2022 - The STS Year in Review

Welcome !

Welcome to the end-of-year edition of the STS Newsletter by PCS, keeping stakeholders up to date about market and regulatory developments in the world of STS.

As ever, we very much welcome any feedback on this Newsletter.

Market data – Looking back at 2022 – What the numbers tell us about STS

In this section, we will focus on specific numbers in 2022 before going, in section 3., to a broader analysis of what transpired in 2022 in the STS securitisation markets.

Please note that, differently from most year-end commentaries, we have focused on number of deals rather than volume of issuance. The reason for this is not that numbers have a greater explanatory power than volume but rather that they have a different and complementary explanatory power.

Many research firms and other commentators provide the volume numbers and it seemed of limited value to just do the same. By focusing on numbers, PCS hopes to shed not a better light but a different light on the year.

(All numbers are as of 12th December 2022 and so comparisons with 2021 are not exactly on the same basis. PCS only expects very few additional STS deals by year end though..)

The big picture

(Hover over the sections for legends)

Commentary

Europe-wide STS transactions went from 206 to 177 and term true sale transactions went from 125 to 99.

Last year’s comparison showed a misleading steep decline in EU true sale STS deals. This, as we explained at the time, was the result of legacy ABCP transactions achieving STS in 2020 and therefore falling out of the figures in 2021. This year’s decline has however nothing misleading about it. Publicly placed STS true sale transactions decreased (from 79 to 75) in 2022, for reasons we explain below.

Looking at the UK alone adds little to change to this downbeat analysis. UK STS transactions were at 18 for both years.

Asset classes

Public Transactions20212022YoY
RMBS2327+17%
Auto3732-14%
Consumer1213stable

Commentary

As RMBS shows a slight increase and consumer loan numbers remain almost identical, the victim of the lower number of public European STS transactions is the auto sector. Last year’s asset class story had been the emergence of autos as the dominant product in number, overtaking RMBS, the previous holder of the title. This year saw its percentage of deals drop back, almost back to sharing the top spot with mortgages.

This is consistent with other market data showing that auto issuance (STS and non-STS) in 2022 was €12.5 bn. This is not only a meaningful climb down from 2021’s €16.7 bn issuance but is also the lowest auto public issuance since the GFC1PCS is grateful to BAML for its non-STS numbers.

As for last year, non-bank/non-captives grew as a percentage of issuance at the expense of captives. The best guess though is that this is not so much a reflection of long-term trends as much as the subdued market for new cars due to supply issues. When (if?) Europe’s industrial supply chain problems are solved, it is reasonable to expect a rebalancing of the auto securitisation mix.

To be clear though, this is a relative decline for autos. RMBS issuance in the EU (STS and non-STS) is also down 21 % in volume. Even CLOs (not an STS product) went from €39 bn in 2021 to €25 bn in 2022. Placed securitisations Europe wide fell from €125 bn to €88 bn.

Jurisdictions

Commentary

Not a lot of evolution in the jurisdictional distribution except for the decrease of Germany relative to the other countries. This though seems to be primarily the jurisdictional mirror image of the decline in auto issuance, long associated with that country.

Synthetics/on-balance-sheet transactions

The number of synthetic/OBS transactions notified to ESMA as STS went from 15 in 2021 to 32 in 2022. The comparison is misleading to some extent since synthetic/OBS securitisations could only be STS as of April of last year. The comparison is therefore of part of a year vs a full year.

However, the incorporation of synthetic/OBS transactions within STS has clearly been a success and PCS anticipates that it will continue to grow as an STS asset class in 2023 and beyond.

“Events, dear boy, events …” – an analysis of 2022 as a whole

Asked what he had found the most challenging part of being a prime minister, Harold Macmillan is reported to have answered: “Events, dear boy, events…” And how 2022 has proved him right.

When PCS looks back at its prediction section in last year’s End of Year Newsletter , there is a certain sense of pride that we had been so extraordinarily prescient. Our predictions were spot on .… or rather would have been if the year had ended on June 1st. Thereafter, not so much.

Any attempt by the writer to escape footballing metaphors in this season is as lost a cause as that of an astronaut escaping the gravitational pull of a black hole beyond its event horizon. So .…

2022 – a game of two halves

The first part of the year, until June, looked good for European securitisation as a whole and especially STS. The withdrawal of central bank liquidity was bringing traditional originators back to the market after long absences, especially in RMBS, including in the UK. The approaching January 2025 deadline for the final implementation of Basel III was also leading originators to eye “full-capital-stack” securitisations to achieve capital relief.

The previous year had been very positive for securitisation as a whole (with issuance of € 125 bn) but not so good for STS in relative terms. This year looked like the year STS would play some catch-up on CLOs and non-STS RMBS (such as BTL and NC loans).

Synthetics were going strong to add to the upbeat outlook.

Then Ukraine was invaded, followed by a panic over energy supplies, followed by an acceleration of inflationary pressures, followed by increasingly dire predictions of central bank rate hikes; the whole wrapped in a deep fog of uncertainty.

As a result, the second half of the year saw something of a collapse in public issuance. It must be noted that this was not a panic, nor was it a dead stop. Deals did get done, albeit with reduced demand, albeit often on a pre-placed basis with a small investor group.

This second half can itself be divided in two. From June to October, the driver of reduced issuance was entirely price volatility. An originator was reluctant to go to market with initial price talk at 60 bp to find that it was having to pay 90 bp on the day of pricing. On the other side of the equation, an investor was reluctant to buy at 60 bp to find that the same paper would be trading at 90 bp at the end of the year, forcing a mark-to-market loss. So both stayed away.

By October, the macro-economic outlook for Europe dimmed and credit concerns began to creep in – especially for less “top end” issuers. These credit concerns fed into investor expectations on price and resulted in deals being postponed or pulled by originators not willing to pay the new spreads.

