regulatory developments relating to securitization ... · Hogan Lovells' Structured Finance and Securitization practice handles every aspect of structured finance transactions. We

Summary of key EU and US

regulatory developments relating

to securitization transactions

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Summary of key EU and US regulatory developments June 2015 1

Introduction

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2 Summary of key EU and US regulatory developments June 2015

Numerous regulatory developments have been enacted orproposed in the United States and the European Union overthe past few years in response to the financial crisis. Thesedevelopments continue to have a significant impact on theregulatory treatment of securitization transactions.

In the United States, the major regulatory reform impactingsecuritization transactions has been the Dodd-Frank WallStreet Reform and Consumer Protection Act (the "Dodd-Frank Act"), which was signed into law on July 21, 2010 butcontinues, five years later, to require substantial ongoing rule-making in order to implement its specific provisions. Thestructure of the Dodd-Frank Act was to enact broad goals butthen delegate specific regulatory reform to the various UnitedStates financial regulatory agencies.

In the European Union, the impact on securitizationtransactions has come from various regulatory reforms suchas the Basel II and III Accords, various capital requirementsincluding the latest Capital Requirements Directive andCapital Requirements Regulation (together the "CRD"), theCredit Agency Regulation (the "CRA Regulation"), theAlternative Investment Fund Managers Directive (the"AIFMD") and the Solvency II Directive, among others. Thisbrochure summarizes and compares the regulatorydevelopments in the United States and the European Unionacross the following areas: risk retention, due diligence,disclosure and the role of credit rating agencies and analysesthe differences in the United States and the European reformsin these areas.

This brochure also provides a summary of several key UnitedStates reforms for which no European Union equivalentcurrently exists but which nonetheless have an importantimpact on the regulatory treatment of securitizationtransactions in Europe.

Emil ArcaPartner, New York

T +1 212 918 [email protected]

Lewis CohenPartner, New YorkT +1 212 918 3663

[email protected]

Peter Humphreys

Partner, New YorkT +1 212 918 [email protected]

Dennis Dillon

Partner, LondonT +44 20 7296 [email protected]

Sharon Lewis

Partner, Paris & LondonT +33 (1) 5367 [email protected]

Julian CraughanPartner, London


James Doyle

Practice Area Leader – IDCM, London,LondonT +44 20 7296 5849

[email protected]

Tauhid IjazPartner, LondonT +44 20 7296 5221

[email protected]

Evan KelsonCounsel, New York


Overview

mailto:[email protected]





Key:

Rules which are currently in force

Proposed rules

No equivalent provision

Subject Summary of EU provisions Summary of US provisions

Retention of Risk Article 405 CRR and Article 51 of theAlternative Investment Fund ManagersRegulation ("AIFMR")

On January 1, 2014, the securitization riskretention, due diligence and disclosurerequirements under Article 122a of the CapitalRequirements Directive 2009/111/EC ("CRD II")were replaced by Articles 404-410 of the CapitalRequirements Regulation (EU)575/2013("CRR"). The new rules have direct effect inmember states to reduce the risk of differencesin the way that the rules are implemented andinterpreted across member states. Theprovisions of Articles 404-410 of the CRR arebroadly very similar to those contained in Article122a of CRD II. However, despite thissimilarity, the new CRR regulatory technicalstandards (the "risk retention RTS") (whichwere published in the Official Journal on June13, 2014 and came into force on July 3, 2014)differ in some significant respects to theguidance which existed under Article 122a ofthe CRD II regime.

In December 2014, the European BankingAuthority ("EBA") published an opinion andreport on application of the risk retention rules.Some of the key conclusions of the opinion andreport are set out below.

• In addition to the "indirect approach"under which regulated investors mustsatisfy themselves that appropriate riskretention is in place, the EBArecommends introducing a "directapproach" whereby originators will berequired to publish information on riskretention in a standard format.

Dodd Frank Section 94112 CFR Parts43,244,373,123417 CFR Part 24624 CFR Part 267

On October 21, 2014 and October 22, 2014, in a seriesof separate meetings, the Board of Governors of theFederal Reserve System, the FDIC Board, theDepartment of Housing and Urban Development, theFederal Housing Finance Agency, the Office of theComptroller of the Currency, and the SecuritiesExchange Commission (collectively, the "JointRegulators") approved final risk retention rules underSection 941 of the Dodd-Frank Act. These rules willapply to private and Rule 144A transactions as well aspublic transactions if they involve asset-backedsecurities ("ABS"), a term also known as the"Exchange Act ABS" definition and broadly defined tomean a fixed-income or other security collateralized byany type of self-liquidating financial asset (including aloan, a lease, a mortgage, or a secured or unsecuredreceivable) that allows the holder of the security toreceive payments that depend primarily on cash flowfrom the asset.

The risk retention rules were originally proposed onMarch 29, 2011. After approximately 10,500 commentletters, many of which were highly critical of the originalproposals, the Joint Regulators reproposed new ruleson August 28, 2013 to address various concerns raisedduring the initial comment period. The final riskretention rules are substantially similar to thereproposed rules but incorporate certain additionalchanges based on comments received on thereproposal. The final risk retention rules were officiallypublished by the Federal Regulators in the FederalRegister on December 24, 2014 and will apply for

Summary of key EU and US regulatory developments relating tosecuritization transactions



• The EBA recommends the scope ofconsolidation for testing risk retentionshould not be expanded beyond thecurrent set of entities subject to aconsolidated scope of regulatorysupervision.

• The EBA's view is that an originatorshould always be of real substance andhold some "actual economic capital" onits assets for a minimum (unspecified)period of time. The EBA was concernedthat the current definition of "originator"was being interpreted without followingthe "spirit" of the regulation.

• The EBA recognized that harmonizationbetween the EU rules and non-EUlegislation on risk retention is needed toavoid harming the ability of EU originatorsand investors.

Under the AIFMD and the related delegatedregulation, AIFMR, alternative investment fundmanagers are now also subject to equivalentrisk retention and due diligence requirementswith respect to the alternative investment fundswhich they manage. These requirements are tobe interpreted in a consistent manner with thenew risk retention and due diligencerequirements of the CRR.

Similarly, risk retention and due diligencerequirements will ultimately apply to EUinsurance and reinsurance undertakings whenrules under the Solvency II Directive areimplemented by member states, on January 1,2016.

Retention Requirements

Article 405 provides that an EU credit institutionor investment firm, collectively referred to as"institutions" (under Article 122a, the rules onlyapplied to EU credit institutions) can be exposedto the credit of a securitization (as defined inArticle 4(61) of the CRR only if an originator,sponsor or original lender has explicitlydisclosed that it will retain a material neteconomic interest (with no sharing of retention)of at least 5% of the securitized exposure.

Similarly, Article 51 of the AIFMR requiresalternative investment fund managers to ensurethat they only invest in securitizations where theoriginator has disclosed a 5% risk retention.

Interpretation of Key Definitions

Regulators had issued guidance on how toapply or interpret Article 122a (the "Article 122aguidance") which, among other matters,introduced an element of flexibility into the

residential mortgage-backed securities beginningDecember 24, 2015, and will apply for all other ABSbeginning December 24, 2016.

Section 941 of the Dodd-Frank Act amended theSecurities Exchange Act of 1934 (the "Exchange Act")by adding a new Section 15G, which mandates riskretention for a securitizer (or sponsor) of ABS andgenerally requires a securitizer (or sponsor) of ABS toretain at least 5% of the credit risk in the assetscollateralizing the issuance. However, Section 15Gexempts certain types of assets from the risk retentionrequirements and also authorizes the Joint Regulatorsto exempt or establish a lower risk retentionrequirement for other types of assets that aredetermined to meet underwriting standards thatindicate a low credit risk. In addition, Section 941 alsogenerally prohibits the securitizer from engaging in anydirect or indirect hedging or other transfer of thisrequired credit risk.

Overview of Risk Retention Requirement

Consistent with Section 15G, the final risk retentionrule generally provides that sponsors of ABS arerequired to retain at least a 5% economic interest of the"fair value" of the aggregate interests in a transaction.A sponsor can satisfy the risk retention requirementsby (i) retaining an "eligible vertical interest," wherebythe sponsor holds a portion of each class (or tranche)of ABS interests issued as part of a singlesecuritization transaction or a single eligible verticalsecurity representing the same percentage of eachclass, (ii) retaining an "eligible horizontal residualinterest," whereby the sponsor retains the first lossposition, to ensure that the securitizer bears the risks ofloss before the security holders, (iii) retaining an"eligible horizontal reserve account," whereby thesponsor holds cash or cash equivalents in a specifiedtype of reserve account (interest-only reserve accountsdo not qualify), or (iv) any combination of the above."Fair value" of the retained interests is to bedetermined in accordance with U.S. GAAP, although afair value calculation is not required for retention of an"eligible vertical interest." In addition, under the finalrule, sponsors holding an "eligible horizontal residualinterest" are required to disclose certain informationrelated to the fair value calculation thereof prior to thesale of ABS, including a description of the methodologyand assumptions used to make the fair valuecalculation. Within a reasonable time after closing, thesponsor must also disclose the actual fair value of theretained "eligible horizontal residual interest" at closing,the amount the sponsor was required to retain atclosing, and any material differences between theactual methodology and assumptions and those usedprior to sale. One important distinction from thereproposal is that the final rule does not require asponsor holding an "eligible horizontal residual interest"to be subject to cash flow restrictions.



definition of "originator" which facilitated CLOsand CMBS transactions by providing for theretention requirements to be satisfied by a thirdparty entity whose interests were optimallyaligned with those of the investors. Thisguidance was omitted from the risk retentionRTS, potentially adversely affecting the ability tostructure such transactions to ensure that theyare compliant with the CRR rules. In addition,the EBA has recently stated that sometransactions have been structured to meet thelegal requirements to fit within the definition of"originator" while not adhering to the "spirit" ofthe rules. Some of those structures haveprompted the EBA's proposal to reconsider thedefinition of originator again, with a view toadopting a more restrictive approach to thedefinition.

