Report from the Commission to the Council and the European Parliament - Expected impact of article 122a of Directive 2006/48/EC
Date: 2010-05-28
Institutions: European Commission
Subjects: credit institution, issue of securities, provision of services, report, right of establishment, stock-exchange listing

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EUROPEAN COMMISSION 

Brussels, 28.5.2010 
COM(2010)262 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

EXPECTED IMPACT OF ARTICLE 122A OF DIRECTIVE 2006/48/EC 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

EXPECTED IMPACT OF ARTICLE 122A OF DIRECTIVE 2006/48/EC 

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Securitisation is a business model in which an issuer1 transfers loans and other credit 
risky assets to investors in the form of tranches. These tranches represent claims on 
the securitised assets of different seniority, the seniority determining in which order 
losses that occur on the securitised assets affect the investors in any of the different 
tranches.  Since  the  summer  of  2007,  securitisation  markets  have  been  in  broad 
distress  after  large  unexpected  losses  on  securitisations  of  mortgage  loans  surfaced 
and  are  only  slowly  and  partially  recovering.  Because  this  distress  has  deeply 
affected  the  financial  system  and  the  wider  economy,  it  is  crucial  that  regulation 
addresses the root causes of the large unexpected losses in certain securitisations. A 
root cause can be identified as a lack sound loan underwriting practices on the part of 
the  issuers  that  was  made  possible  because  professional  investors2  in  the 
securitisation  tranches  did  not  exercise  due  diligence  in  their  investments  and  did 
therefore not impose effective discipline on the issuers.  

Article  122a3  imposes  requirements  on  credit  institutions  in  the  European  Union  in 
order  to  make  sure  that  they  invest  only  in  securitisations  where  they  have  applied 
appropriate  due  diligence  and  where  the  originators  have  an  incentive  to  act 
diligently in the underwriting of the loans to be securitised. The article also obliges 
credit  institutions  –  where  they  act  as  originators  themselves  –  to  cater  for  the 
relevant  disclosures  needed  for  investors'  due  diligence.  The  Article  underwent 
substantial  change  during  the  legislative  process  and  there  was,  also  given  the 
difficult condition that securitisation markets were in, no impact assessment carried 
out  about  its  requirements  in  their  final  shape.  In  particular,  during  the  legislative 
process, concerns were expressed about the effectiveness of one of its elements, the 
requirement for issuers of securitisations to retain exposure to the securitisation ("the 
retention  requirement")  so  that  they  have  an  incentive  to  diligently  originate  loans. 
These concerns led to the inclusion of the following provision: 

"By  31  December  2009  the  Commission  shall  report  on  the  expected  impact  of 
Article  122a,  and  shall  submit  that  report  to  the  European  Parliament  and  the 
Council, together with any appropriate proposal. The Commission shall draw up its 
report after consulting the Committee of European Banking Supervisors. The report 
shall  consider,  in  particular,  whether  the  minimum  retention  requirement  under 
Article  122a(1)  delivers  the  objective  of  better  alignment  between  the  interests  of 
originators or sponsors and investors and strengthens financial stability, and whether 

For convenience, this report uses the term "issuer" for banks do both of these activities, even if strictly 
speaking the actual securities are issue by a special purpose entity and the issuer technically is a sponsor 
or originator in the terms of the Directive. 
Retail investors became only indirectly exposed to securitisation tranches and to a very limited extent; 
they  would  have 
where 
underestimated risks due both to selling practices and inadequate product transparency. 
see Annex for an extract of the Directive text 

they  bought  financial  products  containing  securitisation 

tranches, 

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an  increase  of  the  minimum  level  of  retention  would  be  appropriate  taking  into 
account international developments."4 

Accordingly,  this  report  provides  a  high  level  assessment  of  the  overall  impact  of 
Article  122a  (Part  1  of  the  report),  and  then  considers  the  questions  about 
effectiveness  of  the  retention  requirement  and  the  appropriateness  of  raising  its 
minimum level (Part 2). Part 3 of the report draws conclusions. There is an Annex of 
this report that discusses technical suggestions made by CEBS for improving specific 
aspects of the retention rule. The Commission notes that it is required to draw up this 
report  before  the  relevant  requirement  of  the  directive  has  to  be  implemented  in 
Member  States'  legislation.  This  report  consequently  discusses  the  expected  impact 
of  the  requirement  and  the  expected  merits  of  raising  the  minimum  retention  level, 
but cannot draw on concrete experience with the application of this requirement. 

