On Friday January 17, ESMA opened a period on assessment of data completeness of Securitization Disclosure. The consultation paper can also be accessed on ESMA’s web site.

Each party reporting data under Article 7 of the Securitization Regulation may use different No Data option for fields it cannot populate (each option disclosing the reason for its use, e.g. ND1 meaning that required information has not been collected because it was not required by the lending or underwriting criteria at the time of origination). In order to keep up the information value of the disclosures, ESMA limits the use of the different No Data options. The core of the new consultation deals with a calibration of acceptance thresholds for the use of No Data[1] options in the disclosure templates. ESMA defines two root causes of No Data usage – Legacy Assets and Legacy IT Systems. The first one represents a situation where the reporting entity lacks most of the data for a limited number of loans granted whereas the later one would be referred to if a limited number of fields is unavailable across many exposures. These thresholds will be applied to all asset classes from templates for underlying exposures, not including Investor reports (Annexes 12 and 13) and Inside Information and Significant Events (Annexes 14 and 15) and are expected to change over time with a trajectory towards increased data completeness.

The consultations paper deals in greater detail with data analysis and requests for a feedback on proposed calibration of initial thresholds for data from both Legacy Assets and Legacy IT Systems. Further to his, ESMA opens a discussion around threshold revision process without making any specific suggestion about the timing.

It also worth noting that ESMA does not expect the Securitization Repositories to check for data completeness for non-STS transactions issued prior to 2019. Only public securitizations issued after Jan 1, 2019 or deals seeking the STS label will be subject to the aforementioned data completeness requirements.

ESMA has announced to close the consultation period on March 16 and evaluate all feedback collected. At PwC, we expect to see ESMA’s follow up on this topic later in Q2, 2020, for which we will publish our detailed opinion via a separate blog entry.

For more information on securitization markets, please feel free to get in touch with your PwC’s subject matter experts.

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] ND1-4

Dear readers,

The first year of our blogging activities concerning Securitization and Structured Finance Issues is over. We have received quite some feedback from you and would like to thank you accordingly. Knowing that our topics are of interest to the Securitization community is key for us and guides us to compile not only informative but also relevant posts.

Therefore, our first post of 2020 will provide you with a short recap of what happened in 2019 and our expectations of the key market developments for 2020. We welcome your input on this and will provide you with an update on our expectations at the end of this year. As always, we take a regulation-driven look and analyze its effects on market developments.

Stephan, Philipp & Petr

2019 short recap

2019 was one of the most important years for the Securitization markets since 2009. New regulatory provisions for Securitizations came into effect and – unlike to what had happened in recent years when new regulation was introduced – markets saw an increase in activity.

Their first reaction to the new regulation was surprisingly positive. Even an increase of risk weights for the better-rated senior tranches (moving from a floor of 7% to 10% means an increase by over 40% after all) while more subordinated tranches profit from lower risk weights in many cases, depending on the approach used (interestingly, under SEC-ERBA it is not possible to calculate a risk weight of exactly 1250% for a first loss piece due to the formula’s math but the resulting risk weight will remain some percent below 1250%). The reaction of the markets was positive however. This was probably due to investors valuing the decisive step to higher transparency which the disclosure requirements introduce, independently of whether the transaction is STS or not (although STS transactions fulfill even higher transparency requirements than other transactions). While there was little activity in the first quarter, STS transactions started to appear with a clear trend visible in the second half of the year.

Despite total volume issued in 2019 was lower than in the previous years, we could observe a growing ratio of publicly placed to total issuances which continues to follow the trend from previous years. This is clearly a positive signal demonstrating a healthy securitization environment.

Even though we do not expect final 2019 issuance (as soon as Q4 numbers are available), to reach the heights of the previous years, we still see the market positively. Lower issuance in 2019 was caused by almost ceasing market activity in Q1 as a cautious as well as preparatory reaction to new regulatory rules. During that period during the impression was that markets were literally gaining momentum for the issuance of transactions which had been under preparation for months. Market pick-up can be seen form March on where both “classic” transactions as well as STS deals started being issued. The STS label became quickly recognized and used by many originators. The following figure illustrates its growing popularity throughout 2019.