The definition of "sponsor" in the CRR is definedto include both credit institutions and investmentfirms (under Article 122a, "sponsor" referred tocredit institutions only). While this might appearto allow for additional flexibility whendetermining the identity of retainer, evencollateral managers with sufficient capital to actas a retainer may not fall within the definition ofinvestment firm (or sponsor) under the CRR asa result of being from a non-EU country, beingauthorized under the AIFM Directive or nothaving the right categories of authorizationunder the Markets in Financial InstrumentsDirective.

Aggregator Entities

The definition of "originator" under the CRRcontinues to cover entities purchasingreceivables for their own account and thensubsequently securitizing them, in a similarmanner to Article 122a. Therefore the definitionof "originator" under the CRR is still wideenough to cover aggregator entities whichpurchase portfolios of assets and subsequentlysecuritize them although additional care needsto be taken given the EBA report referred toabove.

Multiple Originators

The risk retention RTS provide that the retentionrequirement may be fulfilled by a single ormultiple originators. Where there are multipleoriginators, the retention requirement mayeither be fulfilled by:

• each originator in relation to the proportionof the total securitized exposures for whichit is the originator;

• a single originator, provided the originator

Hedging and Transfer of Risk Retention

Under the final risk retention rules, a sponsor isallowed to reduce its risk retention requirement by theportion of any risk retention assumed by an originatorof the securitized assets, so long as such originatorcontributes more than 20% of the underlying assetpool. The sponsor, however, is not allowed to allocateto an originator any portion of the required riskretention amount exceeding the percentage ofsecuritized assets contributed by such originator. Thepurpose of the 20% threshold is to cause an originatorto retain a sufficient amount of risk to create anincentive for such originator to monitor the quality ofthe assets in the pool.

While the final risk retention rules contain a generalprohibition on hedging and transfer, a sponsor isallowed to transfer its retained interest to a majority-owned affiliate, or in the case of a revolving poolsecuritization, a wholly-owned affiliate. In addition, thefinal rule allows for the sponsor to take hedge positionsthat are not materially related to the credit risk of theparticular securitization transaction, such as positionsrelated to overall market interest rate movements andcurrency exchange rates. Hedge positions tied tosecurities that are backed by similar assets originatedand securitized by other persons are also allowed. Aswith the reproposal, the final rule also contains certainhedging and transfer restriction time limits thatterminate a sponsor’s prohibition on hedging andtransfer of the required risk retention once a specifiedtime period has passed based on when delinquencieshistorically tend to peak. Finally, the final rule prohibitsa sponsor or any affiliate from pledging any retainedinterest as collateral unless the obligation is with fullrecourse to the sponsor or affiliate. Any originator,originator-seller, or third-party purchaser that retainscredit risk pursuant to the final rule will be required tocomply with the hedging and transfer restrictions as if itwere the sponsor.

Qualifications and Exemptions

The final rule allows for a securitization transaction tobe exempt from the risk retention requirement if it iscollateralized solely by a single class of qualifyingassets and by servicing assets. Qualifying assets areassets meeting certain prescribed underwriting criteriaincluding for commercial loans, commercial real estateloans, and auto loans as described in more detailbelow. For ABS issuances involving a blended pool ofqualifying assets and non-qualifying assets, the finalrule reduces the required risk retention percentage bythe "qualifying asset ratio" (unpaid principal balance ofthe qualifying loans in the pool / total unpaid principalbalance of all loans in the pool) at the cut-off date, butnot to less than 2.5%. In addition, the sponsor mustdisclose the qualifying loans, the non-qualifying loans,and the material differences between them.



has established and is managing theprogram or securitization scheme or hasestablished the program or securitizationscheme and has contributed over 50% ofthe total securitized exposures.

Hedging and Transfer of Risk Retention

Article 405 of the CRR requires that theretention must be kept for the life of thesecuritization and hedging of the retained risk isnot permitted (subject to certain exceptions).

Methods of Retention

Under Article 405, there are five differentmethods of retention (as opposed to four underArticle 122a) which may not be combined orchanged during the term of the transaction(except in exceptional circumstances such as arestructuring):

• vertical slice;

• pari passu share;

• on balance sheet;

• first loss tranche (similar to US horizontalslice option); and

• first loss exposure to every securitizedexposure in the securitization (which wasnot part of Article 122a).

Disclosure of Retention

The risk retention RTS confirm the need todisclose (i) the identity of the retainer andwhether it retains as originator, sponsor ororiginal lender, (ii) the form the retention willtake, (iii) any changes to the method of retentionand (iv) the level of retention at origination andof the commitment to retain on an on-goingbasis. Where transactions are exempt from theretention requirements (for example, theexposures are guaranteed by, among others,governments or central banks or the transactioninvolves correlation trading) then the exemptionapplied must be disclosed.

Retention must be confirmed with the samefrequency as that of the reporting in thetransaction and at least annually.

Unfunded Forms of Retention

The risk retention RTS also introducerestrictions on unfunded forms of retention sothat where an institution other than a creditinstitution acts as a retainer on a synthetic orcontingent basis, the interest must be fully cashcollateralized and held on a segregated basis asclient funds. This restriction further limits the

Residential Mortgage-Backed Securities

Under the final rule, residential mortgage loans thatmeet the definition of a "qualified residential mortgage"are exempt from the standard risk retentionrequirements. The final rule aligns this definition withthe definition of "qualified mortgage" adopted by theConsumer Financial Protection Bureau, which becameeffective on January 10, 2014. Under the final rule, theJoint Regulators are required to review the definition of"qualified residential mortgage" to determine itsadequacy at any time upon request by a JointRegulator, or periodically beginning no later than fouryears from the effective date of the rule, and every fiveyears thereafter. The final rule also contains a newexemption for securitization transactions collateralizedsolely by community-focused residential mortgageloans that are not otherwise eligible for "qualifiedresidential mortgage" status and are exempt from theability-to-pay rules under the Truth in Lending Act("TILA"). In addition, the final rule exempts certainowner-occupied three-to-four unit residential mortgageloans that are exempt from the ability-to-pay rulesunder TILA but that otherwise meet the samerequirements under the "qualified mortgage" definitionas a one-to-two unit residential mortgage loan.

Qualifying Commercial Loans

To be deemed a "qualified commercial loan" under thefinal rule, among other things, (i) the borrower’s totalliabilities ratio must be 50% or less, the borrower’sleverage ratio must be 3.0 times or less, and theborrower’s debt service coverage ratio must be 1.5x orgreater based on two years’ projections, (ii) theborrower’s primary repayment source must be itsbusiness operating revenue, and (iii) the borrower mustmake equal monthly payments that fully amortize aloan over a term that is no greater than five years fromorigination.

Qualifying Commercial Real Estate ("CRE") Loans

To be deemed a "qualified CRE loan" under the finalrule, among other things, (i) the loan must be securedby a first mortgage on a commercial property, (ii) adebt service ratio of 1.25x for qualifying multi-familyloans, 1.5x for qualifying leased loans, and 1.7x forother CRE loans is required, (iii) the amortization termmust be less than 30 years for multi-family loans and25 years for other loans, and (iv) there must be amaximum LTV ratio of 65% and combined LTV ratio of70% at origination. One important modification underthe final rule is that land loans (loans secured byimproved land if the obligor owns the fee interest andthe land is leased to a third-party that owns allimprovements on the land) are now included in theCRE loan definition.

Unfortunately, the "qualifying commercial loan" and"qualified CRE loan" exemptions will likely not beuseful for many issuers since the manner in which such



methods of retention available to entities whichare not banks and may also lead to difficultiesfor non-bank entities which have used unfundedforms of retention under the Article 122a CRD IIrules and now find that they no longer arepermitted to do so.

Consolidation

Under Article 122a and the CRR retention canbe provided by any member of a group ofspecified financial entities supervised on aconsolidated basis. The Article 122a guidancealso allowed, in certain circumstances, forretention to be provided by any member of aconsolidated group. The EBA expresslydeclined to provide for equivalent flexibility inthe risk retention RTS on the basis that it did notfall within the scope delegated for the regulatorytechnical standards.

The EBA has recently confirmed that it believesthat the scope of consolidation should not beexpanded.

Nominal Value

Article 405 and the risk retention RTS clearlystate that the retained interest and securitizedexposures should be calculated by reference tonominal value (i.e., par value, without taking intoaccount and discount or premium). Note thatunder the proposed U.S. risk retention rules, amarket value measurement (rather than nominalvalue) would apply.

Consequences of Breach

The recitals to the implementing technicalstandards on additional risk weights (whichwere published in the Official Journal on June 5,2014 and came into force on June 25, 2014)provide that in considering whether aninstitution has failed, by reason of negligence oromission to meet the retention requirement andwhether to apply additional risk-weighting as aconsequence, competent authorities are not tobe influenced by breaches by the retainer of itsretention commitment so long as the investinginstitution can demonstrate that it has takenappropriate account of prior failures, if any, bythe retainer in respect of earlier securitizations.

