Article 122a clarification welcomed

Author: | Published: 4 Oct 2011
Collateralised loan obligation lawyers have welcomed the European Banking Authority’s (EBA’s) clarifications of the Capital Requirements Directive (CRD) skin-in-the-game rules, describing them as "helpful".

In Q&A clarifications on Article 122a of the CRD, released on September 29, the EBA confirmed that equity retention holders can hold part of a first-loss tranche.

For example, a retention holder could hold half of a 10% first-loss tranche to retain a 5% interest. The first-loss tranche retained can also rank pari passu with other tranches.

Lawyers had been worried that regulators may have required a separate, super-subordinated tranche of notes.

The role of the third-party retention holder has also been clarified. To be eligible to hold the retention, the EBA confirmed that third parties need to be involved in the structuring of the transaction, selecting the exposures and defining the eligibility criteria and reinvestment restrictions.