With the Securitisation Regulation and the Reporting Technical Standards (RTS), financial institutions now have more stringent requirements when disclosing information on their securities, including mortgage-backed securities. Can artificial intelligence reduce the time, cost, and compliance risk involved by the RTS?
RTS are just the latest step in a series of provisions to enhance transparency to the market of securities in the EU: following the Securitisation Regulation (Regulation 2017/2402), the EU Commission has then laid down the Reporting Technical Standards in the Commission Implementing Regulation (EU) 2020/1228 that became effective on September 23, 2020.
The technical standards detail the requirements that financial institutions need to comply with when disclosing information about their securities to investors. The EU Commission has provided 15 pre-made templates developed by the European Security Market Authority (ESMA) of the precise requirements that need to be complied with. The templates show the detailed loan-level information that each financial institution (originator, sponsor, or SSPE) must provide to its investors. These include commercial and residential mortgage-backed securities.
While this is a much needed move, it also adds further constraints to financial institutions, paired with the necessity to comply in a short timeframe.
How to extract loan-level data from all the existing agreements and fill up the corresponding reporting templates? Artificial intelligence proves to be a much needed ally to automate this process, making due diligence and reporting more effective, less risky, and much less time consuming.
The New Reporting Guidelines and Template Requirements
The Securitisation Regulation requires financial institutions to provide periodic reporting of information on the underlying assets of the securitisation.
The Reporting Technical Standards set out the granularity of the information to be disclosed: underlying exposure-level data can be extremely useful for investors and to adequately understand and monitor the risk and performance of securities.
The RTS has established that the disclosure must happen by using prescribed reporting templates, developed by ESMA, which must be used to make any new information available about a securitisation in accordance with Article 7 of the Securitisation Regulation. ESMA has even published guidance on how to complete the disclosure templates in its Q&A Document on Securitisation Topics. There are 15 templates that have been published and made available as Excel files in order to assist stakeholders in their analysis of the technical standards.
You may want to take a look at the templates regarding residential mortgage-backed securities and commercial mortgage-backed securities.
The information requested by financial institutions on these types of securities is very detailed, going from property level to loan level information, and covering areas such as:
- Geographic Region
- Employment Status
- Tenant Identifier
- Tenant Name
- Date Of Lease
- Rent Payable
- Rent Currency
The standard templates should make it easier for investors and potential investors in a securitisation to conduct due diligence on the securities portfolio and better monitor the underlying risks.
Clearly, this means that this information needs to be extracted by each and every real estate agreement – a commercial or residential agreement, and from each credit agreement attached to it. The extracted information needs to be inserted in the reporting templates as instructed in the Regulation.
Producing compliance reports is not an easy task – it requires analyzing and reviewing a large number of underlying agreements – including leasehold agreements and credit agreements, and extracting the information that needs to flow into the Commission-approved templates.
Lease Abstraction and Contract Review Technology
The good news is that detailed requirements paired with repetitive review and extraction tasks make the ideal battlefield for artificial intelligence technology.
For commercial mortgage-backed securities and residential mortgage- backed securities, financial institutions would need to review two types of contracts: real estate agreements – be it leasehold or purchase agreements, and loan agreements. Not dissimilarly, the EU Regulation provides for extracting information at property level and loan level.
AI-powered document review technology allows for quick, detailed, and precise review of any kind of agreement, identifying key data and extracting it, without the need for costly, time consuming manual review and extraction.
Loan agreements and real estate agreements are substantially different in content and structure, though, so the AI-technology needs to be trained to identify and extract detailed sets of information from each type of contract.
At Cognitiv+ we are fully aware that two different types of contracts require different expertise and that complex issues require solutions that are able to tackle complexity.
We’ve developed two solutions:
Our Lease Abstraction tool is an artificial intelligence-powered technology that allows for fast, intelligent review of your real estate contracts.
Our Contract Review technology is engineered for reviewing and extracting information from commercial contracts, including loan agreements.
Both technologies can be further customized and fine-tuned to identify and extract key provisions and data as required by the Reporting Templates RTS or by internal reporting policies.
The added value in Cognitiv+ lies in the versatility of the solutions and in the possibility to integrate with existing database management system, through our API.
The features of Cognitiv+:
- Automatically identify and extract key data at scale, as required by the Securitisation Regulation and Reporting Templates RTS.
- Fine-tune and personalize the technology to extract additional sets of data in addition to data that is required by EU regulations;
- Data is extracted in a filterable excel spreadsheet.
- Extracted information can be integrated into your own system with Cognitiv+ API.
If you would like to know more about our Lease Abstraction or Contract Review technology, we will be happy to provide you with a free demo of our software.