Grandfathering under the CRR

Note: All provisions contained in Articles404-410 of the CRR apply to "new" publicand private securitizations issued on or afterJanuary 1, 2011 and, as of January 1, 2015apply to existing public and privatesecuritizations issued prior to January 1,2011 with new underlying exposures.

loans ordinarily originate would not enable them toqualify as "qualifying commercial loans" or "CREloans."

Qualifying Auto Loans

With respect to auto loans, the requirements for beinga "qualified automobile loan" under the final rule aresubstantially the same as those in the reproposal and,amongst other requirements, include (i) the borrowermaking equal monthly payments that fully amortize aloan over an expanded maximum allowable loan termthat is no greater than (a) six years from the originationdate for new cars or (b) 10 years minus the differencebetween the model year of the vehicle and the currentmodel year for used cars, (ii) a minimum downpayment requirement of approximately 10%, (iii) theborrower’s debt-to-income ratio being less than orequal to 36%, and (iv) the borrower having at least 24months of credit history, including no current 30-daysdelinquencies and no payments 60-days past dueduring the past two years. As with the "qualifyingcommercial loan" and "CRE loan" exemptions , the"qualified automobile loan" exemption will likely not beuseful for many issuers since the manner in whichautomobile loans are currently originated in theindustry would not enable them to qualify as "qualifiedautomobile loans." For example, it is unusual to requirea 10% down payment and the current underwritingstandards used with respect to consumer reporting donot focus on the same criteria as those in the rule.

One important exclusion from the "qualified automobileloan" definition is that auto leases are not included.

Other General Exemptions

In addition to the above qualifications and exemptions,the final risk retention rule also contains certain othercomplete and partial exemptions from the risk retentionrequirements for certain types of securitizationtransactions. These include, amongst others,residential, multi-family, and healthcare facilitymortgage loan securitizations insured or guaranteed bythe United States or by obligations of the United Statesgovernment (including agencies thereof), securitizationtransactions collateralized solely by loans guaranteedby Fannie Mae and Freddie Mac, and several types ofre-securitization transactions collateralized solely byservicing assets and meeting certain otherrequirements.

Transaction Specific Risk Retention Rules

In addition to the general risk retention requirementsunder the final rule, there are certain other riskretention rules applicable to specific types of ABStransactions.



The risk retention RTS do not provide fortransitional arrangements for transactions thatwere structured to comply with the Article 122aguidance but are now required to comply withthe CRR regime. However, the EBA hasconfirmed that the Article 122a guidance willremain relevant when a competent authority isdetermining whether or not additional riskweights should be applied in respect of asecuritization issued on or after January 1, 2011and before January 1, 2014. While thisguidance is beneficial for entities that werealready invested in securitizations that compliedwith the Article 122a guidance, it does notappear to apply to new investors acquiring aposition in an existing deal which satisfied theArticle 122a guidance but does not meet therequirements under the risk retention RTS.

Further, while the risk retention RTS do notprovide transitional arrangements for theapplication of the CRR requirements to pre-2011 transactions, the Article 122a guidanceappears to remain relevant in assessing how tointerpret substitution of exposures fortransactions before January 1, 2011.

Commercial Mortgage-Backed Securities ("CMBS")

Under the final rule, a third-party purchaser that meetsthe same risk retention standards as the securitizerand conducts due diligence on each asset prior to theissuance of the CMBS can retain the first-loss position(B-piece). In addition, the B-piece can be sold and heldby no more than two third-party purchasers in certaincircumstances. Furthermore, the sponsor or initial third-party purchaser is allowed to transfer the B-piece afterfive years from the date of closing. As with thereproposal, the risk retention requirement can besatisfied if the third-party purchaser holding the B-piececombines its interest with the sponsor that retains anadditional required retention. However, for this option,an independent operating advisor must be appointed.

Collateralized Loan Obligations ("CLOs")

The Joint Regulators rejected attempts to exempt CLOmanagers from being deemed "securitizers" and thusnot subject to the risk retention rules. The final ruledoes provide a risk retention option for open marketCLOs that allows the 5% risk retention requirement tobe satisfied by lead arrangers of loans purchased bythe CLO, rather than the CLO manager. This option isavailable for an open market CLO (i) that is managedby a CLO manager, (i) that holds less than 50% of itsassets in loans syndicated by lead arrangers that areaffiliates of the CLO or originated by originators thatare affiliates of the CLO, and (iii) whose assets consistonly of CLO-eligible loan tranches and related servicingassets. This option is similar to the option proposed inthe earlier proposals and is generally viewed by theCLO market as impractical.

Revolving Pool Securitizations

The final rule changes the definition of "revolvingmaster trust" to "revolving pool securitization" andallows any type of legal entity to use this option,whether or not it is organized as a trust. Under thisoption, a sponsor of a "revolving pool securitization,"such as a credit card deal, can satisfy the risk retentionrequirements by retaining a transaction level seller’sinterest of at least 5% of the unpaid principal balanceof all outstanding ABS held by the investors in theissuing entity. In addition, the seller’s interest can bereduced by combining it with a series level seller’sinterest or other horizontal forms of risk retentionissued after the effective date of the risk retention rules(although the horizontal risk retention may only be heldby the sponsor or a wholly-owned affiliate). Thehorizontal forms of risk retention are measured on afair value basis and include an "eligible horizontalretained interest" or a residual interest in excessinterest and fees meeting certain requirements, or acombination of the two. Under the final rule there is notime limit terminating a sponsor’s prohibition onhedging and transfer of the required risk retention for"revolving pool securitizations." In addition, the seller’s



interest must be maintained during the life of thesecuritization.

Asset-Backed Commercial Paper ("ABCP") Conduits

The final rule provides a separate risk retention optionfor ABCP conduits that is substantially similar to thatunder the reproposal. Under the final rule, the sponsorof an "eligible ABCP conduit" will satisfy the riskretention requirements if, for each ABS interest theABCP conduit acquires from an intermediate specialpurpose entity (SPE), the originator-seller of the SPEretains an economic interest in the credit risk of theassets collateralizing the ABS interests being acquiredin the same form, amount, and manner required underone of the standard risk retention options or revolvingpool securitization risk retention options. The definitionof "eligible ABCP conduit" under the final rule requiresthat the ABS interests acquired by an ABCP conduitare collateralized solely by ABS interests acquired fromintermediate SPEs and servicing assets and are (i)ABS interests collateralized solely by assets originatedby an originator-seller and by servicing assets, (ii)special units of beneficial interest (or similar ABSinterests) in a trust or SPE that retains legal title toleased property underlying leases originated by anoriginator-seller that were transferred to anintermediate SPE in connection with a securitizationcollateralized solely by such leases and by servicingassets, (iii) ABS interests in a revolving poolsecuritization collateralized solely by assets originatedby an originator-seller and by servicing assets, or (iv)ABS interests that are collateralized, in whole or inpart, by assets acquired by an originator-seller in abusiness combination that qualifies for businesscombination accounting under U.S. GAAP, and, ifcollateralized in part, the remainder of such assetsmeet the criteria in items (i) through (iii). The ABSinterests must also be acquired by the ABCP conduit inan initial issuance by or on behalf of an intermediateSPE either directly from the intermediate SPE, from anunderwriter of the ABS interests issued by theintermediate SPE, or from another person whoacquired the ABS interests directly from theintermediate SPE. In addition, the ABCP conduit mustbe bankruptcy remote from the sponsor of the ABCPconduit and any intermediate SPE and a single eligibleliquidity provider is required to enter into a legallybinding commitment to provide 100% liquidity coverageto all the ABCP issued by the ABCP conduit.

As with the reproposal, the originator-seller will beconsidered the sponsor of the ABS issued by anintermediate SPE and therefore the use of the ABCPoption by the sponsor of an "eligible ABCP conduit"does not relieve the originator-seller from itsindependent requirement to comply with risk retentionobligations with respect to the assets collateralizing theABS issued by the intermediate SPE. Some othernotable differences between the final rule and the



reproposal are that the intermediate SPE can be anorphan rather than wholly-owned by the originator-seller, and the commercial paper tenor can be up to397 days (the Rule 2a-7 standard) as opposed to ninemonths.

Foreign-Related Transactions

The final rule creates a safe harbor from the riskretention requirements for certain "foreign related"transactions that have limited connections to the UnitedStates and U.S. investors. The purpose of this safeharbor is to exclude certain transactions from the riskretention requirements in which the effects on U.S.interests are sufficiently remote so as not tosignificantly impact underwriting standards and riskmanagement practices in the United States or theinterests of U.S. investors. Under the final rule, asecuritization transaction will be subject to the foreign-related transaction safe harbor if (i) registration is notrequired, and the transaction is not registered, underthe Securities Act of 1933, (ii) not more than 10% ofthe value of all classes of ABS interests are sold toU.S. persons or for the account or benefit of U.S.persons, (iii) neither the sponsor nor the issuing entityis (A) organized under the laws of the United States (orany other possession of the United States), (B) anunincorporated branch of a U.S. entity, or (C) anunincorporated branch of a non-U.S. entity located inthe United States, and (iv) not more than 25% of thesecuritized assets were acquired from an affiliate orbranch organized or located in the United States. Aswith some of the other risk retention rules, marketparticipants have indicated that having a 10% thresholdon the sale of ABS interests to U.S. persons effectivelymakes this exception unworkable as it is difficult toknow in advance what percentage of the transactionwould be sold into the U.S. in a cross-border deal.

