European Union legislative institutions agreed to various compromises in the form of amendments to proposed legislation concerning the European securitization framework. The institutions also agreed to proposed amendments to the Capital Requirements Regulation.

In a series of "trilogues," legislators met to negotiate the terms of proposed amendments. As Cadwalader attorneys explained in a recent memorandum addressing the negotiations, legislators agreed to the following key compromises:

  • minimum requirements will remain at 5% for all modes of risk retention;
  • the European Systemic Risk Board will monitor risk levels in the securitization market;
  • the "sole purpose test" will be adopted to determine whether an entity is considered an originator;
  • limits on "cherry picking" assets will be imposed on originators;
  • requirements will be implemented to prevent retail investors lacking the ability to bear losses from investing in securitizations;
  • due diligence standards will be established for institutional investors; and
  • with limited exceptions, re-securitization will be banned.

For the Capital Requirements Amendment, a new "hierarchy of approaches" for calculating securitization transaction exposures was adopted, along with certain other changes to capital requirements, including lower capital requirements for "simple, transparent and standardized" securitization.

The Cadwalader memorandum was authored by Stephen Day, David Quirolo, Nick Shiren, Daniel Tobias, Jeremiah Wagner, Suzanne Bell, Robert Cannon, Neil Macleod, Claire Puddicombe and Merryn Craske.

Commentary / David Quirolo

Market participants will, no doubt, welcome the compromises agreed in trilogue, particularly as regards the modifications of Parliament's more controversial proposed amendments to the Securitization Regulation. Though the full effect of the new regime will not be clear for some time, significant progress has now been made in developing a new legal framework for securitization in the EU.

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