No Good News, but No Bad News Either

On 16 October 2019 the European Commission (EC) adopted a delegated regulation supplementing Regulation (EU) 2017/2402 (the Securitisation Regulation) and setting out the final regulatory and technical standards in respect of the transparency requirements for originators, sponsors and securitisation special purpose entities (SSPEs) including the final disclosure templates required for compliance with the Securitisation Regulation (the Final RTS). The Final RTS are now subject to a three month “no objection” review period by the European Parliament and the European Council, following which, if approved as expected, they will be published in the Official Journal of the European Union and shall enter force on the twentieth day thereafter. The Final RTS are therefore are expected to apply from February 2020.  

The asset level disclosure and reporting templates for CLOs do not vary substantially from what was previously published by the European Securities and Markets Authority (ESMA) in January 2019.  Although the (relatively) good news is that work done by market participants in respect of these templates will not have been wasted, the CLO market was hopeful that certain points in the templates, and the use of some data options, would be clarified. Set forth below in this OnPoint are the key takeaways.

Background

Article 7 of the Securitisation Regulation, which has applied to securitisations the securities of which are issued on or after 1 January 2019, requires among other things, originators, sponsors and SSPEs to make available to investors, competent authorities and, upon request, to potential investors, certain information on the transaction and underlying exposures.

Articles 7(3) and (4) of the Securitisation Regulation mandated ESMA to produce draft regulatory and implementing technical standards (RTS and ITS) specifying both what information must be disclosed and standardised templates for submitting that information. 

Following a public consultation during which several issues were flagged by market participants, ESMA published an initial draft RTS (which included draft disclosure templates) in August 2018. Market participants and competent authorities raised a number of concerns about the industry’s ability to comply with the draft RTS and the EC notified ESMA that it would only endorse the draft RTS once certain amendments were made. Following this, ESMA published revised draft RTS in January 2019 (the Draft RTS), together with a Q&A document intended to provide guidance on the completion of the templates.

Key Takeaways - Final RTS and Disclosure Templates

On 16 October 2019 the EC adopted a delegated regulation supplementing the Securitisation Regulation and setting out the Final RTS in respect of the transparency requirements for originators, sponsors and SSPEs, including the form of the final disclosure templates. 

The following are the key takeaways for the CLO industry:  

• Effective Date.  The Final RTS are now subject to a three month “no objection” review period by the European Parliament and the European Council, following which, if approved as expected, they will be published in the Official Journal of the European Union and shall enter force on the twentieth day thereafter.  We expect this to occur in February 2020. 
• Applicability. The Final RTS will apply to all EU securitisation transactions, including new issue CLOs, refinancings, warehouses and resets that have closed since 1 January 2019 (when the Securitisation Regulation became effective). The transaction documentation for most EU deals issued since 1 January 2019 have provided for the transition to the new disclosure requirements and the relevant parties will now need to transition to the templates once the Final RTS become law.  In general, no noteholder consent should be required.  Other EU deals (in particular, older deals) may need to be amended to provide for these requirements.  
• Jurisdictional Scope.  For the US CLO industry, there has been no clarification as to the applicability of these requirements to non-EU CLOs.  Whilst the adoption of the Final RTS has brought a welcome degree of certainty to the EU CLO market as to the form of the disclosure and reporting templates for CLOs, nothing in the Final RTS addresses the impact of the Article 7 of the Securitisation Regulation and applicability of the Final RTS including the disclosure templates to non-EU CLOs.  While guidance on the jurisdictional scope has been sought from regulators (in the form of an online Q&A), there has to date been no clarification on this point. Dechert has taken the view that the Final RTS and disclosure templates do not apply to non-EU CLOs and the CLO industry has generally followed this approach.
• Templates Basically Unchanged.  The disclosure and reporting required by the Final RTS are substantially the same as that contained in the Draft RTS and accordingly there are no significant new requirements.   
• No Transition Period.  While the industry had argued for a transition period for implementing the Final RTS, this will not be forthcoming based on the text of the Final RTS.  Nonetheless, a good deal of work has been already done by CLO market participants on the draft templates (which closely follow the final templates).   

The Final RTS are now subject to a three month “no objection” period by the European Parliament and the European Council, following which, if approved as expected, they will be published in the Official Journal of the European Union and shall enter force on the twentieth day thereafter. Therefore, we expect the Final RTS to apply to new CLO issuances, refinancings and resets from February 2020.