In addition to the above transaction specific riskretention options, the final rule also provides separaterisk retention options for certain other types of ABStransactions including those involving student loans.

Due diligence anddisclosure:

general

Articles 406 and 409 CRR and Article 52AIFMR

Due diligence and disclosure requirementsunder the CRR

Under Article 406 of the CRR, there is anobligation on investors which are institutions to:

• have a thorough understanding of thetransaction, the risks and the structuralfeatures (e.g. waterfalls, triggers, defaults);

• obtain information they require from theissuer, sponsor or originator; and

• obtain an explicit statement from theoriginator, sponsor or original lender that ithas made the necessary risk retention.

Dodd-Frank Section 945 Rule 193 Securities Act

For registered ABS only, issuers are required:

• to perform a review of assets underlying an ABSwhich is designed and effected to providereasonable assurance that the disclosureregarding the pool assets in the prospectus isaccurate in all material respects; and

• to disclose the nature and the findings andconclusions of such review.

Third parties may be engaged to conduct portions ofthe due diligence:

• If the issuer attributes findings to the third party,the third party must consent to being named as an



Article 409 provides that an institution acting asoriginator, sponsor or original lender is requiredto ensure that institutions who are prospectiveinvestors have readily available access to allmaterially relevant data on the credit quality andperformance of the underlying exposuressupporting a securitization. The informationenables investors to perform their own "stresstest" both initially and on an on-going basis.

Loan Level Disclosure

Loan level disclosure is typically required but,for granular assets, data disclosure on acollective portfolio basis (e.g. stratificationtables) should be technically sufficient under therisk retention RTS, although the desire toaccess central bank liquidity investorrequirements may dictate otherwise. In additionloan level disclosure will be required underCRA3 for all asset types covered by CRA3(subject to potential exemptions for private andbilateral securitizations). (See the sections on"Due diligence and disclosure: loan leveldata" and "Rating agencies: generalprovisions relating to conflicts of interestand disclosure" below).

Loan level disclosure is also being driven by theBank of England and ECB disclosurerequirements for collateral eligibility (below).The risk retention RTS do not refer specificallyto the loan level templates produced, forexample, by the ECB and Bank of England, butthey are considered to be a suitable method ofmeeting disclosure requirements in appropriatesituations.

Due diligence and disclosure requirementsunder AIFMR

There are similar (but not identical) provisionsunder the AIFMR, requiring alternativeinvestment fund managers to ensure thatsponsors and originators:

• have established sound processes forgranting credit, managing on-goingadministration and monitoring of underlyingloans;

• have adequate loan portfolio diversity andwritten credit risk policies;

• provide ready access to materially relevantdata on credit quality and performance ofunderlying loans, cash flows and collateraland any other relevant data necessary forthe AIFM to have a "comprehensive andthorough understanding" of credit risk of asecuritization; and

"expert" in the prospectus;

• the issuer may rely on a review by an affiliated (butnot an unaffiliated) originator.

If assets in the pool deviate from disclosedunderwriting criteria, the issuer must disclose:

• how the assets deviate, and the amount andcharacteristics of nonconforming assets;

• which entity determined that the nonconformingassets should be included in the pool; and

• if compensating or other factors were used todetermine that assets should be included.

This rule will affect entities which issue in the U.S. andmay influence the way in which they presentinformation in Europe.



• disclose the level of risk retention and anymatters which could affect their ability tomaintain it.

In contrast, Article 408 of the CRR requiressponsor and originator institutions to applysound and well-defined criteria for credit-granting, but there is no equivalent of the fore-going AIFMR obligation that requires analternative investment fund manager to "ensurethat sponsors and originators" satisfy theforegoing requirements.

Provision of disclosure

On a public deal:

• disclosure in terms of retention are typicallydealt with in the "Summary" and "RiskFactors" sections as well as in a dedicatedrisk retention section; and

• disclosure of loan level data so investorscan comply with the requirement to showon-going understanding of exposuresinvested are typically dealt with via postingto websites.

In the context of a private deal where the listingis only made for withholding tax purposes andthe investor is not buying "off the prospectus",the CRR requirements are typically met viadirect provision of information andrepresentations and covenants in transactiondocuments.

Due diligence anddisclosure: loan

level data

ECB and Bank of England CollateralEligibility & Loan Level Data Initiatives

ECB Collateral Eligibility and LoanTemplates

On December 16, 2010 the ECB announced theestablishment of loan-by-loan informationrequirements for ABS in the Eurosystemcollateral framework. This loan level informationis intended to increase transparency andcontribute to more informed risk assessments ofABS and restore the weakened confidence inthe securitization markets.

The Eurosystem published the loan-by-loaninformation requirements on existing and newlyissued ABS, firstly for residential mortgage-backed securities and gradually for other ABSthereafter (most recently for credit cardreceivables on September 19, 2013). Loan leveldata is submitted in accordance with an ECBspecified template and at least on a quarterlybasis on, or within one month of, the interestpayment date for the relevant security. Further,the ECB has announced additionalrequirements for modifications to ABS that have

Regulation AB II

Dodd-Frank Section 942(b)

On August 27, 2014, the SEC adopted final revisions toRegulation AB ("Reg AB II") that significantly revisedRegulation AB as it relates to disclosure, reporting andshelf registration of ABS. These final rules wereinitially proposed in 2010 and 2011.

Enacted in January 2005, Regulation AB is acomprehensive set of rules that addresses theregistration, disclosure and reporting requirements forABS under the Securities Act of 1933, as amended(the "Securities Act"), and the Exchange Act.

Reg AB II only applies to transactions sold in aregistered public offering and does not apply totransactions exempt from registration under Rule 144Aor otherwise. The Reg AB II regulations have not yetbeen published in the Federal Register and theeffective date of Reg AB II will be based on the date ofpublication. Registrants must comply with the newrules and registration requirements (other than theasset-level disclosure requirements) no later thanNovember, 23 2015 and must comply with the asset-level disclosure requirements for all publicly offeredABS issued no later than November, 23 2016.



been submitted as collateral. To facilitatereporting of loan level data, the assets mustconsist of a homogenous pool. The ABS datasupplied via the templates is processed anddisseminated as necessary by the EuropeanDatawarehouse.

As of 1 May 2015, counterparties are no longerrequired to inform the Eurosystem one monthprior to any planned modifications to such ABS.Upon submission of any ABS that is "own-used", counterparties are no longer under anobligation to inform the Eurosystem of anymodifications made to such ABS in the sixmonths prior to its submission.

A summary of the implementation timeframesfor the various loan level data templatesintroduced by the ECB is set out below. Inrelation to the effective date, such loan leveldata needs to be provided in respect of anyrelevant ABS from the effective date in order tocomply, whether issued before or after theeffective date (subject to the phasing in periodsmentioned below).

Underlyingasset

PublicationDate

*EffectiveDate

RMBS December2011

January3, 2013

SME loans April 2011 January3, 2013

CMBS April 2011 March 1,2013

Auto loans,consumerfinance andleasingtransactions

May 2012 January1, 2014

Credit cardreceivables

September2013

April 1,2014

*Updated versions have subsequently been published for some

of the templates.

Subject to the temporary derogations mentionedbelow, all existing and newly issued ABS mustnow fully comply with the loan level datarequirements to qualify for Eurosystemeligibility.

As of October 2013, the Eurosystem maytemporarily accept as collateral RMBS and SMEABS that do not comply with the required loanlevel data reporting requirements on a case bycase basis and subject to the provision ofadequate explanations for the failure to achievethe mandatory level of compliance.

Asset Level Disclosure

Reg AB II requires ABS issuers to disclose asset-levelinformation for ABS backed by residential mortgages,commercial mortgages, auto loans, auto leases, anddebt securities (including resecuritizations). Reg AB IIasset-level disclosure does not apply to other types ofABS, including those backed by equipment loans andleases, student loans, floorplan financings, managedpools such as CLOs, and synthetic transactions(although the original proposals with respect to theseasset classes have not been withdrawn and so theymay be enacted in the future in some form). Thenumber of data points required to be included in theasset-level data depends on the type of asset, and insome cases, such as ABS backed by residentialmortgages, there are up to 270 different data pointsrequired to be included. Required asset-level dataincludes, among other items, information related to theterms of the asset, a unique identifying asset number,the identity of the servicer and the servicing advancemethodology, the characteristics of the obligor, theunderwriting of the asset, collateral related to eachasset, and cash flows related to each asset, such astiming and amount of payments and expected changesto payment terms over time.

Asset-level disclosure is required to be made at thetime of the offering as part of the preliminary and finalprospectuses, and on an ongoing basis as part ofperiodic Form 10-D filings. This asset-level informationis also required to be provided in standardized, taggeddata format called eXtensible Mark-up Language(XML) and posted on EDGAR so that it can be madepublicly available.

Securities Act Registration

Under Reg AB II, a complete preliminary prospectusmust be filed under Rule 424(h)(1) at least threebusiness days prior to the date of the first sale in anoffering of ABS issued under a shelf registrationstatement. This preliminary prospectus must containall information required in the final prospectus otherthan certain pricing and underwriting fee information. Ifthere is any material change from the information setforth in the preliminary prospectus, a prospectussupplement must be filed at least 48-hours before thedate and time of the first sale of the offering and mustclearly state what material information has changedfrom the initial preliminary prospectus.

