European Commission Endorses ESMA Templates for Loan-Level Data Reporting for Securitizations

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.

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