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Reporting Revisited: EU Commission Clarifications On Article 7 & Third Country Securitisations – Financial Services


On Monday 10 October 2022, the European Commission (the
“Commission”) delivered its report1 (the
Commission Report”) to the European
Parliament and the Council on the functioning of the EU
Securitisation Regulation2. In this Client Alert we
examine the Commission Report as it relates to the jurisdictional
scope of the EU Securitisation Regulation, and the Commission
Report’s ramifications for existing and future securitisations
and the near-term growth of the CLO market.

We focus on the scope of the obligation to make specific
information3 (“EU Transparency
“) available to institutional
investors4 pursuant to Article 7 of the EU
Securitisation Regulation (“Article 7”) as this applies
to securitisations where none of the originator, sponsor or SSPE is
established in the European Union (“Third Country

Since the entry into force of the EU Securitisation Regulation
in its final form in 2019, the securitisation market in general,
and the loan securitisation market in particular, has taken the
view that EU Transparency Reports do not need to be made available
to investors in Third Country Securitisations in the specific (and
administratively burdensome) format mandated by Article 7.

As we discuss more fully through this Client Alert, in our view
it is possible not only that the market approach to the provision
of EU Transparency Reports by US-based CLO managers in particular
will start to shift, but that we are already seeing the beginning
of a trend in that direction.

The Commission Report: Genesis and Summary

Article 46 of the EU Securitisation Regulation mandated the
Commission to produce the Commission Report and was preceded by
advice5 (the “ESAs’
“) and a final report6 (the
ESAs’ Report“) from the Joint
Committee (the “Joint Committee”) of the European
Supervisory Authorities7 (the
ESAs“) which amongst other

  • identified, in the case of the ESAs’ Report, significant
    legal uncertainty in the jurisdictional scope of application of the
    EU Securitisation Regulation, with the ESAs’ Opinion
    recognising that Third Country Securitisations were unlikely to use
    ESMA’s templates9 for Article 7 reporting; and

  • invited the European Commission to amend the EU Securitisation
    Regulation or provide interpretative guidance10 on its
    correct jurisdictional application.

The Joint Committee particularly noted, in the ESAs’ Report,
the confusion arising from the use of the words “where
applicable” in Article 5(1)(e)11 of the EU
Securitisation Regulation and postulated that these could be read
as intending to limit the Article 7 reporting obligation, such that
“verification of compliance with the disclosure requirements
is not applicable when the originator, sponsor or SSPE to parties
is not located in the EU”12.

This interpretation, which was recognised in the Commission
Report13, also found favour with the High Level Forum on
the Capital Markets Union, which in the seventh of the key
recommendations in its Final Report dated June 2020 (the “HLF
Final Report”)14 for the development of a robust
securitisation market invited15 the Commission to
clarify that Article 5(1)(e) did not apply to Third Country
Securitisations. Instead, the High Level Forum recommended that
such investments should instead be subject to proportionate due
diligence as required under Article 5(3) of the EU Securitisation

For all these exhortations and suggestions from academics,
industry, national regulators and the ESAs, the Commission has
instead largely chosen its own approach to the question of
jurisdictional application. In the Commission Report, the

  • invites16 ESMA to review the Article 7 reporting
    templates, with the aim of better aligning these with
    investors’ needs;

  • invites17 ESMA to bifurcate Article 7 reporting
    templates to differentiate public securitisations from private
    securitisations, with the latter being simplified and tailored to
    the needs of national supervisors;

  • concludes that the definition of “private
    securitisation” is working well and does not need

  • declares that “institutional investors must verify that
    the sell-side parties of the transaction, irrespective of their
    location, comply with the respective obligations under [Articles 6,
    7 and 9 of the] regulation” … “EU institutional
    investors may not invest in securitisations if the sell-side
    entities are found to be not in compliance with these
    obligations”19; and

  • recognises that “the current text of Article 5(1)(e) …
    de facto excludes EU institutional investors from investing in
    certain [Third Country Securitisations] … because the
    third-country sell-side parties might not be interested in
    providing [EU Transparency Reports]”.

