SFA Submits Feedback on European Commission High Level Forum CMU Report

Main Takeaway

The European Commission launched a call for feedback from stakeholders on the High Level Forum report and SFA submitted feedback requesting the Commission’s support for regulatory guidance to be issued. Our response reiterated our previous advocacy and supports the recommendation that compliance should be approached on the basis of the principle of proportionality.

Background

Recent European securitization regulations, collectively developed and implemented by four separate EU bodies, came into effect at the start of 2019 and consolidated a patchwork of existing securitization laws.

SFA formed a task force following the release of these regulations to provide market participants a forum to discuss how the securitization industry is interpreting and implementing the regulations.

The foundational approach of European securitization regulations differs from those in other jurisdictions, including the U.S., and relies on granular loan-level disclosures regardless of the underlying asset characteristics in ways that other jurisdictions do not.

Further, market participants and legal advisers have come to different conclusions on the interpretation of portions of the rules – specifically, regarding due diligence requirement for EU investors purchasing securities issued by non-EU entities. This ambiguity has left due diligence requirements open to interpretation and has led to confusion and uncertainty in the global securitization market.

In July 2019, SFA sought guidance  from European regulators on whether the securitization regulation requires institutional investors to verify compliance with EU transparency requirements when European Union originators, sponsors or securitization special purpose entities are not involved.

In June 2020, the advisory group that was formed under the European Commission, the High Level Forum on the Capital Markets Union, published a report setting out recommendations for legislative fixes relating to securitization. This included a sensible clarification on the transparency/disclosure and reporting requirements in line with what SFA previously recommended – specifically, Article (5)(1)(e) should not apply on non-EU issued deals and so no strict compliance would be required with Article 7 disclosure and reporting.

The European Commission launched a call for feedback from stakeholders on the High Level Forum report and SFA submitted feedback to request the Commission’s support with issuing regulatory guidance, reiterating our previous advocacy and supporting the recommendation that compliance should be approached on the basis of the principle of proportionality.

SFA’s Key Points

More specific guidelines are necessary to help EU institutional investors conclude whether or not non-EU securitizations are in compliance with EU securitizations regulations. Most U.S. issued securitizations do not provide the loan-level information on the underlying exposures as required under the EU regime given that such disclosure is not required for most U.S. securitization asset classes.

Differences in reporting requirements of non-EU regulations should not mean an EU institutional investor cannot comply. SFA suggests that European regulators provide guidance to this effect: An EU institutional investor must be satisfied it has received sufficient information to carry out due diligence obligations proportionate to the risk profile of the non-EU securitization.