2020 Expectations

Peak regulation most likely reached Regulation activity has been going on since Securitization Regulation and the CRR Amendment came into effect in January 2019. EBA issued, among others, draft technical standards on Weighted Average Maturity and STS for Synthetics or its Opinion on NPE securitizations while ESMA published their Draft Technical Standards on the templates for disclosure under article 7 of the Securitization Regulation. Although it seems like a lot of additional regulation and thus business as usual, the list for 2020 has become shorter. We expect to see work on the application of Article 7 for third country issuances, a finalization of the STS for Synthetics and – towards the end of the year – a new draft of the DP on Significant Risk Transfer (see (4)). ESMA will start the process of licensing Securitization Repositories (see [Link]). Although this sounds like a lot, we clearly expect the regulation activity to slow down in 2020 compared to the past years. This will give market players the possibility to further develop their business under existing rules and develop market standards for STS and other open issues (e.g. Data Quality under Article 7 or expectations on Cash Flow Models).

1. Loan-level data becomes the topic of the day

Loan-level data or underlying exposures, as commonly being referred to by ESMA, will in 2020 find its way to regulators and investors in two formats – by ECB templates and newly by ESMA templates. Even though the reporting logic is similar, the data reported differ to some extent (depending on asset class). In general, the new ESMA templates cover a wide range of new data fields which we expect to be quickly leveraged by investors and regulators to better understand embedded risks. Further, we expect ECB to incorporate ESMA templates to its eligibility requirements[1] defining what is an acceptable collateral for ECB liquidity. Is effectively means that ECB will gradually move away from its own loan-level data templates over the next years, likely starting in the second half of 2020.

2. STS takes over public transactions

The 2019 trend towards the issuance of STS transactions will gain additional momentum. Big market players have already done their first issuances in 2019, as illustrated by Figure 3. Smaller players will now learn to achieve STS compliance. 2020 will also see a further increase of the use of third-party verification agents who, after their first verification, will help smaller players by spreading Know-how gained in 2019. A specificity of the German market, smaller Cooperative and Savings Banks without an individual capital market access will enter the market via private transactions hosted by their respective core institutions (DZ BANK and the Landesbanken). Relevant asset classes will be car loans and leases at first with MBS assets classes next in line.

Besides cashflow securitizations, the success of STS and thus the principles governing it (a better understanding of each transaction leading to enhanced market resilience from policymaker’s perspective) will also depend on the further development of STS for Synthetics. Although in the end a decision taken by COM (not in 2020), in the course of this year market players will gain insight into the political sphere´s appetite to extend STS to other transaction types. This will have impact on the further development of the market for Synthetics and thus the availability of efficient solutions for SRT (see (4)). We do not expect a final decision on the matter in the course of 2020.

3. SRT is back on the agenda

Basel IV, supervisory capital add-ons as result of the SREP process (in many cases due to IT / Data deficiencies, see (2)) and the macroeconomic environment will see a rise in securitization transactions targeting risk transfer. This will lead to each risk transferring bank developing its own understanding of compliance with the 2017 EBA DP on risk transfer. Under market conditions of increasing demand for SRT, ECB will communicate its own view of the 2017 DP bilaterally. Lawyers and professional services firms will spread the word, moving the system to a more homogeneous implementation of the 2017 DP. EBA is expected to take market developments into account and will likely issue an updated version of the DP towards year end. EBA will most likely position itself concerning tranche thickness, commensurate risk transfer and structural features. Whether EBA offers one or more approaches such as it did in the 2017 DP, towards the end of 2020 market players can be expected to have gained a substantially better understanding of the way SRT takes that at the beginning of the year.

