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.

Commission's Call for Evidence on Securitisation - progress...but ever so slow

In the securitisation consultation  which closed last month, the Commission wrote that it would issue a call for evidence to the Joint Committee of the ESAs on the key unfinished parts of the STS reform - namely capital calibrations and LCR treatment.

True to its word, the Commission has now issued this call for evidence (found here).

The good news is that it seems to cover all the items needing to be covered including the capital calibrations for both bank and insurance investors and the treatment of securitisations for the liquidity coverage ratio.  It also name checks the excellent report from the High Level Forum on Capital Markets' Union containing most (if not all) the recommendations that we, at PCS, and many market participants have called for.

The bad news is that the ESAs (ie the EBA, EIOPA and ESMA) do not have to report before September 2022.  This means that the very earliest we could expect these reforms to be introduced is at the end of next year.  When one considers the continued decline of the STS securitisation market, the need to revitalise this market to assist banks faced with capital constraints and the financing of Europe's green transition, this extended timetable is unfortunate to say the least.  We should not lose sight of the fact that the High Level Forum's recommendations were issued in June 2020.

PCS would therefore implore the European Union, at the very least, to keep to this most elongated timetable and not to allow it to slip further if it wants to have any securitisation market to revive.

European Commission consults on securitisation

In line with the traditional review process, the European Commission has issued a consultation on the functioning of the EU’s securitisation framework.

The deadline for the consultation is 17 September 2021.  PCS will be responding, of course, and strongly encourages all market stakeholders to express their views.

This is potentially an important milestone in completing the reforms started in 2019 but left unfinished.

Repairing the issues that remained a problem would greatly help revitalising a key financing tool for the European economy.

Long awaited homogeneity RTS is out

Today, the European Commission formally adopted the regulatory technical standard (RTS) on homogeneity which may be found here.

In order for a securitisation to be STS, it must meet a lengthy series of criteria. One of these criteria is that the assets in the securitised pool must be homogeneous in character. Because of the difficulties inherent in defining something as elusive as “homogeneity”, this criterion was the only STS criterion for which the Commission was required to issue an RTS. This it did today. This does not mean though that this RTS is law as of today. Once adopted, it will be scrutinised by the Parliament and the Council who may reject it (but not amend it). Normally, the Parliament and Council have three months to veto such an RTS. However, this period is likely to be impacted by the fact that a new Parliament is coming in and it may therefore be September or October before the new RTS is officially on the books. However, its adoption today is a key step in lifting the uncertainty hanging over the STS market. As this document is so recent, PCS has yet to do a thorough analysis. At first glance, the Commission appears to have simplified somewhat the EBA’s original proposal without changing the underlying approach.

A new joint-note shows the depth of consensus over the European Commission’s securitisation proposals

A note on STS securitisation signed by 32 associations and market participants sets out aspects of the Commission’s simple, transparent and standardised securitisation proposals that would need modifications if the project is to revive the European securitisation market.

The joint-note on STS securitisation, together with a similar joint position paper published by AFME/EFAMA/ICMA and Insurance Europe, shows the very strong, and unusual, degree  of consensus amongst stakeholders over the additional steps necessary to allow securitisation to help fund the European economy.  The signatories of the note – and the earlier joint position paper – represent issuers and investors, large and small participants, financial and non-financial economic actors and representatives of many geographies.  In effect, they represent a cross section of all interested parties with experience in this finance channel.

The note sets out ten elements of the current European Commission proposal that need to be modified in order to create a market that has the four necessary characteristics for success: that the regulatory framework be stable, holistic, clear and executable.  All ten elements are set out against these four requirements in a helpful appendix.

With public issuance of securitisation, according to S&P figures, down from €500 bn in 2006 to €75 bn in 2015 – and this notwithstanding the extremely robust performance of these bonds during the crisis – the market is at risk of stalling entirely.  Should this happen, the capacity of a safe securitisation market to help return the European financial system to a more normal and stable basis could be delayed by a number of years.  This explains the sense of urgency behind the desire of stakeholders to see a new and appropriate regulatory regime come into being.

PCS was honoured to be a signatory of the joint-note and fully endorses its content.

Insurance Europe publishes its response to the Commission's proposals on STS securitisation

Insurance Europe, the representative body of the European insurance industry, has published its response to the Commission's STS securitisation proposals.

As with many stakeholders in European finance, Insurance Europe is favourable to the Commission's approach to reforming the regulations around securitisation through the STS definition.  In common with most other voices in this debate, including PCS, it believes the proposed STS definition is broadly correct and workable.

The response does focus though on some of the same issues to which we, at PCS, had drawn attention.  These include the non-neutrality of capital charges.  The inexplicably high degree of non-neutrality which we had analysed in the context of bank investors and the CRR proposals exist equally in the context of insurance investors and Solvency II and Insurance Europe presents some possible answers in their paper.

Insurance Europe also draws attention, as have all other investors and investor bodies, to the necessity of some form of independent third party certification system if we wish to see new investors to the securitisation market.

In addition, Insurance Europe focuses sensibly on how to avoid the duplication of due diligence when insurance companies invest through asset managers.

Finally, Insurance Europe pleads for an acceleration of the process amending Solvency II since the current proposals currently have no deadline for this.

