the initial disclosure to all information necessary to verify that points (i) to (iv) are complied with; or
2. (b) overcollateralisation, as defined to in point (9) of Article 242 of CRR, if that overcollateralisation operates as a ‘first loss’ position of not less than 5% of the nominal value of the securitised exposures.

2

Where the first loss tranche exceeds 5% of the nominal value of the securitised exposures, the retainer may chose to retain a pro-rata portion of such first loss tranche only, provided that that portion is equivalent to at least 5% of the nominal value of the securitised exposures.

1

The retention of a first loss exposure at the level of every securitised exposure as referred to in point (e) of Article 6(3) of Chapter 2 shall only be considered to be fulfilled where the retained credit risk is subordinated to the credit risk securitised in relation to the same exposures.

2

By way of derogation from paragraph 1 of this Article, the retention of a first loss exposure at the level of every securitised exposure as referred to in point (e) of Article 6(3) of Chapter 2 may also be fulfilled through the sale by the originator or original lender of the underlying exposures at a discounted value where each of the following conditions is met:

1. (a) the amount of the discount is not less than 5% of the nominal value of each exposure; and
2. (b) the discounted sale amount is refundable to the originator or original lender only if, that discounted sale amount is not absorbed by losses related to the credit risk associated to the securitised exposures.

1

In the case of NPE securitisations as referred to in Article 6(3A) of Chapter 2, for the purposes of applying Article 4(1)(a) and Articles 5 to 8 of this Chapter to the share of non-performing exposures in the pool of underlying exposures of a securitisation, any reference to the nominal value of the securitised exposures shall be construed as a reference to the net value of the non-performing exposures.

2

For the purposes of Article 6 of this Chapter, the net value of the retained non-performing exposures shall be calculated using the same amount of the non-refundable purchase price discount that would have been applied had the retained non-performing exposures been securitised.

3

For the purposes of Article 4(1)(a), Article 5 and Article 8 of this Chapter, the net value of the retained part of the non-performing exposures shall be computed using the same percentage of the non-refundable purchase price discount that applies to the part that is not retained.

4

Where the non-refundable purchase price discount as referred to in the second subparagraph of Article 6(3A) of Chapter 2 has been agreed at the level of the pool of underlying non-performing exposures, the net value of individual securitised non-performing exposures included in the pool or sub-pool, as applicable, shall be calculated by applying a corresponding share of the non-refundable purchase price discount agreed at pool or sub-pool level to each of the securitised non-performing exposures in proportion to their nominal value or, where applicable, their outstanding value at the time of origination.

5

Where the non-refundable purchase price discount includes the difference between the nominal amount of one tranche or several tranches of a NPE securitisation underwritten by the originator for subsequent sale and the price at which that tranche or those tranches are first sold to unrelated third parties as referred to in the second subparagraph of Article 6(3A) of Chapter 2, that difference shall be taken into account in the calculation of the net value of individual securitised non-performing exposures by applying a corresponding share of the difference to each of the securitised non-performing exposures in proportion to their nominal value.

1

When measuring the level of retention of the net economic interest, the following criteria shall be applied:

1. (a) the origination shall be considered as the time at which the exposures were first securitised;
2. (b) where the calculation of the level of retention is based on nominal values, it shall not take into account the acquisition price of assets;
3. (c) finance charge collections and other fee income in respect of the securitised exposures net of costs (‘excess spread’) shall not be taken into account when measuring the retainer’s net economic interest; and
4. (d) the retention option and methodology used to calculate the net economic interest shall not be changed 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 the retained interest.

2

The retainer shall not be required to replenish or readjust its retained interest to at least 5% as losses are realised on its retained exposures or allocated to its retained positions.

1

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

1

The obligation in the first subparagraph of Article 6(1) of Chapter 2 to retain on an ongoing basis a material net economic interest in the securitisation shall be deemed to have been met only where, taking into account the economic substance of the transaction, both of the following conditions are met:

1. (a) the retained material net economic interest is not subject to any credit risk mitigation or hedging of either the retained securitisation positions or the retained exposures; and
2. (b) the retainer does not sell, transfer or otherwise surrender all or part of the rights, benefits or obligations arising from the retained net economic interest.

1A

By way of derogation of paragraph 1(a) of this Article, the retainer may hedge the net economic interest where the hedge:

1. (a) is not against the credit risk of either the retained securitisation positions or the retained exposures; or
2. (b) is undertaken prior to the securitisation as a prudent element of credit granting or risk management and does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions or exposures and the securitisation positions or exposures transferred to investors.

