The European Securities and Markets Authority (ESMA) published a consultation paper in February 2014, setting out (amongst other things1) the draft Regulatory Technical Standards (RTS) on disclosure requirements for structured finance instruments (SFIs), as required under Article 8b of the Credit Rating Agencies Regulation2 (the Regulation) as amended by the Credit Rating Agencies 3 Regulation3 (CRA3). The RTS will complement the existing regulatory framework for Credit Rating Agencies (CRAs) within the European Union (EU), as implemented under or pursuant to the Regulation.

The CRA3 disclosure requirements will apply to the originator, sponsor and issuer of an SFI if any one of them is established in the EU and is in addition to (where applicable) existing disclosure requirements under the Prospectus Directive4, Article 409 of the Capital Requirements Regulation(CRR), the reporting requirements for eligible collateral under the European Central Bank (ECB) and Bank of England funding schemes, and disclosure obligations under Rule 17g-56.

Background

Article 8b of the Regulation (which came into force in June 2013) imposed the broad requirement on issuers, originators and sponsors of SFIs established in the EU to jointly publish information on the quality and performance of the assets underlying SFIs, the structure of the securitisation transaction, the supporting cash flows and collateral, and information necessary to conduct comprehensive stress tests on cash flows and collateral values. ESMA was required to set up a website for publication of such information, and to develop draft RTS (for submission to the European Commission by 21 June 2014) to specify the scope, frequency and presentation of information to be published.

ESMA released a discussion paper on CRA3 implementation in July 2013 seeking comment from market participants on specific questions relating to scope of application, type of information to be published, and frequency of disclosure. The current consultation paper includes a feedback statement summarising responses to the discussion paper.

The most significant features of the draft RTS are discussed below.

Scope of application

Despite being implemented under the regulatory framework for CRAs, the disclosure requirements for SFIs are imposed directly on originators, sponsors and issuers of SFIs, in order to address CRA3 objectives including reduction of investor dependence on credit ratings, increasing transparency and reinforcement of competition between CRAs by facilitating an increase in unsolicited credit ratings. However, as currently proposed, the disclosure requirements will apply not only to rated SFIs, but to all SFIs for which the issuer, originator or sponsor is established in the EU, irrespective of whether rated or unrated, offered to the public or subject to private placement, or admission to or location of trading and would include bilateral transactions. Application is not limited to SFIs that qualify as securities, but extends to other financial instruments such as money-market instruments (e.g. ABCP programmes).

For the purposes of the Regulation, SFIs are defined by reference to the Capital Requirements Directive7(CRD) definition of ‘securitisation’, which covers a transaction or scheme involving tranching of the credit risk associated with securitised exposures. As with the CRR risk retention and disclosure requirements (which replaced the CRD risk retention and disclosure regime as of 1 January 2014) the CRA3 disclosure requirements will not therefore apply to ‘single-tranche’ issuances. ESMA has also clarified that bonds linked to current quotes of an index or benchmark will not be classified as SFIs.

Scope and frequency of information disclosure

The draft RTS require detailed quarterly loan-level disclosure across all asset classes8. Adopting what it describes as a pragmatic approach, ESMA has taken the ECB reporting templates as a starting point, replicating most of their content (including all mandatory fields, but none of the optional fields or guidance notes) verbatim into standardised quarterly reporting templates across the following seven asset classes: RMBS, CMBS, SME ABS, Auto-Loan ABS, Consumer Loan ABS, Credit Card ABS and Leasing ABS. Although described as ‘loan-level’ templates, each also contains bond-level reporting fields in terms of the corresponding ECB reporting template. At present, templates have been produced only for the seven asset classes that are eligible to be pledged as collateral at the ECB, which do not currently include ABCP or CLOs. It is envisaged in the draft disclosure requirements that additional templates will be developed and phased in for classes of assets that cannot be attached to one of these seven asset classes. It would appear therefore that when the RTS come into force, there will not be templates in place for ABCP or CLOs and it is not clear at what date in the future templates will be developed.

In addition, the draft RTS set out general parameters for monthly investor reporting (including asset performance, cash flow allocation, status of triggers, counterparty ratings, liquidity/credit support utilisation, account balances and hedging details), as well as inputs and outputs for cash flow models to be published at closing and updated if changes to the structure (e.g. trigger breaches) impact cash flows.

A transaction summary (including transaction-, ownership- and cash flow-structure diagrams) is also to be published at closing summarising structural issues, asset characteristics, cash flows, credit enhancement, liquidity support, voting rights and transaction triggers.

Significantly, copies of all relevant transaction documents (including offering documents, asset sale agreements, servicing and cash management agreements, trust and security documents, intercreditor agreements, swaps, liquidity facilities and subordinated loans, but excluding legal opinions) are to be disclosed at closing, along with “any other relevant underlying documentation”. It is not clear to what extent the document disclosure requirement extends to loan-level documentation.

Data protection

The obligation to disclose information does not extend to where publication would breach national or EU data protection laws. In this regard, ESMA notes that the replication of the ECB loan-level reporting templates builds on the work already done in this area.

Who must comply?

As long as any one of the issuer, originator9 or sponsor10 of an SFI is established in the EU, each such party must jointly comply with the disclosure requirements, and shall jointly agree upon and designate the entity responsible for provision of information to the ESMA website. The issuer, originator and sponsor are permitted to outsource disclosure duties to the servicer or management company of an SFI but neither the designation of the relevant entity, nor the outsourcing to a third party, will release the other entities from responsibility for compliance.

From when?

The disclosure requirements will apply to all SFIs issued after the date of entry into force of the RTS which will follow endorsement by the European Commission.

Consultation

ESMA has asked market participants to consider and respond to four questions:

  1. Do you agree that issuers, originators and sponsors of an SFI established in the EU shall jointly agree upon and designate the entity responsible for providing the information to ESMA?  
  2. Do you consider that national data protection laws could impact the publication of information?  
  3. Do you consider the information requested under the draft RTS as appropriate?  
  4. Do you consider the frequency of reporting under the draft RTS as adequate?

Next steps

The consultation closes on 11 April 2014. On the basis of responses, ESMA will update the draft RTS and submit it to the European Commission for endorsement by 21 June 2014.

Reception

The industry is concerned that the level of disclosure will limit the re-emergence of the securitisation market and hinder the growth of the real economy by imposing significant costs and administrative burdens on the market.

The AFME and other industry groups are preparing a comment letter in response.