As outlined in our ongoing series of STS Client Alerts (see Part 1 and Part 2), the development of the new regulatory framework for securitisation is ongoing. The key legislation - which comprises the Securitisation Regulation and Regulation Amending CRR - takes effect from 1 January 2019 but requires additional detail to implement it fully, in the form of various Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS) and guidance.
One important part of the technical standards currently under development deals with the disclosure framework for securitisations, which will accompany the Securitisation Regulation with RTS on the detailed information to be disclosed by transaction parties, and accompanying ITS on the standardised format of that information. The final report of the European Securities and Markets Authority (ESMA) setting out its final draft RTS and ITS on disclosure has been sent to the European Commission for approval, and it contains some key differences from the consultation draft which we highlight below.
The transparency requirements
The draft RTS and ITS are intended to assist transaction parties in meeting the transparency requirements of Article 7 of the Securitisation Regulation (in particular, the provisions of Article 7(1)(a) and 7(1)(e) regarding underlying exposure information and investor reports), and they are intended to apply to all securitisations, and not just "simple, transparent and standardised" (STS) transactions, from 1 January 2019. The originator, sponsor and securitisation special purpose entity (SSPE) must designate amongst themselves one entity to make the required information available to investors, potential investors and the various competent authorities listed in Article 17. For "public" deals, onward disclosure of this information (to various authorities) is also required to be made via a "securitisation repository".
The various templates set out for the disclosure of the required information, some of which will already be familiar to transaction parties used to reporting loan-level data to regulators such as the European Central Bank (ECB), are:
- Underlying exposures templates which provide for the reporting of exposure-level data on transactions backed by residential real estate, commercial real estate, corporate exposures, automobiles, consumer exposures, credit cards, leasing and "esoteric exposures". Separate templates for ABCP transactions and programmes are also provided. A new add-on template to reflect the inclusion of non-performing loans in a securitisation has also been added.
- Investor report templates for both ABCP transactions (which require monthly reporting) and non-ABCP transactions (which require quarterly reporting), which are intended to capture materially relevant data on the credit quality and performance of the underlying exposures, information about events that trigger changes in the priority of payments or the replacement of counterparties, cash flow data (for non-ABCP transactions), and risk retention information.
- Inside information templates to report information that the originator, sponsor or SSPE would typically be required to disclose under the Market Abuse Regulation.
- Significant event templates to report events such as a material breach of obligations, change in structural features or risk characteristics of a transaction, or, for STS securitisations, where the transaction ceases to meet the STS requirements.
Key differences from the consultation draft - scope and timing
Many securitisation market participants were hoping for clarification that the disclosure requirements would not apply to "private" (e.g. ABCP) transactions given that the language used in the Securitisation Regulation and to direct ESMA's mandate is somewhat general and does not specify the scope of application of the disclosure requirements. However, in a departure from the approach of the consultation draft, the final report makes clear that ESMA does plan to require reporting on ABCP and other "private" transactions, although it would appear that the data would then not have to be disclosed via a repository. As a result, the RTS and ITS are split into provisions applying to all securitisations, and those applying only to public securitisations (i.e. those for which a prospectus has been drawn up).
Another key consideration for the industry is the timing of the introduction of the disclosure requirements. While ESMA's mandate did not extend to the setting of a compliance timeframe, it became clear during the consultative period that the industry would welcome a phase-in period during which full compliance could be reached over time. As a result, ESMA's final report suggests allowing a transitional period of 15-18 months to allow transaction parties to reach full compliance with the disclosure standards. While this is of course a matter for the Commission to decide, this suggested timeframe reflects similar periods allowed for compliance with ECB and other reporting regimes.
Other key changes
Other changes made to the RTS and ITS from the consultation draft include:
- The standardised reporting format has been changed to "XML" (from "ISO 20022" as originally proposed), in line with existing loan-level reporting regimes and with which market participants have become familiar;
- Some technical amendments to the reporting templates and fields have been made, based on market feedback, including expanding the availability of the important "no data" fields but allowing less flexibility around how and when these are used;
- A simplification of the requirement to generate a "unique identifier" code for every reported transaction, and a change to the party responsible for generating that code (from the repository itself, to the reporting entity);
- Since the consultation draft largely assumed that most deals would involve bank originators, some flexibility has been introduced to better accommodate non-bank originators;
- The final report includes only the disclosure requirements; the operational standards and access conditions for repositories (included in the consultation draft) have been left out and will be dealt with in separate RTS. This is mainly to ensure timely adoption of the present RTS and ITS so as to prevent the "Article 8b" reporting requirements of the CRA III Regulation taking effect in the interim period (as the Securitisation Regulation provides for this as a back-up option); and
- ESMA appears to clarify that the new disclosure obligations will only apply to new securitisations issued after 1 January 2019 as well as "legacy" deals closed pre-1 January 2019 that subsequently apply for STS status. With regard to deals that securitise assets originated pre-1 January 2019, ESMA appears to be satisfied that limited use of "no data" fields will facilitate this.
As with all of the required RTS and ITS under the Securitisation Regulation, the Commission has a three-month period in which to endorse them. Since there are some (possibly contentious) aspects of the final report with which the Commission may not agree, endorsement may not be a foregone conclusion. If the Commission requests further changes to the final drafts - particularly if this requires another consultation round - this could lead to a delay in the RTS and ITS taking effect from 1 January 2019 and the possible interim application of the "Article 8b" requirements.
Ongoing industry advocacy efforts may assist with resolving some of the outstanding issues. Further engagement with the Commission may lead to the introduction of mitigants such as a phased roll-out of the disclosure requirements over a transitional period. ESMA has also now requested further feedback on the Final Report which may indicate it is aware of the market reaction to the divergence in scope of the Final Report from the original consultation. However, at this late stage in the run-up to the new regulatory regime taking effect, there is a balance to be struck between gaining the most desirable outcomes and the timely resolution of these issues.
We are happy to discuss this or any other aspect of the new securitisation regulatory regime with you, and assist with your preparations for the new framework becoming effective from 1 January 2019.