European Commission publishes its review on the functioning of the EU Securitisation Regulation

On 10 October 2022, the European Commission published its report on the functioning of the Securitisation Regulation (Regulation (EU) 2017/2402) (the Report), as mandated by Article 46 of the Securitisation Regulation. On a positive note, the Commission affirms the value of securitisation to the EU financial markets, stating “The Commission remains fully committed to the aim of creating the framework for a thriving and stable EU securitisation market. Such a market is an indispensable building block of a genuine Capital Markets Union and might become even more important for tackling the challenges of financing economic activity in the significantly more difficult market environment that seems to be evolving at the moment. The Commission will therefore continue to closely monitor the securitisation market and intervene, if and when deemed appropriate, to fully reap the benefits of a thriving securitisation market for the EU.”

In the Report, the Commission has recommended that no amendments should be made to the text of the Securitisation Regulation immediately. In its view, more time is needed to get a full picture of the impact of the new framework. However, the Commission acknowledged that there is some room for fine-tuning, particularly in relation to disclosure requirements. The Commission has invited ESMA to review its disclosure templates for underlying exposures, to remove unnecessary fields and align them more closely with investors’ needs. In relation to private securitisations, the Commission has asked ESMA to draw up a dedicated and simplified template, tailored more to supervisors’ needs. This will be welcome news for the industry.

The Commission also included in the Report responses to issues raised in the European supervisory authorities’ opinion of 25 March 2021 on jurisdictional scope of the Securitisation Regulation (the Joint Committee Opinion). Helpfully, the Commission has dismissed some of the more concerning suggestions made in the Joint Committee Opinion around how the risk retention and disclosure requirements should be satisfied in transactions involving a mix of EU and third country sell-side parties. However, some EU institutional investors may struggle with the hard-line position the Commission has taken on disclosure requirements for investment in third-country securitisations (see key point 4 below), at least until there can be legislative change to the text of the Securitisation Regulation.

A key area of concern for the industry is the prudential framework for securitisation. The Report notes that the Commission will further consider possible amendments to this once it has received a response to its call for advice to the Joint Committee of the European Supervisory Authorities for the purposes of the securitisation prudential framework review. The Commission will also give more consideration to making the significant risk transfer framework more efficient, transparent and consistent.

Key points to take away from the Report are:

1. Disclosure: The Commission has invited ESMA to review its standardised disclosure templates with a view to addressing technical difficulties in completing certain fields, removing unnecessary fields and aligning them more closely with investors’ needs and to consider whether loan level data is useful and proportionate to investors’ needs for all types of securitisations.

2. Private securitisations: The Commission dismissed calls to make the definition of private securitisation more specific but acknowledged issues in relation to applying the ESMA standardised disclosure templates to private transactions. The Commission invited ESMA to draw up a dedicated disclosure template, which the Commission expects to be more tailored to supervisors’ requirements and to “simplify considerably the transparency requirements for private securitisations”.

3. Jurisdictional scope: In response to comments made in the Joint Committee Opinion, which suggested that in a mixed jurisdiction transaction the risk retainer and designated reporting entity would need to be located in the EU, the Commission dismissed such interpretation as not being supported by the legal text and confirmed that the intention of the legislation could be met through the supervision of institutional investors’ compliance with diligence obligations. This confirmation is welcome.

4. Article 5(1)(e) and availability of information on third-country securitisations: An aspect of the Report which may be unpopular among the EU investor community is the hard-line approach taken to the interpretation of Article 5(1)(e). The Commission has confirmed that, in its view, EU institutional investors will only be able to comply with their Article 5 due diligence obligations with respect to third-country securitisations where information is provided fully in accordance with the requirements of Article 7. It acknowledges that this may prevent EU institutional investors investing in third-country securitisations where the sell-side is not willing to comply with EU disclosure requirements. However, the Commission suggests that if the ESMA templates are simplified (as a result of the Commission’s request to ESMA referred to above), this might encourage more third-country sell-side parties to provide information as required. Additionally, the Commission notes that this issue deserves thorough consideration in any future amendment of the Securitisation Regulation, marking this for future review.

5. AIFM investors: The Commission has clarified the scope of the institutional investor definition in relation to AIFMs. Third country AIFMs that market and manage funds in the EU do have to comply with the due diligence requirements of the Securitisation Regulation but only in relation to the funds that the third-country AIFM markets and manages in the EU. Sub-threshold AIFMs do fall within the scope institutional investors and should comply with the due diligence requirements.

6. STS Equivalence: The Commission has dismissed the introduction of an STS equivalence regime at this time, as it states that no securitisation regime in any third-country jurisdiction could be considered equivalent to the EU’s STS framework (even the UK’s, given the EU’s introduction of an STS regime for on-balance-sheet securitisations that was not followed in the UK).

7. Sustainable securitisation: In relation to disclosure of sustainability-related information, the Commission recognised the need to develop principal adverse impact disclosures and suggested that the scope of the technical standards that are currently in development to specify what information should be provided in respect of the sustainability indicators for STS transactions should be “as wide as possible”. The Commission also took the opportunity to agree with the EBA’s view that there is no case for creating a dedicated sustainability label for securitisations in the near term, given the limited supply of green underlying assets. Instead, the proposed EU Green Bond Standard should be adjusted to be made more appropriate for application to securitisations.