Background

Article 7 of the European Union Securitisation Regulation (“EUSR”)¹ sets out transparency requirements for originators, sponsors and securitisation special purpose entities (“SSPEs”). These are detailed further in the Disclosure RTS² and in the Disclosure ITS³, which were adopted in September 2020 and include 14 reporting templates to facilitate disclosure of all relevant data on the credit quality and performance of underlying exposures. The transparency requirements are aimed at ensuring that investors receive the information needed to make informed assessments about a transaction and, at an industry level, encourage the provision of uniform and standardised information across deals. However, there are a number of perceived flaws with the current requirements which have been subject to much industry and regulatory discussion in recent years.⁴

On 21 December 2023, the European Securities and Markets Authority (“ESMA”) published its Consultation Paper on the securitisation disclosure templates under Article 7 of the securitisation regulation (the “ESMA CP”), as tasked by the European Commission (the “EC”) in its Report on the functioning of the Securitisation Regulation (the “Article 46 Report”). The Article 46 report took into account industry comments and, though concluding that there was no immediate need for a revision of the EUSR, acknowledged certain shortcomings in the existing framework in relation to disclosure requirements. ESMA’s review of the disclosure templates considers reducing the disproportionate disclosure on private, and third-country, securitisations by creating a simplified dedicated template and ensuring adequate proportionality of transparency requirements and usefulness of data for a proper due diligence.

Perceived shortcomings of the current disclosure regime for securitisation

Securitisation is heavily regulated with more prescriptive requirements than comparable industries, such as the covered bond market, which leaves it at a competitive disadvantage. In addition to the Article 7 disclosure templates, it is worth noting that additional reporting obligations also may apply in other circumstances.⁵ Key issues with the current regime under Article 7 include:

Public and private securitisations

Private securitisations⁶ are subject to the same disclosure requirements as public transactions, albeit not required to report to a securitisation repository. Stakeholders have been spilt on the usefulness of this arrangement; some believe that the current transparency regime allows proper due diligence and market monitoring, whilst others question the usefulness of the templates, particularly for private transactions which are often negotiated with the opportunity for bilateral disclosure. Another issue is to what extent supervisors are aware of, and need prescriptive data in relation to, the issuance of private securitisations.

The Article 46 Report also discussed whether “private” deals should be more clearly defined and exempted from the transparency requirements altogether, including intra-group transactions without third-party investors.⁷ The EC did not see a reason to change the definition and to focus instead on the transparency requirements; whilst a more specific definition would be feasible, it’s view was that the problems could be addressed, at this stage, with targeted changes to the templates.

Proportionate disclosure and due diligence

There has been a divergence of views from stakeholders as to whether certain fields are redundant, whether more information might be beneficial in some cases and also as to the use of no-data options. Whilst some participants may find the information useful, the templates have been criticised for being too prescriptive, not flexible enough and requiring excessive or redundant information. There can be practical difficulties with completing some required information fields, including where the templates are not appropriate for certain asset classes. Also, loan-level data could be modified, or aggregated data permitted, for certain asset classes which are revolving, more granular or with short-term maturities, such as auto loans, trade receivables or credit card transactions. .

Administrative burdens and associated costs could be mitigated with a more proportionate regime though, as the ESMA CP points out, changes to the current regime will also result in additional administration and costs for current participants.

Third-country securitisations

Third-country securitisations, where the investor is situated in the EU and all the sell-side entities are located outside EU, have faced particular difficulties with disclosure requirements. Article 5(1)(e) of the EUSR requires EU institutional investors to verify that "the originator, sponsor or SSPE has, where applicable, made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article”. There had been calls for a more principles-based approach, or an equivalence standard to apply. However the Article 46 Report confirmed that Article 5(1)(e) of the EUSR requires that EU institutional investors must receive full Article 7 templated disclosure notwithstanding that the securitisation originates outside the EU. This has placed EU institutional investors at a competitive disadvantage in third-country markets, as third-country sell-side parties might not be willing, or able, to provide disclosure in line with the EUSR. Joint industry associations requested some relief from the EC until such time as the use of a simplified template is available.⁸ Unfortunately no relief was granted which makes it more imperative that a useful dedicated template for private- and third-country transactions be made available. Of course this means that third-country originators have the costs and administrative burden of operating under a regime now that could be subject to modifications, and associated costs, to their systems further down the line. The current and proposed treatment of third-country securitisations in the EU diverges from the UK and is likely to be more favourable in the UK, as discussed in “UK position” further below.

