Eurogroup adds its support for the revitalisation of European securitisation

The only thing arriving seemingly in greater numbers than new public securitisation transactions this March are expressions of support for the market from European policy makers. The same day as the supportive Governing Council of the ECB's statement but maybe less noticed, we saw the publication of the "Statement of the Eurogroup in inclusive format on the future of the Capital Markets Union". The Eurogroup is an informal body created in 1997 in which the ministers from the euro area member states discuss matters relating to their countries' common responsibilities related to the euro. This statement was the result of a request by the Euro Summit for the group to look into how to give the European Union a deep and effective capital market.

A number of items are worth noting. First, the development of a deep securitisation market is one of the thirteen recommendations made by the group. It is also one of the very few recommendations relating directly to the fixed income markets. This shows the growing consensus amongst policy makers of how essential the securitisation market is to any hope of creating a capital market able to fund Europe's future, a topic we have written about extensively.

Secondly, and in common with the ECB, the Eurogroup identifies the regulatory framework as the main choke point keeping European securitisation at such low levels compared to its international peers. It seems therefore clear to them that improvements to the current regulatory rules are the key to unlocking the growth of a safe but deep European market. Going beyond generalities, the Eurogroup specifically mentions bank and insurance prudential requirements, due diligence and disclosure rules as the relevant topics to be investigated.

This report was written to help set out the agenda for the next Commission whose appointment will follow June's European parliamentary elections.

PCS files its response to ESMA's consultation on disclosure

PCS has filed its response to ESMA's consultation on disclosure requirements. Our views are that the current disclosure templates are overly prescriptive, contain many unnecessary requirements and have become a deterrent to potential originators. This constricts a European securitisation market that is ever more necessary to the future of the continent. Even if one does not want to wade through the more than twenty pages of our response, containing a number of fairly technical points, we would invite stakeholders to peruse our general considerations on the subject set out in the first few pages.

More support for securitisation reform from the ECB

Following the speech by Christine Lagarde last November calling for the revitalisation of the European securitisation market as a key priority for the European Union, the European Central Bank has now issued a statement by its Governing Council on advancing the Capital Markets' Union. As in the speech by Ms Lagarde, the statement places the growth of a securitisation market at the center of its recommendations. Together with consolidated European supervision, the harmonisation of insolvency, accounting and securities laws, the improvement of post-trading regimes and the amelioration of the fiscal disadvantage faced by equity investments, securitisation is one of the ECB's five key reforms. Also welcome is the fact that the ECB does not just stay within generalities in calling for an improved market but explicitly focuses on the items that need fixing: the prudential treatment of securitisation for bank and insurance investors and the disproportianate due diligence and disclosure burdens that tilt the playing field against securitisation. Interestingly, it also raises the issue of a possible use of public guarantees to assist the market. This is certainly an idea that has been doing the rounds within policy circles in recent months and will no doubt generate quite a lot of debate within the European Union.

Securitisation, Europe's categorical imperative

It is rare for Immanuel Kant's name to be associated with the technical subject of securitisation. Yet this is what happened when Christine Lagarde asked for a "Kantian shift" in respect of the CMU. Taking our cue from such eminent personage, PCS also called on the memory of the great Enlightenment philosopher in an article published in Eurofi's Regulatory Update magazine and entitled, "Securitisation, Europe's categorical imperative".In the article, we set out the reasons securitisation's benefits go well beyond assisting European banks with episodic capital tight spots. Securitisation, by helping at one and the same time both the banking channel of finance and the capital market's channel of finance, can transform for the better the European financial architecture and help Europe hold its own in an increasingly uncertain and unforgiving world.

PCS response to the PRA consultation on the output floor

Today, PCS submitted its response to the PRA on its consultation on how best to handle the introduction of the output floor pursuant to Basel 3.1 as it relates to securitisation.

Although welcoming the PRA’s suggestions, PCS felt bound to point out that all the obvious difficulties that flow from a rigid application of the proposed Basel rules to securitisations – and especially SRT securitisations – flow from the original miscalibration of the capital requirements.  More specifically, they flow from an incorrectly calibrated non-neutrality factor. This is then made worse by structural flaws in the current CRR architecture that results in doubling-up the prudential buffers.  Therefore, PCS urges the PRA to go beyond ad hoc, stop-gap measures designed to ameliorate the most egregious outcomes of the currently miscalibrated framework and fix, once and for all, the Pillar 1 non-neutrality issue.  For reasons set out in our response, we do not believe that leaving this issue to the Basel Committee is the best way to proceed.

The response also addresses, of course, the specific proposals put forward by the PRA and seeks to answer the question of whether STS should be extended to synthetics (as it has been in the EU).  PCS tried to show why, for reasons of prudential coherence, competitiveness within the UK banking system and the international competitiveness of the UK as a whole, such extension should be put in effect.  PCS also sought to demonstrate how, subject to some modifications of the current scheme. this can be done with no negative impact on the soundness of the UK banking system.

ESMA's Christmas Present: a Consultation on the Disclosure Templates

With the markets pretty much gone for the festive break, ESMA gave the markets an unexpected Christmas gift: it published today the much-awaited public consultation on the overhaul of Securitisation Regulation's disclosure templates.

To be commended, ESMA's consultation showed no lack of ambition, in that it opens potentially wide vistas of change rather than limiting itself to tweaks.

