STS – the end of a long march, maybe the start of a new dawn

Today, in the European Parliament 457 votes were cast in favour of the STS Regulation (out of 617) and a further 458 votes for the CRR Regulation.  Six years after the industry argued for a bifurcated regulatory scheme that treated high quality securitisation fairly and after many twists and turns, the new regime has finally seen the light of day. (As a technical matter, the law still requires the final signature of the Council, expected next week and publication in the Official Journal, expected within a couple of weeks.)

Overall, we believe that – whilst no more perfect than any other complex legislative outcome – the new regime is workable, if somewhat complex, and provides the basis for a revival of a safe and robust securitisation market in Europe.  Some last minute wobbles concerning self-certified mortgages and due diligence requirements (known to the cognoscenti as the “Article 17 issues”) were to a large extent successfully resolved in the final text.

But the new Regulation, whilst laying solid foundations for a new securitisation market, still requires some additional construction fully to fulfil its potential.  In that sense, the industry’s long march may not yet be completely over.  First, the STS criteria remain frighteningly vague in part and will only acquire solidity after the EBA’s guidelines and recommendations as to their interpretation.  All industry eyes are now turned to the EBA, therefore, to fill in the blanks.  Secondly, without a change to the Solvency II securitisation calibrations for insurance companies, the only benefits of STS are for bank investors (and, to some extent, money market funds).  So industry also turns to the Commission for Solvency II amendments, which PCS understands are being prepared.  Changes to the Liquidity Cover Ratio (LCR) rules would also be enormously helpful and entirely logical.

Two final thoughts on the new regime.

First, regulation can only provide the framework for financial markets.  Whether, in the appropriate framework, markets thrive depends on the traditional elements of willing sellers and willing buyers agreeing on price.  Therefore, whilst the STS regime is an important, if not essential, component of a strong European securitisation market, its normalisation remains crucially dependent on the overall monetary policy of central bankers.  Put bluntly, so long as financial actors can obtain free money from their central bank there will remain little incentive to access more expensive funding sources such as securitisation.  So it is with great interest that we await today’s ECB statement on a possible taper.

Secondly – Brexit.  As a Regulation, the STS regime will, upon publication in the Official Journal, become UK law by direct applicabillity.  Depending on the final terms of the withdrawal bill currently before the British Parliament, it is likely that the STS regime will remain UK law after Brexit.  However, to the great disappointment of PCS, the European lawmakers rejected any extra-EU dimension to the STS regime.  This leaves us with the possibility of two identical STS regimes, operating in entirely separate, watertight spheres.  PCS hopes that, in due course, this anomaly will find a sensible solution.