Disappointingly, despite the prior volumes of academic analysis,
the Commission Report provides no commentary on the inclusion of
the words “where applicable” in Article 5(1)(e), choosing
to ignore that aspect of the debate entirely. Article
4620 of the EU Securitisation Regulation also
contemplated that the Commission might “if appropriate”
accompany its Commission Report with a legislative proposal.
However, the Commission has declined to do this, commenting instead
that it “is of the opinion that the [EU] Securitisation
Regulation seems overall to be fit for purpose and does not see the
need for major legislative change at this

What does this mean for EU investors in Third Country

Regardless of any academic dissection of the Commission Report
and its legal propriety22, the Commission’s
pronouncements are certain to have a compelling effect on the
investment activities of regulated European investors and the
regulatory activities of national competent
authorities.23 We examine its practical impact on market
participants below.

New transactions

Absent an ECJ judgment to the contrary, EU investors will likely
take the prudent approach of ceasing to invest in Third Country
Securitisations that do not provide EU Transparency Reports. The
short term effect is likely to be a reduced investment universe for
EU investors and a corresponding reduction in the diversity of
their portfolios until relevant Third Country Securitisation
markets get up to speed on the requirements and necessary practical
steps to compliance.

For new transactions, including those that are still being
marketed, the position is therefore straightforward, and we expect
that the vast majority of Third Country Securitisations that target
European investors will provide for day-1 EU Transparency Reports
using the current ESMA templates. It should be noted in this regard
that sponsors of US CLOs that constitute Third Party
Securitisations will be outside the boundaries of the
administrative sanctions and remedial measures set out in Article
32 of the EU Securitisation Regulation regarding the content and
delivery of the reports and, where they so elect, would simply be
complying with the requirements in order for European investors to
meet their due diligence requirement.

As an alternative, sponsors or originators of such Third Country
Securitisations, such as the vast majority of US CLOs, whose
platforms have historically complied with the 5% risk retention
obligation imposed under Article 5(1)(d) and Article 6(1) of the EU
Securitisation Regulation but not the Article 7 reporting
requirements, may elect to tailor their standard retention
compliance covenant package to include a “springing”
covenant that the relevant retention holder will agree to comply
with the Article 7 requirements where required as a result of a
future amendment of the EU Securitisation Regulation (as is
contemplated by the Commission Report).


1. The English language version of the Commission Report
can be found here.

2. Regulation (EU) 2017/2402, as amended. Note
that, as part of the “onshoring” of EU legislation to the
UK during the Brexit process, amendments to the EU Securitisation
Regulation made by the Securitisation (Amendment) (EU Exit)
Regulations 2019 led to a divergence between the UK Securitisation
Regulation and its EU counterpart.

3. This information includes (a) quarterly reports on
underlying exposures (Article 7(1)(a)), (b) copies of transaction
documents (Article 7(1)(b)), (c) a transaction summary (Article
7(1)(c)), and (d) quarterly investor reports (Article 7(1)(e)).
Anecdotally, Milbank’s understanding is that investors make
little to no use of the quarterly reports. Rather, for both public
and private securitisations, deals are marketed, and investors
rely, on issuers’ contractual undertakings to provide detailed
periodic portfolio reports. These reports, which, unlike the
regulatory templates, are continually refined and improved to
reflect changing market conditions and investor sentiment, reflect
decades of rating agency and investor interactions. The need to
process the mass of resulting data has also produced a
pocket-industry of expert services, that collate and compare deal
reports, and provide sophisticated analytical tools allowing
investors to interpret and manipulate information to inform their
investment decisions. In the CLO market, for instance, the
appropriateness of the historical reporting framework and the
discipline that they, alongside the transaction structures and
underlying eligibility criteria, imposed on the transaction parties
was reflected in the way that sector of the market ultimately
emerged almost entirely unscathed from the global financial crisis
(the “GFC”) of 2007-2008.

4. Article 2(12) of the EU Securitisation

5. ESAs’ Opinion to the European Commission on
the Jurisdictional Scope of Application of the Securitisation
Regulation dated 25 March 2021.

6. Joint Committee Report on the Implementation and
Functioning of the Securitisation Regulation dated 17 May

7. Being the European Banking Authority (the
EBA“), the European Insurance and
Occupational Pensions Authority
(“EIOPA“) and the European Securities
and Markets Authority (“ESMA“). The ESAs
established the Joint Committee Securitisation Committee (the
JCSC“) in accordance with Article 36(3)
of the EU Securitisation Regulation and the JCSC authored the
ESAs’ Opinion and ESAs’ Report.

