Communication NBB_2011_03/ Information concerning the implementation of Article VII.35 of the regulation on own funds

boulevard de Berlaimont 14 | 1000 Brussels t +32 2 221 21 11| f +32 2 221 31 00 | www.bnb.be Communication NBB_2011_03 of July 4, 2011 Information concerning the implementation of Article VII.35 of the regulation on own funds

Scope:
This communication is addressed to credit institutions.

Summary/Objectives:
The purpose of this communication is to obtain the information required to comply with the annual publication obligations imposed on competent authorities by Article 122bis of European Directive 2009/111/EC regarding securitization.

Madam,
Sir,

On September 30, 2010, the Banking, Finance and Insurance Commission (CBFA) published a circular, reference CBFA_2010_20, presenting the regulation of July 27, 2010. The latter amends the regulation of October 17, 2006, on the own funds of credit institutions and investment firms in the context of the transposition of European Directives 2009/27/EC, 2009/83/EC, and 2009/111/EC.

In the field of securitization, particular attention should be paid to the provisions introduced by Article 122bis of European Directive 2009/111/EC and transposed into Belgian law by the new Article VII.35 of the regulation on own funds.

In the context of its implementation, Article 122bis explicitly requires that competent authorities draw up an annual summary report, starting from December 31, 2011, on the results of prudential supervision regarding compliance with provisions on retention and due diligence by institutions, as well as on any corrective measures imposed.

In this context, institutions active in the (re)securitization sector (or those planning to become so), acting as originators, sponsors, initial lenders, or as investors, are requested to inform the prudential supervision services of the National Bank of Belgium by letter, by September 30, 2011 at the latest, of the measures taken to comply with the new provisions of Article VII.35 of the regulation on own funds; in particular, regarding the following aspects: governance, retention and/or investment policies and procedures, internal controls, specific stress tests, the role of internal audit, and, where applicable, the compliance function.

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In cases where this implementation has not yet been carried out or is in progress, the concerned credit institutions are invited to explain the reasons for such delay and to agree on an implementation schedule with the prudential supervision services to which they are subject. The administrative bodies of each institution must ensure, however, that it takes the necessary measures to comply as soon as possible with the principles of Article VII.35 of the regulation on own funds.

For your information, the provisions of Article VII.35 have been in force since December 31, 2010.
They concern (1) the retention principle that must be implemented by the originator, sponsor, or initial lender for all securitization transactions carried out from January 1, 2011, and (2) the duty of due diligence and risk management by investor institutions (prior analysis and monitoring of investments) as well as by originator and sponsor institutions (criteria for selecting securitized exposures).

The objectives of the provisions set out in this article are (1) to ensure the alignment of the economic interests of originators, sponsors, or initial lenders with those of investor institutions (the "skin in the game" concept), thereby mitigating the perverse effects of the "originate-to-distribute" model which were at the origin of the recent financial crisis, and (2) to promote sound due diligence on the part of investor institutions when selecting and monitoring their investments.

The main elements of the article are as follows:

1. Retention principle according to which originators, sponsors, or initial lenders must retain a net economic interest of at least 5% in their securitization transactions. This is achieved based on the different retention modes specifically described in the article. It is measured at inception and must be maintained permanently (except for the "normal life" of the transaction); it therefore cannot be subject to specific hedging.

2. Due diligence principle at the level of investor institutions, aimed at ensuring a correct understanding of the risks associated with the investment before making the investment decision, and then ensuring, on a continuous basis, correct monitoring of the risks and performance of the investments made.

3. Due diligence principle at the level of originator and sponsor institutions, aimed at implementing sound and well-defined credit granting criteria for the underlying exposures of securitization transactions that are not different from those applicable to non-securitized exposures.

4. Transparency principle vis-à-vis investor institutions, according to which originators and sponsors ensure to provide the necessary information (including regarding the retention principle) to allow for adequate implementation of the due diligence duty by investor institutions.

For securitization transactions issued before January 1, 2011, a transitional period is provided until December 31, 2014. After this date, securitization transactions issued before January 1, 2011, for which underlying exposures are replaced or for which new underlying exposures are added, must also be subject to the requirements of Article VII.35.

In the event of non-compliance with this provision, the exposures are deemed not to have been securitized and transferred to third parties. The exclusion of securitized exposures from the calculation of own funds requirements will not be authorized.

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NBB boulevard de Berlaimont 14 | 1000 Brussels t +32 2 221 21 11| f +32 2 221 31 00 | www.bnb.be

Article VII.35 also provides for an additional risk weighting system that applies to investor institutions in the event of failure to comply with the due diligence principle and to originator and sponsor institutions in the event of failure to comply with the transparency principle.

In the context of this implementation, it is recalled that a useful reference can be made to the guidelines regarding Article 122bis of Directive 2009/111/EC, which were published on December 31, 2010, by the Committee of European Banking Supervisors (CEBS).

A copy of this communication is transmitted to your statutory auditor or approved auditor.

We ask you to accept, Madam, Sir, the expression of our distinguished consideration.

The Governor,
Luc Coene

The CEBS has become the European Banking Authority (EBA) since January 1, 2011.