EXPECTED OVERALL IMPACT OF ARTICLE 122A 

The expected impact of Article 122a has to be assessed against  the shape in which 
securitisation markets are at the moment. Prior to the crisis, securitization was widely 
hailed  as  a  financial  system  stabilizer.  It  was  supposed  to  be  a  key  part  of  a  more 
efficient  credit  allocation  process,  dispersing  credit  risk  to  a  broader  and  more 
diverse group of investors rather than concentrating it on bank balance sheets. Hence, 
the banking and overall financial system would be more resilient, mass bank failures 
would be avoided, and credit cycles would be smoother. However, it turned out that 
the degree of risk dispersion fell far short of ideal. Instead, often other banks ended 
up  holding  the  securitisations,  either  directly  or  indirectly,  often  without  properly 
understanding the risk that they were diversifying into. 

Securitisation  also  gave  rise  to  severe  principal/agent  problems  of  misaligned 
incentives between issuers and ultimate investors. As risks were passed on along the 
chain,  those  best  placed  to  maintain  prudent  loan  underwriting  and  monitoring 
standards  were  more  focused  on  fee  maximization.  Furthermore,  many  of  the 
investors  at  the  end  of  the  chain  failed  to  exercise  appropriate  due  diligence,  and 
relied  too heavily  on credit  rating  agencies for their risk assessments.  Some  of this 
overreliance  on  credit  ratings  stemmed  from  the  increasing  complexity  of  products 
and of ensuring in-house analytical capabilities. At the level of the rating agencies, 
flawed  methodologies  and  data  inputs  were  often  used  to  assign  ratings,  and  the 
investors  who  relied  on  them  did  not  always  have  sufficient  analytical  capabilities 
and information to question agency ratings and assess investments themselves. 

Global securitization gross issuance soared from almost nothing in the early 1990s to 
peak at almost $5 trillion in 2006. Since then, volumes have dropped off sharply. In 
to  government  sponsored)  mortgage-backed 
fact,  U.S.  private  (as  opposed 
securitisation collapsed almost completely. This collapse has been partially offset by 
surging European issuance – which however is composed almost solely of securities 
retained  by  issuers  for  use  as  collateral  in  order  to  access  central  bank  liquidity 
facilities.  The  issuance  of  securitisation  not  collateralized  by  real  estate  has  stayed 
fairly robust, again supported by central bank facilities. On the other hand, although 

4 

See Article 156, 9th sub-paragraph. 

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7. 

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the  performance  of  loans  that  underlie  most  non-mortgage  securitisations5  is 
expected to deteriorate, professional investors still seem to be relatively comfortable 
with  these  securities.  This  comfort  level  could  largely  be  due  to  the  believe  that 
structures and performance dynamics are better understood and the fact that issuers 
are seen to have substantial "skin in the game", ie retain a portion of the risk of the 
exposures they securitise. 

Against this background, the Commission expects that the impact of Article 122a on 
securitisations  will  be  positive.  The  Article  will  help  aligning  the  incentives  of 
issuers and investors more closely and thereby to make securitisation sounder and to 
instil new confidence in this source of financing. The ultimate consequence could be 
that  securitisations  return  in  larger  volumes  and  as  a  source  of  refinancing  of  the 
financial sector's lending to the real economy, while however preventing the excesses 
that  became  apparent  in  the  course  of  the  crisis.6  The  approach  of  Article  122a  is 
three-pronged:  First,  bank  investors  need  to  comply  with  (and  supervisors  need  to 
review  compliance)  with  a  list  of  due  diligence  measures  to  be  undertaken.  These 
required  measures  include  the  investor  performing  stress  tests  on  the  securities  he 
buys, looking through to the underlying portfolio of loans. Second, bank originators 
have to make sure the necessary information for adequate due diligence is available 
to  the  investors.  Third,  issuers  of  securitisations  have  to  maintain  an  economic 
interest in "their" securitisations of no less than 5%. All three prongs of the approach 
together aim at insuring an alignment of interests between investors and originators, 
making sure 

