Definition of encumbrance relating to retained interest of the issuer of securitisations

The mere act of retaining net economic interest in accordance with Article 405 of Regulation (EU) No 575/2013 (CRR) does not constitute encumbrance as defined in chapter 1.7 of the General instructions in Annex XVII to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting). Thus, the retention of a percentage of the nominal value of the tranches of the securitisation (Article 405 (1) second subparagraph letter (a) CRR) or of the tranches contemplated in Article 405 (1) second subparagraph letter (d) CRR) does not encumber the retained securities. Those securities become encumbered only if they are pledged or are subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which they cannot be freely withdrawn. As regards the securitised exposures where notes have been placed with investors so that the transaction cannot be freely unwound by the institution, those would generally count as encumbered as the securitisation will involve the creation of security interests over them. This holds true regardless of the retention requirement in Article 405 CRR. Consequently, net economic interest retained, for example, in accordance with Article 405 (1) second subparagraph letter (b) or letter (e) CRR (retention of originator’s interest of a percentage of the nominal value of the securitised exposures respectively of a first loss exposure of a percentage of every securitised exposure in the securitisation) would be considered to be encumbered. As for the exposures contemplated under letter (c) of Article 405 (1) second subparagraph CRR, their mere retention by the institution would not constitute encumbrance. However, the following rules would apply to asset-backed securities issued and retained by the reporting institution: where those securities are pledged, the underlying assets that are backing them constitute encumbered assets. The source of funding in the event of pledging own asset-backed securities is the new transaction in which the securities are being pledged (central bank funding or other type of secured funding) and not the original issuance of covered bonds or asset-backed securities; and where those securities are not yet pledged, the underlying assets that are backing those securities constitute unencumbered assets.