25 June 2014

Securitisation disclosure requirements: ESMA final advice published under CRA3

Yesterday, the European Securities and Markets Authority (ESMA) published its final advice (linked here) on the implementation of certain requirements referred to in the latest package of amendments to the EU Regulation on Credit Rating Agencies (such package being commonly referred to as “CRA3”).  Among other things, the final advice document confirms ESMA’s views on the implementation of the securitisation disclosure requirements referred to in article 8b of CRA3, and includes a recommended form of the corresponding regulatory technical standards, which standards are now with the EU Commission for review and adoption. 

The final advice document follows on from ESMA’s previous consultations on the implementing measures to be made in respect of article 8b.  Such consultations raised a number of concerns, particularly with respect to scope given the proposed application of the disclosure requirements to private transactions.  Unfortunately, ESMA has not revisited its general approach on this front, although it has recommended a delay with respect to the application of the requirements to private transactions to allow for further work to be undertaken (including further stakeholder consultation) on the appropriate reporting obligations in this context.  It remains to be seen whether this equates to an opportunity to reassess the application of the requirements or the mere postponement of the problem.

Other key points contemplated by the final advice document include the pursuit by ESMA of a “one-size fits all” approach to the application of loan-level reporting requirements under article 8b (rather than a principles-based approach allowing for assessment of the relevant information on a case-by-case basis), although ESMA has moved away from previous proposals to require disclosure of cashflow models, standardised transaction summaries and certain material event information for all relevant transactions.  It is also worth noting that the final advice document indicates that compliance should not be required in general under article 8b until the start of 2017, in order to allow time for the development of ESMA’s new website for disclosures and related preparatory matters.  While this additional compliance time does not address the outstanding issues in respect of article 8b, it is likely to prove helpful to market participants seeking to come to grips with the new requirements in general.

This eAlert provides a preliminary overview of certain key points to note with respect to ESMA’s final advice on the implementation of article 8b.  We remain committed to assisting our clients in navigating the relevant issues ahead and encourage interested clients to contact us with any questions.

Background and basics

By way of background, article 8b of CRA3 provides for the introduction of new ongoing disclosure requirements for structured finance instruments.  The EU authorities have indicated that these requirements are intended to address the risk of over-reliance on credit ratings by financial market participants and to improve transparency in the securitisation markets in general.

Under article 8b of the adopted CRA3 regulation, "the issuer, originator and sponsor of a structured finance instrument established in the Union" are required to “jointly” disclose on an ongoing basis certain information relating to the securitisation and the underlying assets.  For the purposes of the provisions, “issuer” is defined by reference to the corresponding EU Prospectus Directive definition and each of “originator” and “sponsor” is defined by reference to the corresponding EU Capital Requirements Regulation (CRR) definitions.  The term “structured finance instrument” (SFI) is defined by reference to the CRR definition of securitisation, which definition turns in part on the presence of credit risk tranching in the relevant arrangement and potentially extends to a wide range of transactions.

In particular, article 8b requires disclosure on “the credit quality and performance of the underlying assets of the structured finance instrument, the structure of the securitisation transaction, the cashflows and any collateral supporting a securitisation exposure as well as any information that is necessary to conduct comprehensive and well informed stress tests on the cashflows and collateral values supporting the underlying exposures".  This wording may be familiar to market participants as it broadly tracks that used in article 409 of the CRR (which replaced article 122a(7) of the previous Capital Requirements Directive) (being the disclosure requirement which sits within the EU risk retention and due diligence provisions).  However, unlike article 409, article 8b requires disclosures to be made via a new website to be established by ESMA.  A carve-out is included for information "that would breach national or Union law governing the protection of confidentiality of information sources or the processing of personal data".

Various aspects of article 8b are unclear.  This is in part due to the fact that the article sets out only the framework for the requirements, with provision being made for further details, in relation to the content, frequency and presentation of disclosures, to be specified through corresponding regulatory technical standards.  Under article 8b, ESMA was tasked with developing a draft of the technical standards for the Commission’s review and adoption.  The document published yesterday represents ESMA’s final advice on the standards. 

Key points to note

Below is a summary of certain key points to note with respect to ESMA’s final advice related to article 8b.