In order to distinguish the ABS registration system fromthe registration system for other securities, Reg AB IIalso establishes two new forms for registering ABSofferings, Form SF-1 for standalone ABS issuancesand Form SF-3 for ABS shelf issuances. Unlike FormS-3 shelf registration statements that allow the use of abase prospectus and supplemental prospectus, RegAB II, in an attempt to require issuers to make periodicassessments of their continued eligibility to conduct



In addition, as of October 2014, the Eurosystemmay also temporarily accept as collateral non-compliant auto loan, leasing, consumer financeand credit card receivables ABS on a case bycase basis and subject to the provision ofadequate explanations for the failure to achievethe mandatory compliance score required.

Bank of England's Collateral Eligibility andLoan Templates

The Bank of England has published eligibilityrequirements for collateral as part of its marketoperations which cover CMBS, SME loans,RMBS, auto loans, consumer loans, leasingABS, covered bonds and asset backedcommercial paper ("ABCP") which are similarbut not identical to the ECB criteria.

The Bank of England eligibility requirementsstipulate that, in addition to providing loan leveldata, transaction documents, transactionoverviews, standardized monthly investorreports and cash flow models will also berequired. The requirement for the publication oftransaction documents has been in force sinceDecember 2011 for RMBS and Covered Bonds,January 2013 for CMBS, ABCP and SME Loansand January 2014 for Consumer Loan, AutoLoan and Leasing ABS. In each case, therewas a twelve month transition period duringwhich period securities not meeting the newrequirements could remain eligible, but weresubject to increasing haircuts. These phasing inperiods have now come to an end and thereforeany securities not meeting the transparencyrequirements are ineligible for use as collateralin any of the Bank of England's operations.

Please also refer to the Sections on "DueDiligence and disclosure: General" and"Rating agencies: general provisions relatingto conflicts of interest and disclosure".

shelf offerings, requires filings to be made under asingle prospectus document in which the issuer will filean initial form prospectus at the time the registrationstatement filed on Form SF-3 becomes effective andan "integrated" prospectus at the time of eachtakedown.

Shelf Eligibility – Transaction Requirements

The requirement that ABS be rated investment grade inorder to be eligible for shelf registration has beeneliminated and has been replaced by the followingcriteria:

• CEO Certification: The chief executiveofficer of the depositor must sign acertification as of the date of the finalprospectus stating he/she has reviewed theprospectus and is familiar with the securitizedasset, the structure and the materialtransaction documents and based on his/herknowledge, there is no untrue statement ofmaterial fact included or omitted.

• Asset Review: The transaction documentsmust provide for the selection andappointment of an independent assetrepresentations reviewer that must beengaged at the time of issuance and identifiedin the prospectus. The reviewer’sresponsibility will be to review the pool assetsfor compliance with the representations andwarranties following specific trigger events,which must include at a minimum: (i) athreshold percentage of delinquent assetsbeing reached on a pool-wide basis and (ii) aninvestor vote to direct a review. Regardinginvestor direction, the minimum investorpercentage to trigger a vote shall not be setabove 5% of the total pool interest and thepercentage of investors needed to requirereview cannot be more than a simple majorityof voting investors.

• Dispute Resolution: The transactiondocuments must contain provisions allowing aparty making repurchase demands notresolved after 180-days to refer the dispute tomediation or third-party arbitration.

• Investor Communication: The transactiondocuments must contain provisions underwhich the party responsible for the Form 10-Dfilings must include in the report any requestfrom an investor to communicate with otherinvestors.



Shelf Eligibility – Registrant Requirements

Prior to filing a registration statement on Form SF-3, tothe extent the depositor, any issuing entity previouslyestablished by the depositor or any affiliate of thedepositor was required to comply with the proposedtransaction requirements of Form SF-3 with respect toa previous offering of ABS involving the same assetclass during the preceding twelve months, suchdepositor, issuing entity or affiliate must meet certainregistrant requirements at the time of filing the shelfregistration statement. These requirements include thetimely filing of all reports required under the ExchangeAct as well as the filing of all required certifications andtransaction agreements stated above during thepreceding twelve months. In addition, there is aseparate registrant requirement whereby the depositormust disclose its compliance with the registrantrequirements. There is a 90-day cure period for latefilings. An effective shelf on Form SF-3 will becomeineffective if after 90-days following the depositor’sfiscal year end prior to the offering, the requirementsabove, as well as certain other requirements stated inForm SF-3 are not met.

Exchange Act Reporting

Reg AB II also makes several changes to Exchange Actreporting requirements for ABS. With respect to Form10-D, the final rules require pool level delinquencyreporting in the periodic distribution report to bepresented in 30-day or 31-day increments for not lessthan 120-days, rather than monthly information throughcharge-off. Material changes in a sponsor’s interest inthe ABS transaction resulting from a sale or purchase ofthe securities must also be reported. With respect toForm 10-K, added disclosure is required to be includedif it has been determined that for any materialnoncompliance identified in the platform levelassessment, such noncompliance involved the servicingof the assets in the pool. Any steps taken to remedy amaterial instance of noncompliance at the platform levelmust also be included.

Due diligence anddisclosure:

Disclosure ofRepurchases

There is no EU equivalent of the USprovision.

Dodd-Frank Section 943 Rule 15Ga-1

Rule 15Ga-1 requires a securitizer to disclose (bymeans of periodic filing in tabular format) anyrepurchase activity relating to outstanding ABSincluding the number, outstanding principal balanceand percentage by principal balance of assets:

• that were the subject of a repurchase orreplacement request (including investor demandsupon a trustee);

• that were repurchased or replaced;

• that are pending repurchase or replacementbecause: (a) they are within a cure period or (b)the demand is currently in dispute; or



• which the demand was (a) withdrawn or (b)rejected.

Although the SEC was asked to limit the extraterritorialscope of the Rule, the only guidance provided by theSEC was that an issuer or sponsor of ABS that is"subject to the SEC’s jurisdiction" is required to complywith the Rule. Consequently anyone selling ABS toU.S. purchasers must comply with the Rule.

This rule applies to a securitizer of ABS for which:

• there is an outstanding ABS held by non-affiliatesof the securitizer; and

• the underlying agreements with respect to suchABS contain a covenant to repurchase or replaceassets for a breach of representation or warranty.

This rule applies to non-registered transactions (privateplacements including Rule 144A) and transactionsregistered with the SEC.

The initial filing was required to include all repurchaseactivity for the three year period ending December 31,2011; subsequent quarterly filings must include onlythe information for the preceding calendar quarter. Ifthere is no repurchase activity in a quarter, quarterlyfiling is suspended until a demand occurs (but anannual filing must still be made).

Due diligence anddisclosure: Third

party duediligence reports


Dodd-Frank Section 932Rule 17g-5, 17g-7, 17g-10Exchange Act Rule 15Ga-2Exchange Act

In August 2014, the SEC adopted a variety of rulesrelating to NRSRO’s, which were originally proposed inMay 2011.

Rule 15Ga-2 requires that an issuer or underwriter ofregistered or unregistered ABS rated by an NRSROmake publicly available on EDGAR, the findings andconclusions of any report of a third-party due diligenceservice provider (a "TPDDS Provider") relating to "duediligence services" obtained by the issuer orunderwriter. Under the new rules, "due diligenceservices" are defined as a review of the pool assets forthe purposes of making findings with respect to (i)asset data accuracy, (ii) conformity of the assets withunderwriting standards, (iii) the value of the assets, (iv)legal compliance by the originator, and (v) any othermaterial factor related to the likelihood that the issuerwill pay principal and interest as required.

Rules 17g-7 and 17g-10 require a TPDDS Provider toprovide a written certification to any NRSRO thatproduces a rating to which the due diligence servicesrelate, if the TPDDS Provider was engaged by theNRSRO, an issuer or underwriter. This deliveryrequirement will primarily be done by providing thecertification to the issuer or underwriter for posting onits Rule 17g-5 website.



The new rules become effective on June 15, 2015.

The rules include provisions on how NRSROs, issuers,underwriters and TPDDS Providers are to coordinatethe required disclosure and certifications. Under Rule15Ga-2, the issuer or underwriter will generally berequired to furnish a Form ABS-15G to the SEC viaEDGAR no later than five business days before the firstsale of the offering. If the issuer or underwriters eachobtain the same report, only one of them is required tofile. These reporting requirements apply to both non-registered transactions (private placements) andtransactions registered with the SEC. However, anABS offering will be exempt from Rule 15Ga-2 if:

• The offering is not registered (or required to beregistered) under the Securities Act;

• The issuer is not a U.S. person; and

• The securities will be offered and sold only intransactions that occur outside of the UnitedStates.

Rating agencies:general

provisionsrelating toconflicts ofinterest anddisclosure;increased

competition

Credit Rating Agency Regulation

The Credit Rating Agency Regulation ("CRARegulation") (which came into force onDecember 7, 2009 although compliance withmost provisions was only required fromDecember 7, 2010) established a compulsoryregistration process for credit rating agencies("CRAs") operating in the EU. The CRARegulation also aimed to:

• ensure that CRAs avoid and manageappropriately any conflict of interest;

• ensure the quality of rating methodologyand ratings;

• increase the transparency of CRAs; and

• provide a mechanism by which EUregistered CRAs can endorse ratingsissued by non-EU CRAs.

The CRA Regulation was amended by CRA 2,which transferred responsibility for registrationand on-going supervision of credit ratingagencies to the European Securities andMarkets Authority ("ESMA"). The provisions ofCRA 2 applied in EU member states fromDecember 31, 2010.

CRA 3

Amendments to the CRA Regulation (known as"CRA 3") came into force on June 20, 2013.

