Distribution by an originator to its shareholders of a participation instrument the pay out of which is directly linked to the net cash flows under the net economic interest retained

For the purposes of this answer, it has been assumed that where it is stated that pay out of the participation instrument is “directly linked” to the net cash flows of the net economic interest retained by the originator, this means that net proceeds of the retained portion are passed on to owners of the participation instrument. According to Article 6 Regulation 2017/2402 Article 405(1) of Regulation (EU) No 575/2013 (CRR) an institution, other than when acting as an originator, a sponsor or original lender, shall be exposed to the credit risk of a securitisation position in its trading book or non-trading book only if the originator, sponsor or original lender has explicitly disclosed to the institution that it will retain, on an ongoing basis, a material net economic interest which, in any event, shall not be less than 5 %. Moreover , The third subparagraph  Article 6 Regulation 2017/2402 Article 405(1) CRR further provides that the net economic interest, including retained positions, interest or exposures, shall not be subject to any credit risk mitigation or any short positions or any other hedge and shall not be sold. Whether or not the issuance of a participation instrument free of charge constitutes a sale or hedge within the meaning of Article 6 Regulation 2017/2402 Article 405(1) CRR , the prohibition in Article 6 Regulation 2017/2402 Article 405 CRR applies to any transfer of the material net economic interest. Passing on the net proceeds would mean that the net economic interest is no longer retained, since the originator will be exposed to losses from the retained positions, interest or exposures, but not to the positive cash flows , which are passed on to the shareholders. Accordingly, the contemplated transaction would constitute a transfer which would be prohibited by Article 6 Regulation 2017/2402 Article 405 CRR .