If there was ever any doubt as to the aspirations of the European Parliament, the European Commission, the European Banking Authority, the European Securities and Markets Authority (ESMA), the European Central Bank (ECB), the Bank of England and, to a certain extent, certain market participants with regard to disclosure in securitisations one only has to look at some of the major initiatives of the past five years in the securitisation area to see that enhanced disclosure has been a priority.
The reasons for more disclosure have been expressed in a number of ways: (i) enhanced disclosure will allow investors to receive sufficient information on the quality and performance of their underlying assets with a view to enabling them to perform informed assessment of the creditworthiness of the instruments they are buying1, (ii) prospective investors should have readily available access to all materially relevant data 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 exposures2, (iii) transparency, amongst other virtues such as quality, simplicity and liquidity will result in sustainable funding tools for investors resulting in improved market resilience and growth in the real economy3, (iv) that additional data requirements will help both investors and third-party assessment providers with their due diligence leading to restored confidence in the securitisation market4 or (v) that enhanced transparency will enable investors to model risk with confidence and provide originators with incentives to behave responsibly5.
It is said that wisdom and prudence are always recompensed6 but the question remains whether the prudent (and some would argue onerous and at times intrusive) disclosure requirements are being applied with any wisdom. Regulations such as the CRR7, the CRA38 and initiatives such as the Prime Collateralised Securities (PCS) label, the ABS Loan-level initiative of the European Central Bank, the requirements of the Bank of England in order to qualify for the discount window facility and be eligible for collateral in the Bank of England’s operations and possibly in the future be considered as “qualifying securitisations” appear to be generated without any care as to mutual consistency or process of reporting. More worryingly the capital and regulatory treatment does not itself take note of or apply the risk analysis that is being provided through the reporting standards.
LOAN LEVEL INFORMATION
Providing and updating loan level information is not a small undertaking particularly when you have a portfolio of hundreds if not thousands of assets. When you have diverging requirements relating to that loan level information it is even more challenging. The RTS9 in relation to the CRR requires information to be provided on a loan-by-loan basis but recognises that there are instances where the data may be provided on an aggregate basis depending on things such as the granularity of the underlying pool and whether the management of the exposures in that pool is based on the pool itself or on a loan-by-loan basis. CRA3 requires that where a structured finance instrument is backed by residential mortgages, commercial mortgages, loans to small and medium sized enterprises, auto-loans, consumer loans, credit card-loans and leases to individuals and/or businesses, the reporting entity shall provide loan level information through the standardised disclosure template relating to such asset classes. The PCS Simplicity Standards require that prior to an issue, the Issuer or originator will make available (i) for underlying assets which are not granular assets, loan-level data to enable investors or third party contractors to build a cash flow model setting out the transaction cash flows or, (ii) in relation to underlying assets which are granular assets, detailed summary statistics on the underlying assets; and on or about the date of issue and thereafter, it will make available data on underlying assets in a data repository that complies with the requirements of a) the Bank of England concerning data disclosure for eligibility to its repo programs, or b) the European Data Warehouse (ED) or c) another publicly available electronic depository that is approved and published by PCS. The Bank of England requires loan level information to be made publicly available at a frequency of not less than quarterly and within a defined period after the relevant bond payment date for the following assets classes: RMBS, covered bonds, CMBS, CLOs, and securitisations of auto, consumer, lease and private student loans10 in each case based on the relevant template for such asset class. The “qualifying securitisation” initiative suggests that sufficient loan-level or granular pool stratification data should be made available at the time of securitisation to potential investors in order to permit construction and analysis of cash flow models. Information should then be provided on an ongoing basis with updated loan-level performance data and standardised investor reports to current and potential investors on a monthly/quarterly basis throughout the life of the securitisation. The ECB ABS loan-level initiative has its specific loan-by-loan information requirements for ABS that can be accepted as collateral in the Eurosystem credit operations as well as prescribing the templates required for each relevant asset class. Uploading this data was supported by the creation of the ED in June 2012. The ED is now fully operational and provides a central portal where investors, originators and rating agencies can access data.
AND THERE’S MORE
Aside from the demands of the loan-level disclosure discussed above, the RTS provides further that originators, sponsors and original lenders shall ensure that materially relevant data is readily accessible to investors, without excessive administrative burden, the scope of what is materially relevant could potentially go beyond loan-level information. CRA3 also requires that, inter alia, the final offering document, the closing transaction documents, the asset sale agreement, servicing agreements; inter-creditor agreements, swap documentation, loan agreements, liquidity facility agreements and any other relevant underlying documentation must be disclosed, bear in mind that CRA3 continues to apply to private unrated transactions. The Bank of England also requires, inter alia, transaction documents, a transaction summary and a cashflow model to be made freely and publicly available. And the lists go on!
As can be seen a party hoping to have a compliant securitisation with a PCS label that could potentially be a “qualifying securitisation” and be eligible for operations with the Bank of England and the ECB would have several hurdles to jump. Although there is overlap between many of the requirements in the regulations and initiatives it is accepted that there is not a one size fits all. The templates required by CRA3, the Bank of England and the ECB although similar are not identical. In addition the requisite templates need to be uploaded to the Bank of England, the ED and under CRA3, a website set up by ESMA separately. In the case of CRA3, which continues to apply to private unrated transactions, the ESMA website represents a very public forum for sensitive information. All these factors lead to higher administrative costs and reduced enthusiasm.
QUID PRO QUO?
Perhaps the major stumbling block with such onerous disclosure is that it is not clear to many what the tangible benefits are. Securitisation still struggles to be recognised as a High Quality Liquidity Asset for the purposes of the Liquidity Coverage Ratio and continues to be discriminated against for the purposes of calculating risk weights with proposed capital requirements for securitisation exposures much higher than justified by historical losses. The PCS label does not automatically qualify a securitisation for any preferential treatment (although there is no doubt that it is a step in the right direction) and although operations at the Bank of England and the ECB provide liquidity, these really only promote the use of the AAA tranche as a funding tool and are subjected to haircuts. Finally the CRR and CRA3 rather than providing any incentives rely more on the threat of penalties for non-compliance. It is hardly surprising that securitisation in 2013 stood at €174 billion, only 40 per cent of pre-crisis issuance11.
What is really needed is a disclosure standard that is widely accepted across all initiatives and regulations and information that can be posted to a single central location, making the disclosure process less onerous and more streamlined enabling those who are contemplating a securitisation transaction to see the potential rewards for their efforts.