Miscellaneous observations on 2022

Securitisation is part of fixed income…

Although, in itself, a fairly trivial observation, it is important to see what happened to STS securitisation as part of what happened to securitisation; and what happened to the latter as part of what happened to fixed income generally. The increase in spreads seen in STS securitisations broadly reflect increases seen in the whole fixed income market in 2022 (with somewhat of a timing lag for securitisation both on the increase and the decrease).

…but that is not the whole story

As securitisation volumes dropped in 2022, covered bond issuance hit an all-time high at €210 bn for benchmark issuance and probably about three times that for overall issuance.

For years now, the regulatory community has deflected responsibility for the weakness of the European securitisation market away from an inappropriate regulatory framework to the monetary policy of the central banks. This led them to predict (or strongly imply) that tighter monetary policy would lead to a growth in issuance. This year has proved them partly right. There was growth in issuance. It is just that all of it was in covered bonds. PCS invites regulators and policy makers to draw the correct conclusions from the data and focus on fixing the regulatory framework.

Privatisation: no need to panic

Policy makers have been concerned by the number of deals going to the private STS market as against the public market. First, the numbers for this year indicate that this is not a trend. Last year saw 79 public transactions against 127 private ones. In 2022 so far, 75 public deals compete with only 102 private ones.

But also, PCS has seen a number of deals scheduled for public distribution that were “privatised”. This includes technically public securitisations that were, however, pre-placed with a very small group of investors as well as private transactions with banks. In all cases PCS has dealt with, these “privatisations” reflected concerns of price volatility (see above) and never over the regulatory burden of private versus public disclosure.

The liquidity story

When limiting the types of securitisations eligible for inclusion in regulatory liquidity coverage ratio pools under the CRR and confining them to the lowest category (2b), banking regulators have cited the alleged illiquidity of this product. Similar considerations are adduced under Solvency II to punish STS securitisations held by insurance companies.

However, one key feature of 2022 has been to demonstrate these concerns are misplaced. Secondary trading in 2022 was the highest since the GFC at €60 bn. More anecdotally but powerfully indicative, in the dark week of the UK’s mini-budget meltdown, when the bid for the 30-year gilt vanished, £4 bn of asset-backed paper traded in the secondary market without a hitch.

The myth of the illiquidity of the asset-backed market was further debunked in a paper by Risk Control that PCS urges regulators and policy makers to read, and which may be found here.

With regards to Solvency II, PCS continues to be puzzled by the assertion that the Solvency II calibrations are fit for purpose when the capital requirements for having an illiquid pool of whole mortgages on the balance sheet remains lower than the capital required to purchase a highly liquid AAA rated senior tranche of a securitisation benefiting from substantive credit enhancement of the same pool of mortgages.

2023 – Strap yourselves in, it’s going to be a wild ride

Predicting the future has always been somewhat of a quixotic endeavour but today we suspect it is positively delusional.

In this section, we try to identify the events and phenomena that are likely to be important in determining the course of the STS market. But if it is prediction you seek, honesty forces us to advise that a quick trip to the local supermarket to purchase a chicken followed by some judicious toying with the bird’s entrails is as likely to yield an accurate result. This is the world we live in. “Events, dear boy, events…”

The fundamentals are still favourable to STS

Central bank policy is likely to continue to reverse the quantitative easing of the last few years. This leaves banks with substantial amounts of TLTRO, TFS and TFSME cash to repay and replace by other types of funding. As we saw above, much of that funding is going to be through covered bonds. But strategically minded banks will be inclined to avoid putting all their funding eggs in the same basket and should seek to issue some securitisations.

The role of non-bank lenders is likely to continue to grow. These players cannot access covered bonds and have credit ratings too low to access non-equity financing at a commercially viable rate.

The final implementation of Basel III deadline of January 2025 will be one year closer in 2023. This will require banks, if they wish to preserve their lending envelopes, to raise meaningful new capital or reduce risk-weighted assets (RWAs). The latter, short of portfolio sales, can only be achieved by securitisations – whether in traditional or synthetic format.

Finally, the price volatility of 2022 has left a decent size overhang of transactions which were originally scheduled for this year. Should volatility abate and spreads land in an acceptable place, those postponed securitisations could result in a strong recovery in early 2023.

But the headwinds are rising

Fears of recession are growing.  A meaningful economic slowdown in Europe could negatively impact securitisation in two ways. 

First, credit concerns could push up spreads to levels that make it impossible or deeply unattractive for issuers to come to market.  In particular, there is the impact of high spreads on the securitisability of pools generated in lower interest rate environments – “underwater pools”.  These can be securitised, of course, but only if the originator takes a “loss on sale” impact to its P&L.

From January to October 2022, spreads rose inexorably for all asset classes in all jurisdictions.  Senior auto paper trading at 4 bp in January was trading at 50 bp in October.  Dutch RMBS that could be purchased at 11 bp in late January would cost you 65 bp by late October. Since then, spreads in the secondary have pulled back a little.  A key question of 2023 will be whether spreads continue to retrace their steps and how far down they will go before stabilising, or indeed if their rising resumes.

Secondly, a recession may slow the generation of new loans.  This will reduce the volume of primary assets capable of being securitised, as well as the need for financing.

Conclusions?

If the lights do not go out over winter in the largest economy in Europe, and Russia does not resort to a nuclear attack, and China does not invade Taiwan to distract from a botched COVID policy and slowing economy, and central banks do not dreadfully overshoot on rate rises tipping the economy into deep recession, and central banks do not fail to tame inflation leading to major industrial unrest and no foolish archaeologists decide to open that tomb covered in mysterious undecipherable markings despite the terrified warnings of the local autochthonous population then ….

We think that we will see a fairly decent first half of 2023 in STS with a quieter second half.  We think overall issuance will be better than 2022 but not dramatically so. We also see synthetic STS issuance continuing at roughly the same pace.

