On 13 May 2013, the European Commission adopted a number of amendments to Regulation (EC) No 1060/2009 on credit rating agencies (the “CRA Regulation”), the amendments (“CRA3”) set out a number of changes relating to ratings and rating agencies. Two of the main changes that impacted structured finance transactions were the requirement for an issuer or related third party to solicit at least two credit rating agencies to provide credit ratings in respect of a structured finance instrument under Article 8(c) of CRA3 and the requirement for an issuer, originator and sponsor to publish, on an on-going basis, certain information in relation to the quality and performance of assets, structure, cashflows, collateral and certain other information in relation to a securitisation under Article 8(b) of CRA3 (“Article 8(b)”).
Article 8(b) is currently causing much consternation within the structured finance community. Article 8(b) mandated the European Securities and Markets Authority (“ESMA”) to develop much of the detail required under Article 8(b) by way of regulatory technical standards (the “RTS”) a draft of which is required to be submitted to the European Commission within a year of the entry in to force of the CRA Regulation. On 10 July 2013, ESMA published a discussion paper on CRA3 implementation (the “Discussion Paper”), the purpose of which was to gather evidence and market participant’s views for drafting, inter alia, the RTS. On 11 February 2014, ESMA published a consultation paper on CRA3 implementation (the “Consultation Paper”), the Consultation Paper contained a feedback statement in relation to the Discussion Paper and also submitted for public consultation a first version of the draft RTS (the “Draft RTS”).
BROAD SCOPE AND BEYOND MANDATE
The Consultation Paper strays from a number of the provisions in the level 1 text of the CRA Regulation and has resulted in the scope of Article 8(b) being broader than envisaged with the potential to jeopardise access to funding for real economy assets.
Private and bilateral transactions not offered to the public
The Draft RTS provides that private and bilateral transactions and transactions that are not offered to the public or admitted to trading in the EU are within the scope of the CRA Regulation. Arguments have been made that Article 8(b) should be limited to structured finance investments which are required to publish a prospectus under the Prospectus Directive1, such arguments are reinforced, inter alia, by the fact that the definition of “issuer” as used in Article 8(b) cross refers to such definition as used in the Prospectus Directive.
The prospect of the issuer, originator or sponsor being required to post, inter alia, loan level information, sensitive transaction documents and cash flows, in respect of a private and/or bilateral transaction, on a public website established by ESMA would give rise to confidentiality and commercial issues and would likely affect decisions to invest in and/or originate such transactions. It is clear that such a public disclosure of potentially sensitive information would lead to questions of economic feasibility and seems unnecessary given that bilateral/private transactions tend to involve sophisticated investors who are able to negotiate their own information requirements.
The Consultation Paper also provides that Article 8(b) applies to “structured finance instruments with and without credit ratings assigned by an EU registered credit rating agency”. As the CRA Regulation is primarily targeted at rating agencies and credit ratings it is argued that Article 8(b) should only relate to rated structured finance instruments.
The Draft RTS requires a whole raft of information and documents to be provided to the ESMA website as a matter of course. Such an approach overlaps but is not consistent with requirements under Article 409 of the Collateral Requirements Regulation2 which requires that prospective investors have readily available access to all materially relevant data on the credit quality and performance of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure as well as such information that is necessary to conduct comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures. These inconsistent requirements understandably have led to concern about how such disclosure requirements can be complied with so as to satisfy both sets of legislation.
TEMPLATE FOR SUCCESS?
The Draft RTS prescribe standardised disclosure templates for use where loan-level data is required to be disclosed. The templates are annexed to the Draft RTS and are based on the current ECB templates. Although it is helpful that ESMA did not devise its own template and adopted the form used by the ECB, requests have been made to include the flexibility to use other formats such as those published by the Bank of England and potentially other formats that could be introduced in the future for example in the U.S.
EVENT DRIVEN DISCLOSURE IS MAD
Article 6(4) of the Draft RTS provides that “any significant change or event either likely to affect the creditworthiness or the risk characteristics of the underlying exposures or of the structured finance instrument or representing a breach of transaction documentation of the structured finance instrument shall be disclosed…without delay on the website to be set up by ESMA”. The Market Abuse Directive3 already provides that such event-based disclosure is required where the information is material/price sensitive and not publicly available. The introduction of parallel provisions are likely to cause confusion. Article 6(4) also fails to provide some of the carve outs to such disclosure contained in the Market Abuse Directive such as when an issuer wishes to avoid prejudicing it’s legitimate interests.
Comments on the Draft RTS were due by 11 April 2014. Given the nature of the concerns highlighted above and a number of other concerns raised by some market participants the next instalment of the RTS is keenly anticipated. If ESMA chooses to ignore the concerns raised it could be yet another regulatory setback for the securitisation industry at a time when the EU authorities claim to want a revival of securitisation.