European Commission Report on the Review of the Securitisation Regulation
On 10 October 2022, the European Commission (EC) published a report on the review of the Securitisation Regulation, based on their findings from a consultation with the industry and input from supervisory authorities.
European DataWarehouse, as an ESMA-registered securitisation repository, submitted a response to the consultation, providing feedback on the topics of private securitisations, due diligence, jurisdictional scope, and sustainability disclosure. The EC has also relied on data from EDW’s securitisation repository platform in assessing the use of retention methods in public term securitisations.
Whilst the EC judges the Securitisation Regulation to be fit for purpose overall, with no need for major legislative changes at this juncture, some concerns from market participants have been noted and the EC acknowledges there is room for fine-tuning on certain aspects.
The EC report focuses on aspects of the securitisation framework pertaining to the Securitisation Regulation and refers for the review of the prudential treatment of securitisations for banks (CRR, LCR) and insurance companies (Solvency II), to the outstanding report of ESA´s Joint Committee call for advice from October 2021. Once the review of the Joint Committee is delivered, the EC will assess it and potentially propose legislative changes. Any changes on the prudential front would likely be more impactful than the fine-tuning planned for the Securitisation Regulation.
DUE DILIGENCE AND TRANSPARENCY
The EC has invited ESMA to review the disclosure templates for the underlying exposures, addressing any technical difficulties in providing information for certain fields, removing any unnecessary fields, and aligning the templates more closely with investors’ needs.
Additionally, ESMA should also consider whether loan-by-loan data is useful and proportionate to investors’ needs for all types of securitisations, particularly for private deals.
The EC invites ESMA to create a dedicated template for private deals tailored to supervisors’ needs for visibility on the private market. The dedicated template would “simplify considerably” the transparency requirements for private deals, a clear positive. The EC suggests that, if the notifications submitted individually by originators, sponsors, or SSPEs create difficulties for data processing and for the performance of the data quality checks necessary for high-quality data, the recommendation of the Joint Committee report on the implementation and functioning of the Securitisation Regulation of May 2021, to register information on private deals via securitisation repositories, could be a solution once the EC decides to make a proposal to amend the Securitisation Regulation.
With respect to the definition of private securitisation, the EC deems it inappropriate to change the definition of a private securitisation in the regulation (which would lower the transparency burden). Calls for a different definition are found to be almost exclusively linked to concerns around the overly prescriptive transparency requirements.
According to the EC, no regime in a third-country jurisdiction comes close to being considered equivalent to the EU’s STS framework and the UK is actually the only one with an STS regime in place. Hence, it makes little sense to establish an equivalence regime when there is just one other country with a similar framework. As such the Commission notes it would be premature to introduce an STS equivalence regime. Additionally, the framework in the EU continues to evolve. For example, the STS framework for on-balance sheet securitisations has not been adopted by the UK and the EC deems it will only be feasible to review third-country supervisory practices once EU supervisory practices are further developed and fully convergent among supervisors. That will depend on a planned peer review, originally to have been completed by 1 January 2022 but which has since been postponed to 2024.
The EC has taken the advice of EBA that the establishment of a dedicated sustainable securitisation framework is premature, and that changes to the EU Green Bond Standard should instead be made. The European Parliament and the Council are invited to take over this recommendation.
JURISDICTIONAL SCOPE: SELL-SIDE OBLIGATIONS
The report provides useful interpretative guidance on a number of issues, without going into too much technical detail. Notably, the EC deviates from the Joint Committee’s suggestions on the topic of sell-side obligations, noting the JC interpretation is not supported by the legal text. The EC does not deem it necessary to make it so that only an EU-based entity should be able to retain risk, a market friendly interpretation in EDW’s view.
Secondly, as long as one of the sell-side entities is located in the EU, there is a legal obligation to disclose Article 7 information, and this obligation can be enforced even if the reporting entity is established outside the EU. Hence, EDW understands that there is no need for the designated reporting entity to be based in the EU.
Finally, according to the EC, Article 9 on credit-granting standards can only be meaningfully met by the credit-granting entity in the process, regardless of whether or not it is located in the EU. The EC also notes that the obligation should ideally be supervised and enforced against an EU entity and that EU investors must be made aware that this might not always be the case. Still, EU-based investors can only invest in deals that can be verified as complying with Article 9 obligations, so EDW believes the onus is really on the investor side.
JURISDICTIONAL SCOPE: BUY-SIDE OBLIGATIONS
On the topic of buy-side obligations – availability of disclosures for third-country securitisations, the Commission acknowledges that Article 5(1)(e) gives rise to questions of legal interpretation with regards to third-country securitisations. A problem arises because third-country sell-side parties might not be interested in providing the required information according to Article 7 procedures, thus resulting in EU investors’ inability to meet the due diligence requirements and consequently restricting them from investing in the specific securitisation. There is however no concrete action proposed by the EC, as they believe the proposed adjustment regarding transparency requirements (see section above) may make it easier for third-country sell-side parties to provide the required information, thus reducing the competitive disadvantage for EU investors. The EC does however note the issue “might deserve thorough consideration in the context of a future amendment of the Securitisation Regulation”.
JURISDICTIONAL SCOPE: BUY-SIDE OBLIGATIONS – ALTERNATIVE INVESTMENT FUND MANAGERS
The EC also provides clarification on Alternative Investment Fund Managers (AIFMs) acting as institutional investors (who are thus subject to due diligence requirements). According to the Commission, ‘sub-threshold’ AIFMs must be considered as institutional investors within the meaning of the Securitisation Regulation. Furthermore, third-country AIFMs that market and manage funds in the EU have to comply with the due diligence requirements for all their securitisation investments. The broad wording of the relevant legislative article will be amended to remove any legal uncertainty regarding the latter. The guidance will likely lead to more AIFMs falling in the scope of due diligence requirements under the Securitisation Regulation.
Finally, the EC also assesses the supervisory landscape in the EU with respect to due diligence, risk retention, transparency, private securitisations, and STS requirements, outlining a number of improvements on the part of supervisors. This mainly relates to greater convergence and coordination between supervisors with more guidance to be provided by the Joint Committee. The EC also agrees with a JC recommendation to develop a common EU guide on best practices for national supervisors. Clearly, any improvement and harmonisation on the supervisory side are most welcome as this ‘levels the playing field’ and ensures consistency across jurisdictions.