We think the UK will play a bigger role in overall issuance than it has over the last few years.

But then again, you might want to double check against that chicken liver.

Britannia rising

The new dispensation

On December 9th, the Chancellor of the Exchequer unveiled the roadmap to the post-Brexit reform of the regulatory framework for British finance.

Although overshadowed by more headline grabbing subjects such as the future of ring-fencing and bankers’ bonuses, proposals around securitisation were part of the package.

To summarise, since Brexit and during the post-Brexit negotiations, the Treasury kept its powder dry.  Other than promising to devolve large sections of financial regulation from legislative acts, where the European Union had placed them, to regulatory handbooks drafted by the FCA and the PRA, little indication was given about the overall direction of travel.  In particular, it was not clear whether UK rules would stay almost identical to those in the EU in the hope of access to the European market or whether the UK would go it alone.

Maybe it is the result of the new-new-new UK government being run by free-trade, deregulating, “Singapore-on-the-Thames” Brexiteers.  Maybe it is the recognition that, having left the club slamming the door, the club trustees were not going to allow you to still use the clubhouse for free. Either way, the British government has now openly opted for the go-it-alone and make your own rules approach.

However, because the government has also – as promised – devolved most of the technical rulemaking to the FCA and the PRA, it is not clear how deeply the new securitisation rules will differ from the current rules inherited from the EU.  But that will depend primarily on the views of the regulators rather than those of the politicians.

Securitisation proposal

The current proposals for the UK regime unveiled by the Treasury were published in a draft statutory instrument (an application decree/level 2 instrument for our continental readers).

The draft can be found here.

There are quite a few highly technical drafting changes the implications of which are still somewhat unclear.  But here are the highlights.

The definition of “securitisation” remains unchanged.

The STS regime remains in place.   However, the criteria of what makes a securitisation STS have disappeared from the legislative text altogether and are now entirely delegated to the FCA to draft.  Presumably, the FCA will have a consultation to determine what criteria need be met for a securitisation to achieve the STS standard.

Intriguingly enough, with the criteria for STS having disappeared from the draft legislation and, in the absence of a definition of “non-ABCP securitisation” the proposed text appears to leave open the possibility of synthetic securitisations being STS.  This seems now to be in the gift of the FCA although it should be noted that so far the PRA has shown a marked reluctance to assist synthetic securitisations.

The third-party verification and data repositories regimes are kept broadly unchanged.

In line with the free-trade approach of the Treasury, an equivalence regime for STS is set out, with the Treasury deciding which jurisdictions may benefit. 

In a similar vein, the exemption for the special purpose vehicle having to be in the UK is maintained.  The originator and sponsor though need to be UK located.  (However, the concession that allows EU STS to be treated as STS in the UK until December 2024 remains in place.)

Oddly, in our view, the text allows for re-securitisations – which are banned in the EU.  However, any re-securitisation transaction will need to be pre-approved on a deal-by-deal basis.

Retention and disclosure requirements are still in place but the text seems to allow non-UK issuers to sell to UK investors provided they comply with substantially the same standards.  So the total identity of standards required by the EU has been abandoned.

Bear in mind that this is merely a summary of the high points and the document is still a draft.  It could change quite a lot before becoming law.

News you may have missed

  • Hot off the press, the Joint Committee’s response to the European Commission’s call for advice came out on December 12th. As Christmas presents go, the regulatory Santa must have thought the securitisation community had been very bad in 2022 and only deserved a long, wordy lump of coal this year. For a first blush reaction, you can read our News Item.
  • The definition and rules around future green securitisation are still part of active discussions between the European Parliament and the European Council which, together with the European Commission, are currently negotiating the final text of the forthcoming EU Green Bond Standard Regulation.  It is expected that something will be emerging within the next few weeks.
  • In 2022, PCS has brought out its European Symposia Series. These one day complimentary events are devoted to the securitisation market in each specific country as well as across Europe, including a look at current trends and possible future developments. The events offer a chance to meet securitisation experts, regulators, originators, arrangers, investors and servicers, discuss market trends and build relationships. In 2022 we have held Symposia in Warsaw, Lisbon, Athens, Helsinki, Brussels and Milan. For our 2023 calendar see Stakeholders Calendar.
  • Two studies were published recently by Risk Control.  The first is an analysis of the relative liquidity of Corporate Bonds, Covered Bonds (CB) and Asset Backed Securities (ABS). The main finding is that the relative liquidity of ABS shifted significantly after 2016, becoming superior to that of CB. The paper may be found here.  The second is a detailed study of how the new output floors regime within Basel III will affect bank incentives to securitise loans. The main finding is that securitisation of some asset classes, most notably corporate loans, will be greatly discouraged whereas that of residential mortgages will actually be boosted. This paper may be found here.
  • In the Netherlands, DNB came with news about the way they are going to fill in their role as STS supervisor going forward. From November 1st, 2022, DNB will no longer send an assessment of each deal to the institution that had notified the transaction. Instead, they will start conducting investigations at institutions in order to review the arrangements, processes and mechanisms that have been implemented to comply with the Securitisation Regulation. This resembles the approach of the French AFM (as described in our previous Newsletter).

Celebrations and season's greetings

We would like to take this opportunity to celebrate the ten years of the PCS initiative and thank our readers and other stakeholders for their support through a decade of seeking, with their help, to support the European securitisation market as well as to convey our season's greetings and best wishes for the new year.

So, from London, Paris, Milan, Munich, Poznan, Amsterdam and Banholt, the Outreach Team and the Analytical Team from PCS send you Season’s greetings and wish you a happy, prosperous and, above all, healthy 2023.

Joint-Committee of the ESAs response to the Commission is published - expected disappointment has materialised

Today, the Joint-Committee of the ESAs (grouping the EBA, EIOPA and ESMA) has published the long awaited response to the European Commission's Call for Advice on a possible reform of the securitisation capital calibrations under CRR and Solvency II. The response comes in two reports: one for banking and one for insurance. These can be found here and here.