Franken Amendment

Dodd Frank Section 939F

Section 939F required the SEC to carry out a study of:

• the credit rating process for structured financeproducts and the conflicts of interest associatedwith the issuer-pay and subscriber-pay models;and

• the feasibility of establishing a system in which apublic or private utility or a self-regulatoryorganization assigns NRSROs to determine thecredit ratings of structured finance products (the"assigned NRSRO system").

Section 939F was written so that the SEC is requiredto implement the assigned NRSRO system unless theSEC "determines an alternative system would betterserve the public interest and the protection ofinvestors."

The SEC needed to submit the findings of the study,along with any recommendations for regulatory orstatutory changes that the SEC determines should bemade, to Congress. The SEC has missed the deadlineto submit this study.

The study is also required to address a range ofmetrics that could be used to determine the accuracyof credit ratings for structured finance products, as wellas alternative means for compensating NRSROs in aneffort to create incentives for accurate credit ratings forstructured finance products.



CRA 3 intends to reduce over-reliance on creditratings and conflicts of interests and to increasecompetition among credit rating agencies. Themain changes include:

On December 18, 2012, the SEC released the FrankenAmendment Report, the key finding of which was torecommend that the SEC convene a round table todiscuss the study and its findings. The round table tookplace on May 14, 2013.

New disclosure requirements for structuredfinance transactions

The new disclosure obligations set out inArticle 8b of CRA 3 require the issuer, theoriginator and the sponsor to jointly publish ona website set up by ESMA, information on thestructure, credit quality and performance of theunderlying assets of a structured financeinstrument as well as any information that isnecessary to conduct comprehensive and wellinformed stress tests on the cash flows andcollateral values supporting the underlyingexposures.

The regulation implementing regulatorytechnical standards relating to the Article 8bdisclosure standards (the "Article 8b RTS")was published in the Official Journal onJanuary 6, 2015 and came into force onJanuary 26, 2015.

Scope: The disclosure requirements underArticle 8b apply to all structured financeinstruments ("SFI") issued after the date ofentry into force of the regulation implementingthe Article 8b RTS. This includes ABCP wherethey fall within the definition of "a programmeof securitization" under the CRR. Theapplication of the new disclosure requirementsto private and unrated transactions has causedmarket concern – market participants claimthese obligations are not appropriate forprivate SFIs.

Grandfathering and transitionalarrangements: For SFI issued:

• before the Article 8b RTS came intoforce, the Article 8b RTS will not apply;

• after the Article 8b RTS came into forcebut before January 1, 2017, the Article8b RTS will apply but disclosure onlyneeds to be made from January 1, 2017(without the need to provide disclosurefor the prior period);

• on and after January 1, 2017, theArticle 8b RTS will apply.

Nationally Recognized Statistical RatingOrganizations Regulation

In August 2014, the SEC adopted a variety of rulesrelating to NRSRO’s, which were initially proposed inMay 2011.

"Look-Back" Review Dodd Frank Section 932(a)(4)

An NRSRO is required to have policies andprocedures for conducting "look back" reviews todetermine whether the prospect of future employmentby an issuer or underwriter influenced a credit analystin determining a credit rating and, if such influence isdiscovered, the NRSRO must promptly determinewhether the current credit rating must be revised.Under new Rule 17g-8, in the event that an NRSROdetermines that a conflict of interest influenced a creditrating while conducting "look-back" review the NRSROmust promptly publish a revised credit rating oraffirmation, and, if the credit rating is not revised oraffirmed within fifteen calendar days of the discovery ofthe improper influence, place the rating on credit watchor review.

Disclosure of Information about the Performanceof Credit Ratings Dodd Frank Section 932(a)(8)

NRSROs are required to disclose enhancedperformance statistics with respect to initial creditratings and subsequent changes to those ratings, forthe purpose of allowing users to evaluate the accuracyof those ratings and to compare the performance ofratings issued by different NRSROs.

Standards of Training, Experience, andCompetence Dodd Frank Section 936

New Rule 17g-9(a) provides that an NRSRO mustestablish, maintain, enforce, and document standardsof training, experience, and competence for itsemployees who determine credit ratings. New Rule17g-9(b) identifies factors that an NRSRO would needto consider when establishing their standard of training,experience, and competence. Such factors include theability to evaluate and process data relevant tocreditworthiness, technical expertise, the ability toassess underlying asset level metrics and thecomplexity of the securities being rated.



Further, the disclosure requirements will notapply to a transaction until ESMA hasproduced a reporting template for the relevantasset class. Currently, templates exist forRMBS, CMBS, SME loans, auto loans,consumer loans, credit cards and leases. Inaddition, the Article 8b RTS provide that thedisclosure requirements will not apply toprivate or bilateral SFIs until specific reportingobligations have been developed by ESMAand adopted by the European Commission.

Private and bilateral transactions: In a Callfor Evidence published in March 2015, ESMAinitiated its work on preparing reportingtemplates for private and bilateral SFIs, byasking for:

• information to assist it in definingprivate and bilateral SFIs;

• evidence to assess whether thedisclosure requirements in the Article8b RTS could be used in their entiretyfor private and bilateral SFIs orwhether they would need to beadapted;

• information on which categories ofinformation contained in the Article 8bRTS are deemed problematic topublicly disclose and why.

While it is hoped that the reporting obligationsapplying to private and bilateral SFIs will beappropriate and proportionate, it is not yetknown how far ESMA will be prepared todeviate from the current scope, form and modeset out in the Article 8b RTS.

Responsibility: Although the Article 8b RTSno longer provide for joint responsibility of theissuer, originator and the sponsor forpublishing the information required under theArticle 8b RTS, Article 8b of CRA 3 stillcontains a requirement to "jointly publishinformation" so the position is not entirelyclear. Entities falling within the definition oforiginator could also be subject to thedisclosure obligation, even if they had noinvolvement or knowledge of the transaction.The parties may delegate this obligation, butwill still remain jointly responsible forcompliance.

Public disclosure: Under the Article 8b RTS,all required information must be submitted to awebsite to be established by ESMA, where itwill be publicly available. Currently, ESMA hasnot approved the use of hyperlinks to otherwebsites, so unless and until further guidelines

Universal Rating Symbols Dodd Frank Section938(a)

Under new rule 17g-8, each NRSRO is required toestablish written policies and procedures with respectto the use of rating symbols. Such rating symbols areto be designed to assess the probability of default.The rating symbols methodology must clearly defineeach symbol, number or score, and apply such symbol,number or score consistently.

Amendments to Rule 17g-2 of the Exchange Act

Elimination of the "10% rule", which requireddisclosures with respect to 10% of the outstandingissuer-paid credit ratings in each class for which theNRSRO is registered. Modification to the "100% rule"requiring disclosures for all types of credit ratings fromthose initially determined on or after June 26, 2007, tothose outstanding as of or initially determined on orafter three years before the effective date of the newrules.


Under revised Rule 17g-7(a), when taking a creditrating action (including publication of a preliminarycredit rating, an initial credit rating, an upgrade ordowngrade to a credit rating, and an affirmation orwithdrawal of a credit rating), an NRSRO is required topublish a form containing a variety of prescribedinformation about the credit rating.

Revised Rule 17g-7(a)(1)(iii) prohibits NRSROpersonnel involved in sales or marketing, or who are"influenced by sales or marketing considerations," fromalso participating in the determination or monitoring ofa credit rating or in the development of credit ratingmethodologies.


Under revised Rule 17-g3(a)(7), an NRSRO is requiredto furnish an annual report to the SEC with respect itsinternal control structure. Such report must includeany material weakness identified in the internal controlstructure and how such weakness was addressed.



provide for the use of hyperlinks, all relevantinformation will need to be uploaded directly tothe ESMA website. Such public disclosure isone of the key concerns with applying theArticle 8b RTS as it currently stands to privateand bilateral transactions.

Loan Level Data: There is considerableconcern regarding the application of thequarterly loan level data reporting to alltransactions, regardless of the structure ornature of the underlying assets. Although thedisclosure wording of Article 8b is similar tothat of Article 409 of the CRR, under which theEBA has adopted a principles-based approachto asset disclosure, recognizing that pool-leveldata might be appropriate on certaintransactions, ESMA has not adopted a similarapproach.

It is also unclear whether templates developedunder other regulatory regimes (eg, RegulationAB II in the US) will be recognized. This raisesthe prospect of multiple sets of data having tobe prepared. More positively though, the formsof the templates in the RTS are virtuallyidentical to the ECB’s loan level datatemplates.

Transaction Documents and TransactionSummary: Under the Article 8b RTS, keytransaction documents and (for SFIs where aProspectus Directive compliant prospectus isnot prepared) a transaction summary must beprovided without delay after the issue of anSFI.

Transaction parties should consider theimplications of such disclosures and whether itwould be appropriate to remove details of, e.g.,confidential fee arrangements from anydocuments which might have to be disclosed.Such public disclosure is one of the keyconcerns with applying the Article 8b RTS as itcurrently stands to private and bilateraltransactions.

Investor Reporting: Investor reports must beprovided on a quarterly basis or no later thanone month after each interest payment date.ESMA will publish further technicalrequirements for the content of investorreports. The Article 8b RTS no longer requiresubmission of a cash flow model, as had beenproposed in the draft Article 8b RTS.

