Regulation (EU) 2017/2402 (the Securitisation Regulation), amongst other things, aims to enhance transparency in respect of the securitisation market.
Investors and potential investors in a securitisation need to be able to, and may be required to, conduct due diligence and monitor a number of risks. Likewise, the entities listed in Article 17(1) of the Securitisation Regulation (including the European Supervisory Agencies, the European Systemic Risk Board, supervisory and resolution authorities) need to be able to meet their respective mandates, including (amongst other things) monitoring the overall functioning of securitisation markets.
Article 7(3) and (4) of the Securitisation Regulation mandates the European Securities and Markets Authority (ESMA) to produce draft regulatory technical standards (RTS) and implementing technical standards (ITS) specifying both what information must be disclosed and standardised templates for submitting that information. In addition, Article 17(2)(a) and (3) mandates ESMA to draft RTS and ITS specifying the information that must be provided to the securitisation repository and the relevant templates.
On 16 October, the EU Commission published final drafts of an RTS on securitisation transparency – we set out the key points, in respect of investors in securitisations, below.
Key points for market participants
As expected and as market participants in securitisations will be aware from the revised draft RTS published in January 2019, the Transparency RTS applies to both public securitisations (i.e. securitisations for which a prospectus is required to be produced) and private securitisations, with the Transparency RTS drawing a distinction between what is required to be disclosed in each case.
- Inactive exposures – Article 2 of the Transparency RTS sets out tailored reporting requirements for the most prominent underlying exposure types. It also provides that, in respect of “inactive underlying exposures” (i.e. underlying exposures that have defaulted with no further recoveries expected or that have been redeemed, prepaid, cancelled, repurchased or substituted), more granular information is not required to be provided. This is because, as such exposures no longer contribute to the risk profile of the securitisation, it is less useful for investors and potential investors (amongst others), to continue receiving information on inactive underlying exposures.
- Investor report – Article 3 of the Transparency RTS provides that information on the investor report should be made available. This is important because information set out in the investor report can materially impact the performance of the securitisation and the pricing of its tranches.
- Information granularity (all securitisations) – Article 4 of the Transparency RTS sets out the granularity of the information to be disclosed and aims to reflect the depth used in existing disclosure and data collection provisions. This includes, for example, in respect of certain reporting templates, disclosure of information in respect of historical collections, cashflows and triggers that change the priority of payments in respect of underlying exposures. Disaggregated underlying exposure-level data is valuable for securitisation investors and potential investors in order to adequately understand and monitor the risk and performance of securitisation underlying exposures. This is important because information on the risk characteristics of, or the cash generated by, the underlying exposures can materially impact the performance of the securitisation and the pricing of its tranches.
- Information completeness and consistency – Article 9 of the Transparency RTS provides that information made available is complete, consistent and up-to-date.
- “No data” options – Article 9 of the Transparency RTS also provides for specific cases where information cannot be made available. In such situations, the originator, sponsor, or SSPE (i.e. securitisation vehicle) is allowed to explain the specific reason for the information not being available by ascribing the relevant value set out in the Article – for example, value “ND1” is used to describe a situation where the required information has not been collected because it was not required by the lending or underwriting criteria at the time of origination of the underlying exposure. However, limited legislative guidance is provided in respect of explaining the unavailability of information using value “ND5”, or “not applicable”.
- Standardised identifiers – Article 11 of the Transparency RTS provides that standardised identifiers should be assigned to the information made available. Those standardised identifiers should be unique and permanent so that the evolution of securitisation information may be effectively monitored over time.
Public securitisations only (i.e. securitisations for which a prospectus is required to be produced)
- Inside information or significant event information – Articles 6 and 7 of the Transparency RTS provide that inside information or significant event information should be made available for public securitisations.
- Information granularity (public securitisations only) – Article 8 of the Transparency RTS requires the disclosure of additional information, in respect of public securitisations, related to the tranches/bonds in the securitisation, the accounts, the counterparties, as well as additional features of relevance for synthetic and/or collateralised loan obligation securitisations.
Changes since revised draft RTS published in January 2019
As compared to the revised draft RTS published in January 2019 (which we discussed in an earlier article), limited substantive changes have been made to the Transparency RTS.
This means that (amongst others) the following potential concerns remain in the Transparency RTS:
- “No data” options – as noted above, there is limited legislative guidance regarding explaining the unavailability of information using value “ND5”, or “not applicable”.
- Jurisdictional scope – the obligations under the Transparency RTS are not expressly limited to EU-established originators, sponsors and SSPEs and, therefore, potentially have extra-territorial effect.
- No transitional relief – the Transparency RTS does not include any transitional relief or a transitional period, despite ESMA’s initial view that a 15-18 month period might be necessary to assist the transition.
Whilst ESMA's Q&A on the Securitisation Regulation does provide some guidance, particularly in respect of point one, above, the Transparency RTS represented an opportunity to finalise these points.
The EU Commission is required to decide within three months of receipt of the draft Transparency RTS whether to endorse the draft (either entirely, in part or with amendments). As such, the earliest date at which the Transparency RTS may be published in the Official Journal of the European Union is mid-January 2020, with the Transparency RTS entering into force 20 days later (i.e. the earliest “in force” date is early February 2020).
Whilst the requirements of the Transparency RTS are highly prescriptive, it does at least give investors, originators, sponsors and SSPEs (i.e. securitisation vehicles) some certainty in relation to the required disclosure requirements following a protracted period since the original proposed RTS and templates were published in August 2018.