As they have just been published, we have yet to read the full conclusions. But the EBA announcement page gives some indication as to the proposals (or lack thereof) contained in the documents.

For the CRR, the EBA has proposed to lower the floor for senior tranches of some STS securitisations from 10% to 7%. Crucially, they do not appear to have taken the opportunity to propose any changes to the infamous p factor. The p factor is the number used in the CRR to account for "agency risk" in securitisations. As PCS has pointed out numerous times, the entire STS regime is designed to eliminate agency risk in securitisations. PCS is not aware of a single securitisation specific agency risk that is not accounted for in the STS criteria.

Unfortunately, the rejection of any amendment to the p factor is not only a missed opportunity to align STS securitisation's capital requirement to the actual risks. It also negates, in the medium term, any value to the proposed lowering of the floor. From January 2025, the introduction of output floors in the final implementation of the Basel III rules will, without change to the p factor, wipe out any benefit from the lower floor.

The EBA also did not take the opportunity to make meaningful changes to the Liquidity Coverage Ratio eligibility criteria. This is notwithstanding the increasing amount of evidence as to the liquidity of high quality securitisations such as this quantitative analysis by Risk Control. (It does seem to propose fixing a problem with ratings limits though, although PCS needs to read the proposal with care to gauge its import).

As for Solvency II, EIOPA proposes nothing. Based on the announcement - but without having read the full report - EIOPA assets that, since the original introduction of STS in Solvency II did not lead insurance companies to buy STS securitisations there is no value to the regime. We would suggest an alternative conclusion: since the introduction of the STS regime in Solvency II was accompanied by grossly excessive capital requirements, it gave no incentive whatsoever for insurance companies to purchase high quality securitisations. It was not the introduction of the STS regime that led to the absence of insurance investors but the failure to see through the STS reform to its logical conclusion by the introduction of the correct and appropriate capital requirements.

PCS continues to be puzzled by the assertion that the Solvency II calibrations are fit for purpose when the capital requirements for an illiquid pool of whole mortgages remains lower than the capital required to purchase a highly liquid AAA rated senior tranche of a securitisation benefiting from substantive credit enhancement of the same pool of mortgages.

PCS hopes that careful reading of the two reports may yield better news but we are not optimistic.

UK publishes proposed amendments to the Securitisation Regulation

At the end of last week, the Chancellor of the Exchequer unveiled the government’s roadmap to a new regulatory framework for British finance.

Although overlooked by most commentators, the announcement contained detailed proposals to revise the Securitisation Regulation inherited from the EU.  These proposals may be found in a draft statutory instrument.

There are quite a few highly technical drafting changes the implications of which are still somewhat unclear.  But here are the highlights.

The definition of “securitisation” remains unchanged.

The STS regime remains in place.   However, the STS criteria have disappeared from the legislative text altogether and are now entirely delegated to the FCA.  Presumably, the FCA will have a consultation to determine what these should be.

Intriguingly enough, with the criteria for STS having disappeared from the draft legislation and, in the absence of a definition of “non-ABCP securitisation”, the proposed text appears to leave open the possibility of synthetic securitisations being STS.  This seems now to be in the gift of the FCA.

The third-party verification and data repositories regimes are kept broadly unchanged.

In line with the free-trade approach of the Treasury, an equivalence regime for STS is set out, with the Treasury to decide which jurisdictions will be so treated.  This was explicitly rejected by the European Commission in their recent report.

In a similar vein, the removal of the requirement for the special purpose vehicle having to be in the UK is maintained.  The originator and sponsor though need to be UK located.  (However, the concession that allows EU STS to be treated as STS in the UK until December 2024 remains in place.)

The text allows for re-securitisations – which are banned in the EU.  However, any re-securitisation transaction will need to be pre-approved by the regulatory authorities on a deal-by-deal basis.

Retention and disclosure requirements are still in place but the text seems to allow non-UK issuers to sell to UK investors provided they comply with substantially the same standards.  The total identity of standards required by the EU has been abandoned.

This is merely a summary of the high points and it should be noted the document is still only a draft. 

Stakeholders' letter to European policy makers: "Securitisation cannot play its vital role for the European economy without reform"

PCS has added its name to a securitisation market stakeholders' letter to European policy makers.

In addition to PCS, the letter is co-signed by AFME representing wholesale markets, the European Banking Federation representing the banking sector, Leaseurope representing the leasing sector, Eurofinas representing consumer lenders, IACPM representing credit portfolio managers as well as the DSA, Europlace and TSI respectively representing market participants based in The Netherlands, France and Germany.

The letter comes back to themes that those who follow PCS have often seen us write about. The importance of a safe but deep securitisation market for the health and growth of the European real economy, the increased urgency of fixing that market in the face of the green challenge and the need to complete the welcome reforms started with the passage of the Securitisation Regulation especially in respect of the CRR calibrations, the Solvency II calibrations and the disclosure regime.

Considering the breadth of representation encompassed by the signatories - in addition to PCS' own independent voice - we hope the letter will be taken to heart by policy makers.

November 2022 Newsletter

Welcome !

Welcome to this edition of the STS Newsletter by PCS, keeping stakeholders up to date about market and regulatory developments in the world of STS.
In this edition, we review the European Commission’s report on the Securitisation Regulation and try to discern what can be learned from it.
We also briefly introduce our European Symposia Series and our brand new website.

In our regular features, we share updated data on the STS securitisation market and, in the people section, we present Max Bronzwaer, Member of the Board of PCS UK and PCS EU and member of the Outreach Team.

We are also adding a new regular feature: “News you may have missed”, short bullet points on developments that may have flown under the radar.

As ever, we very much welcome any feedback.