4. Registration of multiple Securitization Repositories

The first and currently only Securitization repository was established as a part of the ECB’s loan-level data initiative[1] in June 2012 and became fully operational in January 2013. Since then, it has been the only place to store and access underlying information on collateral backing publicly issued ABS bonds. The Securitization Regulation, however, brings forth a provision which allows ESMA to register more Securitization repositories, eventually leading to decentralization of the information curtail for all data users. We are likely to see more than one Securitization Repository registered by the end of 2020. It is yet to be seen whether de-monopolization of this business justifies the costs and efforts made by investors, supervisors, rating agencies and researchers to acquire relevant information and data from multiple sources and will as such enhance transparency and resilience of Securitization markets. It is unlikely that ESMA will reveal its interpretation of the related regulation in 2020, so cost structures originating from Repository-stored data use will remain an open issue during 2020. Further, we expect ESMA to finalize its consultation period for data completeness scoring which will consequently be implemented by the Securitization Repositories. Given ESMA’s intention to gradually increase the scoring requirements we expect this to create dynamics for the originators, leading eventually to enhanced data availability for investors. We expect ESMA to release its first data completeness thresholds in second half of 2020 with further revisions to them in the coming years.

Stephan Lutz – Mail: stephan.x.lutz@pwc.com

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] See press release

The objective of this article is to explain how private[1] securitization can obtain the STS label by complying with the legal disclosure requirements. Following paragraphs aim to outline areas of concern to any reporting or in other way designated entity that wishes to issue and maintain STS label for its securitization. According to Article 7 (2), it is the originator, sponsor or special purpose entity that shall make the data available to third parties. As the interpretation logic between ABCPs and non-ABCPs does not differ significantly, for the purposes of this paper, we further continue with analysis of STS criteria for short-term[2] securitizations only.

In order to fully understand these requirements, this document refers to Regulation (EU) 2017/2402 (Securitization Regulation) and Regulatory Technical Standards (RTS), published by ESMA. The RTS concerning the use of Securitization Repositories (SR) is not legally binding yet[3], therefore some changes altering its interpretation may take place upon finalization.

Any ABCP securitization, irrelevant of its private of public nature, can obtain STS label if Articles 23-26 are met. Further, compliance with Article 7 (Disclosure) is required as this Article is being referred to within the STS criteria. Nevertheless, compliance with Article 7 and Articles 23-26 only will not automatically grant the STS label to a given securitization unless the full regulatory text is considered. An analysis of full Securitization Regulation is beyond the scope of this paper, therefore only dependencies between Article 7 and the STS Criteria will be further discussed.

STS Criteria

STS can be considered an additional layer on top of regulatory requirements for non-STS securitizations. It shall signal fulfillment of more strict rules, demonstrating higher quality of the underlying collateral and sponsor’s commitment to given issuance. STS criteria outline requirements for any European securitization that seeks the STS label. These requirements are defined directly in the Securitization Regulation in chapter 4, section 1 for non-ABCP securitizations and section 2 for ABCP securitizations. Each of these sections breaks down into four articles listing conditions for simple, transparent and standardized issuances.

A short-term transaction that complies with Article 24 and a short-term programme that complies with Articles 25-26 shall be considered STS[4]. None of the aforementioned requirements forbid private securitization to obtain the STS label. It is therefore correct to state that compliance of securitization in question with Articles 24 – 26 shall grant the STS label to both public and private ABCP securitization.

It worth noticing that the STS criteria (Articles 24 – 26) contain a set of specific requirements (e.g. weighted average life) but also cross references to other Articles. Specifically, Article 25 (5), (6) require compliance with provisions stated in Article 6 and Article 7, respectively. Non-compliance with interlinked provisions elsewhere in the Regulation would mean automatic non-compliance with the STS criteria.

