The EU Securitisation Regulation took effect on 1 January 2019, bringing a new Simple, Transparent and Standardised (STS) label for securitisations that meet strict eligibility criteria. Arno Vink and Edwin van Ankeren, Capital Markets Netherlands, discuss what the new regulation and STS designation mean, and how firms can satisfy their expanded disclosure obligations.
The Securitisation Regulation seeks to enhance the safety, liquidity and harmonisation of Europe's securitisation market, and is a cornerstone of the EU's Capital Markets Union. To further these goals, the STS designation has been introduced to differentiate simple products from more opaque and complex ones, and make it easier for investors to understand and assess the risks of investing in a securitisation.
One potential advantage to STS status is that credit institutions and investment firms exposed to them may be eligible for preferential capital treatment under the Capital Requirements Regulation. Perhaps more importantly, the STS label is emerging as a market standard that will help attract investor interest.
Year to date, there have been 46 STS notifications of securitisation transactions, split six private and 40 public transactions. Out of the public transactions eight transactions were closed in 2018 (source: ESMA).
Securitisation Regulation & STS transparency requirements
The Securitisation Regulation imposes strict disclosure requirements (set out in Article 7 and the draft regulatory and implementing technical standards) on all securitisation transactions originated as of 1 January 2019. The disclosures must include detailed information on underlying exposures, along with investor reports.
To be designated STS, a securitisation must comply with close to 100 additional criteria set out in Articles 20-22 of the regulation. Transparency and reporting rules form a key part of those criteria – requiring originators, sponsors and securitisation special purpose entities to make information on the transaction and underlying exposures available to securitisation holders, competent authorities and, upon request, potential investors.
To satisfy the disclosure rules, institutions have to:
Compile the reporting templates
Detailed information (which varies by asset class) must be disclosed for each transaction. The information will be transmitted using standardised disclosure templates developed by ESMA (once the incoming European Parliament ratifies them, which is expected sometime in Q4 2019 or Q1 2020). Reporting parties therefore need to interpret the new technical standards, definitions and template fields to determine what should go into them.
Applicable CRA3 templates are being used until ratification takes place.
Assimilate data for different asset classes
For certain asset classes, more information has to be reported than previously. Sourcing and reporting relevant historical data may be problematic if parties have never reported on, say, energy labels within residential mortgage-backed securities. Similarly, CLO transactions are now included in the regulation's reporting requirements where they weren't before.
Populate templates with standardised data
The regulation seeks to make transactions comparable by ensuring all data is calculated and presented in the same way. Where differences currently exist – for example, in how mortgage originators present performance data such as arrears or losses – that data must be translated into the prescribed standard, as mentioned above.
The disclosure requirements also extend beyond completing the reporting templates. For example, firms need to disclose transaction information to the market pre- and post-closing to enable (potential) investors to perform their due diligence obligations.
In time the information will be disclosed via a registered securitisation repository, but as yet ESMA has no powers to assess repository applications.
Meeting the reporting demands
The skills and infrastructure needed to fulfil the disclosure obligations pose significant challenges.
Creating an efficient, automated and robust reporting infrastructure takes knowledge and investment. With reporting volumes set to rise – as new securitisations continue to grow and many parties amend pre-2019 transactions to make them STS compliant – firms' infrastructures and processes will also need built-in scalability to cope.
Time-to-market is another consideration. Securitising parties need to prepare the templates and collate information for the applicable asset classes before they can launch any STS transactions. Subsequent updates or changes to technical standards must then be monitored and quickly incorporated.
Complying with the STS rules is no easy task. But as the label develops into a market standard, securitisations that meet the rules should gain favour among investors.
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