ESMA seeks feedback on four possible ways forward, ranked from minimal to most extensive:

The deadline for response is the 15 March 2024.

2023 - The STS Year in Review


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 2023 – What the numbers tell us about STS

In this section, we will focus on specific numbers in 2023 before going to a broader analysis of what transpired in 2023 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 2023 and so comparisons with 2022 are not exactly on the same basis. The numbers are extracted from ESMA’s STS database and follow the definitions provided by originators in their STS notifications to ESMA. PCS expects a few additional STS deals by year end but not so many as to invalidate the broad conclusions.)

The big picture

(Hover over the sections for legends)


Overall, 2023 was a solid year. Public securitisation issuance, STS and non-STS combined, in Europe (including the UK) rose from just under €88 billion to a likely €105 billion total by year-end. 

In STS, the number of public transactions rose from 75 (FY) in 2022 to 87 (YTD) in 2023.  The number of private STS transactions though fell from 113 to 92.  This should reassure those who were concerned about the growth of private STS transactions although PCS has long argued that such concerns were misplaced.

The drop in overall STS transactions resulted from a substantial drop in the number of ABCP transactions from 52 to 24.  This, in our opinion, continues the trend that has marked the ABCP STS market since 2019 – namely that existing transactions are converted to STS.  Such conversions occur when the individual ABCP transaction comes up for renewal.  But, as more and more of the stock is converted to STS, this will result in only the annual flow being notified of STS.  This flow is substantially smaller than the stock.

Also driving the drop was the unexpected drop in synthetic/OBS STS trades.

On the other hand, term STS transactions increased to 129 in 2023 from 100 FY in 2022.  With only 87 public transactions in 2023 (all labeled “term”) this indicates a substantial number of warehouse and bank facilities being closed as STS.

Asset classes

Public Transactions20222023YoY


After a disappointing 2022 which saw RMBS pull closer to autos as the top asset class, auto transactions saw very solid growth as RMBS remained flat.  This propelled autos further to the top spot of public STS transactions by number. 

For RMBS, the overall flatness masks a more diverse development.  The UK, as mentioned, saw very strong growth from 7 transactions to 12.  The Netherlands, after an incredibly weak 2022 (only 4 STS public RMBS) saw improved issuance with 7 transactions.  The flat year-on-year results from an overall slackening of an already weak issuance calendar in the other European jurisdictions (2 to 1 in France, 3 to 1 in Spain, 3 to none in Italy, etc…).  This flatness is also reflected in volumes where the year is predicted to close at €34 billion vs €32 billion in 2022 (STS and non-STS combined).



The stand-out, if predictable and predicted, feature of the year was the strong return of UK issuance after a very weak 2022. The number of UK STS transactions went from 19 to 34 with an almost doubling of public STS transactions from 11 to 21.
The Netherlands also had a better year than the admittedly dreadful 2022, going from 5 public STS transactions to 10. Germany held steady with some growth, going from 12 public STS transactions to 17.

Everyone else was pretty flat to down.

Synthetics/on-balance-sheet transactions

With so far only 26 transactions notified STS this year against 36 over the full year in 2022, this is shaping up to be a disappointing year for this STS category.  This is one area where we cannot exclude a flurry of last-minute transactions but nevertheless, we had certainly anticipated a growth in this number for the year.

“Solid performance but with no sparkle” – an analysis of 2023 as a whole

The growth in both the number and volumes of public STS transactions reflects, in our view, the expected yet partial return of traditional bank issuers to the funding market.  As central banks reversed quantitative easing and the ocean of free money dried up, banks had to turn back to more traditional funding channels.  This was more pronounced in the United Kingdom because the Bank of England facilities falled to be repaid earlier than those of the ECB.  This phenomenon should have occurred last year but was stopped by the reluctance of issuers to wade into the extremely choppy seas of fixed income buffeted by inflation and uncertainty in the timing and size of central bank rate hikes.

For those who have argued that the only reason for the quiescence of the European securitisation markets was central bank monetary policy though, the growth of 2023 is far from the vindication they might have expected. 

First, growth to €105 billion from €90 billion is hardly the take-off that Europe needs.  This remains light-years away from the €450-500 billion of the pre-GFC traditional market (ie excluding dangerous products such as CDOs). 

Secondly, when it comes to selecting channels for funding, covered bond issuance dwarfs securitisation.  For 2022, mortgage-covered bond issuance in Europe exceeded €600bn against €32bn for RMBS and €88bn for all securitisations.  In another indication of the distance securitisation still has to make up, the number of issuers in RMBS is only a fifth of the number issuing mortgage-covered bonds.

It should also be noted that the growth in public STS transactions is not matched by overall growth in STS numbers.  Public transactions may have gone from 75 in 2022 to 87 in 2023, but total numbers were 179 YTD against 188 FY in 2022.  This phenomenon be seen for example with autos. When one counts both public and private STS auto transactions, the growth is noticeably more muted – overall growth was only from 51 transactions in 2022 to 56 in 2023 against the 30% (33 to 43) seen in the public space.  This suggests that we are seeing more of a return to the public markets away from private trades than a return to securitisations.