Regulatory state of play

Between consultations on regulatory technical standards which are key to the functioning of the market (SES, homogeneity, SRT) and more in-depth reviews of entire segments of the regulatory architecture (Securitisation Regulation review, Call for Advice on the CRR and Solvency II) it seems that there is great potential for progress for the EU stalled market. Yet, is this more light than heat?

In this edition we look in more detail at the European Commission’s report on the Securitisation Regulation and what lessons it may hold.

EC report on the functioning of the Securitisation Regulation

On October 10th the European Commission released its report on the functioning of the Securitisation Regulation. The Commission was obligated by the regulation itself to produce such a report. (The obligation was in article 46 of the regulation which is why you will see it mentioned by some commentators as the “Article 46 Report”).

Some General Points

First, we were heartened to read the full support for the revitalisation of the European securitisation market displayed in the report’s introduction and the reiteration by the Commission of the benefits such revitalisation would bring to the real economy. PCS hopes this vocal support will be met by equally strong practical legislative and regulatory steps but some recent public pronouncements and proposals from supervisory authorities make us wary that each oratorical step forward could well be met by a practical step backwards.


Secondly, reading between the lines, it seems that a driving force behind the report was the avoidance of any recommendation requiring an amendment to the regulation itself rather than to delegated acts: in the lingo of Brussels, any changes to the level 1 text. PCS is not unaware of the political calculations that may lie behind this position. But it is an unfortunate self-limitation particularly when looking at disclosure for private transaction – as to which more below.


Finally, for those who pay attention to these things, the report does not deal with the burning topics of the CRR capital requirements for banks investing in securitisations, the liquidity coverage ratio (LCR) eligibility criteria or the Solvency II capital requirements for insurance investors. As these key rules appear in other regulations than the Securitisation Regulation, the Commission not unreasonably deemed them “out of scope” of this report. These issues, of course, are the subject of a Call for Advice issued by the Commission to the Joint-Committee of the ESA’s which was supposed to be produced by September 1st and should emerge any day.


What the report does deal with are the following topic:

  • Risk retention
  • Investor due diligence
  • Private vs public transactions and disclosure
  • STS equivalence regimes for non-EU transactions
  • Green securitisations and the EU “Green Bond Standard”
  • Third party verification agents in STS
  • Using limited licensed banks instead of SPVs
  • Non-EU issuer obligations for sales to EU investors (the “jurisdiction issues”)

Risk retention

Here the Commission decided all was working as it should and no changes need be made to the rules. This seems sensible.

Investor due diligence

The Commission acknowledged the view of many, both on the sell and buy sides, that the mandated disclosures in the ESMA templates were disproportionate. It also noted what we have repeated many times: even if the disclosure requirements for securitisation can be defended on their own merits, there are no equivalent or even remotely as onerous requirements on similar instruments. This uneven playing field encourages regulatory arbitrage and is a major headwind to any revitalisation of the market.


Unfortunately, the Commission did not address the issue of the uneven playing field. It did provide a small silver lining by requesting ESMA to revisit the templates with a view to slimming them down. This is certainly better than nothing but, we feel, side-steps the crucial problem of the discriminatory treatment of securitisation compared to other instruments.

Private vs public transactions

The Commission addressed the fear that a rise in private securitisation transactions was occurring as a result of issuers trying to avoid the disclosure requirements of public deals. Based on our own experience, we are fairly certain this is not the case. The report wisely concluded that there was not enough evidence to decide either way.


On the use of the same templates for private and public transactions, the Commission is asking ESMA to devise a dedicated private transaction template. The twist though is that the Commission seems to accept that such template is not required by or for investors. It wants one for supervisory authorities.


Our own view, communicated to policy makers, is that the dilemma of not allowing, on the one hand, capital market deals to “hide in the private shadows”, to use a somewhat overdramatic expression, but without, on the other hand, burdening bank lenders with unnecessary data requirements is to redraw the public/private line away from where it is now (on the use of a prospectus). It seems more prudentially logical to distinguish between (a) capital market instruments and (b) traditional relationship banking facilities.


The advantage of this approach is that traditional banking facilities (including ABCP and warehouse facilities), together with the banks’ due diligence processes, are already regulated by banking supervisors. Such deals should not require any obligatory disclosure since banks’ existing due diligence should be sufficient. Public deals defined as capital market instruments with non-bank investors (or bank treasury investors) would require the extensive disclosure templates produced by ESMA. Sadly, this would require an amendment to the level 1 text which the Commission does not appear willing to contemplate.


If ESMA is going to draw up new templates based on the needs of supervisors, we urge the supervisors to provide ESMA with a realistic list of the data they will genuinely use in their supervision rather than a laundry list of all the data they may wish to use in an ideal world.

STS equivalence

A number of market participants wished the Commission to grant an equivalence regime so that issuance from non-EU originators meeting local requirements could be treated as STS when held by EU investors. The Commission pointed out, rightly in our view, that outside the UK no jurisdiction had anything close to the EU STS regime and so equivalence was not relevant.


As for the UK, the Commission skirts the question which, let us be honest, is one of high politics rather than technical standards.

Green securitisation

The Commission endorsed the position of both the EBA and the ECB (as well as that of PCS and the majority of market participants) that there should be no special regime for green securitisations and that these should be governed by the general principles laid out in the European Green Bond Standard – namely that an instrument is green if the money raised is used for green purposes.

Third party verification agents

The Commission decided all was working well and no changes were required. We agree.

Limited licensed banks

Someone suggested that the Commission look into the idea of using limited licensed banks instead of SPV’s to issue all securitisations. The Commission concluded – as did pretty much everyone else – that this was a terrible idea.

The jurisdictional scope

This is likely to be the most controversial part of the report.


From the moment it passed, the regulation has contained an ambiguity as to whether non-EU securitisations were required to conform to the mandatory provisions imposed on EU securitisations – specifically the retention requirements, the disclosure requirements and the obligation not to cherry pick assets. In other words, was the Securitisation Regulation extra-territorial or did it only apply to EU deals.