•  that investors do not blindly invest in what they do not really understand; 

•  that investors are able to exercise discipline over issuers; and 

•  that originators also keep their own money at risk and do not have an incentive to 

securitise bad loans. 

While  producing  benefits  in  terms  of  aligned  incentives  and  thereby  avoiding 
excessive  risk-taking,  Article  122a  will  also  imply  certain  additional  costs  for 
securitisations. These costs result from issuers having to make disclosures, investors 
having  to  spend  resources  on  due  diligence  and  finally,  from  issuers  having  to 
finance  exposure  to  their  own  securitisations.  The  Commission  expects  that  these 
additional  costs  will  be  highest  for  business  models  in  which  practices  regarding 
disclosure,  due  diligence  and  risk  retention  were  inadequate  before  the  crisis. 
However,  none  of  these  additional  costs  can  be  considered  equal  to  social  welfare 
losses.  A  part  of  them  are  rather  costs  incurred  by  one  economic  actor  that  would 
have had to be borne otherwise by another economic actor. In particular, investing in 
his  own  securitisations,  the  issuer  merely  incurs  costs  in  terms  of  re-financing  and 
potentially incurring credit losses that would otherwise be incurred by securitisation 
investors.  By  consequence,  retention  by  the  issuer  only  involves  real  costs  if  the 
issuer has particularly high funding costs for holding some risks of the securitisation 
himself,  which  may  the  case  for  some  non-bank  issuers  of  securitisations.  In  those 

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such as credit card receivables or auto loans 
Note  that  the  requirements  will  apply  to  new  issuance  only  and  after  a  grace  period  also  to 
grandfathered securitisations that are "refilled" with new loans to be securitised. 

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circumstances  there  may  be  a  reduced  competition  among  lenders,  potentially 
involving a real cost of risk retention. 

Notably,  disclosure  and  due  diligence  involve  real  transaction  costs  for  the 
securitisation business model. While in normal banking, a bank evaluates loans and 
makes  lending  decisions,  keeping  the  loan  on  its  book  until  maturity,  the 
securitisation model at least involves the investor as a further party that has to carry 
out additional screening based on disclosures offered by the issuer. These costs are 
unavoidable if the securitisation model is to be carried out in a sound manner and the 
Directive, by imposing a minimum standard for disclosure and due diligence, merely 
raises  the  cost  of  securitisation  in  circumstances  were  the  activity  would  otherwise 
not  have  been  executed  with  the  due  rigour.  For  that  reason,  the  additional 
transaction  costs  incurred  by  the  issuers  and  investors,  along  with  those  resulting 
from  public  supervision  of  compliance  with  the  requirements  are  balanced  by  the 
social benefit of a more resilient securitisation business model. 

EFFECTIVENESS OF THE MINIMUM RETENTION LEVEL 

The Commission considers, in line with the advice received from CEBS, that there is 
no single level or form7 of retention that is optimal in all securitisations. Because the 
objective  of  retention  by  the  issuer  is  an  alignment  of  his  interest  with  that  of  the 
investor,  the  key  determinant  of  the  optimal  retention  level  is  the  potential 
misalignment  of  incentives  that  exists  in  a  given  securitisation.  The  potential 
misalignment  should  be  thought  of  in  terms  of  the  opportunities  for  the  issuer  to 
select assets, to combine them in a securitisation and to structure the transaction in a 
way that improves his own profits at the expense of investors. The decisive question 
is  about  the  extent  to  which  the  investor  is  able  to  understand  the  risk  and  reward 
profile  of  the  securitisation.  At  one  extreme,  if  the  potential  investors  had  no 
information and understanding of the risk and rewards of the securitisation at all, the 
optimal  solution  would  be  for  the  potential  issuer  to  retain  all  risks  and  rewards  of 
the assets himself, i.e. not securitising the assets in the first place. Otherwise, there 
could be a strong incentive for the issuer to deceive the ignorant investors about the 
true risk.  

