ESMA's much-anticipated proposals to reform the quarterly reporting templates were issued on 13 February. They seem to offer less of a solution than the market has been asking for.
Background
When the European Commission issued its October 2022 Article 46 report, it invited ESMA to draw up a dedicated, scaled-down, template for private securitisations which was tailored to the requirements of regulators rather than investors (who, as the market had been saying for a long time, are able to bargain for whatever disclosure they want in private securitisations).
The ESMA consultation paper which emerged on Thursday 13 February contains a consultation draft amendment RTS which sets out the private disclosure template, in the form of a new Annex XVI which would be used to provide the quarterly information on underlying exposures under Article 7(1)(a). ESMA plans to finalise this and submit it to the EC in Q2 of 2025.
It represents a relatively simple "quick fix" along the lines of the "Option C" described in ESMA's December 2024 feedback statement (to produce "a simplified template for private securitisation" and undertake "a targeted revision of the templates, aimed at streamlining disclosure") bearing in mind that the current holistic "Targeted consultation on the functioning of the EU securitisation framework" (regarding which, it is understood that the EC aims to publish an evaluation and impact assessment in response to it in Q2 of 2025) will consider the level 1 text of the EU Securitisation Regulation itself.
European private securitisations only?
Readers of ESMA's draft amending RTS will note a new definition: a "European private securitisation", which is one for which no prospectus has to be drawn up in accordance with the Prospectus Regulation and "where the originator, sponsor, original lender and SSPE are established in the Union". Use of the new Annex XVI is only permitted in the case of a European private securitisation. The Article 7(1)(a) reporting for any other securitisation – say, of assets originated by an entity established in the USA or the UK – would continue to have to be done using the existing templates in whichever of Annexes 2 to 10 is relevant; and on a loan-level basis.
The ESAs’ Opinion to the EC on the Jurisdictional Scope of Application of the Securitisation Regulation in March 2021 made it clear that EU investors needed to verify (under article 5) that disclosures were compliant with article 7, including that they were done using the relevant Article 7 template. As the ESAs pointed out, this meant that unless institutional investors in the EU were specifically targeted and ESMA template reporting was adopted "it seems very unlikely, or at least very challenging, that EU-located institutional investors would currently be able to discharge the requirement set out in Article 5(1)(e) of the SECR in relation to third country securitisations, as a result of which they will not be able to invest in them".
Since then, the European Commission Article 46 report in October 2022 promised medium-term relief in relation to private securitisations in this regard. The EC noted that Article 5(1)(e), in conjunction with the rules laid down by Article 7 de facto excluded EU institutional investors from investing in "certain third-country securitisations" – such as the USA - "because the third-country sell-side parties might not be interested in providing the necessary information according to the procedures set out in Article 7". The EC noted that the wording of articles 5 and 7 might deserve thorough reconsideration, but that in any event, "the envisaged measures to amend the technical standards that set out the transparency requirements of Article 7… might help reduce the competitive disadvantage for EU institutional investors. This is because this will make it easier also for sell-side parties from third-countries to provide the required information".
Against this backdrop, ESMA's suggestion to limit use of the proposed simplified template to all-EU issues is a puzzle. The EC said in its Article 46 report that this “could replace the existing templates for all private securitisations”, but in its present draft form, this would not be the case, and it would be unlikely to help reduce "the competitive disadvantage for EU institutional investors". There is no explanation for this proposed approach other than the brief statement in recital (4) of the draft amendment RTS that these are "different both in terms of definition and scope from third-country securitisations". The thinking may be that, whilst we await the outcome of the level 1 review, there should be a sell-side entity in scope of Article 7, but this misses the point as regards EU investors and non-EU securitisations.
An additional feature that may limit potential benefits of the private securitisation disclosure regime is that ESMA proposes that originators, sponsors and SSPEs of private transactions would still be required to provide the full set of ‘public’ disclosure information outlined in Article 7(1)(a) of the SECR to investors, potential investors and competent authorities upon request. If an originator has not established the systems necessary to provide such reporting, responding to such a request may be difficult. If the possibility of receiving such a request means that transaction parties have to set themselves up in a way that enables them to comply with the full public disclosure requirements of the SECR on demand, many of the benefits of falling within the reduced disclosure regime would surely be lost.
The content of the proposed template
Readers may remember that the March 2024 response from the ECB to ESMA, inevitably adopting a supervisor’s perspective, had emphasised that proper analysis of the risks associated with a securitisation required access to relevant information, and that the more granular the information, the more thorough the analysis which could be performed, but it did accept that a scaled-down template for private securitisations might be based on the ECB's SSM notification template, and ESMA says – and it seems to be the case - that the new Annex XVI has been drafted having regard to this (and, as EMSA puts it, has been "enriched" by reference to other templates, including the Dutch AFM's private securitisation notification and the private securitisation form contained in the January 2019 joint PRA and FCA direction).
The required detail on the underlying transaction follows the ECB SSM template as regards matters such as the main parties, the key characteristics of the securitisation, the portfolio's main currencies, jurisdictions, exposure classes, and the risk retention method, and the major addition is to ask for breakdowns of defaulted, past due and restructured amounts (by month, up to 6 months past due). It also suggests, perhaps more dubiously, that available information on environmental performance should be reported.
The significant improvement as regards Annex XVI is that this information is to be provided on an aggregate basis, and not in relation to each individual underlying exposure, as is presently the case under article 4 of the Disclosure RTS.
Article 7(1)(e) reporting unaffected
Annex XII – the quarterly investor report template required in relation to article 7(1)(e) – remains required, and unaltered, even for European private securitisations. There is some overlap between Annex XII and Annex XVI – for example, as regards performance of the portfolio and arrears data – which seems unnecessary. The May 2021 Joint Committee report had suggested that at least some private securitisations might be exempted from all the Article 7 transparency requirements, and the European Commission considered (in its October 2022 Article 46 Report) that a simplified, dedicated template for private securitisations "could replace the existing templates for all private securitisations" (emphasis added) but ESMA's approach does not do this.
Conclusion
ESMA's proposals could streamline the reporting requirements for certain transactions. However, they also exclude a large number of transactions that market participants had been hoping would benefit from any reform of the private securitisation reporting regime and do not completely remove the possibility that a full set of public disclosure information would need to be provided at some point during the life of the transaction. Accordingly, we anticipate that interested parties will be keen to voice any concerns to ESMA and as such we would note that the deadline for responses to the consultation is 31 March 2025.
and then 