The European Commission has published the delegated acts on Solvency II and the Liquidity Cover Ratios. Whatever quibbles one may have, it is crucial to recognise the enormous progress achieved by the European Commission in defining high quality securitisation and reflecting its outstanding performance in regulations. This is a positive outcome that was far from predictable barely a year ago.
On Solvency II, they have maintained the division between the treatment of Type 1 and Type 2 securitisations but have now completely flattened the curve for all the Type 1 securitisations below the most highly rated. Whereas the most highly rated require 2.1% capital per year of duration – as set out in the earlier drafts, all other Type 1 securitisations will now only require 3% of capital irrespective of ratings. This is undoubtedly a further improvement for securitisation. The rules now also contain a cap on the charges based on the capital requirements for the underlying assets – a position long advocated by PCS. Will it be enough to allow insurance companies to become large investors? PCS has heard from a number of insurers two concerns: the numbers remain too high for the highly rated product and Type 1 still excludes junior tranches. As the treatment of Type 2 is so lapidary, it is near inconceivable that any insurer will buy such a securitisation. This would therefore seem to lock out insurance companies from the mezzanine securitisations that are key to capital relief.
On the LCR definition, the broader category of ABS allowable as 2B assets is also to be welcomed. Furthermore, by aligning very closely the definition of HQLA under the LCR rules and the Type 1 ABS for Solvency II, the Commission has demonstrated that it fully understands the need for a consistent definition of HQS to be used across the European regulatory space.