OBS - the market that failed to bark

Nevertheless, 2023 was a solid year for STS true sale securitisation.  This cannot be said of synthetic/OBS STS transactions.  With the approach of the Basel III final implementation in January 2025 and the imposition of the “output floor”, expectations were firmly for a growth in the synthetic SRT market.  With the benefits provided by STS in terms of capital reduction, it was also expected that much of this growth would be STS.  The synthetic market being entirely private, it is difficult to gauge its actual growth.  Estimates suggest that the protected notional rose to €250bn in 2023. 

So where are the STS trades?  Again, the private nature of the market makes it difficult to assess.  (Also, a late surge is not impossible, although at this stage improbable).  One reason suggested anecdotally for the relative lack of synthetic STS is, once again, the inadequacy of the regulatory framework for European securitisation.  Under Solvency II, which sets out the capital requirements for insurance undertakings, the capital an insurer must set aside if it enters into a synthetic securitisation on the asset side of its balance sheet is massively greater than the capital it needs to set aside for the identical contract if called an “insurance policy” and lodged on the liability side of its balance sheet.  So, PCS understands that insurance companies are prepared to write these synthetic securitisations much more cheaply if they are insurance contracts than traditional synthetic securitisations.  But insurance contracts not being cash collateralised, cannot be STS.  Yet, so cheap are these synthetics in insurance format that the additional capital the originator needs to hold because of the absence of STS is more than compensated by the lower cost charged by the insurance company.

It is also possible that fewer deals were done in STS format but the average protected notional per deal increased so that the 26 STS transactions so far this year generated RWA reductions equivalent to those achieved last year with more deals. 

What about the investors?

In the EU, the number and identity of the tiny investor base in the senior tranches of true sale securitisations (where the bulk of the cash investment resides) remain unchanged at barely forty players. (The investor base in mezzanine pieces, especially in synthetic format, is considerably larger – at around 200 to 250). 

One development was the willingness of some investors to react to spreads by shifting the segment of the market in which they chose to invest.  Broadly speaking, in the EU secondary spreads for the senior notes tightened throughout the first half of the year, bottoming out around mid-May to widen gently but firmly in the second half, to end pretty much where they started.  By way of example, the Dutch AAA RMBS spread that set off at 38bp in January tightened to 29bp by late May to end the year at 42bp.  Similarly, AAA autos that started 2023 at 38bp, tightened to 27bp late May to go back to 39bp at the end of the year. 

What transpired is a very substantial volume and number of STS issuance in September and October driving spreads up.  Although some expressed concerns about the market’s capacity to absorb this issuance – especially in the seniors where, as we saw, the bulk of the volume resides – the market took all this in its stride but only because some existing mezzanine investors who had stopped purchasing senior tranches due to the narrowness of the spreads were willing to go back into the senior space at the new higher spreads.

The lesson here is though that growth in volume has not resulted in growth in the EU investor base.

Another sign of the fragility of the market is that the other reason the market was able to absorb the autumn spike in volume is that traditional public bond issuance has almost disappeared in STS securitisations.  It has been replaced by longer lead times, public deals that are really privately placed with very few investors, and transactions where the issuance amount is uncertain and will be low-balled for fear of a failure only to be upsized at the last moment. 

PCS believes that extending the minuscule senior tranche securitisation investor base is the essential step to a healthier and deeper market.

Interestingly, the UK in 2023 showed how this might be done.  As we saw, UK growth was more than solid this year and, unsurprisingly, RMBS spreads followed by widening throughout the year.  And by all accounts, that growth did see new investors move it.  These new investors were bank treasuries.  Why?  In our view the heavy mandatory work required by new investors means that only bank treasuries have both the investable volumes and the sophistication to be able to move rapidly into the securitisation market in volume.  This is key to understanding why getting the CRR capital calibration correct for bank investors is so important even if the ultimate aim is to move securitised assets outside the banking system: banks are the only credible first-mover investors able to generate liquidity fast and prime the pump for other types of investors to move in over the longer term.

2024 – More of the same, maybe…

The last few years have been such that one might conclude the black swan event of 2024 would be the absence of a black swan event.

Assuming that 2024 does not throw any shattering surprises (which bearing in mind that there are elections in the USA and the EU and possibly/probably the UK is already a big ask), PCS expects 2024 to be like 2023 except more so.

Assuming no new QE, the return of institutions to true sale securitisation for part of their funding is not a one-off event.  Their funding needs will continue into 2024 and beyond.  We also anticipate that more continental European banks will follow suit as final TLTRO payments are made.  Due to the dominance of covered bonds, securitisation funding will be only an adjunct but will nevertheless increase true sale issuance.  Since plain vanilla transactions in plain vanilla asset classes are likely to generate the cheapest cost of funds, we also anticipate that this funding will be mainly in STS format.

On the headwind side of the ledger, the market and most economists still foresee a slowdown and possibly a recession in Europe for 2024.  This is unlikely to be so severe as to call into question the credit solidity of existing or even future securitisations.  It may though slow down new asset generation as retail customers shun new borrowings.  Banks have sufficient un-securitised stock for their securitisation calendar to be unaffected by slowing asset generation. However, this could affect the volumes securitised by non-bank financial institutions.

On balance, even if the recession materialises, we believe the growth from bank funding needs will outweigh a reduction in non-bank financial institution issuance to produce a moderate growth in true sale securitisation in 2024.

For synthetic/OBS STS securitisations, the private nature of the market renders it too opaque to make any sensible predictions.  The synthetic SRT market will likely continue to grow substantially.  How much will be in STS format though remains mysterious.

