The transparency regime under Article 7 of the EU Securitisation Regulation (EU) 2017/2402 (as amended) (the "EUSR") applies broadly similar disclosure requirements to public securitisations (where a prospectus has been drawn up pursuant to the Prospectus Regulation (EU) 2017/1129) and private securitisations (where no prospectus is required). Public securitisations are subject to additional requirements such as mandatory reporting via a securitisation repository but, in general, private deals such as private asset-backed warehouses and private SRT transactions, are subject to the full regulatory burden of the EUSR's transparency regime.
The European Securities and Markets Authority's ("ESMA") recently launched consultation (the "Consultation") on the proposed revision of the disclosure framework for private securitisations under Article 7 of the EUSR is the latest instalment in the ongoing dialogue on refining the EU's regulatory framework for securitisation to create sustainable growth in the EU securitisation market as part of the EU Capital Markets Union. It builds on ESMA's December 2023 consultation (the "2023 Consultation") concerning revision of the disclosure requirements and templates specified under Commission Delegated Regulation (EU) 2020/1224 (the "Disclosure RTS") and Commission Implementing Regulation (EU) 2020/1225 (the "Disclosure ITS"). The 2023 Consultation posited four options for revising the EUSR's disclosure templates as regards private securitisations as follows.
- Option A: postpone the review of the disclosure templates until the next review of the EUSR;
- Option B: introduce few refinements to the current framework to enhance disclosure;
- Option C: introduce a simplified template for private securitisation and undertake a targeted revision of the templates, aimed at streamlining disclosure; and
- Option D: undertake a complete and thorough review of the reporting framework aimed at a substantial simplification of disclosure requirements.
Noting the upcoming Level 1 review and emphasising the need for proportionality, feedback to the 2023 Consultation favoured Option C. This is in line with responses to the separate but related consultation (the "Commission Consultation") by the European Commission on the functioning of the EU securitisation framework of October 2024, which also contained proposals to simplify and streamline reporting for private securitisations.
The Consultation and new simplified Annex XVI template (the "Annex XVI Template") include some welcome features but also include some confusing and contradictory proposals which need to be refined in order to achieve the stated objective of a simplified disclosure template for private securitisations. As currently drafted, a number of the proposals could potentially involve significant compliance costs for the industry and stifle growth rather than encourage more market participants.
Scope of Annex XVI Template
The Annex XVI Template would be used to provide the quarterly (non-ABCP) or monthly (ABCP) information on underlying assets under EUSR Article 7(1)(a) for a limited catergory of so-called "European private securitisations", which are private securitisations where all of the originator, sponsor, original lender and SSPE are established in the EU. This is a significant limitation and does not go far enough to address some of the challenges of EU institutional investors investing in non-EU securitisations, which are generally treated as private for the purposes of the EUSR.
Securitisations that do not fall within the definition of "European private securitisation" would remain subject to existing requirements and must continue to report on underlying assets using the appropriate templates from Disclosure ITS Annexes II to XI.
It is possible that the scope of the Annex XVI Template may be extended however and the Consultation does ask whether the presence of the originator and sponsor in the EU should be considered a triggering factor for the requirements outlined in the proposed scope of application under the draft RTS.
What would be reported on the new Annex XVI Template?
The required detail under the proposed Annex XVI Template follows the ECB SSM notification template in terms of the key features of a deal. We set out below some key points on the information that would be captured:
- The Annex XVI Template would collect data under four sections:
- Key transaction information on the securitisation;
- Exposure and risk retention;
- Information on securitisation positions; and
- Synthetic securitisation information.
- Unlike the existing templates, the proposed Annex XVI Template is underlying asset-neutral and would apply to all ABCP and non-ABCP European private securitisations, with standardised "no data" options to be used when completing non-relevant sections.
- In a welcome reform, portfolio data would be required to be reported in aggregate rather than at asset/ individual underlying exposure level as currently required under Article 4 of the Disclosure RTS. Aggregate data would include metrics on defaulted exposures, arrears and restructured exposures. This may lead to overlap with investor reports (not currently earmarked for revision) which also capture this aggregate data. ESMA is seeking views on alternative approaches to this duplication.
