The Joint Committee (JC) of the European Supervisory Authorities (ESAs) has published the “Article 44 Report”, which reports every three years on the functioning of the Securitisation Regulation (SECR). Against the background of the European Commission’s forthcoming legislative proposals on securitisation regulation, the report makes specific reference to possible legislative changes. The findings and recommendations of this report are therefore of particular interest.
Steps in the right direction – the key findings of the Article 44 Report
The Article 44 Report covers a wide range of topics and is extensive at 84 pages. Here we focus on the key findings of the report:
- Scope of application of the SECR:
A basic clause is recommended to clarify that all transactions involving at least one buy-side or one sell-side party based in the EU should fall under the scope of application of the SECR. No material effects are initially recognisable.
- Definition of public securitisations:
The definition of public securitisations is to be expanded. In addition to a prospectus, the tradability of the notes on EU-regulated markets and the marketing of the notes on fixed, non-negotiable terms are proposed as criteria. As a result, in particular CLOs would be classified as public securitisations in future.
- Simplification of due diligence requirements:
Due diligence is to be developed into a more principles-based approach. In future, investors should be able to rely more heavily on the STS verification by a third-party verifier, accompanied by a stronger supervision of the STS criteria. A 15-day post-documentation period is to be introduced for secondary market trading in order to promote market liquidity.
- Detailed changes to the STS requirements:
The JC sees no fundamental need to adjust the STS criteria and is limiting itself to a number of detailed adjustments, which may, however, have a material impact. For synthetic on-balance-sheet securitisations, it is being discussed whether unfunded guarantees by insurers can also achieve STS status in future, provided the insurer has a sufficiently good rating. Unfortunately, the JC refrains from issuing a recommendation and suggests that the European Commission carry out a detailed risk analysis.
- Clarification of the risk retention rules for CLOs, among others:
The ESAs have identified a need to clarify the risk retention rules for CLOs. The term “predominant source of revenues” should be clarified in the corresponding RTS and the definition of the sponsor should be extended to include the CLO manager.
- Revision of the disclosure regime:
The ESMA templates should be significantly simplified. The ESAs are in favour of moving away from loan-level data for certain asset classes, e.g. for highly granular portfolios.
- Streamlining the regulatory framework:
Consolidation of responsibilities and better cooperation and coordination between supervisory bodies are recommended in order to reduce duplication of effort and complex processes. In addition, advantages are seen in standardising the supervision of third-party verifiers at European level.
Conclusion and outlook
The ESAs’ Article 44 report contains some positive aspects that we as TSI are also in favour of, in particular the simplification of due diligence and transparency requirements. It is worth noting that the ESAs’ proposal on reporting templates under Article 7 SECR is not in line with ESMA’s recent consultation. The latter proposed a uniform private template without differentiation by asset class (see TSI kompakt of 17 February). On other points, the proposed changes should be treated with caution, as the impact is unclear. In addition, a clear positioning of the ESAs in favour of supplementing the STS criteria for unfunded synthetic on-balance-sheet transactions would be desirable, as this option would significantly expand the investor base in the market. It remains to be seen which proposals the European Commission will include in its legislative proposal. The report does not cover the major measures as capital requirements for banks and insurers under CRR and Solvency II or LCR recognition, as it focuses solely on the SECR.