The mood music's new tempo

The year 2024 will see elections to the European Parliament in June followed by a new European Commission in September or maybe October, with the last plenary vote for this European Parliament in April.  This is, therefore, a good time to reflect on what has been achieved in the four and a half years of the current Parliament and what 2024 and beyond may bring to the world of European securitisation regulation.  (Of course, the UK is no longer part of the union and carving its own path.  For those interested in what that path may be, we suggest our Special UK Edition newsletter.)

The almost-empty glass view

When the last EU elections took place in May 2019, the Securitisation Regulation had just become law.  The market set off on a long march to improve the framework and complete some of the reforms that were felt not to have been brought to their logical conclusions.  The list of desiderata included:

  • More appropriate capital calibrations for bank investors in the CRR (especially the infamous p factor)
  • More sensible approach to the eligibility of securitisations in bank liquidity coverage ratio pools (LCR eligibility)
  • More appropriate capital calibrations for insurance companies in Solvency 2
  • More proportionate and sensible disclosure requirements
  • A more suitable disclosure regime for “private” transactions and a better definition of “private” transactions
  • The extension of STS to synthetic securitisations
  • Improved process around significant risk transfer (SRT)
  • A more even regulatory playing field on mandatory due diligence and a more proportionate approach to the existing mandatory due diligence for investors

Of that long list, synthetic STS was the only item that was successfully achieved (and even then, many believe at too high a cost in complexity).  Limited success was achieved around the SRT process and an extremely narrow amendment of very limited application to the p factor was introduced.

So, looking back a glass almost empty

The glass-half-full view: a new mood music

Despite this paucity of achievements, it would be wrong to conclude that securitisation has made no progress during these last few years.  Those interacting frequently with policymakers in Brussels and across European capitals have been aware of a very clear shift in what one can call the “mood music”.  Five years ago, some policymakers were convinced that securitisation was not definitionally a tool of mass destruction but few risked saying so in public for fear of a political backlash.  Even those few rarely saw well-executed securitisation as more than a “nice to have” aspect of the European capital markets: a useful financing channel with some potential capital management benefits but hardly one that had real potential to transform the architecture of European finance.  And, amongst policymakers, some of the most sceptical were to be found in the Parliament.

Today, the landscape feels very changed.  During the debates on the reviews of CRR, Solvency II and the introduction of an EU Green Bond Standard, support for securitisation (especially STS) was notable from a wide spectrum of the key parliamentary political families. 

At the member state level (the Council), the heavyweight Franco/German couple – in the form of their respective ministers of finance – openly called for the return of a safe and strong securitisation market as a key to achieving the capital market union.  Finally, and most recently, as eminent a personage as Christine Lagarde placed securitisation front and centre of her plea to build a real European capital market.

The result of all these developments was to raise securitisation to the status of a strategic initiative.  This is a dramatic contrast to what it was in 2019: at best merely one item in a long laundry list of possible “nice-to-haves” of a future capital market (see, for example, the High-Level Forum Report of 2020). 

How this transformation came about is complex.  It involves, in our view, a host of interlocking events from, at the highest level, the invasion of Ukraine to the US Inflation Reduction Act to, more prosaically, the continuing high-level credit performance of securitisations as well as the politics of the Banking Union.  It is certainly a topic too weighty and extensive to be dealt with in an end-of-year newsletter. 

However, the revival of securitisation is now a key strategic challenge for the European Union to be played out at the highest political levels.  And that is good news for those who hope to see positive changes being introduced in the next European parliamentary term.

Too early for poultry counting

As we have seen, the battle for the hearts and minds of policymakers has shown great progress in the last few years.  But real change still needs to be put in place and can only come from legislative change voted by the next Parliament, with support for the Council and the next Commission. 

And despite the progress, strong redoubts of scepticism remain to be conquered.

First, all member states have not rallied to the new Franco-German support for a revived securitisation market.  Political changes in Germany could also modify the contours of that alliance when it comes to securitisation.

The European Supervisory Authorities have shown little enthusiasm for the completion of the reforms already started beyond some positive but small tweaks.  EIOPA, looking after insurance regulation, seems especially uninterested.

Finally, much will turn on the final electoral results of the June elections and what kind of parliamentary majority will emerge: a grand coalition willing to push forward the European project or a populist majority at best uninterested in “more Europe”.

So the securitisation community is most definitely in a better place when it comes to the European policy-making “mood music” than it was in 2019 but the practical battles remain to be fought and the landscape in which they will be fought could itself change quite dramatically.

