The Joint-Committee of the ESAs report of the implementation and functioning of the Securitisation Regulation has just been published. As you could probably tell from the inelegant and cumbersome title of the report, this is a document that the European Supervisory Authorities (ESMA, EBA and EIOPA) are required by law to produce every three years. However, this one is important, coming as it does, at a time when the European Commission is mulling over possible deep changes to the European Union's securitisation framework.
At 83 pages, it is not a quick read. It contains much that is quite good. It contains some disappointing conclusions although none that are surprising based on public statements previously made by one or more of the ESAs. It does not contain any real "shockers" for the industry except possibly CLO-land. Finally, on some of the more tricky issues, the ESAs seemed happy to pass the parcel to the European Commission without any recommendation.
A very important point to bear in mind is that the report only deals with the operation of the Securitisation Regulation. It therefore says nothing whatsoever about prudential and capital requirement: no p factor, no floors, no Liquidity Coverage Ratio eligibility criteria, no Solvency II calibrations.
Note this is a report and not a legislative text. It does not implement any new rules but suggests approaches to the European Commission. (That said, some statements may be seen as interpretations of the law that could bind market participants)
We will try to mention some of the more salient items although, depending on which part of the market you operate, we might not mention something that is crucial to you even if not to the market as a whole.
No changes
Looking at the dogs that did not bark, we note that the report explicitly proposes no changes to the definition of securitisation or to the retention rules - including, despite a worrying paragraph musing about 20% retention for synthetics, the 5% level.
It also rejects the idea of following the UK in allowing non-EU SSPEs.
Scope
It suggests clarifying the scope of application of the regulation to any deal with an EU buy-side or sell-side party.
Public/Private
It proposes to expand the definition of "public" securitisations to include, amongst other transactions, transactions where the terms are not negotiable. Although the current definition never made much sense, should this approach be implemented, we anticipate some difficulties and happy law firms being required (and paid) to provide not necessarily straightforward opinions.
The report also proposes that private transactions be required to provide data via Securitisation Repositories.
Due diligence
Good news for non-EU issuers, in that the report proposes they need not provide information in the ESMA template format. But the report is somewhat vague when it says that the "substance" should be the same even if the "format" is not. Does it mean all the same data points, just not in XML or is there more latitude?
ESAs propose that investors no longer be required to verify STS but only if there is a third-party verification agent or the regulators seriously oversee STS compliance. I hope it is not too presumptuous to suggest the former is more likely than the latter.
More importantly, the ESAs accept that the "one size fits all" due diligence requirements should be ended in favour of a more "proportionate" approach that takes into account the correct items (eg seniority of tranche). They then promptly pass that parcel on to the Commission to define what "proportionate" means.
Synthetic/OBS
On the key issue of whether unfunded synthetic transactions should be eligible for STS, after listing the pros and cons, the ESAs decided that discretion was the better part of valour and punted the question over to the Commission for a proposal.
The ESAs then did the same regarding increasing the list of eligible collateral.
STS criteria
The report proposes a number of small but generally helpful modifications to some STS criteria.
Risk Retention
Likely to be the more controversial part of the report, the ESAs display a concern over risk retention in CLOs landing in what are effectively SPVs. They propose therefore that any retention holder must derive more than 50% of their revenue from a source other than the securitised assets.
To be noted, although this proposal is explicitly about CLOs, as formulated it seems it might catch non-bank finance houses that use securitisations to fund their books. If that is so, we suggest the ESAs issue a clarification as soon as possible, since this is one part of the report that can be interpreted as binding on market participants, being as it is a statutory interpretation.
Disclosure
The report fully accepts that the current disclosure requirements - the infamous ESMA templates - are not fit for purpose.
The report opts however for maintaining the template approach but simplifying them, rather than going to a "principles based" approach. It should be noted though that although the latter approach is rejected, it is also discussed in great detail. This might suggest that the ESAs fear the Commission might overrule them on this point and wanted to "limit the damage" should that occur.
The report therefore suggests a streamline set of templates for public securitisations and a special private securitisation set. They accept that loan level data should not be required for very granular assets. They also agree that there should be an exemption to the disclosure requirements for intra-group transactions.
Finally, they call for a revision of the ND fields. Although the mention of eliminating some may be surprising to those who have been calling for extending their use.
There is also a mention of the fact that multiple regulators have multiple reporting standards and that they should "give consideration" to creating a single one. Who said the ESAs could not be polite when addressing their fellow regulatory authorities?
Supervisory framework
Bemoaning the regulatory fragmentation across European jurisdictions and after a lengthy examination of the possible remedies, the ESAs seemed too polite to suggest a solution and wisely left the issue in the hands of the Commission: hot political potato passed.
Third Party Verification Agents
The ESAs suggest that TPVs be centrally supervised rather than just authorised. As we pointed out in our response to the Commission consultation, this suggests that we are not supervised by the French AMF who, the ESAs appear to believe, leaves us to our own devices. This comes as a surprise to us and I am pretty sure to the AMF who do indeed supervise us on a regular basis.
Conclusion
Although far from perfect, this is not a bad report and does suggest a willingness by the ESAs to reform the securitisation framework in a positive manner. This is a good start. Let us see if we can anticipate a similarly positive approach to the prudential side of the equation.
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