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The ambitious lending targets set by the shareholders of Multilateral Development Banks’ (MDBs) which aim to achieve the 2015 United Nations Sustainable Development Goals, require a significant expansion of the MDB lending capacity. If MDBs wish to optimise their balance sheet by engaging in large-scale risk transfer, in organising their activities, they must the meet the needs of potential investors.
Many investors face requirements imposed by their own local regulatory bodies. Risk Control has conducted a project on behalf of the MDB Challenge Fund to generate and document data templates that meet the data needs of investors in MDB risk transfer transactions. Risk Control (2024b) documents data templates and formats that investors would expect prior to closing an MDB portfolio risk transfer.
This report clarifies the local regulatory requirements for data when MDBs implement risk transfer transactions through cash or synthetic (i.e. involving guarantees, CLNs or insurance) securitisation. These requirements may be expressed as part of investors’ due diligence or as part of transparency requirements imposed on originators, issuers or sponsors of the transaction, based in the jurisdiction or not. We have analysed the jurisdictions in which a significant proportion of large institutional investors are located, namely the European Union (EU), the United Kingdom (UK), the USA, Japan, and Australia. Of these, the EU has the more constraining regulation regarding the data issuers must provide to investors.
The data templates developed by Risk Control for MDB cover risk transfer transactions of exposures to Corporate and Financial companies, Infrastructure and Project Finance, and Sovereigns. The templates broadly comply with regulatory requirements. Since the European Securities and Markets Authority (ESMA) data templates employed in the EU are the core of the data templates for MDBs developed by Risk Control, only minor adjustments (which would not add any information in most cases to investors) are required to satisfy EU regulations.
The Risk Control templates would also comply with UK investor data requirements as the format of the data is no longer a strict UK regulatory requirement. Since Brexit, the UK templates may diverge from those of ESMA.
MDBs’ securitisation transactions with US investors may need to comply with the US data templates if they are public transactions (i.e. registered offerings), due to the potential extraterritorial reach of US laws. The adjustments necessary in the Risk Control templates are minimal as most data fields are optional and not mandatory. A mapping tool is necessary to provide all data. Most missing (optional) data would be reformatted or recalculated from other data fields present in the proposed MDB templates.
However, we would recommend that MDBs proceed with private transactions. Private transactions, which represent the bulk of securitisation deals in the US, do not require regulatory data templates from originators, sponsors and issuers. Therefore, MDB templates could be used with no need to comply with US templates, although US market participants tend to follow similar disclosure as public transactions where applicable (mainly for Real Estate Mortgage Back Securities and corporate loans securitisation).
Japanese institutional investors in securitisation must demonstrate that all the loans in the portfolio have been “appropriately” originated and, therefore, must obtain loan-level information from sponsors and originators to avoid a tripling of their capital charges. The Japanese supervisor recommends that data templates developed by the Japanese Securities Dealers Association be employed. These overlap substantially with the US and EU templates, but no specific format is required by regulators.
Therefore, the templates proposed by Risk Control for MDBs should satisfy Japanese investors. Note that Japanese investors are very significant investors in US CLOs and for them, the templates amended for the US market are likely to prove acceptable. There is no formal requirement for data formats in Australia. Hence, the Risk Control MDB data templates should be accepted by the Australian regulators if risk transfer transactions are marketed to Australian investors.
Of the 5 jurisdictions that we have analysed, the EU has the most demanding requirements on data templates. This justifies the Risk Control approach of taking the ESMA templates as a starting point. The resulting templates should prove acceptable in other jurisdictions with only minor adjustments. The current ESMA consultation may indeed permit the use in future of a slimmed-down version of the templates for private transactions and for third country securitisations.