News you may have missed

  • The final Retention Regulatory Technical Standard (2023/2175) was published in the Official Journal on the 19th of October.  As the final draft has been out for a while, the market has been following it and little will change in practice, but now “it’s the law”.
  • Another Official Journal publication was the EU Green Bond Standard Regulation. After much discussion, the EU GBS conforms the treatment of securitisation to that of all other capital market instruments by defining an EU GBS securitisation as one whose proceeds are used to finance taxonomy-compliant activities (rather than one with securitised assets that are themselves taxonomy compliant).  The standard will apply from 21st December 2024 onwards although some crucial elements of the new framework await technical standards that may not be available until very late next year and therefore may not be practically in place until well into 2025.
  • Following the consultations from the UK FCA and PRA on possible amendments to the Securitisation Regulation since it has now been imported into UK law, the PRA also launched a consultation on capital requirements and other CRR aspects of securitisation.  The deadline is 31st January, were you seeking an excuse to skip Christmas lunch with the in-laws.
  • In one of those speeches we may be quoting many years from now as a turning point, should they bear fruit, Christine Lagarde, President of the ECB (for those who just emerged from a ten-year retreat to a silent order monastery), made an impassioned plea, not only for a real European capital market but indicated that the only way to that goal was a revival of the securitisation market.  PCS cannot but cheer on this thoughtful contribution.  (For more on this, see our story in this newsletter: “The mood music’s new tempo”)

Celebrations and season's greetings

We would like to take this opportunity to thank our readers and other stakeholders for their support throughout 2023, as well as convey our season's greetings and best wishes for the new year.

So, from London, Paris, Milan, Munich, Poznan, Amsterdam, and New York, the Outreach Team and the Analytical Team from PCS send you this season’s greetings and wish you a happy, prosperous, and healthy 2024.

Lagarde calls for a strong securitisation market as an essential component of a historically necessary change to Europe's finance architecture

It is not everyday that a public official calls upon the legacy of the great philosopher Immanuel Kant, but Christine Lagarde did just that today in a short but impactful speech on the historical necessity of the creation of a strong European capital market's union.

A more than notable passage in the speech reads: "A genuine CMU would mean building a sufficiently large securitisation market, allowing banks to transfer some risk to investors, release capital and unlock additional lending." Not only is this very high profile support for a strong securitisation market positive, but it should be noted that it is the only actual concrete element given by the president of the ECB of what is required to create this shift in European finance. (Although, to be fair, there are also suggestions of a real European SEC and fewer players on the infrastructure side of capital markets). The point here is that securitisation is not relegated in the speech to one item on a long laundry list of "nice-to-have" changes that could help along the CMU. It is cited the necessary station on the way to a European capital market.

Another notable element of the ECB's support for securitisation is how Lagarde sees securitisation primarily as a capital management rather than funding tool on the banking side of the ledger.

This support for building a strong securitisation market as a necessary and key political task of the next five years is not a lone effort. It reflects a growing and vocal body of interventions by serious players (such as the French and German ministers of finance) going in the exact same direction. It also reflects many private conversations taking place within policy making circles. After a disappointing lack of meaningful movement on necessary regulatory changes in the last few years, PCS is hoping this will be the starting gun for the finalisation of the reforms that began over a decade ago.

This shows growing and open support for a proposition many (including PCS) have been putting forward for a number of years now: a strong capital market is essential if Europe is to prosper and a strong securitisation market is the only realistic way to achieve one. Since Christine Lagarde commendably gave us permission to use his name: "Securitisation for Europe is a categorical imperative least politically".

We strongly encourage everyone to read the (short) speech.

UK PRA publishes a paper on future capital calibrations

Following publication of HM Treasury’s near final statutory instrument and consultations by the PRA and FCA, all aiming to adapt the inherited EU Securitisation Regulation for a post-Brexit UK, the PRA has now issued a Discussion Paper on the Capital Requirements for Securitisation.

The paper focuses on the consequences for the capital requirements of securitisations of the Basel 3 output floor, the hierarchy of methods for determining these capital requirements and a possible STS for on-balance-sheet (synthetic) securitisations.

The initial suggestions of the PRA in all 3 areas deviate from the current trends in EU regulation and are not altogether cheerful: no halving of the p-factor for the purpose of the output floor calculation, a return to the Basel hierarchy of methods and no synthetic STS. However, the PRA did express strong support for a revisiting of the whole capital requirements calibration of securitisations, so some light at the end of the long tunnel might be discerned by optimists.

Responses are requested by 31 January with a consultation paper planned for the second half of 2024.

October 2023 Newsletter


Why an UK edition?
After a period of uncertainty over the UK’s direction of travel in its approach to finance (and hence financial regulations), things are starting to move and the intended path of the rails is starting to appear. This movement also encompasses (and as a priority no less) the revision of the rules governing securitisation.

In this piece we will outline the Edinburgh Reforms, the Financial Services and Markets Acts (“FSMA”, since – distinct from price inflation- acronym inflation is untameable) and then the “near-final” securitisation statutory instrument before closing with the bi-cephalous PRA and FCA consultations. We do not cover all these merely to fill out the newsletter. We believe that, in a technically focused industry such as ours, it is often too easy to address regulatory changes as if they were merely mathematically driven calibrations. In reality, notwithstanding what regulators propound, regulations are political acts. To understand what drives them, it is important to understand the context. And by context, we mean the nestled Russian dolls where the tiny securitisation regulatory doll rests within the overall regulatory framework doll within the larger conceptual framework for finance which itself lies in the high political game of post-Brexit choices. It does not mean that the final regulations are indifferent to data and statistical analysis. It does mean that what can be done and when it can be done is driven more by higher level political calculations than be spreadsheets.

In our regular features, we share updated data on the STS securitisation market and, in the people section, we present Daniele Vella, from our analytical team.

And as usual, in “news you may have missed”, short bullet points draw attention to events that may have flown under the radar in the last few months.

As ever, we very much welcome any feedback.

