Following the consultation paper published by the European Securities and Markets Authority (ESMA) in February 2014 (see CRA3: ESMA proposes wide-ranging disclosure requirements on EU originators, sponsors and issuers), on 24 June 2014 ESMA published its final draft of the Regulatory Technical Standards (the RTS)1 on, among other things, disclosure requirements for structured finance instruments (SFIs)2 , as required under the Credit Rating Agencies Regulation3 (the Regulation) as amended by the Credit Rating Agencies 3 Regulation4 (CRA3). The RTS will set out: (i) the information that the issuer, originator and sponsor of a SFI must publish under Article 8 of the Regulation; (ii) the frequency with which information is to be updated and (iii) the presentation of information by means of standardised disclosure templates.
The new CRA3 disclosure requirements will apply in addition to (where applicable) existing disclosure requirements under the Prospectus Directive5, Article 409 of the Capital Requirements Regulation6(CRR), the reporting requirements for eligible collateral under the European Central Bank (ECB) and Bank of England funding schemes, and disclosure obligations under Rule 17g-56.
The disclosure requirements under the final draft RTS will (subject as follows) apply to all SFIs issued after the date the RTS come into force, however a phase-in approach will apply to transactions not falling within the six asset classes for which reporting templates (based on existing ECB templates for ABS reporting) are not yet developed. In addition, private and bilateral transactions will only become subject to the RTS after a further consultation process and amendment to the RTS to provide for appropriate specific reporting templates.
The disclosure requirements will apply to all SFIs for which any of the issuer, the originator or the sponsor is established in the EU. Accordingly, there may be some situations in which the RTS will catch non-EU securitisations, where only one of the parties (including, for example, a foreign branch of an EU bank acting as sponsor) is established in the EU.
The most significant features of the final draft RTS are discussed in further detail below.
1. Scope of Application
Despite being implemented under the regulatory framework for Credit Rating Agencies (CRAs), the disclosure requirements for SFIs are imposed directly on originators, sponsors and issuers of SFIs, in order to address CRA3 objectives including reduction of investor dependence on credit ratings, increasing transparency and reinforcement of competition between CRAs by facilitating an increase in unsolicited credit ratings.
Notwithstanding the concerns of the majority of respondents to ESMA’s consultation paper, there has been minimal change to the proposed scope of the disclosure requirements. Under the final draft RTS, the requirements will apply not only to rated SFIs, but to all SFIs for which any of the issuer, the originator or the sponsor is established (i.e. has its statutory seat) in the EU, irrespective of whether rated or unrated, offered to the public or subject to private placement, or admission to or location of trading. Application is not limited to SFIs that qualify as securities, but extends to other financial instruments such as money-market instruments (e.g. ABCP programmes).
However, in recognition of the complexity of developing appropriate reporting obligations for private and bilateral SFIs, the final draft RTS now provide for ESMA to conduct a further public consultation in relation to amendments to the RTS to specifically address private and bilateral SFIs, which will not be subject to the RTS until such specific reporting obligations have been developed by ESMA and adopted by the European Commission.
The disclosure requirements will now apply only after 1 January 2017, to SFIs issued after that date, as well as to SFIs issued after the RTS come into force (the 20th day following publication in the Official Journal of the European Union) and which are still outstanding on 1 January 2017. Issuers, originators and sponsors will not be required to keep a backlog of information in respect of the period between entry into force of the RTS and 1 January 2017.
The disclosure requirements will initially only apply to SFIs backed by the following asset classes specified in the draft RTS: (i) credit cards (ii) residential mortgages, (iii) commercial mortgages, (iv) SME loans, (v) auto loans, (vi) consumer loans, and (vii) leases to individuals/businesses. The draft RTS provides standardised disclosure templates for each of these asset-backed classes. A phase-in approach will then apply for all other SFIs (including those backed by trade receivables, store cards, corporate loans and leases, as well as ABCP programmes, synthetic SFIs and re-securitisations) for which ESMA will be required to develop and publish disclosure templates “as soon as technically possible”.
2. Information to be disclosed
The draft RTS require the reporting entity (i.e. the party or parties designated by the issuer, sponsor or originator to carry out their reporting obligations) to provide the following information:
- loan level information through the standardised disclosure templates;
- where applicable:
- the final offering document or prospectus, together with the closing transaction documents, including any public documents references in the prospectus or which govern the workings of the transaction (excluding legal opinions);
- the asset sale agreement, assignment, novation or transfer agreement (and any relevant declaration of trust);
- the servicing, back-up servicing, administration and cash management agreements;
- the trust deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement;
- any relevant intercreditor agreements, swap documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements; and
- any other relevant underlying documentation.
Information is to be disclosed on a website to be established by ESMA.
The requirement for detailed loan-level disclosure continues to apply to all asset classes (including credit card ABS), despite the objections of a large number of respondents to the February consultation paper.
The requirement to publish a separate cash-flow model has been removed from the draft RTS, however transaction documents published must include a detailed description of the transaction waterfalls (which would usually be the case in any event).
If the transaction is to be Prospectus Directive (PD) compliant, there is no requirement to publish a separate transaction summary, however if the transaction is not PD compliant, then a summary of the main features of the SFI must be provided, including:
- the deal structure;
- the asset characteristics, cash flows, credit enhancement and liquidity support features;
- the noteholder voting rights, the relationship between noteholders and other secured creditors in a transaction;
- the triggers in the transaction and the consequences of them being breached;
- the structure diagrams containing an overview of the transaction, the cash-flows and the ownership structure.
Where possible, ESMA has used existing ECB reporting templates to avoid disclosure overlap.
3. Frequency of Reporting
The final draft RTS provide for quarterly loan-level reporting (changed from monthly reporting under the previous draft). Other reporting is expected to be provided "without delay" after the issuance of the SFI.
In addition to periodic loan-level reporting, in order to allow an investor to make a proper assessment of the SFIs, the issuer, originator and sponsor should also disclose information as soon as possible following:
- a breach of the obligations included in the documentation relating to the SFI;
- any significant change in the structure features that can materially impact on the performance of the SFI;
- any significant change in the risk characteristics of the SFI and of the underlying assets.
However, in order to avoid duplication, this will only apply where an SFI does not already fall within the EU market abuse disclosure regime.
4. Responsibility for compliance
In an apparent attempt to address concerns as to responsibility for compliance where SFIs have multiple originators, the final draft RTS provide that the issuer, originator and sponsor may designate one or multiple entities to submit information required to be disclosed or outsource this task to a third party, although this will not release the issuer, sponsor or each originator from their individual compliance responsibility.
Despite a number of respondents querying how the delegation process would work in relation to originators not involved in any way in the SFI (e.g. original lenders of loan portfolios sold and later securitised)7, and whether such originators should be subject to the RTS at all, no further guidance or clarity has been given on these points.
Neither has ESMA addressed concerns as to the extra-territorial effect of the RTS disclosure requirements. As noted above, the disclosure requirements will apply to all SFIs for which the issuer, the originator or the sponsor is established in the EU. Note that if any one of these entities is established in the EU, the transaction will be subject to the disclosure requirements. For example, a transaction under which an English bank establishes a Jersey issuer to securitise real estate loans would be caught. More interestingly, it appears that if a German bank, through its US branch, originated US mortgage loans for a securitisation, the transaction would be subject to the disclosure requirements. Accordingly, there may be some situations in which the RTS will catch non-EU securitisations, where only one of the parties (including, for example, a foreign branch of an EU bank) is established in the EU.
6. Next Steps
The final draft RTS were submitted to the European Commission on 21 June 2014. The European Commission has three months to decide whether to endorse the final draft RTS.