Disclosure Requirements – Article 7

Since STS criteria did not state any limitation for securitization being either private or public, we further examine disclosure requirements. Compliance with Article 7 is a prerequisite for the STS label but also a base requirement for any transaction falling under the Securitization Regulation. Unlike the STS criteria, the disclosure requirements do differentiate between private and public securitizations. All securitizations are required to disclose:

• regularly information about underlying exposures [see (1)(a) of Article 7]
• information through supportive documentation (e.g. OC) [see (1)(b) of Article 7]
• STS notification referred to in Article 27 in case of STS securitization [see (1)(d) of Article 7]
• regularly investor reports [see (1)(e) of Article 7]
• significant events and inside information [see (1)(f-g) of Article 7]

It shall be noted, that 1) and 4) are an ongoing disclosure activity, performed on monthly basis for ABCPs. Points 3) and 4) are one-time notifications and 5) only when applicable. Listed reporting requirements shall be done through a Securitization Repository (SR) as stated in the second subparagraph of paragraph (2) under Article 7. Private securitizations, however, need to additionally provide a transaction summary as per (1)(c) and are exempt from data disclosure through a SR[5]  This is stated in recital 13 of the Securitization Regulation where the bespoke nature of private transactions and its value for the transaction parties is explained.

Article 7 further delegates the development of relevant RTS to ESMA, EBA and EIOPA in paragraphs (3) and (4). Since the disclosure requirements do not further discuss how the data disclosure will physically be carried out, we need to refer to the relevant RTS in order to understand how the disclosure must be technically conducted.

Reporting of Private ABCPs

Given the fact that STS criteria do not distinguish between private and public securitizations, the reporting rule will be driven solely by the RTS related to Article 7. We therefore refer to ESMA’s Q&A document[6] that provides additional guidance and explanation to RTS. Under Q5.13.5 ESMA states that disclosure templates[7] for significant events and inside information (Annex 15 to the RTS) are not required for the private transactions[8]. ESMA further lists templates to be used for reporting of both private and public ABCPs where it states that both public and private ABCPs shall disclose data as per Annexes 11 and 13 (underlying exposures and investor report)[9].

This essentially means, that private ABCPs, compliant with RTS under Article 7, are required to disclose underlying exposures via the data templates in Annex 11 and 13 on monthly basis. The disclosure does not have to happen through a SR, yet the data templates shall be made available directly to holders of securitization positions, to competent authorities[10] referred to in Article 29 of the Securitization Regulation and, upon request, to potential investors.

Guidance for Reporting

Our analysis confirms that private securitizations are required to disclose information about underlying exposures. This shall be done on timely basis for both STS and non-STS issuances. Since private transactions were not provided with any type of disclosure template prior to the Securitization Regulation[11], the new  standards will require a similar data-handling infrastructure as for public securitizations – IT setup for data aggregation, validation and dissemination.

In case instructions or guidance provided by national competent authorities on reporting of private securitization are not available, reporting entities are free to make use of any arrangements that meet the conditions of the Securitization. Therefore, we recommend using a private area of SR, if available, that offers appropriate infrastructure that satisfies ongoing requirements for data disclosure. We further propose to setup, maintain and regularly update data quality management system to reflect ESMA’s up-to-date minimum quality standards (discussed below). Also, such a system can later be easily used for a verification of underlying exposures as per Article 26(1) of the STS criteria.

Further, we notice that Article 7 (2)(a) requires specifically a disclosure of relevant data through a platform offering a data quality control system until the first SR is registered by ESMA. Specific requirements for functionalities of SR can be also found in relevant SR RTS[12]. Here we can see that ESMA plans to impose data quality rules comprising No Data values, interfiled inconsistencies but also STS-compliance checks for securitizations reported to SR. Even though this seemingly does not concern private transactions; as they do not have to channel their data through SR, it is likely to see similar efforts from Competent Authorities to ensure comparable quality between public and private STS transactions in the future.