  • Scope – consistent with previous proposals, ESMA has indicated that, in general, article 8b should apply to any SFI where one or more of the issuer, originator or sponsor is established in the EU, although actual compliance with the disclosure requirements should not be necessary unless a reporting template is available for the relevant underlying asset type.  The final advice includes reporting templates for RMBS, CMBS and ABS backed by one of SME loans, auto loans, consumer loans, credit card loans and certain leases and refers to the future development of templates for transactions backed by trade receivables, store cards, corporate loans and for resecuritisations, synthetic securitisations, ABCP programmes and other transactions backed by mixed asset pools.  It should be noted that, under the general approach outlined above, the requirements could apply in respect of both EU and non-EU originated transactions and to arrangements involving unlisted and/or unrated securities, notwithstanding the significant technical and policy arguments previously raised by market participants against this outcome.  The application to private transactions is particularly troubling given the nature of such arrangements and, possibly in recognition of this, ESMA has indicated in its final advice that the requirements should not apply to private or bilateral transactions until further work is undertaken by the authorities (including further public consultation and cost-benefit analysis) to develop and adopt appropriate reporting obligations.  It is unclear at this point how private and bilateral transactions should be interpreted for these purposes (oddly, the recitals to the draft regulatory technical standards refer to unlisted transactions separately).  It is also uncertain whether the Commission will accept this recommendation and whether this process will provide an opportunity for meaningful engagement with the authorities on the issues for private transactions (which issues would arguably be best addressed by such transactions being excluded from scope).


  • Timing of application – in keeping with previous proposals, ESMA has helpfully recommended that the requirements should apply in respect of SFIs issued on or after the date of entry into force of the regulatory technical standards only.  As a result, existing transactions will be outside scope in general.  In conjunction with this (and in order to provide sufficient time for the development of the corresponding website), ESMA has introduced the concept of an application date in the draft regulatory technical standards and indicated that compliance should be postponed for all relevant SFIs until such date, which is proposed to be 1 January 2017.  For SFIs issued on or after the date of entry into force of the standards (which is likely to be in late 2014) and before the application date, reporting would only be required if the relevant securities were still outstanding on the application date and seemingly on a going-forward basis only (the draft technical standards indicates in this regard that relevant entities “should not be required to keep backlogs for the information required”).  If accepted by the Commission, this later application date may provide market participants with more time to come to grips with the new requirements, although presumably there will be incentives to try to anticipate the application of the requirements and to make some provision for corresponding compliance arrangements in the context of certain transactions (including standalone term deals) from the date of entry into force.


  • Loan-level reporting; ECB templates – while it was hoped that ESMA would adopt a principles-based disclosure test under article 8b involving the application of a materiality assessment on a case-by-case basis to determine the information to be disclosed in the context of the transaction in question (similar to the test applied under article 409 of the CRR), this has been rejected.  Instead, consistent with previous proposals, a “one size fits all” approach has been taken.  Under this approach, relevant entities are required to disclose loan-level data on a quarterly basis as a matter of course (assuming the transaction is within scope and involves a relevant asset type for which a reporting template is available), regardless of the granularity of the underlying assets or other factors that might reduce the relevance of asset-level information and notwithstanding concerns raised by market participants with respect to the potential consequential sharing of commercially sensitive data in certain scenarios.  This reporting is to be done using specified templates based on the forms developed by the European Central Bank (ECB) for the purposes of the reporting requirements which apply under its eligible collateral framework.  While it is helpful that ESMA has not sought to develop its own reporting templates, market participants had hoped for flexibility to use other accepted forms (such as the Bank of England templates).  We note that it is not clear based on ESMA’s final advice that any flexibility provided by the ECB with respect to its reporting template would also exist under article 8b.


  • Other information to be reported – in addition to requiring the provision of quarterly loan-level information, ESMA has indicated in its final advice that certain other disclosures should be required under article 8b.  Consistent with previous indications, ESMA has modelled this section of the requirements on the Bank of England (BoE) transparency requirements, but certain important changes have been made as compared to the proposals.  In particular, whereas the previous proposals referred to disclosure of key transaction documents, standardised investor reports, transaction summaries and cashflow models (in each case, in terms broadly in line with the BoE provisions), the final advice document revisits these last two items and indicates that transaction summaries should not be required where the prospectus is drawn up in accordance with the EU Prospectus Directive and that cashflow models should not be required to be disclosed (instead cashflow information is to be provided via a detailed description in the transaction documents of the payments waterfalls).  These adjustments are helpful in general and are likely to be particularly welcome in the context of non-UK originated transactions where experience with the BoE requirements may be lower.  That said, certain key issues identified in respect of these additional disclosure obligations (e.g. concerns relating to the disclosure of transaction documents in a private transaction context) are not addressed in the final advice document and remain outstanding as they are closely linked to the wider issue of the scope of application.  Lastly, with respect to investor reports, we note the ESMA has indicated that the format for this reporting will be specified at a later stage through technical reporting instructions to be developed in connection with its website.