Oudea skeptical about the Commission’s proposals

Reuters has published an article quoting skeptical remarks made by Frederic Oudea, the boss of Societe Generale, on the impact of the Commission’s securitisation proposals.  After an initial welcome of the Commission’s plans, these statements reflect the growing concern of many that despite 85% of the proposals being excellent, the 15% in need of further work may still derail the Commission’s ambition for a revived market.  Investors concerns around the lack of a “common language” provided by third party certification, issuer concerns with the nature of the attestation required of them, general concerns about the issue of how a complex definition will be interpreted by the regulators, technical issues with the ABCP proposals and worries about the proposed new CRR bank capital calibrations as well as the absence, so far, of new proposals for insurance companies are the problems most often mentioned.  However, the text is not yet finalised and so there remain many opportunities to improve the scheme and optimise the outcome.

Commission’s securitisation proposal is out

Today, the European Commission published its proposals on securitisation within the Capital Markets Union project.

Based on an earlier draft leaked by the Financial Times, there was much to commend the Commission’s approach, some items to keep an eye on and some issues which were serious enough to have the potential to derail the chances of market recovery altogether.

First, the Commission should be commended for a number of very positive aspects: (a) there is a definition of simple, transparent and standardised (STS) securitisation to be used to bifurcate the regulatory outcomes for this financing channel as a whole; (b) the STS definition focuses on elements of structural integrity rather than on the credit quality of the securitisation or the underlying assets; (c) the STS definition is intended to be used across the regulatory framework so that all types of investors and issuers will be able to work on a single definition and (d) the definition, based on the EBA’s work, is complex (57 criteria by our count) but fundamentally correct and workable.  For all this, we must be grateful for the Commission’s work.

The items that will need an eye kept on them are: (a) many of the 57 criteria remain extremely vague and will need substantial clarification – a process that could either improve or damage the ultimate workability of the scheme; (b) no new calibrations for Solvency II are currently being proposed and whether the proposal can revive the market remains dependent in large measure on where those numbers finally come out and (c) how the scheme would work for third country issuers remains unclear.

Finally there are five items that could endanger the workability of the whole project and call into question its capacity to revive European securitisation

First, the nature of the required attestation could be very problematic for many issuers.  The principle of issuer attestation and the fact that failures in attestation should be actionable is good and uncontested; however, we can see issuers being willing to attest to what they know or control, in other words, the individual 57 components of the STS definition.  But the leaked proposal required the issuers to attest to the conformity of their issuance with the STS rule.  The complexity of the definition means it must be subject to regulatory interpretation.  We anticipate that many issuers will have difficulty attesting to what they are not and cannot be privy to, namely the future interpretation of regulators.

Secondly, the rejection of a formal role for independent third party certification agents in favour of self-attestation and individual investor due diligence.  This was a solution rejected in the consultation response unanimously by every investor and investor association, most banking federations and many public sector bodies.  The absence of a “common language” provided by a real master list and the requirement of repetitive, costly and inefficient mechanical due diligence – as distinguished from credit due diligence which will be performed by investors – is very likely to stop most potential new investors from coming to the market and drive many of the remaining ones out.

Thirdly, the choice to leave the administration of the scheme with a multiplicity of national regulators is problematic.  That national regulators remain in charge of administering the scheme is not problematic but, if they are responsible for interpreting the 57 criteria, then the likelihood that a single STS definition survives across the European Union is very low indeed.  As interpretations drift, it will leave a nationally fragmented market – which is precisely what CMU was seeking to overcome.

Fourthly, the maturity limitations and the unnecessary public disclosure requirements set out of ABCP conduits are likely to close down most of that market.

Fifthly, the EBA proposals for bank calibrations in the CRR context – and particularly the vast non-neutrality factor left in the proposals – are difficult to justify and will drive a key investor class away from securiitisation.

These are the five key issues which we will be paying attention to when reading the just released paper.

European Commission publishes responses to securitisation consultation

Today, the European Commission published the responses to the consulation on securitisation within the CMU project.  The Commission received 120 responses, indicating the great level of interest in this issue from many different stakeholders.  As we understand it, these responses will be reviewed with a view to the Commission publishing a concrete proposal in September of this year.  This proposal will center on a definition of "simple, transparent and standardised" securitisation and a regulatory infrastructure bifurcated around such definition.  Issues which we believe remain still very much open are the inclusion of rules around synthetic securitisations, asset backed commercial paper conduits and the best way to "operationalise" the regulations to avoid regulatory uncertainty or costs undermining the project's capacity to help fund economic recovery.  On the latter point, PCS has published two substantial analyses of the issues raised and their possible solutions: "The illusory promise of self-attestation" and "Certification in the context of a regulatory framework for securitisation".

European Commission publishes today a Green Paper on the Capital Markets Union together with a new consultation on securitisation

Today, the European Commission publishes its Green Paper on the Capital Markets Union.  In the paper its sets out five priority for early action, of which the building of a sustainable securitisation market is one.  Underlying the seriousness with which the Commission is approaching the securitisation brief, together with the Green Paper was published a consultation on securitisation.  This consultation, with a May 13 deadline, requests stakeholder views on the notion of a bifurcated approach to the regulation of securitisation similar to that which PCS has been advocating since its inception.  In particular, the consultation explicitly addresses the possibility of a revision to the bank capital rules for bank investors in securitisations.  PCS views both these papers as milestones towards the creation of a strong and safe securitisation market in Europe.