Regulation (EC No. 24/2009) of the European Central Bank (the Regulation) came into force on 9 February 2009. The Regulation forms part of EU legislation providing for the collection by the ECB of monetary and financial statistics. Under the Regulation, euro area SPVs that fall within the definition of a "financial vehicle corporation" (FVC) are required to:
- Report their existence to the relevant National Central Bank (NCB) – deadline end of March 2009; and
- Make quarterly reports to the NCB detailing their assets and liabilities – first report due January 2010 in respect of the last quarter of 2009.
Application of the Regulation
The reporting obligations under the Regulation apply to all FVCs resident in a euro area Member State. The definition in the Regulation of FVC is very broad, and it is likely to capture many Irish "Section 110" SPVs that issue securities or similar debt instruments, including, in particular, stand alone securitisation vehicles engaged in the issue of, amongst others, CDOs, CLOs and RMBS, and repackaging vehicles.
In summary, the Regulation defines an "FVC" as an undertaking which:
- is constituted as, among others, a public or private limited company;
- carries out or intends to carry out a securitisation transaction, and is insulated from the bankruptcy or other default of the originator; and
- issues securities, other debt instruments and/or financial derivatives offered for sale to the public or sold through private placements, and/or legally or economically owns, or may own, assets underlying such issue.
"Securitisation" is also broadly defined and would appear to capture any transaction involving the transfer of assets, and/or credit risk of such assets, to an SPV which in turn transfers such credit risk to investors by means of an issue of debt instruments or through financial derivatives. "Originator" is defined simply as the transferor of assets or of the credit risk of such assets.
In view of the very wide language used in these definitions, there has been some debate in the market over the correct interpretation of the definition of FVC. In particular, it has been suggested that an SPV which relies on an originator for payment of expenses (as is the case in most repackaging structures) or as servicer of underlying assets or as swap provider, is not "insulated from the bankruptcy or other default" of such originator. However, while the issue is far from being clear, a better view may be that such an interpretation would appear to be too broad and would appear to defeat the stated purpose of the legislation. Accordingly, it may be more appropriate to apply a narrow interpretation to "insulated from bankruptcy or other default" so that an SPV will be considered to be so insulated once it cannot form part of the bankruptcy of the relevant originator. Furthermore, it would appear that an SPV which acquires assets from several sources, including the secondary markets, could come within the definition of an FVC. Each separate source of such assets would be an "originator" for the purposes of the Regulation.
In Ireland, five of the principal law firms engaged in the securitisation market have developed a recommended common approach to the Irish Central Bank for the purpose of making the required initial notification. Further information on this approach is available from the contacts listed above.
Reporting Obligations - Existence
Article 3 of the Regulation provides that an FVC must notify its existence to the NCB in its jurisdiction of residence within one week of "taking up business". In effect, this means that each new FVC will be required to make such notification within one week of its incorporation or establishment.
Existing FVCs are required to notify their existence to the relevant NCB by end of March 2009.
Reporting Obligations - Quarterly Data
Article 4 of the Regulation sets out the obligation to make quarterly reports of asset and liability data. An FVC is required to provide its NCB, on a quarterly basis, with data on end-of-quarter outstanding amounts, financial transactions and write-offs or write-downs, in accordance with the standards set out in Annex I, II and III of the Regulation and as determined by the relevant NCB. In addition, the quarterly reports are required to comply with relevant accounting standards.
Article 4 also gives NCBs the discretion to: exempt an FVC from reporting on a mark to market basis; accept valuations made within a quarter instead of at quarter end; and to allow an FVC to provide indirect data on write-offs or write-downs if the NCB could thereby derive the actual write-off or write-down data.
The first quarterly reports will be due in January 2010, relating to the last quarter of 2009. Each NCB is required to report aggregate data to the ECB by close of business on the 28th working day following each quarter end and in that regard is obliged to set a deadline for receiving data from FVCs. Accordingly, it is likely that FVCs will be required to report to the relevant NCB several days before aggregate data is due to be submitted to the ECB.
Under Article 5 of the Regulation, NCBs may grant derogations from the reporting obligations of the Regulation in certain cases. In particular, NCBs may grant FVCs a derogation from reporting data on securitised loans where:
- such loans are originated by euro area monetary financial institutions (MFIs) and broken down by maturity, sector and residency of debtors; and
- the MFIs continue to service the loans.
The basis for this derogation is that this data is already captured by the reporting obligations of MFIs. This derogation should apply to, for example, RMBS and CMBS securitisations where the originator continues to service the relevant mortgages. The relevant FVC would still be required to notify its existence to the NCB and to provide quarterly data on items other than the relevant securitised loans.
Sanctions are provided for in Article 7 of Regulation (EC) No. 2533/98, which provides that fines up to €200,000 may be imposed for non-compliance with the Regulation.
Impact on Documentation
As the actual reporting of the data under the Regulation will in practice fall on corporate servicers, it will be necessary to include appropriate provisions in corporate service agreements and other transaction documents to ensure that corporate servicers undertake, and are provided with any information they need to so undertake, the required reporting under the Regulation.