June 2019

The EU Securitisation Regulation1, which came into effect on 1 January 2019, consolidates and harmonises the European Securitisation risk retention regime and aims to create “simple, transparent and standardised” (STS) transactions

In particular, Article 7 of the regulation will increase the scope and nature of the transparency and disclosure requirements applicable to issuers, sponsors and originators of collateralised loan obligation transactions, a form of securitizations where payments from multiple loans are pooled together and passed on to different classes of owners in various tranches.

Detailed requirements for the information to be provided were set out in the draft regulatory technical standards (RTS) by the European Securities and Markets Authority (ESMA). Under these standards, CLO transactions will be required to provide information per the relevant reporting annexes including those on corporate underlying exposures, investor report information and, for ‘public’ transactions, annexes dealing with inside information and significant event information, if applicable.

While these annexes raised concerns among industry participants over operational practicalities and the resources required of enhanced reporting– and exacerbated by the lack of any introductory transitional period, the European Supervisory Authorities provided indicative relief saying that it was unlikely that the EMSA RTS would be adopted immediately2. Instead, the transitional provisions of Article 43(8) of the Securitisation Regulation will apply to the underlying exposure and investor reporting obligations under Article 7(1)(a) and (e) until further notice.

During this interim period, CLO transactions will still have to comply with the primary transparency requirements set out in Article 7. Such compliance will impose a number of new obligations, such as:

  • The disclosure of all transaction documentation prior to pricing,
  • The provision of a transaction summary, if no prospectus is available, and,
  • The ongoing reporting of ‘inside information’ and ‘significant events’ such as material breaches of transaction documentation and changes in the structural or risk characteristics of the securitisation, if applicable.

Despite the delay to the disclosure requirements transitional provisions apply, supplementing the third revision on Credit Rating Agencies(CRA3)3  with regard to disclosure requirements for structured finance transactions. Under these requirements the issuer, sponsor and collateral manager of a CLO need to set up a framework where the transaction, particularly European transactions, will be compliant with the reporting requirements. Investors may also request Article 7 information from non-EU issuers, sponsors and originators to satisfy the requirements of the regulation.

“We expect the earliest date at which the new ESMA templates become applicable will be toward the end of the third quarter 2019 – after it has been approved by the European parliament - and there is some possibility of a significant transitional period,” explains James Warbey, Partner in Milbank law firm’s London office.

Time for action

Amidst the uncertainty over timings on the implementation of the regulation, industry participants comprising of issuers, collateral managers and collateral administrators such as Deutsche Bank, have joined working groups to prepare the reporting requirements, starting from data source, accessibility, and determining the confidential nature of some of the details required.  Only public securitisations require a securitisation repository and the expectation is that going forward CLOs will be structured as private securitisations, meaning they will list on secondary, exchange-regulated markets, not on primary regulated markets and, as a result, will not require a securitisation repository. This will become part of collateral administrators’ and collateral managers’ deal management processes.  

A key issue for working group participants is where they will source the data from and whether they are allowed to disclose the data given confidentiality constraints. Given its due diligence on the underlying assets, most of the data will be accessible to the collateral manager, who shares that data with the collateral administrator. The collateral administrator may sit across many deals.

The most onerous of the new reports to be submitted is Underlying Exposures Information – Corporate, with over 200 fields at the asset and/or obligor level to be recorded under the proposed ESMA template.

“As we look to build out structures to meet transaction requirements - particularly investor reporting and transparency –it will continue to be the collateral managers that typically fulfil the risk retention requirements,” explains Warbey. “While there is an obligation in the level 1 text to designate one of the issuer, the originator or the sponsor as the reporting entity in Article 7, it makes sense for the parties to allocate this responsibility to the issuer, given that the issuer will obviously have the benefit of confidentiality undertaking exemptions that allow it disclose the necessary information.”

Working in partnership

As a collateral administrator, and as holders of the transaction data, Deutsche Bank can provide the necessary support to the collateral manager for this reporting service. 

“Whilst there are still some outstanding points to be clarified by ESMA, we are no longer in a situation of uncertainty as it is becoming quite clear where data can be sourced,” says Rochelle Hsu,Regulatory Conformance Lead, Deutsche Bank “it is also possible that ESMA may permit the usage of certain values for data that is not available or not obtainable from any party in the deal.”   

According to Alan Corderoy, Head of Structured Credit, Repack & DCC Client Services, London: “Collateral administrators have a key role to play as they maintain a substantial portion of the data and will be able to produce that data for relevant parties and format it in a way that is compatible with their requirements. Having one provider streamlines the process.”

As collateral administrator Deutsche Bank provides reporting to the transaction and the assurance that the manager using a party that is familiar with the transaction already. “This is a progression of our service offering to managers even though it is the issuer or the manager’s duty to fulfil and not ours,” Corderoy concludes.

“It’s a natural extension of things that we know and we build on Deutsche Bank’s longevity and experience in the market to further expand our existing role and service delivery to our clients,” adds Hsu. “As collateral administrators, we are a key partner in supporting collateral managers fulfil their regulatory obligations.”

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Sources

1 https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32017R2402
2 https://www.milbank.com/images/content/1/0/v2/108662/CLO-Group-London-Client-Alert-3.12.18-4839-5385-9457-v.2.pdf
3 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2015.002.01.0057.01.ENG

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