Event Based Reporting: For SFI to which theMarket Abuse Regulation does not apply,event based reporting under the RTS remainsa requirement. Issuers, originators andsponsors must jointly disclose any such eventswithout delay but the RTS do not provide



further detail on the types of informationcovered by this provision nor thecircumstances in which an issuer can delay thepublication of such information. Issuers,originators and sponsors of SFI to which theMarket Abuse Regulation does apply will stillneed to publish a copy of announcementsmade under that regulation on the ESMAwebsite.

Harmonization of due diligence anddisclosure requirements: On 12 May 2015,the European Supervisory Authorities("ESAs") published a report detailing theirrecommendations regarding the current EUdue diligence and disclosure requirements forSFIs. The report recommends that commondue diligence requirements be introducedacross investor types, calling for harmonizationof the due diligence and disclosure obligationscontained in the CRA Regulation, the CRR, theSolvency II Directive and the AIFMD. Thereport recommends that the Article 8b RTSshould be the basis for disclosure of loan leveldata of SFIs, that disclosure requirementsmust reflect investors' due diligence needs andthat investors should be able to tailor the datathey obtain from the SFI website to meet theirdue diligence requirements.

Requirement for two rating agencies forstructured finance transactions

CRA 3 introduced a two ratings requirementfor securitizations requiring issuers or relatedthird parties of structured finance instrumentsto obtain ratings from two credit ratingagencies where issuers pay for those ratings.

Rotation for re-securitizations

CRA 3 introduced a four-year rotation rule forre-securitizations. This requirement does notapply where at least four rating agencies eachrate more than 10% of the total number ofoutstanding rated re-securitizations or wherethe credit rating agency has fewer than 50employees or an annual turnover of less thanEUR10 million at group level.

Small and medium-sized rating agencies

CRA 3 requires that when an issuer or relatedthird party intends to mandate at least twocredit rating agencies it must considermandating an agency with 10% or less of totalmarket share "which can be evaluated by theissuer or a related third party as capable ofrating the relevant issuance or entity". Therequirement includes a proviso which seems tocondition the requirement on there being a



credit rating agency available for such purposefrom a list maintained by ESMA. Where theissuer or related third party does not appoint atleast one credit rating agency with no morethan 10% of the market share, this needs to bedocumented. Views differ over whether thatneeds to be in the prospectus or just relevantboard minutes.

In the UK the FCA issued a letter remindingparties of these obligations, which mayforeshadow greater regulatory scrutiny of suchdecisions.

Own risk assessment

CRA 3 reduces over-reliance on external creditratings by requiring: (i) firms to make their owncredit risk assessments and (ii) the EUCommission to undertake a review ofreferences to credit ratings in EU law with aview to deleting all such references forregulatory purposes by January 1, 2020.

Sovereign debt

CRA 3 imposes additional requirements onCRAs relating to sovereign debt ratings.

Shareholdings

CRA 3 introduces limits on shareholdings incredit rating agencies and prevents creditrating agencies from rating those entities inwhich its largest shareholders have aninterest.

Civil liability standard

CRA 3 harmonizes the civil liability of CRAsacross the EU.

Methodologies

CRA 3 introduces measures to improve CRAs’methodologies and processes.

Market Share

In December 2014, ESMA published its mostrecent annual report listing all EU registeredcredit rating agencies at that date. The reportalso included data of each credit ratingagency's total market share and the types ofcredit ratings issued by them, as required byArticle 8d of CRA 3, In December 2014, therewere 23 registered credit rating agencies.There are also 4 certified credit ratingagencies.

As at December 2014, twenty credit ratingagencies each had a total market share of10% or less. Three rating agenciescollectively had a total market share of90.44%. Six of the registered credit ratingagencies had issued ratings for structuredfinance products during the course of 2014.



Credit ratingagencies:

Requirement forDescription of

Representationsand Warranties in

Reports

There is no EU equivalent of the USprovision although the rating agencies mayin practice nonetheless make Rule 17g-7disclosure.

Dodd-Frank Section 943 Rule 17g-7 Exchange Act

NRSROs must include in any report accompanying acredit rating a description of:

• the representations, warranties and enforcementmechanisms available to investors; and

• how they differ from the representations,warranties and enforcement mechanisms inissuances of "similar securities".

For purposes of the Rule "credit rating" includes anyexpected or preliminary credit rating issued by anNRSRO (i.e., a pre-sale report).

Rating agencies have published asset class specificmodel provisions against which they evaluatetransaction provisions.

This rule applies to non-registered transactions (privateplacements including Rule 144A) and transactionsregistered with the SEC.

The SEC was requested to provide, but did notprovide, an exclusion for non-U.S. transactions andrating agencies are therefore providing this report forboth U.S. and non-U.S. transactions.

Proprietarytrading; affiliated

transactions;separation of

investment banks

There is no exact EU equivalent of the USprovision.

On December 18, 2013 the Financial Services(Banking Reform) Act received Royal Assent inthe United Kingdom. The Act will implementkey recommendations of the IndependentCommission on Banking chaired by Sir JohnVickers which recommended that retail andinvestment banking activities be separated. Thering fencing regime will come into full effect onJanuary 1, 2019. The Prudential RegulationAuthority and the Financial Conduct Authorityare currently consulting on the detail of the ringfencing rules and expect to finalize their rulesduring the course of 2016. The FinancialServices (Banking Reform) Act 2013 does notinclude a prohibition on proprietary trading, butrequires reviews of proprietary trading activitiesby the PRA and an independent body once thering fencing regime is in effect to see whetherrestrictions on proprietary trading should beimposed.

The European Commission published itslegislative proposal on reforms of the structureof EU banks on January 29, 2014, following thepublication of its consultation paper in May2013. The conclusion of the legislative process(agreement between the European Parliamentand the Council of Ministers) is expected tooccur in late 2015. Currently, the European

THE VOLCKER RULE

Dodd-Frank Section 619 12 CFR Parts 44, 248,35117 CFR 255

Prohibited activities

The Volcker Rule generally prohibits "banking entities"from:

• engaging in proprietary trading;

• acquiring and retaining any "ownership interest" inor sponsoring "covered funds";

• entering into (or their affiliates entering into)"covered transactions" with a covered fund that thebanking entity sponsors or to which it providesinvestment advice or investment managementservices (the so-called "Super 23A prohibition"because it incorporates the restrictions underSection 23A of the Bank Holding Company Act butwithout the benefit of that provision's exclusions);and

• engaging in transactions otherwise permittedunder specified provisions of the Volcker Rule ifthe transaction involves or results in specifiedconflicts of interest



Parliament procedure file indicates that theEuropean Commission's proposal will beconsidered by the European Parliament in itsplenary session taking place on September 8,2015.

The European Commission's legislativeproposal (which takes the form of a draftregulation) will apply to only the largest andmost complex EU banks with significant tradingactivities and will:

• ban proprietary trading in financialinstruments and commodities;

• grant powers to national regulators to requireseparation of certain trading activities whenthey consider that the activity in questionthreatens the financial stability of the bank inquestion or of the EU.

The European Commission has suggested in itslegislature proposal that the ban on proprietarytrading should take effect on January 1, 2017and the separation powers for nationalregulators should take effect on July 1, 2018.The legislative proposal follows the publicationof the Liikanen report on October 20, 2012which recommended the legal separation ofcertain activities such as proprietary trading ofsecurities and derivatives from deposit-takingbanks within the banking group. The reportproposed that the separation should bemandatory for banks with more than a €100bnof trading assets, representing between 15 and25 per cent of the relevant bank’s total balancesheet. The legally separated deposit bank andtrading entity can operate within a bank holdingcompany structure.

Covered funds and exclusions

"Covered funds" include all entities that rely on Section3(c)(1) or Section 3(c)(7) of the U.S. InvestmentCompany Act of 1940 as an exemption from registrationunder such Act.

• Most ABCP conduits and some ABS issuers rely onSection 3(c)(1) less than 100 investors or Section3(c)(7) only qualified institutional buyers/qualifiedpurchasers exemptions and thus are likely to be"covered funds" unless the fund falls within anexclusion from the covered fund definition.

• Excluding a fund from the definition of coveredfunds has significant beneficial consequencesincluding that a banking entity may acquire andretain any "ownership interest" in or sponsor suchfund and may engage in activities with the fund thatwould otherwise be prohibited coveredtransactions.

• The final rule includes several exclusions which arerelevant to structured finance transactions.

Under the "loan securitization exclusion" a bankingentity is allowed to own an interest in and sponsor afund that is an issuing entity for asset-backedsecurities, the assets or holdings of which arecomprised solely of:

• loans (defined as any loan, lease, extension ofcredit, or secured or unsecured receivable that isnot a security (as defined in the Exchange Act) or aderivative);

• rights or other assets designed to assure theservicing or timely distribution of proceeds toholders of such securities and rights or other assetsthat are related or incidental to purchasing orotherwise acquiring and holding the loans;

• interest rate or foreign exchange derivatives that (i)by the written terms of the derivative directly relateto the loans, the asset-backed securities, or thecontractual rights of other assets permitted underthe loan securitization exclusion; and (ii) reduce theinterest rate and/or foreign exchange risks relatedto the loans, the asset-backed securities, or thecontractual rights or other assets permitted underthe loan securitization exclusion; and

• special units of beneficial interest ("SUBIs") andcollateral certificates that meet the followingrequirements:

(A) The special purpose vehicle that issues theSUBI or collateral certificate (collectively, a "SUBIissuer") itself meets the requirements in the loansecuritization exclusion;

(B) The SUBI or collateral certificate is used for the



sole purpose of transferring to the issuing entity forthe loan securitization the economic risks andbenefits of the assets that are permissible for loansecuritizations under the loan securitizationexclusion and does not directly or indirectly transferany interest in any other economic or financialexposure;

(C) The SUBI or collateral certificate is createdsolely to satisfy legal requirements or otherwisefacilitate the structuring of the loan securitization;and

(D) The SUBI issuer and the issuing entity areestablished under the direction of the same entitythat initiated the loan securitization.