Conclusion

Private ABCP securitization may obtain the STS label upon fulfillment of all relevant disclosure requirements. In order to do so, private STS ABCP securitization must follow a data disclosure schedule for investor reports and underlying exposures by using specified templates. The use of a SR for this ongoing disclosures is not mandatory and can be expected to rather depend on guidance provided by National Competent Authorities which may eventually create a heterogeneous disclosure universe across the member states.

Please contact PwC where our subject matter experts are available in case of any questions.

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] defined as those where no prospectus has been drawn up in compliance with Directive 2003/71/EC

[2] short-term securitizations refer to ABCP securitizations (Asset-Backed Commercial Paper)

[3] Final Report, published by ESMA on December 12, 2018. Endorsement from European Commission is still pending

[4] see Article 23 of the Securitization Regulation

[5] see third subparagraph of paragraph (2)

[6] Questions and Answers on Securitization Regulation, version 3 from July 17, 2019

[7] Disclosure Templates developed by ESMA for data reporting

[8] Q&A document states under Q5.13.5 that Annex 15 shall not be used, however, the information itself must be disclosed in some way

[9] See Q5.1.2.1 in Questions and Answers on Securitization Regulation

[10] National Competent Authority in Germany is BaFin. Please refer to ESMA’s full list.

[11] Disclosure of data through ABS Repository was a condition for eligibility assessment determining whether collateral can serve in Eurosystem’s credit operations. For non-eligible transactions, there was no disclosure of loan-level data required.

[12] Final Draft on SR RTS

[13] Additional Credit Claims are non-marketable asset type, comprising exposure to residential real estates or small-medium enterprises. See ECB’s Occasional Paper

Why new templates?

The European Securitization Regulation that came into force in January 2019 requires data disclosures for most securitizations originated in Europe. Compliance with the disclosure requirements will mean submission of an official set of templates of loan-level data to a securitization repository, a process that has some similarities with the disclosure of derivatives transactions under EMIR. The Regulation bestows ESMA with the power to develop the templates which then have to be endorsed by the EU Commission (EC), adopted by European Parliament and finally be published in the Official Journal as a European regulation. Only after this, the templates will become mandatory for all securitizations issued after January 1, 2019.

Just a few days ago, on October 16, 2019, EC released the official disclosure templates that were so impatiently awaited by the securitization market. It took the Commission exactly 288 days to endorse the templates since the time ESMA published their final draft on its web site. Besides the field-by-field addendum, EC further provides details by releasing an endorsed RTS where it states among others:

Private transactions are fully exempt from data disclosure though a securitization repository. Despite interim proposal from ESMA to include private transactions into disclosure requirements through repository, this effort finally did not find its way into the endorsed RTS.

Standardized identifiers will be used across all asset classes, including fields for “back-up” IDs in case the original ones can no longer be maintained. From a data user perspective, this is a very welcome feature as it allows easy data reconciliation and time series analysis.

No Data options are allowed for most of the fields in either option of ND1-4 or ND5. The meaning of individual inputs remains the same when compared to ECB’s taxonomy:

Very limited use of ND values was the main reason of rejection of the final RTS draft published by ESMA in August 2018 (“the Commission requests ESMA to examine whether, at the present juncture, the ‘No Data’ option could be available for additional fields of the draft templates”). EC seems to have viewed the templates as being too strict and inflexible to accommodate a unified standard across multiple jurisdictions in Europe. As a result, the number of fields allowing ND5 or ND1-4 increased. From our perspective, ND5 does not influence data analysis, performed by investors or regulators as it only signals non-relevance. ND1-4, however, give a room to data providers to omit some data that is currently not available for disclosure.

Template Comparison

Having the templates’ history in mind, we looked closer at the final layouts released by EC in Annexes 1-15 and compared them to the final draft ESMA submitted for endorsement in [January 2019]. Apparently, EC took the proposed templates over as drafted by ESMA with very few changes:

ND1-4 became newly available for:

• Interest Revision Date 1 (field RREL51)
• Interest Revision Date 2 (field RREL53)
• Interest Revision Date 3 (field RREL 55)

ND5 became newly available for Primary Income Currency (AUTL18).

