Anyone interested in the current state and future development of securitisation in the EU will want to, and should, read Monday 10 October’s overdue 27-page Article 46 report from the European Commission. There is some good news, especially the heralding of reduced disclosure requirements for private issues, and the rejection of the controversial suggestion in the ESAs’ 21 March 2021 opinion about sell-side responsibility where there is a mixture of EU and non-EU sell-side parties. The rest is more mixed.
Reduced disclosure requirements
ESMA has been invited to review the existing disclosure templates with a view to simplification where possible – most respondents thought there were unnecessary elements in the data fields - and more importantly, the EC has accepted that requiring private securitisation disclosures to use the required templates is excessive, and has invited ESMA to come up with a much scaled-down template for private securitisations which is tailored to the requirements of regulators, not investors (who, as the market has been saying for a long time, are able to bargain for whatever disclosure they want). This “could replace the existing templates for all private securitisations”.
Private transactions had been exempted from complying with the detailed disclosure requirements under the pre-EUSR regime, and when ESMA initially consulted on disclosure, that was its position. It then changed it, to everyone’s surprise, putting private deals in scope, on the basis that “using the technical standards as a vehicle for defining different categories of information to be provided for public versus private securitisations, on the basis of ‘the holder of the securitisation position’, would not be within the scope of ESMA's mandate". The EC has now stressed that having different templates for private and public securitisations is legally possible, on the basis that Article 7(3) of the EUSR allows for the development of templates “taking into account the usefulness of the information for the holder of the securitisation position” – a point which had been forcefully made by AFME.
The ESAs’ opinion expressed the view that where there was a mix of EU and non-EU sell-side parties, the risk retention and due diligence obligations should be assumed by an EU party, so that there was a responsible entity within the scope of supervision. The EC rejected this (rightly, because the legislation does not support this approach), although non-EU sell side parties cannot ignore the EUSR when and if they want to distribute to EU investors, since their Article 5 due diligence obligations indirectly require compliance (see further below)
The dismissal of any equivalence regime for STS (and indeed as regards disclosure) was unsurprising. It could only apply to the UK, and it seems to have gone without saying that this would not happen. There is almost three times as much text devoted to “sustainable securitisation”- where the EC sees no case in the short or medium term for a special “sustainability” label for securitisations – as there is to equivalence: readers may draw their own conclusions. The accompanying 60-page summary of responses report notes that most respondents had been impacted by the lack of recognition of non-EU STS securitisation (typically, being prevented from purchasing some UK- or US-originated securitisations because they would face higher capital charges) but their call for an equivalence regime for UK STS was seemingly outweighed by the views of public authorities, two of which cautioned that this “could encourage investment in third country securitisation instead of enhancing the EU securitisation market”.
EU investors’ disclosure requirements for non-EU issues
The EC agreed with the ESAs’ view, that Article 5(1)(e) does require EU investors to obtain Article 7-compliant disclosures before investing in non-EU issues. Market participants had taken different views about the vexed question of Article 5(1)(e) compliance. It had been difficult to find a satisfactory middle ground between the two possible interpretations of “where applicable”, and difficulties had particularly arisen as regards the requirement for loan-level information, which is not required, nor market practice, in the USA save for certain types of public issue (and apparently not in Australia and Japan either).
The ESAs themselves had admitted that "the current verification duty laid out in Article 5(1)(e)… may be overly inflexible for third country securitisations" and recommended that it "should be reassessed to determine whether more flexibility could be added to the framework without undermining its ultimate objective", whilst recognising that amendments to the EUSR itself would be required to do this properly. However, the EC rejected the June 2020 High Level Forum on Capital Markets Union's suggestion that EU investors should be allowed to judge for themselves whether they had sufficient information to satisfy Article 5, and did not even allude to the suggestion in the ESAs' Joint Opinion of an "equivalence" regime for transparency requirements in relation to third country securitisations.
The EC accepts that this “de facto excludes EU institutional investors” and that “the issue might deserve thorough consideration in the context of a future amendment of the Securitisation Regulation”. Until that day arrives, the EC can only offer some lukewarm comfort, that the envisaged reduction in the Article 7 disclosure requirements (see above) “might help reduce the competitive disadvantage for EU institutional investors”.
Small (sub-threshold) AIFMS may qualify for a de minimis exemption from several aspects of the AIFMD, but the EC has no doubt that both they, and and non-EU AIFMs marketing or managing funds in the EU, constitute “institutional investors” for EUSR purposes, and that they should, because Article 5 is there to protect EU investors.
The response summary report notes the views of industry respondents that the absence of non-neutrality factors in the US framework (unlike the CRR supervisory parameter “p”) created an uneven playing field, and that the current non-neutrality levels in SEC-IRB and SEC-SA were punitive, and disproportionate in comparison with covered bonds. Public sector stakeholders, perhaps unsurprisingly, “generally disagreed”. This topic is the subject of a separate review by the EC which has not yet concluded, and once it is, the EC “will assess the appropriateness and convenience of potential amendments to the securitisation prudential framework”.