On September 3, 2020, the remaining regulatory technical standards (RTS) of the Securitization Regulation completed their scrutiny period and were confirmed and published by the European Parliament in the Official Journal. This legislative act comes one year and nine months after the Securitization Regulation formally entered into force and thus formalistically completes the transition from the current regulatory regime into the new one. The approved RTS will enter into force on September 23, 2020 and will bring substantial changes to the market mechanics. The following text was compiled in order to help the reader to better understand the market impact.
Establishment of Securitization Repository (SR)
The new legislation defines the final standards of application for registration of SRs as well as it sets forth technical standards relating to its operations, data collection, aggregation, comparison, access and verification of completeness and consistency. Having this RTS entered into force allowed ESMA to open application period, starting on September 23, 2020, where entities wishing to be registered as SR can submit their application. It is worth pointing out that based on Securitization Regulation it is expected, though likely in the long run, to see several SRs on the market. There is, however, no indication provided by ESMA on the limit of licenses granted or cooperation between established SRs.
In order to facilitate the application process, ESMA released in December 2019 an early guidance on the application mechanics. The document outlines all relevant information that shall be followed by entities willing to initiate their compliance check with ESMA, leading to registration as SR. Upon receipt of given application, ESMA has 20 working days to assess its completeness. After this time, the applicant will be notified of ESMA’s findings. Once the application is complete, ESMA will require additional 40 business days to examine the application’s compliance with the requirements of the Securitization Regulation. This can also include on-site visits at applicant’s premises. According to Article 12, ESMA must adopt decision no later than 40 working days after confirming the application’s completeness and this decision will come into effect on the 5th working day following its adoption – after which the SR will start to receive, store and make available securitization data. The licensing decision shall also be communicated to the National Competent Authority and the European Commission.
At PwC, we assume that this application process for the first successful SRs will take approximately six months in total. Should this assumption be correct, we expect to see the first SRs starting operations in late March 2021. The time of establishment of the first SRs will be an important milestone as it will trigger convergence of ESMA and ECB templates for ECB’s collateral eligibility, further discussed in chapter Dual Reporting of Underlying Exposures.
New Reporting Requirements
Second important piece of the published RTS deals with the new reporting regime. Starting on September 23, 2020, all European (public and private) securitization will be required to disclose detailed information about their underlying portfolios using ESMA Templates. These loan-by-loan templates use a similar logic and layout known to the market from the past years as ECB Templates. These templates were introduced by the ECB in 2014 and remain in place for the purposes of validation of the Eurosytem’s eligible collateral and as one of the requirements to qualify for the ABS purchase program (ABSPP).
Compared to ECB’s templates, ESMA templates removed all optional fields, mainly increasing requirements for data completeness and became mandatory for new asset classes such as ABCPs, NPLs and Esoteric Transactions. Also, the format in which these datasets will be made available has been narrowed down from previously used Excel sheets, CSV files and XML files to a single option – the XML format.
Detailed comparison of ECB and ESMA templates will be discussed elsewhere on our PwC Capital Markets Blog
Temporary Disclosure Requirements
Even though the first SR will be registered well after the beginning of the new reporting regime, the requirement to use the ESMA templates from September 23, 2020 onwards remains binding. Before ESMA registers the first repository, Article 7 (2) of the Securitization Regulation shall be followed, which provides further guidance on the transition period. It states, that in case of unavailability of an SR, the reporting entity shall fulfill reporting requirements stated in Article 7 (1) by using a website that:
- Provides a well-functioning data quality control system
- Has appropriate governance standards and organizational structure
- Addresses operational risk in an appropriate manner
- Ensures data protection and is capable to react promptly to data queries
- Is capable of storage of submitted data for at least of 5 years after the maturity of the securitization
Once the SR is established, it shall be used as the only option in order to fulfill disclosure requirements defined in Article 7 of the Regulation.
Dual Reporting of Underlying Exposures
As soon as the first SR is registered, all securitizations subject to Article 7 will be required to make the data available through the means of a repository. Data disclosed prior the date of registration of the first SR do not have to be resubmitted to the SR.
Notwithstanding this, use of ESMA’s templates for the underlying exposures shall begin as soon as these templates enter into force. From this day on, there will be, however, a number of originators suddenly facing a dual disclosure requirement. Besides reporting via ESMA templates, all originators seeking ECB eligibility will be required to continue reporting to ECB’s designated repository via the existing ECB templates. This practice of dual reporting is expected to be challenging for many originators because it raises reporting cost and adds complexity due to different sets of templates that must be reconcilable or at least consistent with each other. This will require the implementation of data quality and integrity rules to prevent concerns on the available data quality.
In March 2019, ECB announced an amendment of eligibility criteria which will newly accept underlying data being disclosed by ESMA templates. ECB will phase out its own templates for eligibility gradually over 3 months – 3.5 years, depending on the transaction’s vintage. ECB’s templates will no longer be applicable for securitizations originated after 2019 shortly after the first SR is registered and ESMA templates are in full use. For securitization originated prior 2019, an addition of 3 years of grandfathering period will be granted. While the fulfilment time of the first condition is still unknown, the commencement of the dual reporting will be triggered by the ESMA templates – on September 23. Should we use the assumption of six months long application period for the first SR, we can estimate following two convergence timelines:
- For securitizations originated in 2019 or later, the convergence period from ECB templates to ESMA templates will be only three months long and will start once the both ECB’s conditions are met. In this scenario, we expect dual reporting to last from September 23, 2020 until March 23, 2021. This applies to institutions willing to migrate from ECB Templates to ESMA Templates on the earliest time possible. For other entities, there is still time window of three months to do so, eventually stretching the dual reporting period to a maximum of 9 months (September 23, 2020 – June 23, 2021).
- For securitizations originated prior 2019, the convergence period will be extended additionally by a maximum of 36 months. In such a case, the transition period will look as follows:
This lengthy grandfathering period may not be as convenient as it appears. The inevitable dual reporting between September 23, 2020 and March 23, 2021 will be organizationally demanding for all issuers. It is therefore advisable for those issuers who can to fully switch to ESMA templates to do so as soon as possible (i.e. March 2021). Reporting entities with transactions issued prior 2019 are free to use up time until the final deadline, being June 2024. There are, however, many institutions originating new securitizations on a yearly basis which brings them into a situation where old outstanding transactions or master trusts will be given more time to converge than recent issuances. In such a case, the adoption of ESMA templates for all transactions at once would be the most sustainable solution, since partial use of ECB templates for selected transactions is cumbersome to maintain.
We support ECB’s decision to recognize the ESMA templates as a sufficient way of data disclosure for eligibility under efficiency, reporting integrity and complexity reduction reasons. Gradual replacement of ECB templates will clearly decrease organizational efforts for those issuers seeking both ECB eligibility and compliance with Securitization Regulation. This especially holds for originators of transactions that require data submission on monthly basis (e.g. AUTO asset class). There still are a lot of issues around the content of ESMA’s templates which we regularly discuss in this Blog but which are not within the scope of this article.
Concerning the number of registered Securitization Repositories in Europe, we predict the European Authorities will conduct a balanced approach between the European core principle of competition and the ability of the individual repositories to conduct business on competitive markets. This would achieve both the goal of raising transparency and improved efficiency and resiliency of the market.
For any question related to this topic, ESMA Templates or to Securitization Regulation in general, please contact your PwC experts.
Dr. Philipp Völk – Mail: firstname.lastname@example.org
Petr Surala, CFA – Mail: email@example.com
 The number of fields allowing ND values has decreased
 Transaction wishing to be accepted as collateral for Eurosystem’s refinancing operations
 Expected based on our scenario