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EC PUBLISHES FINAL REGULATORY TECHNICAL STANDARDS ON RISK RETENTION

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EC PUBLISHES FINAL REGULATORY TECHNICAL STANDARDS ON RISK RETENTION 1

The European Commission published the final regulatory technical standards specifying the requirements for investor, sponsor, original lender and originator institutions under Articles 404-410 of the Capital Requirements Regulation (CRR) on 13 March 2014. The final regulatory technical standards (FinalRTS) can be found here.

While there are a number of changes from the text of the draft regulatory technical standards published by the European Banking Authority on 22 May 2013 (Draft RTS), the majority of the changes are cosmetic, including condensing the draft text, clarifying the language and correcting typos. The substance remains mostly unchanged.

The key changes made in the Final RTS are:

  • Livingstone, Judith

    Livingstone, Judith

    Article 10 spells out that calculation of the retained portion shall be based on nominal values of the securitised exposures and the acquisition price of the assets shall not be taken into account;

  • The Final RTS clarifies in Article 12 that hedging which does not hedge credit risk of the retained securitisation positions/retained exposures shall not be considered a hedge for the purposes of the hedging prohibition. While this is not a substantive change it is a helpful clarification;
  • Article 14 has been amended to clarify exactly who can hold the risk retention slice on a consolidated basis, but it does not change our understanding that retention on a consolidated basis must be conducted through an EU parent credit institution, EU Financial holding company or EU mixed financial holding company (each as defined in the CRR);
  • The provisions relating to positions held in (or which are eligible to be held in) the correlation trading portfolio are amended in Articles 13 and 20. These are now slightly broader and provide more guidance as to compliance with Article 406 of the CRR;
  • The provisions in Article 15 relating to outsourcing have been amended so that the express statement “Outsourcing shall not relieve institutions of their obligations to understand and assess the risk of the securitisation positions” has been deleted and replaced with a simple obligation for institutions that outsource their due diligence to “retain full control of that process”. This can be read as lowering the obligation on institutions that outsource their due diligence, although we would recommend a cautious approach to outsourcing in any event;
  • Previous references to “bond covenants” in Article 16 (previously Article 18) have been broadened to refer to “obligations related to the tranches included in the documentation relating to the securitisation”. This appears to mean that investors can take account of the full suite of transaction documents, including covenants given by originators, collateral managers and other transaction parties, as well as those set out in the bond terms and conditions;
  • Article 17 amends the frequency of review of securitisation positions held. Institutions should now review when they become aware of material changes to structure features of a securitisation that can materially impact on its performance, rather than simply upon becoming aware of a material change in the securitisation position’s performance;
  • Article 18 changes the requirement of investors to “demonstrate when requested that they took due care” in relation to stress testing, rather than simply taking due care;
  • A minimum level of due diligence procedure is created in Article 19 which clarifies that investor institutions shall only change their due diligence procedures if there is an increase in (rather than a change to) the risk profile of the securitisation positions held; and
  • Article 21 deletes the provision that the obligation to apply the same sound and well-defined criteria for credit granting to exposures to be held and exposures to be securitised does not “prohibit modification of aspects of the underwriting process for specific loan types in order to meet the conditions for sale of such loans to the securitisation”. It is not clear what the Commission’s intention was in removing this wording; on the face of it this deletion may allow more flexibility to modify underwriting processes; however we would recommend that originators take a cautious approach on this.
Waddington, James

Waddington, James

The Final RTS do not demonstrate any significant changes from the Draft RTS, although there are some helpful clarifications, particularly around the due diligence requirements placed on investors. While the Final RTS are not yet in force and the European Parliament and Council have the right to raise objections to the Final RTS, we would not expect any significant changes to be made at this stage, although market practice will continue to develop now that there is some certainty on the risk retention provisions. Investors in securitisations subject to the CRR should review the Final RTS carefully to ensure that they understand their due diligence and monitoring obligations prior to becoming exposed to a securitisation.

