The 13 March 2024 response from the ECB to ESMA about reforming article 7 commented, amongst other things, about reforming the regime for private securitisation disclosures. As the main banking regulator in the EU, it is unsurprising that it approached the ESMA consultation from the standpoint that detailed, granular disclosure was a good thing:
“The availability of loan-level data (LLD) for asset-backed securities (ABSs) is key to improving investment decisions and performing proper risk evaluation, especially due-diligence analyses. Prudent and diligent analysis of the risks associated with a securitisation transaction is critically dependent on access to relevant information. The more granular information is available, the more thorough an analysis can be performed”.
Its view of what caused problems before the GFC is that investors had insufficient data to be able to analyse and understand such complex products, which led to overreliance on credit ratings. Arguably, this ignores one other factor: many investors would not have had the time to do the required analysis even if they had had the data. The financial exuberance in the 2000’s led to investors buying into structured deals based primarily on the credit ratings because if they didn’t, but their competitors were, then – so long as deals kept performing - they would have had hard questions to answer: so, the instinct to run with the herd prevailed.
The ECB goes on to assert that asset-level information “enables more accurate evaluation of potential risks and of the future performance of the underlying assets” and that “a lack of granular and high-quality data inhibits the quality and depth of analyses or valuations”. It notes “with concern” that the current quality of the data submitted for public issues “is not satisfactory” and that too much use is made of the “no data” answer, and that some reported data even had “highly unlikely values or values that lead to inconsistencies across fields”.
The ECB welcomes the inclusion of more risk indicators related to climate change, and cautions against a wholesale revision of the reporting regime, on the basis that it is only 3 years old: possibly at odds with the European Commission’s October 2022 Article 46 report, which had noted that “the Commission considers that the templates have been in use for a sufficient amount of time to allow for any potentially significant shortcomings to become apparent”.
Back in March 2022, we had the ECB’s “non-binding guidance” in respect of the SSM for EU "significant institutions" regarding Article 7 disclosures, setting out what it regarded as minimum standards of information necessary for it to do its job of supervising significant EU banking institutions properly when they were the originators or sponsors of securitisations. These covered information on the main characteristics of the underlying exposures and on the structure of the securitisation , and the ECB seems to suggest that for private issues, a template covering just these aspects might be adequate. It adds that:
“In principle, a change of disclosure standards for private securitisations would require a change in Level 1 legislation. A detailed legal analysis could provide clarity on this point”.
This seems to be contrary to the conclusion of the European Commission in section 6.2 of its October 2022 Article 46 report, that:
“Having different templates for private and public securitisations is also legally possible, as Article 7(3) of the Securitisation Regulation allows for the development of templates ‘taking into account the usefulness of the information for the holder of the securitisation position’”.
Query how soon we see ESMA finalise new RTS and ITS, and whether the EU’s timeline to reform the law regarding private securitisation disclosure will be significantly different from the UK’s.
and then 