8. The ESAs Opinion also suggests (in paragraph 13(a))
that where an EU Securitisation Regulation breach occurs after
issuance, an EU investor should sell its holding. In Milbank’s
view the relevant legislation is more nuanced than this, and does
not require the fire-sale of non-compliant holdings. See “What
does this mean for EU investors in Third Country

9. These templates were enacted in Commission Delegated Regulation (EU) 2020/1224
(the “Disclosure RTS”).

10. The suggestion for, and subsequent use of,
interpretative guidance is a curious approach to legislation and
one which, for all its timeliness, creates legal uncertainty and
arguably ill-serves the securitisation community and wider
financial markets. Although Article 17(1) of the Treaty on European Union
broadly empowers the Commission, and charges it to oversee the
application of Union law, the specific competencies of the European
Union’s institutions are addressed in Article 288 of the Treaty on the Functioning
of the European Union (the “TFEU“),
which provides that only regulations, directives and decisions are
to have [legally] binding effect. The competency to provide rulings
on the interpretation of acts (e.g. regulations) of the EU
institutions is reserved to Court of Justice of the European Union
in accordance with Article 267 of the TFEU. Interpretative
guidelines and answers to legislative questions are customarily
addressed by the EBA in its Single Rulebook.

11. ticle 5(1)(e) (Due-diligence requirements for
institutional investors) of the EU Securitisation Regulation
provides that “Prior to holding a securitisation position, an
institutional investor, other than the originator, sponsor or
original lender, shall verify that … the originator, sponsor or
SSPE has, where applicable, made available the information required
by Article 7 in accordance with the frequency and modalities
provided for in that Article;” [emphasis

12. Paragraph 20(ii), footnote (9) of the ESAs’
Report. This ambiguity was the subject of our 12 December 2018 Client Alert: Securitisation
Regulation: Application of Disclosure to Non-EU CLOs
widespread recognition amongst national supervisors (per feedback
on Question 4 of the feedback statement accompanying the Commission
Report), legal commentators and market participants, including the
Financial Markets Law Committee who addressed the issue in their letter to the Commission dated 5 November

13. Section 11.2 of the Commission Report.

14. A New Vision for Europe’s Capital

15. See pages 54 and 64 of the HLF Final

16. Section 5 of the Commission Report.
ESMA has not wasted any time in responding to this
request, reaching-out to industry associations such as
AFME on 12 October 2022 for their input and
suggestions on improving the reporting templates with a view to
revising the Disclosure RTS.

17. Section 6.2 of the Commission Report.

18. Section 6.3 of the Commission Report. This is welcome
news for the CLO industry as under Article 7(2) of the EU
Securitisation Regulation, “private securitisations” are
exempt from the obligation to make EU Transparency Reports
available through a securitisation repository which imposes
additional administrative overheads and costs on public

19. Section 11.1 of the Commission Report.

20. “By 1 January 2022, the Commission shall present
a report to the European Parliament and the Council on the
functioning of this Regulation, accompanied, if appropriate, by a
legislative proposal…”.

21. Section 3, page 7 of the Commission

22. For the reasons set out in note [9], this approach by
the Commission is arguably ultra vires or, in the European
vernacular, a “détournement de procedure”. It is
somewhat curious in light of the express authority (noted above)
under Article 46 of the EU Securitisation Regulation given to the
Commission to accompany its Commission Report with a legislative
proposal to improve the functioning of the EU Securitisation
Regulation. This alleged impropriety in the Commission’s
provision of interpretative guidance is compounded by the fact that
the wording of Article 5(1)(e) went through multiple iterations as
part of the legislative process. The critical words “where
applicable” were not included in what was then Article 3(1)(c)
of the Commission’s original proposal, but were added to the EU
Securitisation Regulation by the Council in the third Presidency
compromise proposal (ST 14537/15) of 30 November 2015 ECON
Committee Members (Petr Jezek, Michael Theurer & Sylvie
Goulard) as published in the ‘Amendments 109-316’ draft report issued by the EU Committee on
Economic and Monetary Affairs on 27 July 2016. This new wording was
then adopted by all co-legislators in the provisional agreement resulting from
interinstitutional negotiations
of 28 June 2017. Further, Petr
Jezek’s contribution during the sitting of the European
Parliament of 25 October 2017 (video available here – see 18:11:52) made it clear that
the intention behind the EU Securitisation Regulation’s final
position achieved through the interinstitutional negotiations was
growth and not “stifling” of the securitisation markets.
As such, it is unclear whether the European Parliament and the
Council would share the Commission’s view as to the legislative
intent of Article 5(1)(e).

23. Prior customary practice for Article 7 by Third
Country Securitisations marketed to EU investors was to provide for
risk retention under Article 6 of the EU Securitisation Regulation
but not to provide for EU Transparency Reporting.

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