By Dechert LLP.

If you have questions or for more information please contact:

James Waddington
Partner

Dechert LLP
[email protected]
+44 20 7184 7645

Judith Livingstone
Associate

Dechert LLP
[email protected]
+44 20 7184 7578

Investing

What should I invest and How do I invest

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What should I invest and How do I invest 2

By Imogen Clarke

With all the uncertainty that has arisen from 2020, with lockdown threatening businesses and the warning of a second wave, the topic of investments has taken on new meaning. Nowadays, more people are concerned with what makes for a good investment, or, if you’re a novice, how to best invest.

For instance, you might be unsure about the reliability of the company you’re looking to invest in, as well as the long-term prospects of your investment.

If you are unsure of your investments, then it is best to seek advice from financial experts like The Fry Group, who deal with tax, wealth and estate planning. They will see that you have a strong financial plan in place to help meet your objectives. They will develop a strategy that is built around your needs and asses any risks that could hinder your plans.

There are some things you’ll need to consider for your strategy; for instance, are you looking to make investments that are more of a risk and will take longer to come to fruition? Or, alternatively, are you wanting a faster approach that will result in a steady income? Whether or not you decide to play it safe all depends on your current financial situation and whether you have the means to take more of a risk. Do you have any other debts that take precedence over your future plans? Is your investment strategy realistic?

With the aid of a specialist – or investment manager – you can design an investment concept that works for you and your goals, and start to build a regular income from your investments. There are four main areas when it comes to assets (groups of investments) that you can consider:

  • Equities
  • Bonds
  • Alternatives
  • Cash

Your investment manager will test the risks associated with your investment, and if it proves to be a positive investment choice, then you will be able to invest more over time.

So, how do you decide where to invest?

According to The Fry Group, ESG investing (Environmental, Social and Governance) is a good option for investors looking to support businesses that meet their similar ethics.

The main areas of ESG investing include:

  • Environmental challenges (climate change, pollution, etc)
  • Social issues (human rights, labour standards, child labour, etc)
  • Governance considerations relating to company management

According to The Fry Group, “Many investors choose to consider ESG investing in order to ensure any investment decisions reflect personal beliefs and values. As a result, they choose to support companies who are making informed, responsible decisions which take into account their wider societal and global impact. In this way investors can achieve peace of mind that their investments are creating a positive effect.”

ESG investing is also more relevant now than ever, as more businesses are looking to present themselves as an environmentally conscious corporation that recognises the values of their consumers.

As The Fry Group puts it, “In the past, ESG investing has been seen as a niche investment approach, for a relatively small number of people with specific requirements. This has changed significantly in recent years, with a growing awareness of environmental issues such as climate change and an increasing understanding of social issues and human rights. As a result, many people are increasingly interested in reflecting their opinions and lifestyle choices through the way they invest.”

So, if you want your investments to pave the way for your personal values and reflect your own morals, then this is the route to go down. But how does it all work?

There are four areas of ESG investing:

  • Responsible ownership and engagement: when companies are encouraged to make necessary improvements.
  • Avoidance or negative screening: whereby businesses are ‘graded’ based on how ethical their business practices are and are avoided altogether if their methods are not approved.
  • Positive screening strategies:when companies meet the ESG goals and are approved for investments.
  • Impact investment strategies: the purpose of this is to use investment capital for positive social results such as renewable energy.

You will need to take into account your own personal objectives as well as the objectives that meet the ESG investment criteria. And, in terms of financial performance, ESG investing can be hugely beneficial. Those who opt for ESG investing perform a more in-depth analysis into long-term and future trends that affect industries, meaning that they are better prepared for changes in consumer values when they arise. And, with all the unpredictability that this year has offered us so far, isn’t it better to do the research and have all angles covered?

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Investing

Investment Roundtable: Live with Jim Bianco

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With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

Sign up for this exclusive webinar now

Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

Sign up for this exclusive webinar now

Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Investing

Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 3

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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