Consultation proposals

The ESMA CP seeks feedback from stakeholders on various aspects of the proposed disclosure templates, including their scope, format, and usability. This provides an opportunity for market participants to influence how the reporting framework can be improved to better meet the needs of both investors and sell-side players. It is possible however that ESMA may also take the opportunity, in addition to considering streamlining the templates, to consider where additional data fields might be warranted, such as in relation to climate-related data.

Matters under consideration include: (i) creating a new simplified template for private securitisations, including third-country securitisations, that is tailored particularly to supervisory needs, (ii) assessing the usefulness of loan-level disclosure for highly granular pools of underlying exposures, (iii) addressing possible technical and practical difficulties in completing the information required in certain fields, by streamlining, or removing unnecessary fields and potentially aligning them more closely with supervisor/investors’ needs and (iv) considering the possibility of introducing dedicated templates for new asset classes not covered in the current disclosure framework.

The stakeholders consulted by ESMA prior to publishing the ESMA CP took conflicting views in relation to the need of a separate template for private securitisations, with issuers and originators in favour of introducing them and investors emphasising the necessity for uniform and standardised information across both public and private deals. There is also concern that a simplified disclosure template would not necessarily lead to a reduction in cost, as the entities who are subjected to the reporting requirements would have to reconfigure their internal systems for generating securitisation data and reports, leading to associated implementation costs. In view of the diversity of opinions, ESMA has proposed four different options for implementation (the “Options”) going forward:

• Option A: Delay any changes to the disclosure templates until the next review of the EUSR, maintaining the current framework in its entirety.

Whilst having the advantage of avoiding costs of changes and avoiding overlapping with any future review of the EUSR, this option would result in a significant delay before any improvements are adopted. Failing to address the issues sooner rather than later could be particularly detrimental to investments in third-country securitisations and private securitisations in general.

• Option B: Consider introducing specific refinements to enhance the current level of disclosure and address certain limitations, including limiting the use of no-data options and incorporating additional risk-based indicators.

This removal of no-data options and the inclusion of new fields in the templates would make completion of the templates more burdensome and not address the issues identified in the Article 46 Report.

• Option C: Draw up a simplified template for private securitisations and get the market view on streamlining some annexes in the current disclosure framework, exploring areas where granularity around loan-level data can be relaxed and considering tailoring the templates to new asset classes if necessary.

This Option would entail creation of a dedicated single template for all private transactions (ABCP and non-ABCP) aimed primarily at supervisory needs, but it is unclear with respect to specific proposals as to how existing templates will be replaced. It is only considered that the new template would contain a common minimum list of fields that might capture, for example, certain information describing transactions that are also found in the current notification template required by the Single-Supervisory Mechanism function within the European Central Bank (the "ECB").⁹ Furthermore, this option seeks to explore the potential transition from loan-level disclosure towards a more aggregated-level of information for certain asset classes which are (a) revolving in nature, (b) highly granular, or (c) of short-term maturity. But such aggregation instead of loan level data shall, if at all, only apply to certain asset classes as the ESMA CP notes the essentiality of loan level data as requirements for Eurosystem collateral eligibility. This option further explores the deletion of existing disclosure templates as well as the addition of new templates for specific asset classes.

This is the Option that most closely aligns with the mandate provided by the EC to ESMA pursuant to the Article 46 Report, though it is worth noting that the potential duration and associated costs for implementation might be a hindrance. It may also not address the needs expressed by all stakeholders but it might definitely improve the position for the securitisation market compared to Options A and B.

• Option D: Conduct a comprehensive review to the disclosure framework, with the aim of adopting a single template per asset class, with a limit on the number of fields across the templates and mandatory and optional fields introduced in place of the existing No-Data Options system. The same level of information would be provided in both private and public securitisations.

This would allow for the most comprehensive review of the existing templates for both public and private deals, to tailor them to needs of all stakeholders in this sector and simplify the current framework. The drawback is that this exercise will need to be assessed for compliance with the EUSR and likely require long-term consideration and could overlap with any future review of the EUSR. It also risks additional reporting processes where participants might require additional data.