The Edinburgh Reforms

Following a fairly long period of what friends of the British government would call “reflection” and its foes “drift”, His Majesty’s Treasury (HMT) finally came out with an overarching policy approach to post-Brexit financial regulations. This was announced in December 2022 in Edinburgh, hence the package being named the “Edinburgh Reforms”.

The result is not especially surprising. Between the poles of maximum equivalence with EU rules and a radical and complete re-invention of the UK regulatory framework, the Edinburgh Reforms appear to lie on a mid-point. They seek to keep most of the existing framework but with departures whenever those are perceived in the national interest.

The reforms also seek clearly to re-define this national interest by explicitly setting as the goal of regulatory rules not only the prudential safety of the overall system but also the international competitiveness of the UK (together with supporting the “real” economy’s access to finance). Clearly, HMT is inviting rule makers to create an environment where the UK (and particularly the City of London) is a major global hub for international finance, servicing the global capital markets and not only the needs of UK borrowers. The obvious target of these efforts will be European market participants who will be, if the government gets its way, invited to use London for their transactions. How the European Union will react to these efforts will bear some attention. How the UK regulators balance prudential considerations with competitiveness will also likely prove interesting.

Beyond this, though, the Edinburgh Reforms are aspirational, setting out the broad direction of travel rather than a series of specific changes.

For our market though, it is notable that the government does set out in the reforms an order of priority for rule changes. And, securitisation is named as a tranche 1 priority. So far, so good.

Financial Services and Market Act

The tool the government gave itself to implement the Edinburgh Reforms is the Financial Services and Market Act (FSMA) of June 2023.

We will not go into technical details and invite you to read the many good technical pieces on the FSMA published by law firms. These are the four points someone with an interest in securitisation needs to know.

First, as a matter of general constitutional legal order, regulators and central banks are only allowed to do what is set out in their democratically determined mandates. So, to enact the ambitions of the Edinburgh Reform, the UK government has widened the mandates of the PRA and FCA to include, as a secondary objective and after prudential safety, growth and competitiveness. This can be important since, when discussing possible reforms of the securitisation regulations, neither the PRA nor the FCA can claim that they are prohibited by the exiguity of their mandates from caring about such things.

Secondly, the FSMA basically devolves pretty much the entirety of what was the EU’s Securitisation Regulation to the FCA and PRA. This is, technically, why although the FSMA explicitly repeals many existing EU laws, it does not repeal the Securitisation Regulation. There is no need since the FCA and PRA can now change pretty much any aspect of the old EU Sec Reg without any resort to HMT or the UK Parliament. As an example, the entirety of the STS criteria have been removed from primary legislation to rest in the FCA Handbook where the FCA can change them at any time.

Thirdly, and more of interest to amateurs of the minutiae of regulatory law, the FSMA introduces an interesting way to get round a common regulatory conundrum. Usually, regulatory oversight is applied to types of entities. In other words, the FCA supervises funds, the PRA supervises banks, etc… So, when an entity that is of a different type than those supervised performs an activity, it can fall between the cracks. Those cracks then need to be laboriously filled by legal provisions. The FSMA creates a new category of “designated activities”. These DAs are chosen by HMT and allocated to a regulator so that no entity performing such a DA goes unregulated. Securitisation was named a “designated activity” so that even an industrial corporation, if it engages in a securitisation, will be regulated by the FCA.

Fourthly, the FSMA invents a new expression: “manufacturer” of securitisation. This is self-explanatory covering originators, CLO managers, ABCP sponsors, etc… Not very exciting but we mention it to forestall some head scratching by our readers when they stumble for the first time on yet another technical term.

Near-Final Statutory Instrument

In July, HMT published what it described as the “near-final statutory instrument” (NFSI) amending the EU Securitisation Regulation. PCS gave a brief analysis at the time that you can find here.

Because, as we mentioned in the FSMA section, so much of the rules have now been moved to the PRA and FCA, the NFSI is not long or involved. You can read our original publication for a slightly more detailed analysis but there are two key general takeaways.

First, the NFSI confirms the approach that non-UK based special purpose vehicles can be used in UK STS transactions, but the originators and sponsors must still be on-shore.

Secondly, the draft gives HMT the power to designate other jurisdictions as "equivalent" to the UK for the purposes of the regulation of securitisations e.g. on disclosure requirements. In the specific context of STS, this would mean that a securitisations meeting the STS rules from those jurisdictions will be able to be treated as STS by UK investors. The text deliberately uses the expression "simple, transparent and comparable" derived from the Basel rules so one assumes that equivalence may be available to those countries that have adopted STC. How this will work in practice is still unclear.

By way of contrast, the European Union has firmly set its face against any equivalence regime for securitisation.

The NFSI is expected to come into force before the end of 2023.

The PRA and FCA Consultations

Published a little over a week from each other in July/August, we will treat these two consultations as one. The proximity of their publication dates, the similarity of the approaches and the questions as well as telling facts such as both announcing that there will be a review of the distinction between private and public transactions at a later date, clearly indicate that the PRA and FCA are working closely together on this file. This is most commendable. This is also why PCS is less concerned than some law firms by the fear that different rules for banks (PRA) and everyone else (FCA) will create uncertainty and an uneven playing field.

As a general overview, the word “clarification” appears an awful lot. The consultations do not anticipate any root and branch changes to the rules inherited from the EU. The basic architecture of the Securitisation Regulation will remain, for the time being, unchanged. The key elements of retention, mandatory disclosure, mandated due diligence, STS, third party verification agents, data repositories all stay in place.