If, at the other extreme, the issuer had no informational advantage compared to the 
investor  regarding  the  risks  of  every  single  underlying  asset,  a  misalignment  of 
interests  could  not  occur  and  retention  of  risk  would  not  be  necessary.  Obviously, 
neither extreme is realistic in real life securitisations. But it is sure that the issuer will 
almost  always  have  a  comparative  advantage  over  the  investor  when  it  comes  to 
access  to  information  and  ability  to  evaluate  the  information.  The  issuer  will  often 
have  originated  the  loans  himself  and  possibly  has  year-long  experience  in  the 
relevant  market  segment  whereas  an  investor  may  only  incidentally  buy  a 
securitisation of the respective loans in order to include it into a diversified portfolio.  

12. 

To compensate for the structural comparative disadvantage of the investor in terms 
of access to information and ability to evaluate it, retention will be important to align 
interests. The right amount and form of retention however depends on the magnitude 

7 

ie for instance first loss or different tranches of a securitisation. 

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this  disadvantage.  Different  securitisation  produce  different 

of 
information 
asymmetries, depending for instance on the types of underlying assets, ranging from 
loans  to  corporates  that  publish  comprehensive  financial  information  at  one  end  of 
the  spectrum  to  retail  loans  or  complex  structured  project  finance  loans  with  little 
publicly  available  information  at  the  other  end.  Therefore,  different  securitisations 
may require different retention measures in order to achieve an alignment of interests 
to  compensate  for  information  asymmetries.  The  optimal  amount  and  form  of 
retention  in  every  specific  case  will  depend  on  a  number  of  difficult-to-measure  or 
qualitative  factors,  so  that  it  is  not  feasible  to  establish  a  formulaic  approach  to 
determining the optimal retention level in the directive. 

Accordingly, the directive only requires a moderate minimum level of retention and 
requires  investors  to  explicitly  evaluate  the  retention  policy  adopted  by  the  issuer. 
This  in  turn  means  that  investors  should  refrain  from  buying  securitisations  where 
the retention level, even if it meets the required 5% minimum, is insufficient in light 
of the transparency of the underlying risks. As a consequence, actual retention levels 
may be higher than the required minimum. 

The consideration that retention levels should vary across securitisations is consistent 
with  the  wide  range  of  retention  levels  that  exist  in  actual  securitisations,  ranging 
from  almost  nothing  to  100%,  in  which  case  the  underlying  assets  may  be  fully 
guaranteed  by  the  issuer.  Detailed  evidence  about  retention  levels  is,  differentiated 
according to transaction type and origin is contained in the CEBS report. In terms of 
impact  of  the  retention  requirement,  it  is  worth  noting  that  it  does  not  impose  any 
additional constraints on securitisations where retention levels are already above 5% 
independent of this requirement. However, from a policy perspective it is important 
to recognise that there is evidence suggesting that in the pre-crisis euphoria, retention 
levels  for  certain  types  of  securitisations  have  indeed  dropped  to  levels  that  appear 
unsustainably low in light of the structural informational disadvantage of investors.8 
Accordingly,  a  regulatory  minimum  retention  level  appears  very  relevant  as  a 
regulatory backstop mechanism to improve market resilience in times when bubbles 
build  up.  However,  such  regulatory  backstop  should  not  be  set  too  high.  For 
relatively  transparent  securitisations  where  the  informational  disadvantage  of 
investors is small, the moderate 5% minimum  may actually constitute the adequate 
level. In those instances, a higher minimum retention requirement could constitute an 
unnecessary  regulatory  constraint  for  market  participants.  An  unnecessarily  high 
minimum  retention  requirement  may  have  real  costs  connected  to  it  if  different 
potential  issuers  of  securitisations  face  markedly  different  cost  of  funding.  In  that 
case,  a  higher  than  necessary  retention  requirement  could  potentially  imply  that 
certain non-bank issuers would find securitisations not an attractive business model 
anymore, meaning that they leave the market and thereby reduce competition among 
lenders. 

