The EU Securitization Regulation was adopted on December 12, 2017 and has applied since January 1, 2019. For many, the adoption of the Securitization Regulation was heralded as an end to years of regulatory heart and brain ache. It was now surely just a question of completing the level-two legislation requirements and the securitization market would be back in business? Unfortunately this was wishful thinking, particularly in respect of the transparency technical standards required to be produced under Article 7 (Transparency requirements for originators, sponsors and SSPEs) of the Securitization Regulation.
Articles 7(3) and (4) (Transparency requirements for originators, sponsors and SSPEs) of the Securitization Regulation required the European Securities and Markets Authority (ESMA) to produce draft regulatory technical standards (RTS) and implementing technical standards (ITS and, together with the RTS, the Transparency Technical Standards) detailing information to be disclosed in respect of underlying exposures and investor reports together with standardized templates for the submission of such information (the Reporting Templates), these were required to be submitted to the European Commission (the Commission) by January 18, 2019.
On December 19, 2017 ESMA published a consultation paper in order to fulfil this requirement (the Consultation Paper). The reaction from the industry to the Consultation Paper was broadly supportive although there were comments and feedback on a variety of detailed issues. Recital (3) of the RTS was unequivocal that the Reporting Templates would not apply to private securitizations.
On August 22, 2018 following the consultation period, ESMA published its final report on securitization disclosure technical standards (the Final Report) and submitted it to the Commission. The Final Report consisted of draft Transparency Technical Standards and included Reporting Templates with respect to quarterly portfolio level disclosure, quarterly investor reports, inside information relating to the securitization that the reporting entity is obliged to make public under Article 17 of the Market Abuse Regulation and any significant events.
The Final Report was met with frustration and disappointment. Among other concerns, it was considered that the Final Report contained a number of proposals that were materially different to those in the Consultation Paper and had not been subject to any meaningful consultation with the industry. The Final Report removed the previous exemption for private securitizations, this was apparently because ESMA had received legal advice that it did not have the power under the Securitization Regulation to differentiate between public and private securitizations, the result was that private securitizations would to report the same detailed information as public transactions, something which was not only a surprise and not merely onerous, but also rather pointless since private investors would have agreed before investing on the scope and detail of the required reporting.
The Final Report also revealed a tightening of the standard of compliance with the Reporting Templates and the removal of some practical flexibility that was considered valuable. Many of these changes threatened a hiatus and potential cliff-edge for the securitization market. One development that was welcomed though was the recommendation by ESMA that a transition period of 15-18 months be granted for the implementation of the Transparency Technical Standards, but this was a gift that only the Commission had the power to actually give. Given the market reaction to the Final Report, there was significant uncertainty as to the scope and application of the reporting requirements and whether the contents of the Final Report would actually be adopted by the Commission.
Article 43(8) (Transitional provisions) of the Securitization Regulation provides that until such time as the Transparency Technical Standards are adopted by the Commission, originators, sponsors and SSPEs shall, for the purposes of the obligations set out in Articles 7(1)(a) and 7(1) (e) (Transparency requirements for originators, sponsors and SSPEs) of the Securitization Regulation, make the information referred to in Annexes I to VIII of Delegated Regulation (EU) 2015/3 (CRA3 RTS) available in accordance with Article 7(2) of the Securitization Regulation, the forms prescribed under the CRA3 RTS (CRA3 Templates). As January 1, 2019 approached without any indication of whether or not the Final Report would be adopted by the Commission in time, the market was forced to start contemplating the use of the CRA3 Templates, but the uncertainty and the prospect of having to use the CRA3 Templates followed by the requirement to report using the Reporting Templates at some future point was already beginning to stall potential deals.
Sensing the disquiet in the market, the European Banking Authority, ESMA and the European Insurance and Occupational Pensions Authority (collectively the European Supervising Authorities or ESAs) published a joint statement on November 30, 2018 (the Joint Statement) regarding the Reporting Templates. In the Joint Statement they acknowledged that the Reporting Templates were unlikely to be adopted by January 1, 2019. The ESAs stated that they expected national competent authorities to generally apply their supervisory powers in their day-to-day supervision and enforcement of applicable legislation in a proportionate and risk-based manner. This approach meant that national competent authorities could, when examining reporting entities’ compliance with the disclosure requirements of the Securitization Regulation, take into account the type and extent of information already being disclosed by reporting entities. The ESAs also noted that they expected that difficulties with compliance would be solved with the final adoption of the Technical Standards and the Reporting Templates. The Joint Statement provided further that this approach would not entail general forbearance, but a case-by-case assessment by the national competent authorities of the degree of compliance with the Securitization Regulation.
The Commission finally responded to ESMA’s Final Report on December 14, 2018 their response requested amendments to the RTS, the ITS and the Reporting Templates. In particular, the Commission requested ESMA “to examine whether, at the present juncture, the no data option could be available for additional fields of the draft templates.” The Commission also noted its agreement with ESMA’s overall approach, while also signalling the need to avoid excessive burdens on reporting entities, in view of the disclosure standards being “the first instance of a comprehensive Union-wide disclosure regime for securitizations” and of the sanctioning regime in case of non-compliance. This notification from the Commission triggered a period of six weeks during which ESMA could amend the RTS, the ITS and the Reporting Templates on the basis of the Commission’s proposed amendments and resubmit them in the form of a formal opinion. The Commission’s response was again met with frustration and disappointment, mainly due to its very limited scope given the many issues that had been flagged in response to the Final Report and the volume of changes that had been requested.
On January 31, 2019 ESMA published its opinion in which it stated that it:
- Agreed with the Commission’s proposed amendments;
- Had performed a number of adjustments broadening the ability for reporting entities to use the no data options in the respective templates, based on the Commission’s request as well as stakeholder feedback, while reiterating that ‘No data’ options should be used to signal “legitimate cases” where information cannot be provided, or where the template field in question is not applicable and further that the no data options did not constitute a form of forbearance or other similar arrangement permitting reporting entities to avoid providing the requested transparency for reasons other than those covered by the specific no data options defined in the RTS and further warned that it would “closely monitor” the use of the no data options;
- Had made minor adjustments and clarifications to the template fields rather than adjusting for no data options in the fields and described a number of such measures that had been implemented;
- Had also taken note of substantial requests from reporting entities and other securitization market participants not related to the use of no data options, which ESMA believed reflected a need for additional guidance as market participants move towards the implementation of the Reporting Templates rather than a need for adjusting the disclosure requirements themselves. To this end, ESMA published alongside its opinion a first set of Q&As on its website, even before the RTS and ITS are adopted by the Commission; and
- Had also adjusted the drafting of the RTS with respect to the disclosure of inside information and significant event information by merging the inside information and significant event information templates into a single template.
Unfortunately, ESMA considered that changes to the disclosure requirements with respect to (i) whether private securitizations were covered in the disclosure requirements, (ii) the geographic scope of application of the disclosure requirements and (iii) transitional periods for the disclosure requirements, were neither within its mandate nor within the scope of the changes requested by the Commission. The Final Statement, which failed to confirm a potential transitional period, has cast doubt on how much time the market might actually get between adoption of the ITS and RTS and actually having to implement the Reporting Templates.
Certain markets, such as the European CLO market and the European trade receivables securitization market, have already begun to navigate these transparency requirements and US securitizations wanting to attract European investors have also begun to look at these provisions (raising the questions of whether US securitizations even need to comply with the RTS and ITS) but on the whole, the European securitization market is slowly digesting and adjusting to these new imperfect requirements and the hope is that once the RTS and ITS and the related Reporting Templates are finally adopted, the European securitization market will adapt and thrive once again.