Regulation of shadow banking

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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
ankenverband to be compatible with one another in order to support market integration and avoid competitive distortion. The regulation of securitisation will help to restore confidence if the standards set are met by market participants and succeed in eliminating the perverse incentives that arose during the crisis. A comparison of risk retention requirements in the EU and US shows they take different approaches. While the US requirement obliges the originator or arranger of a securitisation to retain a portion of the risk, the EU rule prohibits investors from investing in transactions where no risk has been retained. According to IOSCO’s analysis, differences in the regulatory approach can have a significant influence on some crossborder transactions. EU requirements, for instance, apply to all securitisations, irrespective of the jurisdiction in which they originate. Yet IOSCO did not find evidence of material incompatibilities between regimes. This is due, among other things, to the existence of sufficient overlap in the range of permissible ways to satisfy the risk retention requirement. This enables the originator of a securitisation to meet the regulatory prerequisites on both sides of the Atlantic. IOSCO nevertheless proposes a roadmap towards international alignment of the rules on risk retention. Regulation of shadow banking 29
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