Application of the ‘sole purpose test’ with respect to the criterion predominant source of revenues.

Art. 2 (7) (a) of Commission Delegated Regulation 2023/2175 stipulates the following Revenue Test : “the entity has a strategy and the capacity to meet payment obligations consistent with a broader business model that involves material support from capital, assets, fees or other sources of income, by virtue of which the entity does not rely on the exposures to be securitised, on any interests retained or proposed to be retained in accordance with Article 6 of Regulation (EU) 2017/2402, or on any corresponding income from such exposures and interests, as its sole or predominant source of revenue ”. The ESA report (JC 2025 14) from March 2025 in particular in the context of Collateralised Loan Obligation (CLO) securitisations as they relate to third party origination CLO vehicles, reiterates this guidance and clarifies that the word “predominant” translates into a 50% threshold: “[…] According to the RTS, this means that the entity’s revenues should correspond to no more than 50% on the exposures to be securitised, risk retained assets or proposed to be retained in accordance with Article 6 of the SECR, or any corresponding income from such exposures and risk retained assets. […]”.  It is also acknowledged that the JC of the ESAs seek to invite the European Commission to confirm this interpretation and if needed to consider some legislative adjustments to clarify the term “sole purpose” in the Level 1 text. The Submitter would like to confirm that in situations where such aforementioned originator invests in securitization tranches in excess of the minimum risk retention in accordance with Art. 6 of the Securitisation Regulation, the Revenue Test is met if: X / Y ≤ 0.5  where X means the sum of gross revenues based on exposures to be securitized and gross revenues of tranches mandatorily held to fulfil the minimum risk retention, and  Y means all gross revenues. The gross revenues of tranches voluntarily held in excess of the minimum risk retention should therefore only be included in Y.

It is appropriate to perform the Revenue Test such that it distinguishes between the revenues of: (i) tranches held mandatorily to fulfil the minimum risk retention; and (ii) tranches held voluntarily in excess of the minimum risk retention.    The revenues of tranches voluntarily held in excess of the minimum risk retention are only included in Y. This is justified as Art. 2 (7) (a) of Commission Delegated Regulation 2023/2175 refers to “interests retained or proposed to be retained in accordance with Article 6” and Article 6 of the Securitisation Regulation establishes the minimum risk retention requirement. Hence, the quantity X only refers to revenues of tranches mandatorily held to fulfil the minimum risk retention, but not to revenues of tranches voluntarily held in excess of the minimum risk retention. The Submitter understands that post the publication of the ESA report in March 2025 the CLO market has adopted the Revenue Test as outlined above and would like to confirm that this adoption is correct to avoid the risk of future market disruption.