23 March 2015

Securitisation disclosure requirements: ESMA seeks input on private and bilateral transactions

At the end of last week, the European Securities and Markets Authority (ESMA) published a call for evidence (Call for Evidence) (linked here) to collect information from market participants about private and bilateral securitisations and the application of disclosure requirements to such transactions.  In particular, ESMA seeks feedback on the appropriate approach to the application of the (public) disclosure and reporting requirements under article 8b of the EU Credit Rating Agency Regulation to private and bilateral transactions. ESMA’s focus on this topic was expected and is to be welcomed given the significant issues presented by the application of article 8b to such transactions.

The Call for Evidence follows on from ESMA’s previous consultations on the implementing measures to be made under article 8b and the adoption and entry into force earlier this year of requirements (including loan-level reporting requirements) for newly issued public ABS backed by certain types of assets (namely residential mortgages, commercial mortgages, SME loans, auto loans, consumer loans, credit card loans and certain leases).

This eAlert provides an overview of certain key points raised by the Call for Evidence.  We encourage interested clients to contact us with any questions and to provide feedback to ESMA.

Background and basics

By way of background, article 8b of the Credit Rating Agency Regulation 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 market participants and to improve transparency in the securitisation markets in general.

Under article 8b, "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 (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.

ESMA provided its final advice to the Commission in June 2014 and recommended that article 8b should apply to any SFI where one or more of the issuer, originator or sponsor is established in the EU, regardless of whether the relevant transaction involves listed and/or rated securities, although actual compliance with the disclosure requirements is not necessary unless a reporting template is available for the relevant asset type.  However, in acknowledgement of the heightened considerations for private and bilateral transactions, ESMA indicated in its final advice that the requirements should not apply to such transactions until further work could be undertaken (including further engagement with stakeholders) to consider the additional considerations arising in connection with them from a disclosure perspective.  Helpfully, the Commission accepted ESMA’s suggested “phase-in” approach and the need for further consideration in a private and bilateral transaction context.  The publication of the Call for Evidence represents the kick off of this further work.

Key points to note

Below is a summary of certain key points to note with respect to the Call for Evidence.

  • Consistent messages on scope but proportionate application should be possible – in keeping with previous indications (and contrary to previous submissions made by market participants), ESMA notes in the Call for Evidence that it considers that article 8b applies to all SFIs where the issuer, originator or sponsor is established in the EU and regardless of whether the transaction is public or private.  As a result, ESMA further notes that it is not possible to exempt private and bilateral transactions from the requirements by means of “level 2 regulation” such as the regulatory technical standards made under article 8b.  However, more helpfully, it is suggested that “proportionate” application of the requirements should be possible in “legitimate cases” to reflect the “specificities” of private and bilateral transactions.  Such legitimate cases are described to possibly include scenarios where “certain prerogatives of the issuer (such as the protection of trade secrets) come into play”.  The acknowledgement of the need for adjustments to the requirements for private and bilateral transactions is helpful in general but the challenge now will be to ensure that the appropriate adjustments are made.  The feedback provided by market participants will presumably shape ESMA’s recommendations to the Commission in this regard.
  • Information gathering exercise – as the name of the published document suggests (i.e. call for evidence), ESMA is seeking input from market participants on a number of high-level topics and has not provided detailed proposals for comment.  In particular, the stated objectives of the Call for Evidence are to (i) “seek views of market participants and gather information that may help ESMA to define private and bilateral transactions in SFIs and to establish whether the two categories should be kept separate” and (ii) “gather evidence to assess whether the disclosure requirements could be used in their entirety for private and bilateral SFIs or whether they should be adapted”.  Again as the name of the published document suggests, feedback is sought in questionnaire format and targeted at individual institutions, with certain questions for originators and sponsors and others for investors.
  • Defining private and bilateral transactions – on the first objective described above, ESMA asks whether private and bilateral transactions should be defined by the type of procedure used for the placement of the instruments (e.g. private placement vs public offer or listing), transferability of the SFI, nature and number of parties involved in the transaction or other elements, and also seeks input on whether private transactions should be defined separately from bilateral transactions.  Feedback is sought on whether intra-group transactions should be regarded as a different category.
  • Case for proportionate or adjusted application and possible safeguards – on the second objective described above, ESMA asks for input on the types of information and disclosures that give rise to issues in a private and bilateral transaction context and why such issues arise.  ESMA also seeks feedback on whether the relevant issues apply across all private and bilateral transactions, or only in some cases.  Comments are requested on possible solutions or safeguards, such as “the use of ranges instead of specific figures or other tools such as anonymisation of confidential data”.  Consistent with previous indications, it is clear that ESMA is considering whether it is necessary and/or appropriate to develop separate disclosure templates suitable to the specific nature and features of private and bilateral transactions.  Particular feedback is also sought from investors on their due diligence procedures, including on the information that they require to make an informed assessment.

 Next steps

The deadline for responses to the Call for Evidence is 20 May 2015.

ESMA indicates that all responses received will be analysed “as part of the revision of the existing CRA3 RTS” (i.e. the regulatory technical standards made under article 8b).  This suggests that we will see as a next step the development and submission by ESMA of its advice to the Commission on appropriate amendments to the regulatory technical standards for the adjusted application of the disclosure requirements to private and bilateral transactions and how such transactions should be defined.

The Call for Evidence does not refer to the intended timing of application of the (adjusted) requirements to relevant private and bilateral transactions and so this remains unclear.

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
Fabrice Faure-Dauphin +33 140065393
Partner, Paris fabrice.faure-dauphin@allenovery.com
Vanessa Hardman +44 2030884362
Partner, London vanessa.hardman@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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© Allen & Overy LLP 2019 This document is for general guidance only and does not constitute definitive advice.
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