  • Event based reporting – whereas ESMA had previously proposed that relevant entities should be required in respect of all relevant SFIs to make certain event based disclosures without delay, this has been adjusted in the final advice.  In particular, ESMA has indicated that, in circumstances where the EU market abuse regime applies (which would include scenarios where the relevant securities are admitted to trading on an EU regulated market), reporting via the ESMA website will only be necessary if disclosure is required under the market abuse regime.  In other circumstances, ESMA has indicated that relevant entities should be required to disclose as soon as possible any significant change or event relating to (i) a breach of the contractual obligations relating to the SFI, (ii) structural features that can materially impact on the performance of the SFI or (iii) the risk characteristics of the SFI and of the underlying assets.  While it is helpful that ESMA has sought to take account of existing disclosure obligations under the market abuse regime, concerns remain with respect to the recommended requirements for arrangements not within the scope of the regime.  In particular, given that the requirements are not limited to non-public information, there is a concern that relevant entities may have to republish information which is already publicly available to investors and that relevant entities may be required to monitor all types of information which could be relevant with respect to the transaction risk position.


  • Designed reporting entity – as noted above, article 8b requires the issuer, originator and sponsor to jointly publish the required information.  Consistent with previous proposals, ESMA has recommended in its final advice that flexibility should be available for the issuer, originator and sponsor to designate one or more entities (including a third party) to undertake the required actions provided that the appointees remain responsible and that ESMA is informed of the designated entity’s name.  Unfortunately, ESMA has not addressed the concerns raised by market participants with respect to identifying and achieving compliance in respect of all potentially relevant entities under article 8b given the nature of the originator and sponsor definitions and the fact that these terms may extend to multiple entities and such entities may not be involved in, or have any connection to, the relevant securitisation.


  • ESMA website – little information is provided in the final advice document with respect to the new website to be established by ESMA.  That said, the draft regulatory technical standards refer to the publication in due course of technical reporting instructions relating to matters including the transmission and format of reported information.  Helpfully, the final advice document expressly acknowledges the need to provide issuers, originators and sponsors with sufficient time and information to develop adequate systems and procedures for compliance.  The document also indicates that, to the extent necessary, the reporting instructions will include instructions intended to address any data protection and other confidentiality concerns with respect to required disclosures (in particular, the final advice refers to allowing for the rounding up or down of figures and to the provision of regional area codes).  Finally, we note that while it was hoped that the ESMA website would be established as a “platform” allowing for the centralised publication of hyperlinks to underlying published information, rather than as a new forum for the full publication of relevant information (with accompanying new software systems), this does not appear to be what ESMA is working towards based on references in the final advice document to the reporting of information in a standard format “to allow for automatic processing of the data on the website”.

Next steps

The draft regulatory technical standards included in the final advice document have now been submitted to the EU Commission for approval and will not be finalised until adopted by the Commission and until confirmation has been obtained that the EU Parliament and Council have no objection to the standards.  Taking into account the usual timelines for these steps, the standards are unlikely to be finalised before late 2014.

It should also be noted that further changes could be made to the technical standards, although it is likely that ESMA and the Commission have worked together on some level to try and avoid the need for significant revisions.  Notwithstanding this, it is our understanding that changes could arise as part of the legal review process by the Commission, particularly if provisions within the draft technical standards are perceived to go beyond the primary legislative text and/or to otherwise affect matters of policy.

For the purposes of transactions closing now, once again we note that it is helpful that ESMA has indicated in its final advice that the requirements should apply in respect of only SFIs issued after the date of entry into force of the regulatory technical standards.

We encourage clients to contact us with any questions related to the topics covered in this eAlert.

Salim Nathoo +44 2030882838
Partner, London salim.nathoo@allenovery.com
Angela Clist +44 2030882437
Partner, London angela.clist@allenovery.com
Tim Conduit +44 (0)20 3088 2066
Partner, London tim.conduit@allenovery.com
Vanessa Hardman +44 2030884362
Partner, London vanessa.hardman@allenovery.com
David Krischer +1 2126106350
Partner, New York david.krischer@allenovery.com
Christian Lambie +44 2030882472
Partner, London christian.lambie@allenovery.com
Sally Onions +44 (0)20 3088 3584
Partner, London sally.onions@allenovery.com
Franz Ranero +44 (0)20 3088 2424
Partner, London franz.ranero@allenovery.com
Nicole Rhodes +44 2030884408
PSL Counsel, London nicole.rhodes@allenovery.com

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