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. Analogously, similar situation can be observed on private ACC[13] transactions where National Central Banks did replicate data quality techniques from ABS repositories to enforce minimum data quality standards.

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.

As of beginning of 2019, the new Securitization Regulation applies. It consists of 48 articles and brings forth several noteworthy rules, concerning mostly disclosure practices and Simple, Transparent and Standardized (STS) framework.

The STS Framework

The STS refers to a set of criteria that grant an STS label to a compliant ABS transaction. The requirements are described in articles 18 – 28 and can be broken down as follows: