* ESMA report does not address all concerns
* Potential for further discussion offers hope for
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
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".
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
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
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
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'
"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
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
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
"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
The draft RTS also includes a website called the European
Rating Platform and the reporting of fees charged by the
(Reporting by Anil Mayre, editing by John Mastrini)