What do the consultations portend?

First, a welcome statement that the interpretation of the rules will be principles based rather than focused narrowly on the words of the text. This, of course, is made possible by the fact that the rules are not in a level 1 legislative text, as in the EU, but in the PRA’s or FCA’s own handbooks. This gives the regulators flexibility that is not available to their counterparts across the Channel.

Secondly, some catch up with beneficial changes that have already occurred in the European Union such as changes to the calculation of the retention requirements for non-performing loan transactions.

Thirdly, clarifications of some timelines and nature of disclosures.

Fourthly, the possibility of expanding somewhat the scope of allowable re-securitisations. But for anyone fearing the return of the dreaded CDO cubes, this looks – thankfully – extremely limited.

Fifthly, lots and lots of highly technical changes with minimal impact (if any) on the market but which have become necessary due to the new legal framework under which the regulators now operate. Who is empowered to do what to whom under what legal authority.

In addition to the changes foreshadowed by the consultations and set out above, both the PRA and the FCA as alluded above have indicated their intention to re-examine the definitions of public and private securitisations with the possible intention to amend their respective disclosure requirement.

A technically important note is that both consultations explicitly state that there is no change to the current approach to interpretations and guidelines issued by ESMA or the EBA prior to the coming into force of Brexit (1st January 2021). These still apply unless specifically changed by UK regulators.

There are two items that are not to be found though in the consultations. One logical and understandable, the other a major disappointment.

The first is that there are no questions of possible changes to the capital requirements for holding securitisations inherited from the EU CRR and Solvency II for banks and insurance undertakings respectively. This does not mean these are off the table, but reflects the technical reality that HMT made securitisation a tranche 1 priority and not CRR or Solvency II. Therefore, such questions are simply not on today’s agenda.

Secondly, and disappointingly, there are no suggestions that STS may be extended to synthetic securitisations as it was in the European Union. If competitiveness of UK banks is a concern for the PRA, this could be a major missed opportunity.


In conclusion, although these are only consultations, they announce a very conservative approach, preserving most of the European architecture. This, in PCS’ opinion, is not to be frowned upon. Broadly, the framework inherited from the EU works in balancing safety and market efficiency. It can certainly be improved in places which seems to be the UK regulators intent. This gradualist approach also reflects the call of many market participants who have argued that, after more than a decade of continual changes, stability is what the sector needs more than anything.

Market data

Our market data is now interactive. You can select any of the 8 tabs (STS Type, asset class, .... ) and you can enable or disable any of the time series. Hoover the mouse over any of the number to get more info.

Remember, as always, that PCS’ data is by transaction 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.

Comparing full year data to partial year data is always somewhat misleading. In this case, comparing 2023 to 2022 for STS is more so than usual. On the simple numbers for true sale transactions (term and ABCP) 2023 would, at first glance, look like a continuation of last year. However, this would miss the substantial upswing in the public market. After a slow(ish) first half of the year, the late spring and summer of 2023 saw a real surge of STS transactions getting ready for post-August launch. This resulted in September in the largest monthly volume of issuance (STS and non-STS) since the GFC. And deals continued to come out in October with a pipeline that looks still fairly full till the end of the year.

Also most noteworthy was the investors' absorption capacity. At one point in August, when we saw the number of STS transactions we were verifying in-house, we became quite concerned at the market's capacity to take up this volume. Most of the concern was not about the availability of cash but investors' bandwidth. The regulatory requirements on due diligence make the mandated analysis of a securitisation much more time consuming than for other capital market instruments. With the very limited number of investors still left standing in this market, would they be able to analyse so many deals? Our original scepticism proved unfounded. Wisely, originators and arrangers shifted to longer lead times in bringing deals to market. This repaid handsomely last month and earlier this month. Not only did the market absorb the volume but was able to do so with only moderate spread softening at the senior end and pretty much none lower down the capital structure.

Based on what we have seen and continue to see in our pipeline, 2023 could prove a very good year indeed for STS true sale.

Why? In a rare case of a market prediction being correct, we are seeing the delayed effect of the end of ultra-loose monetary policy from central banks. As the "free money" open bar was closed, banks have returned to traditional funding sources. Even though covered bonds have become (thanks to regulatory asymmetry) banks' favoured funding tool, a securitisation diversification play has always made strategic sense. This growth should have happened last year but war, inflation and rates volatility kept many players out of the capital markets. This phenomenon was particularly visible in the United Kingdom, but we expect it to spread further in the EU.

Another reason is the looming approach of the final implementation of the Basel capital requirements in January 2025. This is focusing banks' attention intensely on capital usage and management. So a number of true sale transaction were also full stack capital trades.

Focus on capital management should also be driving synthetic STS transactions. This is not, however, visible in the numbers so far with 17 STS notifications to ESMA versus 41 for the full year in 2022. Our conversations in the market suggest that not much need be read, at this stage, in this number as the market is reported to be working on quite a few transactions and this may be only a timing issue. We shall see.

Basel Endgame

In July, the US Fed published a "notice of proposed rulemaking" ("NPR") aimed at completing the capital adequacy regime set out in the final, amended Basel 3 agreement. It is unclear to us what possessed someone in officialdom to name this process the "Basel Endgame". Whether this is because, as US banks are claiming, the Fed is a regulatory Thanos, intent of wiping out half of all banks or, as the Fed possibly imagines, they are the regulatory Avengers come to save the financial world, the jokes write themselves. But this is serious business.

