On October 3, 2016, the EBA published final Guidelines on implicit support for securitization transactions under the Capital Requirements Regulation. Examples of such transactions include purchases of deteriorating credit risk exposures from an underlying pool or improvement of quality of credit enhancements through the addition of higher quality risk exposures.

The CRR places restrictions on providing implicit support to securitizations. These rules apply in addition to the so- called "skin in the game" requirements on originators to retain part of the risk on securitizations. To prevent uncapitalized risks of implicit support, the CRR requires that any reduction in capital requirements gained through a securitization must be justified by a corresponding transfer of risk to third parties. The CRR also states that a transaction is not considered to provide support to a securitization if it is executed under arm's length conditions and taken into account in the assessment of significant risk transfer. The CRR requires a sponsor or originator institution that has failed to comply with this requirement to, at a minimum, hold own funds against all of the securitized exposures as if they had not been securitized. The Guidelines set out an objective test in relation to the definition of "arm's length conditions." A transaction will be considered to be executed on arm's length terms where the terms of the transaction are such as they would be used in a normal commercial transaction if the parties had no relationship with each other, and each party acted independently, entered into the transaction of its own volition, acted in its own interests and did not enter into the transaction on the basis of extraneous considerations. The Guidelines also set out conditions in relation to the assessment of significant risk transfer and the relevant factors that will be taken into consideration.

The Guidelines will apply from March 1, 2017. The final Guidelines are available at: http://www.eba.europa.eu/documents/10180/1603711/Final+report+on+Guidelines+on+implicit+support+for+securitisation+transactions+%28EBA-GL-2016-08%29.pdf . 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.