This ambiguity was made worse when the Joint-Committee of the ESAs took a hard line on interpretation arguing not only for extra-territoriality but for imposing on non-EU deals not only EU obligations but the requirement of EU located liable party e.g. EU based retention holders.


The report pulls back from the Joint-Committee’s more extreme view that the law requires EU based entities to be involved in all non-EU securitisations sold to EU investors. However, it does endorse a wide extra-territorial approach. For the Commission, any non-EU securitisation sold to EU investors does need fully to comply with all the Securitisation Regulation requirements.


Since EU supervisors cannot control non-EU parties, the Commission also throws the obligations to ensure that non-EU transactions meet the EU standards on EU investors. EU investors, of course, are subject to sanctions by EU supervisors.


In theory, a non-EU issuer who wants to sell to the EU could choose to meet all the retention, disclosure and no-cherry picking requirements of the Securitisation Regulation. This is not therefore a legal prohibition on EU investors buying non-EU deals.


In practice, unless the European bid is a large part of the investor bid for any deal, it is hard to see why an issuer would meet all of its national rules (e.g. Reg A B in the US) and all the European rules. This interpretation may well be the death-knell of European investors capacity to purchase non-European securitisations, at least directly.


PCS’ own mandate is to focus on European securitisations, so we do not have an official position on this subject. We do have much sympathy for the Commission’s position. Yet, we do wonder if there would not be a less extreme approach that would allow EU investors to purchase non-European deals that substantially meet all the Securitisation Regulation’s requirements.

Other stuff

The report was also bad news for non-EU Alternative Investment Fund Managers (AIFM) who had hoped not to have to comply across the board with EU rules if they were small or if they only marketed a few funds in the EU. The answer, as far as the Commission is concerned, is if you are an AIFM marketing a single fund in the EU, whatever your size, you will have to comply with all the Securitisation Regulation obligations on institutional investors.


Also, the report looked at the supervisory framework – grounded primarily in the national competent authorities – and found no cause to change the current system. Considering the Commission’s reluctance to amend the level 1 text, this is unsurprising.


The report does note the risk of divergence in a system based on national authorities. This echoes concerns voiced by the ESAs and may well be the harbinger of greater attention and cooperation across European national regulators.

Conclusions

On the whole, this is not a bad report although it does miss opportunities for change – especially around private transaction disclosure.


It also clearly lobs the ball into ESMA’s court on some key issues around disclosure. We hope that ESMA will be bold when dealing with these matters and take the opportunity substantially to improve the situation in line with the Commission’s strong support for measures that support the market.


Also, as we have said in our news item when this report came out, much of the key battles still need to be fought around the CRR, LCR and Solvency II amendments.


In this respect, we would like to quote the last paragraph of the report in full:
“The Commission remains fully committed to the aim of creating the framework for a thriving and stable EU securitisation market. Such a market is an indispensable building block of a genuine Capital Markets Union and might become even more important for tackling the challenges of financing economic activity in the significantly more difficult market environment that seems to be evolving at the moment. The Commission will therefore continue to closely monitor the securitisation market and intervene, if and when deemed appropriate, to fully reap the benefits of a thriving securitisation market for the EU.”


We could not have put it better ourselves.

Market data

Our market data is now interactive. You can select any of the 5 tabs (STS Type, asset class, .... ) and you can enable or disable any of the time series (#YTD/2019,#YTD/2020,...) Hoover the mouse over any of the number to get more info.

  • Looking at STS type, we have two misleading charts and one worrying one.  The ABCP bars suggest a relentless decline.  This is an illusion though as 2020 was the year of stock when sponsors turned many existing transactions into STS.  That continued a little in 2021.  By now and going forward, we are in the years of flow when new transactions only are appearing in the statistics.  The OBS (synthetic) shows growth but this can be accounted for the fact that STS has only been available since half way through 2021 for synthetics so 2020 was always going to be zero and 2021 less than a full year.  That said, we believe there will be continued growth in that STS class.
  • The worrying chart is the decline of public term transactions.  Having seen traditional bank originators replaced by many new challenger lenders, there was an expectation that the former would start to return to the market as, both in the UK and in the EU, cheap central bank funding would have to be repaid.  This seemed to be borne out by a return of some traditional originators especially in the UK.  This trend was brutally reversed by inflation, rate rises and a war (and, in the UK, by…whatever that was).  All these drove up both interest rates and spreads.  Price volatility exploded and uncertainty in the capital markets as a whole is now higher than its was in 2008 or 2012.  Public issuance declined to a trickle.
  • Looking at jurisdictions, one cannot but be struck by the relentless decline of UK public issuance.  As mentioned above, hopes had been kindled early in the year that this would be reversed and signs were encouraging.  Second half of the year volatility (both worldwide and with the UK’s own special, nay unique, flavour) put many deals already in the pipeline in abeyance as postponement became the order of the day.  Regulatory improvements are as needed in the UK as in the EU, but the Treasury -  on their third Chancellor in as many months – have their attention elsewhere one assumes.
  • Broadly, synthetic STS continues to grow strongly and we believe that will go on as Basel III full implementation (including the dreaded output floors) approaches.  Public deals, after a promising start, are down to originators who have to use securitisation as their business model (platform lenders, some auto captives, portfolio aggregators) whilst it seems anyone with a decent alternative has put their deals on hold or gone private.

Remember, as always, that PCS’ data is by deal rather than, as many research houses do, by volume.  This is not that this is a better way of presenting the data but it is a different way of presenting the data which, hopefully, reveals additional information.

