Classification of a vertical security in a traditional securitisation

Is a vertical security as defined below in a traditional securitisation which refers to x% of the cash flows of the securitised exposures a securitisation position?

In a traditional securitisation, one SSPE holds a certain pool of assets. The following securities are issued: • A security referencing 5% of the cash flows of the pool assets (‘vertical security’) and • Three securities referencing 95% of the cash flows of the pool assets with different subordination levels (these three securities with different subordination levels are classified as securitisation positions). Article 4(1)(61) CRR provides a definition of ‘securitisation’: “securitisation means a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, […]” Article 4(1)(67) CRR provides a definition of ‘tranche’: “a contractually established segment of the credit risk associated with an exposure or a number of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in each other such segment, […]”. Q&A 2472 states the following: “[…] if an originator institution retains […] a vertical tranche which has a nominal value of no less than 5% of the total nominal value of all the issued tranches of notes […], the retained tranche(s) are part of the securitisation and should be treated under the securitisation framework.” Article 1(d) of the Commission Delegated Regulation 625/2014 provides the definition of ‘vertical tranche’: “Vertical tranche means a tranche which exposes the holder of the tranche to the credit risk of each issued tranche of the securitisation transaction on a pro-rata basis”. Based on these definitions, a bank would classify the vertical security in this traditional securitisation referencing 5% of the cash flows of the pool assets as a non-securitisation position since it (i) does not refer to x% of the cash flows of other tranches in this traditional securitisation and (ii) does not fulfil the ‘tranching requirement’ since it is not part of a subordination waterfall. In addition, the credit risk of the vertical security is linear to the credit risk of the underlying pool, i.e. it is therefore not tranched. Effectively, this represents a retention of x% of each loan, although this retention is achieved in a security format. Typically the bank acting as originator would retain the vertical security. Retention via such a vertical security is a common market practice for US risk retention purposes. In the US regulatory framework such a vertical security does not qualify as a securitization position. The question is relevant for EU banks acting as originator in the US market for group level reporting purposes.