Industry responses

On 21 March 2024 a joint associations' response was published, comprising a number of industry bodies’ responses to the ESMA CP (“Joint Associations’ Response”), in favour of making targeted changes now based on Option C, with a wider review as part of any future review of the EUSR. The Loan Market Association also favours Option C in its response¹⁰. On 13 March 2024, the ECB also published its response to the ESMA CP. While the ECB broadly supports proposals to streamline the overall reporting burden and reduce the total number of reporting fields by removing those that are potentially unnecessary, consistent with Option C proposed in the ESMA CP, it made it clear that availability of loan-level data in respect of asset-back securities (ABSs) would still be a necessity, as it was crucial for analysis of risk and the making of investment decisions. The ECB also expressed concern about the use of no-data options, one of the factors leading to the level of data provided at the moment not being satisfactory. In contrast, the Joint Associations’ Response notes that “more flexibility”, as opposed to less, is needed in the use of no-data options and that changes to the use of non-data options could negatively impact the securitisation market. We support comments in the Joint Associations’ Response in this regard and believe that any changes made should try to ease the burden on the securitisation market where feasible.

Perhaps unsurprisingly, given that the ECB has been clear that a direction of travel for its monetary operations, including bond purchases, is to support the green transition¹¹, the ECB emphasised its support for the inclusion of more data linked to climate change, in order to undertake better assessments of risks in the context of sustainability. To this end, it has suggested that it might be useful to introduce dedicated templates for renewable energy assets, with the data fields in such templates to be built from input from stakeholders in the renewable energy industry. The Joint Associations’ Response does not support including additional climate risk metrics at this stage but proposes that EMSA might consider establishing a separate focus group to consider the provision of climate data in the future to understand how to address this. Given the uncertainty over what amendments (if any) may be proposed as a result of the ESMA CP, as well as the costs, which are like likely to be substantial, associated with implementing such amendments to the existing templates, it would not be surprising if some market participants would prefer to retain the current disclosure framework.

UK position

The UK on-shored the EUSR with effect from 1 January 2021 with minimum changes (the "UKSR" and together with the EU Securitisation Regulation, the "Securitisation Regulations"). The disclosure templates used in the UK are substantially the same as the current ESMA templates. The UKSR is soon to be replaced with a new framework. The UK Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”), as part of the proposed revised framework for securitisation in the UK, are considering possible “limited adjustments to disclosure requirements for ‛public’ securitisations” and, unlike in the EU, a more proportionate disclosure regime for ‛private’ securitisations so this could be an area of future divergence between the EU and UK. Formal consultations are expected [in quarter 2 2024] but initial views were sought on possible modifications following the PRA and the FCA consultations on the draft rules relating to securitisation (the PRA’s Consultation Paper 15/23 – Securitisation: General requirements of 27 July 2023 and the FCA’s Consultation Paper 23/17 of 7 August 2023). A number of factors to be considered were highlighted in a joint association response to these consultation papers by Association for Financial Markets in Europe (“AFME”), UK Finance and CREFC Europe which we hope will be taken into account in these consultations.

In relation to third-country securitisations, the UK position differs from the EU position. The UKSR currently requires that disclosures provided in relation to non-UK securitisations are “substantially” the same as under Article 7 of the UK Securitisation Regulation. The proposed rules replace this with a requirement for “sufficient” disclosures to assess risk, with access to further information. In terms of what is “sufficient”, the FCA and the PRA each provide a list of information that must be included as a de minimis. The jurisdictional scope of the UKSR and ambiguities as to interpretation of what is ”substantially” the same have been problematic for the market. Uncertainty in this area, and requirements that have not corresponded with those familiar to third-country originators, have often resulted in third country transactions not targeting UK or EU investors or including disclaimers in documentation that disclosure and on-going reporting may be non-compliant and each relevant investor should make its own decision on whether to invest. As with the EU, there have been calls for a more principles-based approach or even an equivalence standard to apply but this clarification is a welcome development.

Next steps

The ESMA CP consultation ended on 15 March 2024, following which there should be more clarity on the views taken by industry players with regard to each of these Options. ESMA will assess the feedback in the various Options and also consider whether any combinations of such Options are possible.

The FCA and PRA consultations are awaited but it is unlikely that any changes will be finalised before 2025.

For both the EU and the UK, regulatory changes will take time and, once finalised, market participants will need a transition period in which to implement those changes from a practical perspective.

Closely linked with the transparency regime are the requirements on investors to conduct due diligence. In its Article 5 Issues Report, AFME highlighted a number of issues faced by institutional investors when complying with their obligations under Article 5 of the Securitisation Regulation. ESMA is expected to produce a consultation on guidelines on due diligence requirements under the EUSR this quarter which is awaited with interest.