8 

For instance Franke, G., and Krahnen, J.P., (2008) “The Future of Securitization”, mimeo or the IMF 
October 2009 Global Financial Stability Report. 

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CONCLUSIONS 

In  terms  of  overall  impact,  the  Commission  expects  that  Article  122a  will  help 
aligning the incentives of issuers and investors more closely. Thereby, it will make 
securitisation  sounder  and  instil  new  confidence  in  this  source  of  financing.  The 
ultimate consequence will be that securitisations return in larger volumes as a source 
of  refinancing  of  the  financial  sector's  lending  to  the  real  economy,  while  however 
preventing the excesses that became apparent in the course of the crisis. Regarding 
the specific question of the effectiveness of the minimum retention level chosen, the 
Commission  concludes  that  the  existing  moderate  minimum  retention  level  of  5% 
should be kept,  acknowledging  that  investors should require higher retention levels 
depending on the securitisation in question. 

Therefore, the overall design of Article 122a can be expected to meet its purpose. In 
concluding  on  this  report,  the  Commission  would  point  to  a  number  of  technical 
points  raised  by  CEBS  that  are  briefly  discussed  in  the  annex  to  this  report.  The 
Commission considers that there is no immediate need to propose legislative changes 
to  Article  122a  in  this  context.  However,  the  Commission  will  closely  monitor 
international  developments  in  this  field,  acknowledging  that  also  in  jurisdictions 
outside the EU there is interest in introducing requirements similar to Article 122a, 
including  retention  requirements.  As  these  developments  materialise  further,  the 
Commission  will  make  sure  that  Article  122a  will  also  be  assessed  in  light  of 
potentially different solutions found in other jurisdictions. 

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Annex – technical points identified by CEBS 

A) METHODS OF RETENTION 

(1) 

CEBS  recommends  a  modification  of  the  methods  of  retention  that  would  allow 
retention of a share of the risk each of the securitised exposures rather than retention of 
exposures  to  the  tranches  of  the  securitisation  sold  to  investors.  This  is  currently 
already allowed according to paragraph 1 letter (b) of Article 122a, however only for 
the specific case of "revolving securitisations". It would be worthwhile to evaluate a 
change of the Article in order to allow a wider use of this method of retention in the 
context of preparing a future amending directive. 

B) EXEMPTIONS 

(2) 

(3) 

(4) 

(5) 

A  number  of  exemptions  to  the  application  of  the  retention  requirement  of  Article 
122a  are  listed  in  paragraph  2  of  the  same  Article.  In  particular,  a  securitisation  is 
exempted when the securitised exposures are claims or contingent claims on i) central 
governments  or  central  banks,  regional  governments,  local  authorities  and  public 
sector entities of Member States; ii) institutions to which a 50% risk weight or less is 
assigned under Articles 78 to 83; or iii) multilateral banks being of comparable credit 
risk to central banks. 

Likewise,  the  Directive  provides  that  the  retention  requirement  shall  not  apply  to:  i) 
transactions based on a clear, transparent and accessible index, where the underlying 
reference entities are identical to those that make up an index of entities that is widely 
traded,  or  are  other  tradable  securities  other  than  securitisation  positions;  and  ii) 
syndicated loans, purchased receivables or credit defaults swaps where the instruments 
are not used to package and/or hedge a securitisation that is covered by the retention 
requirement. 