The NPR is over a thousand pages long. But at its core lies the removal of the "internal ratings based approach" ("IRB") and its replacement by an "enhanced standardised approach". In simple terms, US banks will not longer be able to base their risk weighted assets ("RWA") calculations on the output of their own internal credit models. But it gets worse (for the banks). The NPR also adopts what is known as the "dual stack" approach: banks must calculate their RWAs under the new enhanced standardised approach and the old standardised approach and use the higher of the two in setting their capital.

The NPR also revises the capital requirements for securitisations by doubling the infamous p factor. It also lowers the floor on senior AAAs but raises it for lower tranches. And, of course, the general dual stack rules and disappearance of the IRB approach is likely to impact capital requirements for banks' holding of securitisations.

For those concerned about the political impact this may have in Europe (UK included), two points should be borne in mind.

First, as PCS has set out in its response to the FSB and in other publications, the key issue with European regulations is follow through: the first wave of regulations dealt with all securitisations as an undifferentiated whole and calibrated its treatment on the worst as revealed by the GFC; the second wave defined in great detail a high quality securitisation type (STS) similar to those securitisations that survived the GFC with ease. We have argued that Europe needs to finalise the reforms by completing a third wave that takes into account the creation of STS and recalibrates the securitisation rules to the actual risks (very low) associated with this new category. Now, the United States never introduced a high quality category (such as the Basel "simple, transparent and comparable (STC)" model). Therefore, there is some kind of logic to the Fed approaching securitisations as still riddled with potential agency risk. This is not an endorsement of the precise proposals included in the NPR, but it does underline the inapplicability of the Fed's reasoning to the European context.

Secondly, the impact of the securitisation part of the NPR is likely to be much less impactful in the US than a similar approach in Europe. The US has the deep capital market to which Europe aspires. It also has sensible capital rules for insurance companies (in contradistinction with Solvency II). Therefore, the bank bid is much less crucial to the securitisation market than it is in Europe, where - in the absence of a revision to Solvency II - bank purchases are a necessary starting point (but not end point) to the revitalisation of the market. Also, the NPR only applies to banks with over US$ 100 billion in assets - whereas the European regime applies to all banks.

The NPR is still, at this stage, a proposal. Should it proceed, it will come into force in 2025 with a three year phase in.

To say that US banks reacted negatively would be more than an understatement. They have predicted Armageddon should these rules be introduced. (PCS was told that, so horrified were the banks that they have taken out ads on Washington DC bus stops opposing the proposals. We must wonder how bemused commuters were to see their traditional add for cut-price fried chicken buckets replaced by a poster addressing Basel III capital requirements).

News you may have missed

"Let a thousand reports bloom...."

Well, maybe not a thousand, but we have seen two interesting reports published on the securitisation market. The first by ESMA, the other by the ESRB on the SRT market. Full of interesting facts, they repay reading. You can also find them on the PCS website in our Great Library section.

More Green from Brussels

Although not technically securitisation news, PCS is convinced that, in order to thrive, the European securitisation market will need to carve out a niche in the green finance ecology. Therefore, it behoves us to pay attention to existing and future green rules. In June, the European Commission published a new EU Sustainable Finance Package.

Broadly, the package adds to the existing Taxonomy, deals with the proposed regulation of ESG ratings firms and adds some flesh around the Commission's approach to "transition finance".

Retention draft RTS published

A year after the EBA published its proposals on retention, the European Commission finally issued its final draft retention regulatory technical standard. Basically unchanged from the original EBA proposal, bar exceptional circumstances, this draft will become law sometime late in Q3 2023 or in Q1 2024.

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, meet Daniele Vella.

I graduated in Rome on law and economics, with a short parenthesis in Strasbourg, where I studied European law.  Then I started working as a lawyer in 1996, initially accruing experiences on various sectors of law, working in Rome and in Paris.  Work ranged from real estate contracts and financing to corporate reorganisations, intellectual property, criminal law and regulatory compliance.

In spring 1999, a securitisation law was enacted in Italy and it was a very hot sunny summer day in Rome when I entered in a book shop, probably just to have the relief of air conditioning, and found a book on securitisation, then another and another again.  I found this so enlightening and this was the sign I was waiting for.  My focus on securitisation started from that moment.  So, following an LLM on banking and finance law at the University of London, my career focused exclusively on securitisation and banking transactions, working initially for Clifford Chance and then Allen & Overy and Hogan Lovells. Clients have been investments banks acting as arrangers or managers, rating agencies, originators or service providers in the securitisation sector.

Then, it was again on a beautiful hot sunny summer day in 2018 when PCS announced the opening of its new office in Paris and, here I am.

On a personal level, I love country life and mountain trekking.  And sometimes it’s only thanks to noise reduction software clinking cow-bells are not in the background when I’m on a call.  Actually, especially in the summer, I often work from a cosy nest in the Alps, where everything can be seen from high level and with larger horizons.

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]
Rob KoningMember of the Outreach Team[email protected]
Harry Noutsos  Member of the Outreach Team[email protected]
Ashley HofmannMember of the Outreach Team[email protected]
Lauren ShirleyEvents Manager[email protected]