News you may have missed

  • In Italy, the decree appointing the relevant national competent authorities (NCAs) in charge of supervising the securitisation market was finally passed on 3rd September.  It can be found here (in Italian). Life for the market has not been made easier since, depending on the party and the activity involved, the supervising authority might be the Bank of Italy, IVASS, COVIP or CONSOB.
  • In France, this August, the AMF published the first official report by a national competent authority on the implementation by local issuers of the STS rules. It can be found here (in French) or here (in English). It had some somewhat unkind things to say. This report is the most visible indication of a much greater attention spent by NCA’s on the STS regime across most of Europe.
  • In the United Kingdom, no doubt countless lessons will be learned from the debacle of the last few weeks.  One of them matters for our market though: in the same week that saw the Bank of England intervene because there was no bid on the 30-year gilt, £4 billion of ABS traded in the secondary market without a hiccup.  This is proof of the argument PCS has been making since 2014 in respect of the eligibility criteria for the liquidity coverage ratio pools: ABS is only illiquid in an ABS crisis – which was the data the EBA used.  But sovereigns are illiquid in a sovereign crisis as UK pension funds discovered brutally, corporates in a corporate crisis and covered bonds in a bank crisis.  The supposed intrinsic illiquidity of securitisation was always a myth.  It is high time the authorities revisit the LCR criteria.
  • In Greece, the Bank of Greece has been invited to present at the PCS’ symposium on 21st September the supervisory approval process for STS issuance, both true sale and synthetic.  It involves quite a few steps.
  • At the time of print, the EU Green Bond Standard draft regulation is in trilogue.  For those not familiar with the legislative process in the European Union, this means that the European Parliament and the European Council (representing the member states) are seeking to agree a common text based on their respective proposals with the help of the European Commission.  We hope that the parties will be able to fix the current Commission draft in line with the wishes of the EBA, the ECB, PCS and most of the market to ensure that securitisations are treated like other capital market instruments and can meet the EU GBS when the funds raised by the originator are spent on green projects (“use of proceeds”).  There have already been two trilogue meetings on October 12th and October 18th to discuss the legislation as a whole, with the next scheduled for November 16th.  The discussions in trilogue are not public though, so we will have to wait and see.
  • Two EBA consultations closed recently.  Both are important to the health of the synthetic securitisation market.  The first is on fixing the amount of capital which synthetic excess spread will attract.  The second is on the requirements for the homogeneity of pools under the STS regime.  PCS responded to both and our responses may be found here and here.  The most important is the first, as the current EBA proposals would shut down an important component of the synthetic securitisation market, but we believe solutions exist that fully remedy the problem perceived by supervisors without punishing legitimate transactions.

PCS European Symposia Series and new PCS website

In the ten years since our founding, PCS has continually strived to improve the ways in which it helps the market. As part of that mission, PCS started a series of symposia across Europe aimed at investors, issuers, regulators and other market participants.  In each symposium we combine a Europe wide view with a local focus

Each complementary event covers fundamental principles as well as the most recent market and regulatory developments. It explores the benefits of securitisation as a crucial mechanism for financial institutions in obtaining funding but also in achieving capital relief. We have been honoured by the participation of experienced voices from the buy side, sell side, legal but also supervisory authorities.

PCS has already held symposia in Warsaw, Lisbon, Athens, Helsinki and Milan which attracted over 350 attendees.

For the upcoming symposia in Brussels, Dublin, Amsterdam, Madrid, London, Paris and Frankfurt see Stakeholders Calendar.

PCS has a new website.  In addition to the traditional sections on verified transactions, the new site has added troves of new resources for anyone looking for information on securitisations.  From the curious novice to the hard core practitioner looking for some highly technical information, the PCS website should be your first stop.  Up-to-date market information, regulatory texts, webinars and presentations on key topics, all and more is there.

Our people

PCS is a compact organisation with a total staff of 15.

In each newsletter we will introduce one of them so that people get to know us. This time, Max Bronzwaer, Member of the Board of PCS UK and PCS EU and member of the Outreach Team.

Max Bronzwaer

In 1988, I started working in financial markets as a Senior Economist in the Wholesale Mortgage Investment department of ABP Investments (today APG Asset Management). We invested in residential mortgages through buying mortgage portfolios from banks and insurance companies (nowadays called whole loan sales) and the silent funding of new originations under labels name-linked to the originators (nowadays called white labels).
My first encounter with the securitisation market was in September 2001 when I presented to investors STReAM 1, the first (and only) RMBS issued by ABP. RMBS was still a relatively new asset class at the time and ABP was a new name as an issuer, resulting in a full two week roadshow covering some twenty cities and an investor meeting in London that was attended by more than 120 (!) investors.
From April 2002 until August 2018, I was Treasurer and Member of the Management Board of Obvion Mortgages and, among other things, responsible for Obvion's RMBS programme STORM, one of Europe's leading RMBS programmes with more than 40 transactions and total issuance of over EUR 55 billion since December 2003. In June 2016, we issued the world's first green RMBS: Green STORM 2016.
On a personal level, I enjoy driving my 1976 Corvette, also occasionally on the circuit of Spa Francorchamps, and riding my two motorcycles.

Contact information

For any questions or comments on this STS Newsletter you can contact the PCS staff.

Ian BellCEO[email protected]
Mark LewisHead of the Analytical Team[email protected]
Martina SpaethMember of the Analytical Team[email protected]
Rob LeachMember of the Analytical Team[email protected]
Fazel AhmedMember of the Analytical Team[email protected]
Daniele Vella     Member of the Analytical Team[email protected]smarket.org
Rob KoningIssuer Liaison [email protected]
Harry Noutsos  Issuer Liaison[email protected]
Ashley HofmannDirector Market Outreach[email protected]
Max BronzwaerMember of the Board of PCS UK and PCS EU and member of the Outreach Team [email protected]

PCS responds to the EBA's consultation on the draft "homogeneity" RTS

PCS filed its response to the EBA's consultation on the draft "homogeneity" RTS. Broadly, PCS is very supportive of the EBA's overall approach. We are especially in agreement with the idea of keeping a single definition of "homogeneity" for all types of STS transactions, whether true sale or synthetic. We also agree with the need to clarify the definition of "large corporate". We do, however, depart from the EBA in the best way to do this and have concerns with the proposed solution being the only solution on offer. Our response also draws attention to the vital importance of the proposed transition period. The EBA proposal is welcome and, even, essential if we wish to avoid a prudential regulation exacerbating rather than calming systemic risks. But for it to work, a transition period of appropriate length is required.