The  rationale  of  these  exemptions  is  that  securitisations  with  the  above  listed 
underlying  exposures  constitute  little  issue  in  terms  of  misaligned  incentive  because 
either  a)  the  securitised  assets  are  of  particularly  low  risk  or  b)  the  issuer  has  little 
degrees of freedom to compose the securitisation in a manner that is disadvantageous 
for  investors  because  the  composition  of  the  securitisation  is  determined  by  the 
composition of an index. The mention of syndicated loans, purchased receivables and 
credit  default  swaps  in  fact  does  not  constitute  an  exemption  but  rather  clarifies  that 
these  types  of  instruments  do  not  per  se  constitute  securitisations  –  unless  they  are 
actually used to package a securitisation - and therefore do not fall under the retention 
requirement. 

CEBS  argues  that  these  exemptions  do  not  constitute  a  possibility  to  circumvent  the 
retention requirement in situations where it should apply, but goes on to say that the 
exemption referring to institutions with an assigned risk-weight of 50% or less can be 
seen  as  problematic.  CEBS  considers  that  under  Articles  78  to  83  of  CRD,  risk 
weights of 50% and less are assigned to credit risk exposures of entities rated highly 
by  rating  agencies  and  notes  that,  as  the  current  crisis  had  made  clear,  such  a  credit 
rating was not at all a guarantee of the entity’s ability to repay its credit obligations. 
Similarly,  CEBS  argues  that  the  exceptions  related  to  regional  governments  and 

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multilateral development banks should be confined to those exposures that are treated 
as  exposures  to  central  governments  and  central  banks  because  of  their  low  default 
risk.  The  Commission  would  agree  with  the  view  that  the  exposures  enlisted  in  the 
exemption  are  not  equivalent  in  terms  of  risk  profile,  although  in  tendency  the 
Commission  thinks  that  all  the  enlisted  exposures  can  be  considered  relatively  low 
credit  risk.  It  is  a  question  of  judgement  what  the  acceptable  degree  of  risk  for  this 
exemption  is  and  CEBS  did  not  go  further  into  this  question.  The  Commission 
furthermore thinks that the concerns about rating agency ratings as a measure of risk 
are  valid  in  principle,  but  that  there  is  no  alternative  measure  of  risk  except  credit 
institutions'  own assessments that could be referenced in legislation. On balance, the 
Commission  believes  that  the  existing  exemption  should  be  maintained  for  lack  of 
clear evidence that either the degree of risk in the exposures in question or the rating 
agency  ratings  as  an  approximate  measure  for  the  riskiness  of  those  exposures  are 
inadequate.  

(6) 

CEBS  furthermore  considers  that  one  additional  exemption  should  be  incorporated 
into  Article  122a  in  order  to  prevent  securitisations  based  on  an  institution’s  own 
liabilities, including covered bonds whose underlying collateral is on the balance sheet 
of the issuer institution, from falling under the scope of Article 122a. The Commission 
thinks  that  a  securitisation  of  a  banks'  own  liabilities,  in  particular  of  covered  bond 
claims, would typically fall under the existing exemption for exposures to institutions 
unless  the  bank  in  question  is  externally  rated  and  of  a  particularly  weak  credit 
quality.9  Therefore,  because  the  existing  exemption  should  be  maintained,  the 
Commission will not consider proposing this additional exemption. 

C) FURTHER PROVISIONS AND SAFEGUARDS 

(7) 

(8) 

In its call for advice, the Commission had asked CEBS whether additional provisions 
and  safeguards  should  be  added  to  the  wording  of  Article  122a  in  order  to  address 
potential for issuers to circumvent the retention requirement. One concern which the 
Commission  has  highlighted  in  this  context  is  the  ability  to  structure  transactions  in 
ways that avoid the application of the retention requirement, in particular through any 
fee or premium structure. CEBS argues in this context that it would not be possible to 
consider  all  the  factors  which  could  undermine  the  effectiveness  of  a  retention 
requirement.  Therefore,  such  concerns  should  in  the  view  of  CEBS  be  addressed  by 
requiring disclosure of fees and remuneration structures to enable investors to take a 
view on the impact on the interests of the originator.  

