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As Article 46 of the Securitization Regulation recommends, the European Commission published its Report on the operation of the Securitization Regulation (Regulation (EU) 2017/2402) on October 10, 2022. Nevertheless, the Commission recognizes the importance of securitization to the EU financial markets, adding that it "remains fully committed to the purpose of building the framework for a healthy and stable EU securitization market."
Such a market is an essential component of a genuine Capital Markets Union. It might even be more crucial for addressing the difficulties of financing economic activity in the substantially more challenging market climate that now appears to be developing. The Commission will monitor the market closely and intervene as necessary to ensure that the EU fully benefits from a vibrant securitization market.
The Commission has advised against making immediate changes to the Securitization Regulation's text in the Report. It believes the additional time is necessary to understand the new framework's effects fully. The Commission admitted that some adjustments might be made, particularly regarding disclosure requirements. The Commission has requested that ESMA evaluate its disclosure templates for underlying exposures to remove any extraneous fields and better tailor them to the needs of investors. The Commission has asked for the ESMA to create a specific, condensed template for private securitizations that is more suited to the requirements of supervisors. The industry will be happy to hear this.
Additionally, the Commission addressed concerns about the jurisdictional extent of the Securitization Regulation in the Report. Fortunately, the Commission has rejected some of the Joint Committee Opinion's more alarming ideas about how to satisfy the risk retention and disclosure obligations in transactions involving a mix of EU and non-EU sell-side parties. However, until the Securitization Regulation's text can be legally changed, some institutional investors in the EU would find it difficult to accept the Commission's rigid stance on the disclosure requirements for investments in third-country securitizations.
The prudential framework for securitization is a significant source of worry for the sector. According to the Report, the Commission will continue to think about potential changes to this once it has heard back from its request for advice to the Joint Committee of European Supervisory Authorities to assess the prudential securitization framework. The Commission will also give the significant risk transfer framework's improvement in efficiency, transparency, and consistency further thought.
The Commission has asked ESMA to review its standardized disclosure templates to address technical challenges in filling out specific fields, eliminating extra areas, and aligning them more tightly with investors' needs. Additionally, the Commission has asked ESMA to consider whether loan-level data is valuable and proportionate to investors' appetites for all types of securitizations.
The Commission did draw attention to issues with using private transactions as a context for the ESMA standardized disclosure templates. The Commission rejected demands to make the concept of private securitization more precise. The Commission asked ESMA to create a particular disclosure template that would "considerably simplify the transparency requirements for private securitization" and be better customized to the needs of supervisors.
In response to comments made in the Joint Committee Opinion, which suggested that in a mixed sovereignty contract, the designated reporting body and risk retainer would be required to be based in the EU, the Commission rejected this view as not being supported by the regulatory text. The Commission also affirmed that monitoring institutional investors' adherence to their due diligence responsibilities might fulfill the law's intended goal. We are grateful for this confirmation.
The Report's strict reading of Article 5(1) is one feature that might not sit well with the EU investment community. The Commission has confirmed that, in its opinion, information must be appropriately disclosed following Article 7 criteria for EU institutional investors to fulfill their Article 5 due diligence responsibilities regarding securitization from third countries. It admits that in cases where the sell-side is unwilling to adhere to EU disclosure standards, this may restrict institutional investors from the EU from investing in third-country securitization.
The Commission asserts, however, that if the ESMA templates are made simpler. This may encourage more third-country sell-side firms to disclose the necessary information. The Commission further observes that this matter merits careful attention in any upcoming Securitisation Regulation revision, designating this for future assessment.
Concerning AIFMs, the Commission has defined the institutional investor definition's range. The Securitization Regulation's due diligence obligations must be followed by third-country AIFMs that advertise and handle funds in the EU, but only about the funds they market and manage. Sub-threshold AIFMs must adhere to the due diligence standards because they are under the purview of institutional investors.
Since no securitization regime in any third-country jurisdiction could be deemed equal to the EU's STS framework, the Commission has rejected creating an STS equivalency regime.
The Commission acknowledged the need for developing principal causation disclosures about the disclosure of sustainability-related knowledge. It suggested that the "as wide-ranging as feasible" technical standards are now being established to define what details should be provided about the sustainability performance for STS transactions. The Commission also used the occasion to concur with the EBA's assessment that, given the absence of underlying green assets, there is no immediate need to develop a dedicated sustainability label for securitization. Instead, the proposed EU Green Bond Standard needs to be changed to make it more applicable to securitization.
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