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.

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.

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.

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.

An invitation for feedback from the FSB (, not that one)

Europe’s Financial Stability Board published, on August 30th, an invitation for feedback on the effects of G20 financial regulatory reforms on securitisation .  This is a precursor to a report the FSB intends to write on the topic by mid-2024 and on the draft of which they have committed to consult.

With a tight deadline for submission of 22nd September, it is not clear what European securitisation stakeholders will be able to provide.  The three week deadline leaves no time for the gathering of meaningful data beyond what is already on stakeholders’ shelves or the articulation of complex argumentation additional to what has already been communicated to policymakers.

The FSB has not provided any specific questions and has stated that this is not in preparation for any technical policy or regulatory proposals.  So it is a very open canvas on which respondents will need to decide what they want to paint. Some may wonder whether there is much, if any, point in responding.

This invitation should not be ignored though, in PCS’ opinion.  Next year will see a new European Parliament and a new European Commission.  These will require a sense of priorities and a direction of travel across the policy spectrum.  Reports such as the one the FSB intends to publish are part of the creation of the agenda for the 2024-2029 term. Even if it does not put forward specific policy recommendations, it will contribute to setting the "mood music" on securitisation in the European Union for the coming years.

ESMA publishes an updated securitisation Q&A

It would appear policy makers and regulators are clearing their decks before departing for their summer holidays and the welcoming beach. After the publication on Monday of the retention RTS by the Commission and the publication of the near final draft of the UK securitisation statutory instrument by HMT on Wednesday, it is now the turn of ESMA. The European securities regulator has just published an updated set of securitisation Q&As.

Unsurprisingly, in view of their remit, these deal primarily with disclosure and templates. Helpfully, ESMA has highlighted additions and amendments. Market participants can now add this to their beach reading as they while away the pre-cocktail hours.

PCS responds to the EBA consultation on STS synthetic guidelines and the Commission issues final RTS on retention

Two for one on news today.

First, PCS filed its response to the EBA's consultation on the draft guidelines for synthetic/on-balance-sheet STS securitisations. As we approach the final implementation of the Basel III rules, the issue of capital management has loomed ever larger for many European banks. The increase in synthetic/on-balance-sheet securitisations reflects this trend. Going forward, the creation of a large and successful STS synthetic securitisation segment is likely to be a key element of the future development of the European banking system. This is why this seemingly exceedingly technical and dry consultation is, in reality, of great importance. The stark binary nature of STS - you either fully meet all the criteria or you fail - gives disproportionate importance to every nuance of the rules. Globally, the EBA proposals are sensible but we do point out some aspects of the proposal that we think could benefit from some fine tuning.

Secondly, the European Commission, yesterday, published the RTS on retention. This does not quite make it law, as the European Parliament and Council have three months to object, should they wish to do so. However, taking into account the technical natured of this RTS, this does not appear likely. If no objections are raised, the RTS will become law twenty days after it is published in the Official Journal, in the weeks following the end of the three months.

EBA publishes the RTS on “synthetic excess spread” achieving a sensible and balanced approach

Following their consultation last August the EBA has just published the final draft regulatory technical standard (“RTS”) on the capital treatment of synthetic excess spread.

Although a seemingly exceedingly dry and technical subject, the impact of this paper on the European banking industry should not be underestimated.  In the last few years, synthetic securitisations have become a key capital management tool for an increasing number of European banks.  Without such a tool, the risk of the exiguity of bank capital, in the near future, constraining the credit available to European borrowers was substantial.  The regulatory treatment of synthetic excess spread was likely to play a key part in the availability of this tool, especially for asset classes with higher default rates but higher yields.

PCS has yet to read with care the entire RTS, but our preliminary take is that the EBA has allowed a derogation from capitalisation for synthetic excess spread that is the lesser of the actual cash excess spread generated from the securitised assets and one-year expected loss. 

This is a sensible result for which the EBA should be commended.  First, PCS has always accepted that synthetic excess spread can be abused to provide disguised credit support.  Therefore, capitalisation of excess spread at some level has always been a legitimate prudential requirement.  But if the excess spread contracted in the synthetic securitisation is less than or equal to the excess cash generated by the assets, there can be no disguised credit support since the issuer is only providing the investor with the benefit of cash it actually receives.  It is an uncontroversial fact that banks need not allocate capital against revenue.

The RTS also provides for a cap on the amount of synthetic excess spread that can benefit from the derogation equal to one-year's expected loss. This reflects the STS criterion and thus avoids what could otherwise have been a perverse result of tilting the field in favour of non-STS securitisations.

Finally, the RTS allows grandfathering of existing trades, avoiding an unnecessary dislocation in the banking sector's capital management.

So, by exempting synthetic excess spread below actual cash received from capitalisation (up to one year expected loss) but capitalising anything above, the EBA has provided, in our opinion, the right balance between meeting legitimate prudential principles and not unduly punishing equally legitimate uses of actual excess spread.  In our estimation this sophisticated and grounded approach should allow synthetic issuance to grow whilst avoiding the possibility of abuse.

EBA publishes consultation paper on Guidelines on the STS criteria for on-balance-sheet (synthetic) securitisation

The European Banking Authority has just launched a consultation on the guidelines for the STS criteria for on-balance-sheet securitisation.

Given the growth of on-balance-sheet (synthetic) securitisations since the inclusion in Q2 2021 of synthetic securitisations to the STS framework this is quite important.

We will, in due course, review the paper and publish our views.

A public hearing will take place via conference call on 30 May 2023 from 14:30 to 15:30 (CEST).

The deadline for this consultation is the 7 July, PCS will, of course, be responding.