2

The retainer may use retained exposures or securitisation positions as collateral for secured funding purposes including, where relevant, funding arrangements that involve a sale, transfer or other surrender of all or part of the rights, benefits or obligations arising from the retained net economic interest, provided that such use as collateral does not transfer the exposure to the credit risk of those retained exposures or securitisation positions to a third party.

3

Paragraph 1(b) of this Article shall not apply:

1. (a) in the event of the insolvency of the retainer; or
2. (b) in the case of retention on a consolidated basis, in accordance with Article 14 of this Chapter.

1

Transactions for which the retention requirement does not apply, as referred to in Article 6(6) of Chapter 2, shall include securitisation positions in the correlation trading portfolio which are either reference instruments satisfying the criterion in Article 338(1)(b) of CRR or which are eligible for inclusion in the correlation trading portfolio.

1

A mixed financial holding company, a UK parent institution or financial holding company established in the UK (as defined in Article 6(4) of Chapter 2) satisfying, in accordance with Article 6(4) of Chapter 2, the retention requirement on the basis of its consolidated situation 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 fulfils the retention requirement.

1

Retainers shall not use arrangements or embedded mechanisms in the securitisation by virtue of which the retained interest at origination would decline faster than the interest transferred. In the allocation of the cash flows, the retained interest shall not be prioritised to preferentially benefit from being repaid or amortised ahead of the transferred interest.

2

The amortisation of the retained interest via cash flow allocation set out in paragraph 1 or through the allocation of losses that, in effect, reduce the level of retention over time, shall be allowed.

1

Where an entity securitises its own issued debt instruments, including covered bonds as defined in the FCA Handbook, and the underlying exposures of the securitisation comprise exclusively those own-issued debt instruments, the retention requirement in Article 6(1) of Chapter 2 shall be considered complied with.

1

Subject to paragraph 2 of this Article, in the context of a resecuritisation as far as enabled in accordance with Article 8 of Chapter 2, a retainer shall retain the material net economic interest in relation to each of the respective transaction levels.

2

The originator of a resecuritisation shall not be obliged to retain a material net economic interest at the transaction level of the resecuritisation where all of the following conditions are met:

1. (a) the originator of the resecuritisation is also the originator and the retainer of the underlying securitisation;
2. (b) the resecuritisation is backed by a pool of exposures comprising solely exposures or positions which were retained by the originator in the underlying securitisation in excess of the required minimum net economic interest prior to the date of origination of the resecuritisation; and
3. (c) there is no maturity mismatch between the underlying securitisation positions or exposures and the resecuritisation.

3

A fully supported ABCP programme which meets the requirements of Article 8(4) of Chapter 2 shall not be deemed a resecuritisation for the purposes of this Article.

4

The retranching by the securitisation’s originator of an issued tranche into contiguous tranches shall not constitute a resecuritisation for the purposes of this Article.

1

For the purposes of Article 6(2) of Chapter 2, assets held on the balance sheet of the originator that according to the documentation of the securitisation meet the eligibility criteria shall be deemed to be comparable to the assets to be transferred to the SSPE where, at the time of the selection of the assets, both of the following conditions are met:

1. (a) the expected performance of both the assets to be further held on the balance sheet and the assets to be transferred is determined by similar factors; and
2. (b) on the basis of indications including past performance and applicable models, it can be reasonably expected that the performance of the assets to be further held on the balance sheet will not be significantly better during the time period referred to in Article 6(2) of Chapter 2 than the performance of the assets to be transferred.

2

[Note: Provision left blank]

3

An originator shall be deemed to have complied with Article 6(2) of Chapter 2 where, after the securitisation, there are no exposures left on the originator’s balance sheet that are comparable to the securitised exposures, other than the exposures which the originator is already contractually committed to securitise, and provided that that fact has been clearly communicated to investors.

1

The retainer shall disclose to investors within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation at least the following information regarding the level of its commitment to maintain a net economic interest in the securitisation:

1. (a) confirmation of the retainer's identity, whether it retains as originator, sponsor or original lender and, where the retainer is the originator, how it meets the requirements set out in the fifth subparagraph of Article 6(1) of Chapter 2 taking into account the principles set out in Article 2(6) of this Chapter;
2. (b) which of the modalities provided for in points (a), (b), (c), (d) or (e) of the second subparagraph of Article 6(3) of Chapter 2 has been applied to retain a net economic interest; and
3. (c) 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 5 or 6 of Article 6 of Chapter 2 apply to a securitisation transaction, firms acting as originator, sponsor or original lender shall disclose within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation information on the applicable exemption to investors.

3

The disclosure referred to in paragraphs 1 and 2 of this Article shall be appropriately documented within the final offering document, prospectus, transaction summary or overview of the main features of the securitisation 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.