Mandatory compliance with the European Central Bank's (ECB) new loan-level disclosure requirements became an eligibility condition for residential mortgage-backed securities (RMBS) transactions and asset-backed securities (ABS) backed by SME loans submitted as collateral to the ECB's repo facility, from 3 January 2013. A nine-month grandfathering period was to apply to new deals, allowing securities that did not fully meet all of the loan-level reporting requirements at the compliance date to be/remain eligible but to become fully compliant during that time (i.e. until 30 September 2013 for RMBS and SME ABS), but the ECB made clear that all new deals would have to meet the requirements after that date. The ECB has now announced that, from 16 October 2013, RMBS and SME ABS for which the mandatory level of compliance with loan-level reporting requirements has not been attained (and for which the data provider has neither given an explanation nor provided an action plan for achieving compliance), will become ineligible as collateral for the repo facility. However, the key part of the announcement is that the ECB may temporarily accept non-compliant RMBS and SME ABS as eligible collateral on a case-by-case basis, and subject to the provision of adequate explanations for the failure to comply with the loan-level requirements. This is to ensure a smooth transition to full compliance with the loan-level requirements while ensuring a level playing field between RMBS and SME ABS at different stages of the compliance process.
The ECB had always envisaged extending the loan-level reporting requirements to a wider range of ABS transactions over time, and mandatory reporting for CMBS, consumer finance ABS, leasing ABS and auto loan ABS is due to be phased-in over the next few months. In addition, the ECB has now announced that the loan-level reporting requirements will be extended to ABS backed by credit card receivables, starting on 1 April 2014 (subject to a nine-month phasing-in period). The underlying credit card receivables must consist of a homogenous pool so that the loan-level data can be reported in the single reporting Template developed by the ECB. Further details will be specified in due course.
Edition 5 of this Briefing outlined a further recent decision of the ECB, to relax the current requirement for ABS to have two 'AAA' ratings at issuance (albeit temporarily relaxed for certain securities), replacing it with a requirement for two 'Single A' ratings at issuance for those ABS currently subject to the ECB's loan-level reporting requirements (namely, RMBS, SME ABS, CMBS, consumer finance ABS, leasing ABS and auto loan ABS). That decision would also reduce the current valuation haircuts for senior tranches of ABS from 16% to 10%, and for lower-rated tranches, from 26-32% to 22%. The Legal Act amending the ECB's General Documentation formalising these changes (and possibly specifying the details of the relaxation of the loan-level reporting requirements for RMBS and SME ABS, as well as the extension of the scheme to ABS backed by credit card receivables) has not yet been released.