Final thoughts

The ESMA CP, and steps being taken by the FCA and PRA, represent a significant step towards addressing long-held market concerns. It should be possible to streamline the disclosure process without compromising investor protection or supervisory needs. Any refinements that can simplify the requirements, in particular in respect of private securitisations, would be welcomed by many market participants. In addition to the costs associated with this, this creates an administrative burden that is not necessarily warranted in all cases. Securitisation can be of huge benefit to the wider economy, and its importance as a funding tool in order to fund the move to achieve net zero, as highlighted by Christine Lagarde in a speech in November 2023, on the importance of securitisation for EU capital markets union.¹² This could be all the more important as the EU seeks to fund its transition to net zero over the coming years. In order to meet its full potential, targeted changes are needed in a number of areas and the modification of burdensome transparency obligations is one area which could help facilitate the use of securitisation for a broader range of market players.

For more information on some of the points above please also see:

Smarter, not harder - a new securitisation framework for the UK - Hogan Lovells Engage

ESG securitisation disclosure – a moveable feast - Hogan Lovells Engage

References

1 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation.

2 Commission Delegated Regulation (EU) 2020/1224 supplementing Regulation (EU) 2017/2402 of the European Parliament and of the Council with regard to regulatory technical standards specifying the information and the details of a securitisation to be made available by the originator, sponsor and SSPE

3 Commission Implementing Regulation (EU) 2020/1225 laying down implementing technical standards with regard to the format and standardised templates for making available the information and details of a securitisation by the originator, sponsor and SSPE

4 The Final Report of the High Level Forum of June 2020 identified areas that should be considered by the EC including due diligence requirements for public and private securitisations, proportionate disclosure and due diligence and availability of no data fields in the templates. The Article 46 Report recommended that ESMA should “in particular seek to address possible technical difficulties in completing the information required in certain fields, remove possibly unnecessary fields and align them more closely with investors’ needs. As part of this work, ESMA should consider whether information on a loan-by-loan basis is useful and proportionate to investors’ needs for all types of securitisations”.

5 The Final Report on draft Regulatory Technical Standards on STS securitisations-related sustainability disclosures (“Final RTS”), published by the Joint Committee of the European Supervisory Authorities (“ESAs”), on 25 May 2022, propose a form of SFDR-aligned template in relation to residential and automotive loans, that is contemplated as a stand-alone document for now, separate from the current Article 7 templates. The Final RTS closely align certain voluntary disclosures, for residential and automotive loans, under the EU Securitisation Regulation’s STS regime with the SFDR. Regulatory reporting requirements for securitisation transaction ESG data is currently contained in Regulation (EU) 2017/2402 (the "EU Securitisation Regulation") which requires the provision of limited environmental performance metrics (where available) in respect of residential and auto portfolios for simple, transparent and standardised (“STS”) securitisation transactions.

As securitisations often include underlying assets that could impact climate, the European Supervisory Authorities and the European Central Bank want to enhance disclosure standardisation for securitised assets and have, in a joint statement on disclosure on climate change for structured finance products (the “Joint Statement”) called on originators, sponsors and issuers to be proactive and collect data at the time of loan origination that investors need to assess ESG risks and fill in the voluntary climate-related fields in the existing securitisation disclosure templates. Additional disclosure will also be required for any securitisations availing themselves of the [EU Green Bond standard].

European Significant Institutions, acting as originators/sponsors of a securitisation transaction are advised by The European Central Bank to comply with its notification practices, as set out in its “non-binding” Guide on the notification of securitisation transactions in order to provide the ECB with information needed for the supervision of compliance with Articles 6 to 8 of the Securitisation Regulation (as specified in Article 7) in relation to all securitisation transactions originated after 1 April 2022.

6 Private securitisations are those where a prospectus is not required under the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC as set out in Recital 1 of the Disclosure RTS.

7 The European Supervisory Authorities’ Joint Committee Securitisation Committee supported a refining the definition that would, for example, exempt specific private transactions, including intra-group transactions without third-party investors, from transparency obligations.

8 2022-Securitisation-Regulation-Request-for-guidance_Article-5-1-e.pdf (iacpm.org)

9 Originators or sponsors, for private and public securitisations, notify the SSM of the adherence of these transactions to Articles 6 to 8 of the EUSR using this dedicated template.

10 https://www.lma.eu.com/news-publications/press-releases?id=213

11 ECB takes further steps to incorporate climate change into its monetary policy operations (europa.eu)

12 A Kantian shift for the capital markets union (europa.eu)