Other fields from all remaining 9 ESMA templates remained unchanged. In our opinion, allowing RREL51, 53, 55 to potentially report no data does not hamper data analysis and risk assessment significantly. Allowance for ND5 for AUTL18 has no impact on data reported at all since primary income (AUTL16) has to be disclosed in a format of {CURRENCYCODE_3} which already includes currency denomination.

What is coming next?

We expect the European Parliament to adopt the templates in the following months. Formally, the maximum time allotted to this process is 6 months. After that, the legislation foresees additional 20 days after release in the Official Journal for the RTS to apply. Market participants that are affected by this regulation need to switch to the new templates without any delay as soon as this RTS becomes a European regulation.

At PwC, we have analyzed the templates over the past 10 months. As they differ significantly from the ECB templates for collateral purposes (being used by the market from 2013 onwards*) we do expect data inconsistencies caused by lack of clarity on field-by-field interpretation, but also technical challenges for IT departments. Additionally, ongoing monitoring and data quality issues, especially for STS-seeking deals, may become burdensome. This and other data issues may also be caused by a split legislative governance – templates and their field-by-field setup were developed by ESMA which is also mandated with data quality enforcement, whereas national competent authorities (full list here) are appointed with supervisory power concerning the compliance of data owners with the template provisions.

ESMA is entitled to impose and enforce data quality rules on the level of the securitization repository. Those rules will be primarily linked to ND1-4 values which to certain extend resemble ECB’s efforts in data completeness, indicated by ECB score. ESMA will further develop and propose rules for other fields, including ND5, interfiled inconsistencies and STS non-compliant values. This means that even though more flexibility is given by the final template layout, ESMA still retains tools to enforce more strict disclosures in the future if deemed necessary. One of them is development of a data quality threshold that will indicate a “minimum passing score” which will be calculated by the securitization repository for each incoming data tape. Falling below the threshold would mean automatic rejection of the data and thus non-compliance with the regulation. ESMA further indicates that those thresholds will evolve over time; converging to as little ND values as possible.

2020 will likely bring new ECB eligibility criteria

In March of 2019, ECB announced that eligibility requirements for loan-level data reporting in the ECB collateral framework for the ABSPP is going to be adjusted to reflect EU Securitization Regulation’s disclosure requirements. The convergence depends upon two conditions – (1) ESMA templates entering into force and (2) the first securitization repository getting registered with ESMA. The first condition will most likely be met in the following months, whereas registration of the first repository with ESMA will happen only after finalization of legal framework governing Securitization Repository. Timing for the latter is uncertain yet since this is the last open issue concerning Securitization data reporting, we believe this could happen soon.

It is likely that reporting through ESMA templates will have to take place before the first securitization repository gets registered with ESMA. During this time, the data tapes need to be published and made available to the data users through a website that meets certain criteria (secure hosting, data quality management etc.). Currently, this is being fulfilled by the largest ABS data platform and ECB’s designated repository, the European DataWarehouse.

PwC’s focus

Adoption of the new reporting standards may be challenging for some originators, namely those issuing ABCPs, CLOs or NPL as there has never before been a mandatory disclosure of these data sets. Besides this, data management, monitoring and remediation system will have to become an essential part of overall IT infrastructure on data provider’s side, irrelevant of the specific asset class. Non-compliance with templates or falling below data quality threshold could lead to a loss of ECB’s collateral eligibility, STS label and/or reputation damage.

Please contact our PwC experts in case of any questions.

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

* The ECB loan-level reporting templates apply from January 3, 2013 for RMBS and SME ABS,  March 1, 2013 for CMBS, January 1, 2014 for Consumer Finance ABS, Leasing ABS and Auto ABS, and from April 1, 2014 for Credit Card ABS.