Under the loan securitization exclusion, the issuingentity (or SUBI issuer) may hold securities only if thosesecurities are (i) cash equivalents held in relation to theservicing rights or (ii) securities received in lieu of debtspreviously contracted with respect to the loanssupporting the asset-backed securities.

In addition, the assets or holdings of the issuing entity(or SUBI issuer) may not include any: (i) security,including an asset-backed security, or an interest in anequity or debt security other than as permitted above;(ii) derivative, other than a derivative that meets therequirements set forth above; or (iii) a commodityforward contract.

There is also an exclusion for "qualifying asset-backed commercial paper conduits" which aredefined as an issuing entity for asset-backedcommercial paper that satisfies all of the followingrequirements:

• The asset-backed commercial paper conduit holdsonly:

(1) Loans and other assets permissible under theloan securitization exclusion; and

(2) Asset-backed securities supported solely byassets that are permissible under the loansecuritization exclusion and acquired by the asset-backed commercial paper conduit as part of aninitial issuance either directly from the issuing entityof the asset-backed securities or directly from anunderwriter in the distribution of the asset-backedsecurities;

• The asset-backed commercial paper conduit issuesonly asset-backed securities, comprised of aresidual interest and securities with a legal maturityof 397 days or less; and

• A regulated liquidity provider has entered into alegally binding commitment to provide full andunconditional liquidity coverage with respect to all



of the outstanding asset-backed securities issuedby the asset-backed commercial paper conduit(other than any residual interest) in the event thatfunds are required to redeem maturing asset-backed securities. A regulated liquidity providerincludes: depository institutions; bank holdingcompanies and their subsidiaries; savings and loanholding companies meeting specified requirementsand their subsidiaries; foreign banks whose homecountry supervisor has adopted capital standardsconsistent with the Basel Capital Accord that aresubject to such standards, and their subsidiaries;and the United States or a foreign sovereign. Fulland unconditional liquidity support is not intendedto include liquidity support which is subject to thecredit performance of the underlying assets orreduced by other credit support provided to theasset-backed commercial paper conduit.

There is also an exclusion for "qualifying coveredbonds" which excludes from covered funds any entity(the "covered bond entity") owning or holding adynamic or fixed pool of loans or other assets asprovided in the loan securitization exclusion for thebenefit of the holders of covered bonds, provided thatthe assets in the pool are comprised solely of assetsthat meet the conditions in the loan securitizationexclusion. For these purposes, a covered bond isdefined as:

• A debt obligation issued by an entity that meetsthe definition of foreign banking organization,the payment obligations of which are fully andunconditionally guaranteed by a covered bondentity; or

• A debt obligation of a covered bond entity,provided that the payment obligations are fullyand unconditionally guaranteed by an entity thatmeets the definition of foreign bankingorganization and the covered bond entity is awholly-owned subsidiary of such foreignbanking organization.

A "wholly-owned subsidiary" exclusion applies to anentity, all of the outstanding ownership interests ofwhich are owned directly or indirectly by the bankingentity (or an affiliate thereof), except that:

• Up to 5% of the entity’s outstanding ownershipinterests, less any amounts outstanding under thefollowing paragraph, may be held by employees ordirectors of the banking entity or such affiliate(including former employees or directors if theirownership interest was acquired while employed byor in the service of the banking entity); and

• Up to 0.5% of the entity’s outstanding ownershipinterests may be held by a third party if theownership interest is acquired or retained by thethird party for the purpose of establishing corporate



separateness or addressing bankruptcy,insolvency, or similar concerns.

Covered transactions and Section 23A prohibitions

"Covered transactions" are:

• loans or other extensions of credit;

• investments in securities (other than fundownership interests permitted under the VolckerRule);

• purchases of assets from the fund (includingrepos);

• acceptance of securities from the covered fund ascollateral for a loan or other extension of creditmade by the banking entity;

• issuances of guarantees, acceptances or letters ofcredit on behalf of the covered fund; and

• exposure to the covered fund arising out ofderivative, repo and securities lending transactions.

For ABCP conduits and certain other ABS issuers, theSuper 23A prohibition as written in the proposed rulewas problematic because it would have prevented abank sponsor/investment adviser/manager fromproviding credit, hedging or liquidity facilities to supportsuch transactions. By excluding various structuresfrom the definition of covered fund, the final rule willresolve this issue for many structured financetransactions.

Conflicts of interest

Banking entities cannot engage in permitted coveredtransactions or permitted proprietary trading activities ifthey would:

• involve or result in a material conflict of interestbetween the banking entity and its clients,customers, or counterparties;

• result, directly or indirectly, in a material exposureby the banking entity to a high-risk asset or a high-risk trading strategy; or

• pose a threat to the safety and soundness of thebanking entity or to the financial stability of theUnited States.

A material conflict exists if the bank enters into anytransaction, class of transactions or activity that wouldinvolve or result in the bank’s interests being materiallyadverse to the interests of its client, customer orcounterparty with respect to such transaction, class oftransactions or activity, unless the bank hasappropriately addressed and mitigated the conflictthrough timely and effective disclosure or informationalbarriers.



Conformance period

The regulations under the Volcker Rule came intoeffect on April 1, 2014 but provide for a"conformance period" through July 21, 2015subject to extensions for certain assets asdescribed below.

The Federal Reserve Board has issued guidancewhich provides that banking entities by statute have toconform all of their activities and investments to theVolcker Rule, and that "during the conformance period,banking entities should engage in good-faith planningefforts, appropriate for their activities and investments,to enable them to conform their activities andinvestments to the requirements of [the Volcker Rule]and final implementing rules by no later than the end ofthe conformance period."

The proposed Volcker Rule regulations generatedmore than 16,000 comments. The final regulationsincluded substantial changes and were adoptedwithout the benefit of a re-proposal comments period.The final regulations are not always clear on howdifferent aspects of securitization should be treated andmarket participants continue to evaluate how the finalregulations will apply, particularly to existingtransactions.

On April 7, 2014, the Federal Reserve Board grantedtwo additional, one-year extensions of the"conformance period" originally set to expire on July21, 2015 for certain FDIC-insured banking entities.Under this extension, banking entities existing onDecember 31, 2013 will now have until July 21, 2017 todivest certain CLO interests as required under theVolcker Rule. The reaction to this announcement hasbeen met with strong criticism as many marketparticipants had hoped for a permanent exemption forthese types of CLO interests. The Volcker Rule isotherwise scheduled to become effective as of the endof the original "conformance period" on July 21, 2015.

In addition, on December 18, 2014, the FederalReserve Board announced an extension of theconformance period with respect to investments in"legacy covered funds", being funds for which aninvestment was in place prior to December 31, 2013.The extension does not apply to secondarytransactions resulting in a new investment afterDecember 31, 2013. The extension applies for aninitial 1 year period ending July 21, 2016, but the Boardalso stated that it will act to extend the conformanceperiod for legacy covered funds for a further 1 yearperiod to July 21, 2017.



Conflict ofinterest rule


Dodd-Frank Section 621

Section 27B Securities Act

Rule 127B Securities Act

The proposed rule prohibits, subject to certainexceptions,

• an underwriter, placement agent, initial purchaser,or sponsor, or any affiliate or subsidiary of anysuch entity (each, a "covered person");

• of an asset-backed security including syntheticABS (a "covered product");

• during the period ending on the date that is oneyear after the date of the first closing of the sale ofsuch asset-backed security (a "coveredtimeframe");

• from engaging in a transaction that presentconflicts of interest between a covered person andan investor in the covered product that arise as aresult of or in connection with the related ABStransaction." (a "covered conflict"); and

• which is a material conflict of interest.

The commentary in the proposing release – but not theactual text of the proposed rule – includes a two-prongtest for determining whether an ABS transaction isviewed as "involving or resulting in [a] material conflictof interest," provided that the other conditionsdescribed above are also satisfied.

The test is that:

a securitizationparticipant wouldbenefit directly orindirectly from theactual, anticipated orpotential:

• adverseperformance of theasset poolsupporting orreferenced by therelevant ABS,

• loss of principal,monetary default orearly amortizationevent on the ABS,or

• decline in themarket value of therelevant ABS;

there is a"substantiallikelihood"

that a"reasonable"

investorwould

consider theconflict

important tohis or her

investmentdecision

(including adecision toretain thesecurity or

not).

OR AND



a securitizationparticipant, whodirectly or indirectlycontrols the structureof the relevant ABS orthe selection of assetsunderlying the ABS,would benefit directlyor indirectly from feesor other forms ofremuneration, or thepromise of futurebusiness, fees, orother forms ofremuneration, or thepromise of futurebusiness, fees, orother forms ofremuneration, as aresult of allowing athird party, directly orindirectly, to structurethe relevant ABS orselect assetsunderlying the ABS ina way that facilitates orcreates an opportunityfor that third party tobenefit from a shorttransaction asdescribed above.

This comparison table is for guidance only and should not berelied upon as legal advice in relation to a particulartransaction or situation. This paper reflects key EU and USregulatory developments relating to securitization transactionsas at 8 June 2015.


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