Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Supervisory Authorities Advocate Proportional Approach to Compliance With Certain Aspects of the Securitization Regulation
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  • European Supervisory Authorities Advocate Proportional Approach to Compliance With Certain Aspects of the Securitization Regulation
    11/30/2018
    The European Supervisory Authorities have issued a joint statement addressing two issues arising from the Securitization Regulation. The Securitization Regulation will apply directly across the EU from January 1, 2019 to securities issued under securitizations on or after January 1, 2019. Securitizations issued before that date may be referred to as STS securitizations, provided that they meet certain conditions.

    The first issue addressed in the joint statement relates to disclosure requirements for EU securitizations. The Securitization Regulation requires originators and sponsors to notify ESMA of any securitization that meets the "Simple, Transparent and Standardized" criteria. ESMA will maintain a list of all such securitizations on its website. Securitization special purpose entities, originators and sponsors of a securitization will be required to make certain information available via a securitization repository to holders of a securitization position, to the national regulators and, upon request, to potential investors. The European Securities and Markets Authority and the European Commission still have to address a number of market concerns on the proposed ESMA disclosure templates (that will be introduced as Technical Standards under the Regulation) as part of these transparency requirements. This is a process that will not be concluded by January 1, 2019.

    As a result, the transitional provisions of the Regulation apply and those provisions require that the templates used for disclosure of structured finance instruments under the Credit Rating Agencies Regulation (known as the CRA3 templates) must be used until the ESMA disclosure template is adopted. The ESAs recognize that this will create substantial and costly adjustments for reporting entities that have never provided information using the CRA3 templates. Therefore, the ESAs stress that national regulators, despite having no legal power to disapply the Securitization Regulation, ought to exercise their supervisory powers for the transparency requirements in a proportionate and risk-based manner, by taking into account the type and extent of information already being disclosed by the reporting entities and considering each action taken to comply with the requirements on a case-by-case basis.

    The second issue addressed in the ESA's statement concerns the consolidated application of securitization rules for EU banks under the Capital Requirements Regulation. The ESAs acknowledge that EU banking subsidiaries engaging in local securitization activities in non-EU countries may have difficulties complying with the expanded scope of requirements relating to due-diligence, risk retention, transparency, re-securitization and criteria for credit-granting. These problems are expected to be resolved with the adoption of the revised CRR (which is currently subject to negotiations between the EU legislative bodies) because the scope, on the current version, will limit the new requirements to due diligence obligations. In the meantime, the ESAs emphasize that national regulators must, again, apply their supervisory powers in a proportional manner and make an assessment on a case-by-case basis in instances of non-compliance.

    View the Joint Statement.

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