- A new requirement to report risk retention information would be introduced to reduce the need for competent authorities to separately request this information. There is no equivalent requirement in respect of public securitisations and this proposal would introduce further cross-over with investor reports.
- Dedicated reporting fields are included for the disclosure of significant events for the purposes of EUSR Article 7(1)(g)(i)–(v), namely, material breach of obligations, changes in structural features, shifts in risk characteristics, loss of STS status and material amendment to transaction documents. Such event-driven disclosures would be made using the same format Annex XVI Template as is used for business-as-usual periodic disclosures, utilising the relevant no data options.
- Prescribed information on environmental performance would be required, where available, in respect of in-scope securitisations of residential loans, auto loans and leases.
- Helpfully, the draft amendments also envisage allowing the Annex XVI Template and also investor reports for European private securitisations to be made available in "at least" CSV format (rather than the common XML format). The Consultation seeks suggestions of alternative more flexible formats in respect of the Annex XVI Template.
Impact on other EUSR Article 7 obligations?
The Annex XVI Template would prescribe the simplified format for disclosures pursuant to EUSR Article 7(1)(a) only. Annexes XII and XIII, being the investor report templates required in relation to Article 7(1)(e), would remain unaltered and would still be required for European private securitisations. As noted above, there would be overlap as between the templates for investor reports and the Annex XVI Template – for example, as regards performance of the portfolio and arrears data.
There is a surprising statement in the Consultation's Purpose and Scope section to the effect that, notwithstanding the introduction of the Annex XVI Template, the "full set of 'public' disclosure information outlined in [EUSR Article 7(1)(a)]" may still be requested by investors, potential investors and competent authorities. This requirement seems to fly in the face of the stated objective of the Consultation and would have the effect of increasing the compliance burden on market participants rather than reducing it. It cannot be the case that ESMA, in a drive to simplify the reporting process, would expect market participants to comply with two sets of templates for the purposes of compliance with the requirements of EUSR Article 7(1)(a). This point requires clarification.
Frequency
The Annex XVI Template would be required to be made available for in-scope ABCP deals and non-ABCP deals on a monthly and quarterly basis, respectively and additionally without delay in respect of significant event reporting. The current practice of reporting on risk retention to regulators when requested would be replaced as part of the monthly or quarterly (as applicable) reports.
Commentary
The 2023 ESMA Consultation (and indeed the Commission Consultation) were welcomed as precursors to a necessary regulatory rebalancing of the EU securitisation regime towards a more growth orientated and principles-based approach to disclosure, focussing on all materially relevant information for informed investment decisions.
The EU securitisation market is at an inflection point and the work currently being undertaken by ESMA and the European Commission is extremely important to the future success and growth of the EU securitisation market. If reformed correctly, the regulation of securitisation and risk sharing products will help deliver greater benefits to the wider EU economy and would be a significant step towards achieving the EU's aspirations for an effective and attractive Capital Markets Union. Whilst the Consultation and the proposed Article XVI Template are welcome, more pragmatism will be required to refine the Article XVI Template into something that will make a meaningful difference to market participants.
Private securitisations are often perceived to be more flexible and less costly compared to public securitisations however they still face significant regulatory burdens. The cost of compliance with the disclosure requirements under EUSR is often disproportionate to the benefit for investors and other stakeholders. Simplifying reporting requirements for private securitisations represents an opportunity to lower barriers to entry, reduce compliance costs and make private securitisations more attractive and accessible. We hope that, through the consultation process, the current proposals to simplify the disclosure templates can be refined sufficiently to realise this opportunity.
Next steps
The Consultation will close on 31 March 2025.
ESMA intends to publish a final report and submit draft technical standards to the European Commission for endorsement by Q2 2025 and will coordinate with the European Commission to ensure alignment with any potential Level 1 changes being contemplated as part of a wider review of the EU securitisation regime.
The European Commission has publicly announced that it intends to publish a proposal for a thorough evaluation of the entire securitisation framework by early summer 2025 following its targeted consultation in Q4 2024 (see our previous article here).