The  Commission  agrees  with  CEBS  that  it  is  difficult  to  rule  out  in  legislation  any 
attempt by the issuer to diminish the effectiveness of 5% minimum level of retention. 
As discussed earlier in this report, there is a key role for due diligence by the investors, 
covering  also  the  retention  policy  adopted  in  an  individual  securitisation.  It  is  in  the 
responsibility of investing credit institutions to exercise the due diligence required by 
Paragraph  4  lit.  a  and  b  of  Article  122a  over  both  the  retention  mechanism  and  the 
wider risk profile of a transaction, and that would include risks generated by unusual 
fee structures; it is in turn the supervisory authorities' responsibility to make sure this 
is  done  effectively.  The  Commission  believes  that  the  due  diligence  requirements  of 

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The exemption provided for claims on institutions according to Paragraph 3 lit c). 

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(9) 

Article  122a  can  constitute  a  sufficient  basis  for  making  sure  that  investors  act 
prudently in this regard and supervisory authorities could elaborate further guidelines 
to this end. 

In  a  different  context,  CEBS  notes  that  Article  122a  does  not  specify  the  precise 
mechanism for the disclosure requirements, and in particular that the current language 
only  requires  originators  to  ‘explicitly  disclose’  that  they  meet  the  retention 
requirement.  CEBS  fears  that  this  requirement  could  be  open  to  wide  interpretation. 
CEBS  therefore  recommends  that  the  Commission  should  consider  whether  the 
language is strong enough to achieve its objectives, especially taking into account that 
this requirement is meant to be met on an on-going basis. The Commission agrees that 
the  compromise  wording  found  in  the  legislative  process  does  not  directly  impose  a 
requirement on the issuer of the securitisation, but only indirectly via the investor. The 
Commission  recalls  in  this  context  that  there  was  a  conscious  choice  to  require 
investors  to  make  sure  that  the  issuers  retain  the  exposure,  because  the  issuers  of 
securitisations that find its ways into European investment portfolios may or may not 
be subject to European legislation themselves. In light of this problem, a balance had 
to be struck to find a wording that is also effective for securitisations produced outside 
the EU that at the same time does not place undue burden on the European investor. In 
particular,  the  requirement  again  has  to  be  seen  in  the  context  of  the  additional 
requirement  on  the  investor  to  analyse  the  actual  commitment  of  the  originator.  The 
Commission  agrees  that  the  question  about  the  need  for  clearer  requirements  on  the 
issuer however does deserve further consideration and believes that this question could 
find its answer in the international developments ongoing that may result in retention 
requirements  also  in  other  major  jurisdiction.  The  Commission  will  therefore  follow 
up to this question further in monitoring the relevant developments outside the EU. 

D) GROUP STRUCTURES 

(10)  For  group  structures,  CEBS  points  out  that  in  absolute  terms,  the  principle  of 
application  of  the  retention  requirement  at  both  solo  and  consolidated  levels  still 
remains  the  general  case,  while  the  retention  requirement  can  be  satisfied  on  a 
consolidated  basis  when  the  originators  or  sponsors  belong  to  the  same  group.  This 
latter  possibility  is  subject  to  a  set  of  stringent  conditions.  Thus  the  retention 
requirement is not compulsory on a solo basis in the case of a specialised entity that 
does not directly originate the securitised exposures but belongs to the same group as 
the originator entities. CEBS notes that regulatory arbitrage could potentially arise in 
cross-border  groups  where  different  entities  are  based  in  different  jurisdictions  but 
believes 
implementation  guidelines  for  supervisory 
forthcoming  CEBS 
convergence should address this issue. 

that 

(11)  CEBS  points  to  the  additional  problem  that  the  entity  that  retains  the  interest  in  the 
securitisation on behalf of other group entities could be stripped out of the group, for 
instance, via a sale. CEBS points out that in that case, the other group entities would 
have to address this issue by acquiring exposure to the securitisation again so as to be 
able  to  carry  on  complying  with  the  retention  requirement.  Once  that  has  happened, 
the retention requirement can be expected to meet its objective again. 

EN 

10 

   EN