European Union Amends Capital Requirements Directive to Strengthen Securitization

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Council of the European Union has amended the Capital Requirements Directive in an effort to enhance the originate and distribute model and strengthen securitization practices. The amendments enhance the due diligence and transparency obligations on the originators of securitization operations and on investors. Under the new regime, investors should be able to assess the risks involved in structured products otherwise than solely by the means of the ratings given by rating agencies. In order to encourage better risk assessment, a "skin in the game" amendment requires originators to retain on their balance sheets 5 % of risks transferred or sold to investors.