PCS responds to EBA Consultation on Synthetic Express Spread

PCS filed its response to the European Banking Authority's consultation paper on synthetic excess spread. Although this might appear the most abstruse of technical issues, fit only for quants and CRR geeks, the truth is - as PCS sets out in the introduction to its response - that this highly technical matter will have substantially damaging effects on the European economy as a whole if not properly calibrated.

Unfortunately, PCS feels that the current EBA proposals are indeed not only miscalibrated but would result in the virtual eradication of the use of synthtetic excess spread in Europe. This, we feel, is unnecessary as our response - and those of others - sets out a solution which entirely eliminates the legitimate concerns of policy makers regarding the abuse of synthetic excess spread without making its use practically impossible.

Even if you do not wish to plunge deeply in the technicalities, we do invite you to read our response as it does try, as best one can, to make the issue understandable.

Commission's report on the securitisation regulation is out - but the real battle is yet to come

The European Commission released its report on the review of the Securitisation Regulation on Monday. This was mandated by the Securitisation Regulation itself as part of a normal review process often found in European legislation. There was little to cause surprise to anyone who had been listening to the clear messaging coming from Brussels. The headline was that the Regulation having come into force in 2019 the Commission felt it was too early to tell whether it was working and so no meaningful changes were being proposed. Suggestions of changes to the disclosure rules were welcome, the rejection of a change in the definition of private transactions less so.

But the key point is that the real battlefield that will determine the success or failure of the European market does not lie with a serious root and branch reform of the Securitisation Regulation. It lies with the necessary changes to the prudential rules, specifically the capital requirements under the CRR and Solvency II for insurance companies and the rules on the Liquidity Coverage Ratio. Those were explicitly not in scope of this review but are subject to a now overdue response to a call for advice by the Commission to the Joint Committee of the ESAs. In addition, rule changes to disclosure, especially for private transactions could be impactful. Those battles still lie in our future.

PCS and many market participants though reject the notion that the rules are too recent to be changed and would be loath to see this argument trotted out to justify inaction on the prudential front where incontrovertible cases for change can be made.

The AMF publishes its investigation of STS practices by French banks – it was not impressed

The French AMF, in its capacity as national competent authority under the Securitisation Regulation, did a spot check of five unnamed financial institutions issuing STS securitisations.  The regulator looked at the institutions’ procedures around the issuance of STS securitisations generally, then examined in detail a number of transactions.  Their conclusions are now published in the form of a report (in English)

It would be fair to say that the regulator was deeply unimpressed by what it found in a number of cases.  They expressed the view that, for several institutions (unnamed to spare blushes), the processes around the due diligences of the STS nature of a transaction were weak to barely existent. They also concluded that some transactions failed to meet one of the criteria regarding SPVs.

We would be superhumanly modest if we did not draw attention to a strong recommendation made by the AMF to French originators to mandate a third party verification agent.  Something they describe as a “good practice”.  We are grateful to the AMF, as an impartial and knowledgeable actor, for their recognition of the added value that we bring to the STS process.

PCS welcomes both the spot checking and the report as visible evidence of a phenomenon that we are witnessing across many European jurisdictions: national competent authorities have begun to examine with care the practices and criteria around STS issuance.  When we see the complexities and subtleties our analysts wrestle with each day, we can but conclude the risk of an originator without a thorough understanding of the rules being caught on the wrong side of the STS line have considerably increased.

PCS Launches New Website

PCS is excited to announce that today its new website had gone live: www.pcsmarket.org (same place as before, so no need to update those bookmarks).

Our website has not just been updated but entirely recreated with a cornucopia of new functionality and up to date information on the European securitisation market.  We strongly encourage you to take a tour through the new site and see how much of the information you always wanted to have in an easily readable format in an easily accessible place you can now find there.

For clients and potential clients, we have introduced an easy on-line application form and automatic application upload that does away with those clunky pdf downloads and manual entries.

For investors and market watchers, we have a much-improved search engine for PCS verified transactions.  As before, you can find not only the PCS STS Checklists here but also the prospectus and key data on any PCS verified transaction.

For those who are looking for up-to-date market data on STS securitisations, our new Market Data section allows you to search by country, year and asset class whether you are seeking a better understanding of the underlying trends or just trying to win a bet or confirm a hunch (and if your interest is more focused on PCS, our PCS Data section is there for you).

For those just starting in securitisation or curious about specific aspects, you can access the PCS Great Library where you can find:

  • specially curated “bundles” of documents to get you started on a topic
  • PCS webinars and presentations you may have missed or some you did not miss but would love to have another look at that interesting slide
  • Longer texts not only from PCS but other market participants
  • PCS consultation Responses

The Great Library is there to help you become an expert.

That is not all the Great Library contains.  For hardened specialists, our Essentials section contains all up-to-date key legislative and regulatory texts you will no longer need to hunt out on less than helpful official search engines.

For all stakeholders wanting to plan the next few months or who have forgotten when responses are due on that consultation or a vote is taking place on that new regulation or just when exactly they have to book that tapas bar in Barcelona, we have a new Calendar setting out all the important dates for the securitisation market.  Bookmark it and never miss another important event.

Finally, you can easily find out more details about upcoming PCS events.

In designing the new PCS website, we have not only sought to redesign the front end of a STS verification business.  In line with our mission to revitalise the European securitisation market, we have tried to make our site the indispensable bookmark for anyone interested and/or active in our markets.