Regulation of shadow banking

7
Disclosure requirements
Enhanced standards for disclosing the underlying
exposures in a securitisation and the cascading effect
between tranches have the potential to help restore
investor confidence. The provision of additional
information will also reduce reliance on external ratings.
issuers both when an ABS is issued and on a regular
basis thereafter. On top of that, rules issued by the SEC
require issuers of ABSs to provide information about
expected cash flow, including agreed priorities and
credit enhancement. All fees and expenses paid from
cash flow have to be disclosed on an ongoing basis.
Extensive disclosure requirements have long existed
in both the US and the EU, or were introduced in the
regulation drafted in the wake of the financial crisis.
EU
First, the Prospectus Directive contains specific
requirements relating to the issuance of ABSs in
regulated markets. The directive also requires a
description of cash flows.
Under the revised Section 15(d) of the Exchange
Act, 35) ABS issuers have to ensure ongoing disclosure
over the entire term of the securities. In addition,
the SEC has proposed that standardised information
should be disclosed about individual assets of the ABS.
Furthermore, the proposed Regulation AB II envisages
a requirement for issuers of securitisations to develop
a computer program that will enable investors to check
disclosures about cash flows.
Under CRD II, a financial institution may only invest in
a securitisation if it can demonstrate that it completely
understands the associated risk characteristics. Any
issuer wishing to sell a securitisation to a financial
institution consequently has to make sufficient
information available in advance to enable the investor
to satisfy the requirements of CRD II. As this directive
requires investors to demonstrate their understanding
of the risks over the entire life of the securitisation,
issuers have to disclose the relevant information on an
ongoing basis.
Initiative to standardise reporting requirements
The ABS loan-level initiative of the ECB and the Bank
of England has helped to standardise information
requirements further and create greater data
transparency. 36) The requirements have been in effect
since January 2013 for residential mortgage-backed
securities (RMBSs) and ABSs backed by SME loans, and
since March 2103 for commercial mortgage-backed
securities (CMBSs). For all other types of securitisation,
the reporting requirements took effect at the beginning
of 2014.
In addition, CRD II requires financial institutions which
invest in securitisations to conduct regular stress
tests. All these requirements also apply to insurance
companies under Solvency II and alternative investment
fund managers under the AIFMD.
US
In the US, Regulation AB, 34) which took effect in 2004,
contains detailed disclosure requirements for ABS
Assessment
When seeking to regulate securitisation markets,
it should be borne in mind that they are highly
heterogeneous at both national and global
levels. Securitised assets and forms of issuance
differ within and between jurisdictions. Since
securitisations are frequently issued on a crossborder
basis, national rules and regulations need
34) www.sec.gov/interps/telephone/cftelinterps_regab.pdf
35) www.sec.gov/about/laws/sea34.pdf
36) www.ecb.europa.eu/mopo/assets/loanlevel/html/index.en.html
28 Regulation of shadow banking