ESMA transparency rules meet mixed response

Fri Jun 27, 2014 3:06pm EDT

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* ESMA report does not address all concerns

* Potential for further discussion offers hope for market-watchers

By Anil Mayre

LONDON, June 27 (IFR) - The European Securities and Markets Authority's final report on draft rules for transparency for structured finance instruments (SFI) under the Credit Rating Agencies (CRA3) regulation has met with a mixed reaction.

ESMA asked market participants to comment on its proposals in February. The inclusion of private and bilateral trades in the scope of CRA3 disclosures, in particular, drew attention. The final draft, dated June 24, still envelopes private trades but at least offers the market hope that it could be open to further discussion.

Steven Maijoor, ESMA Chair, said the enhanced requirements under Article 8b would "improve the information available to both investors and supervisors", and "contribute to a reduction in conflicts of interest, improved investor protection and market stability, and greater competition between CRAs".

But market players are picking holes in the arguments. ESMA received 26 responses to the draft RTS on structured finance instruments, a majority of which said that private and bilateral transactions, and unrated deals, should not fall within the disclosure scope. They argued that private and bilateral trades were unsuited to reporting requirements with "potential for negative market impact".

UNCLEAR BENEFITS

Respondents also said such deals were subject to confidentiality agreements and so the benefits of disclosing this information to the public were unclear. They stressed that private securitisation transactions represented an alternative source of funding where traditional bank lending facilities were not available and that public disclosure could hurt this practice.

And given that there are no prospective investors besides the bank providing the financing, there is no added value in public disclosure for private and bilateral structured finance, they said. The disclosure scope of the RTS will initially only apply if a structured finance instrument is backed by assets in a specified list, and ESMA said it would look at developing reporting obligations for private and bilateral trades "as soon as possible".

Richard Hopkin, managing director and head of securitisation at AFME, said that while it was disappointing that private placements were still proposed to be within scope in the RTS, it was positive that the draft suggested further time be taken to discuss this with stakeholders.

ESMA's plan also incorporates reporting requirements from the Bank of England and the ECB to "avoid duplication and overlap".

But Hopkins is not convinced that it does, as a large part of structured finance disclosure rules were already in the Capital Requirements Regulation.

"Disclosure and transparency is at the heart of a high quality securitisation market and we already have Article 409 and the good work carried out by the Bank of England and the ECB - not enough credit has been given for this work," he said.

These additional disclosure requirements unfairly single out the structured finance market. Yves Mersch of the ECB said at the Global ABS conference in mid-June that covered bonds had no common transparency or supervisory framework. Even so, they still benefit from preferential treatment under CRA. It is this bias that ABS market players want to weed out of regulators' thoughts.

"We are arguing for a level playing field. Article 8b piles on extra requirements that do not apply to other fixed income sectors and forms of investment. If you want to revive securitisation you need to strike a balance. It's not just about transparency, just for securitisation. Regulation needs to be holistic. It should reflect the work already done, the existing regulation of this market and ultimately the strong performance of high quality securitisation in Europe," said Hopkin.

INS AND OUTS Some items removed from the previous draft are also causing concern, as ESMA has cut the transaction summary and cashflow modelling requirements.

UK issuers will still have to produce them, as required by the Bank of England, but it could mean fewer data sets to produce for Continental European issuers.

Market feedback to the February paper was that cashflow modelling was already provided by third-party firms and were costly and time-consuming to offer, and could be "subject to conflicts of interest on account of them being provided by the issuer".

ESMA pulled them from the list of requirements, saying the information was accessible to investors in the documents. This has not sat well with this looking to gain a foothold in the market.

"The regulators tell us they want to promote smaller firms to help investors do their due diligence but tales of the difficulty of breaking into rating agency service markets are legion and the road is littered with the bodies of those that have tried," said Ben Bates, CEO of EuroABS - a database, performance reporting and valuation firm.

"The main points of CRA3 are to increase competition among rating agencies, to reduce investors' reliance on ratings and improve transaction and data transparency. ESMA is saying cashflow models are laid out in the documentation but there is a world of difference between the waterfall in the document and plugging the numbers into a programme. Dropping the whole thing on the basis that the issuer is conflicted came out of the blue," he said.

Conversely, one area of reporting that market participants wanted pulled from the RTS but ESMA may not relates to credit card ABS data.

Respondents raised concerns about the sheer volume of loans to be reported on as well as sharing commercial sensitive data. ESMA countered by saying that the ECB's template already covered the necessary details to judge credit quality of the ABS and said it was inadequate to amend or remove the template. It did add, however, that it would continue to monitor and follow-up on new developments.

The draft RTS also includes a website called the European Rating Platform and the reporting of fees charged by the agencies. (Reporting by Anil Mayre, editing by John Mastrini)

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