European Parliament votes the new securitisation rules
Yesterday, in their plenary session, the European Parliament passed long anticipated amendments to the existing STS Regulation and concomitant changes to the Capital Requirement Regulation (CRR). This vote, which had been expected earlier in the year, looked like it had been derailed by a dispute over some of the tax focused provisions which would have potentially cut off access to the European market to Australian issuers. But, after some last minute negotiations between the Australians, the Parliament and Member States, an acceptable compromise was reached.
To recap, the new securitisation rules contained in this legislative act allow certain synthetic on-balance sheet securitisations access to the "simple, transparent and standardised" ("STS") status previously only available to "true sale" securitisations. To achieve this status though, a synthetic securitisation will need to thread a narrow needle made up of around 145 to 160 criteria (depending on the type of transaction). The new rules also amend certain provisions around non-performing loans securitisations ("NPLs") correcting some unintended consequences in the original legislation. The full text of the securitisation amendments may be found here.
Together with new securitisation rules, the European Parliament voted a number of amendments to the CRR - which may be found here. These are consequential to the amendments of the securitisation rules in that they amend capital requirements for banks in line with the new rules.
These two legislative acts are not yet in force as they will first need to be approved by the Member States and published in the Official Journal. The first is a formality that can take place pretty much immediately. On the second, a small point worth noting is that usually laws only come into force twenty-one days following publication in the OJ. Maybe wishing to make up for lost time, the Parliament accelerated this by requiring only three days to pass after publication. This suggests that these reforms may well be in force before the end of April.
Although one can always quibble on details, these new rules - which reflect closely the proposals of the European Banking Authority - will be welcomed by the markets as being a step towards a more consistent regulatory framework for the European capital markets. These rules will, of course, not apply to financial institutions in the United Kingdom. Currently, we are not aware of any plans by the UK authorities to introduce similar amendments.
STS - the end of a long march, maybe the start of a new dawn
Today, in the European Parliament 457 votes were cast in favour of the STS Regulation (out of 617) and a further 458 votes for the CRR Regulation. Six years after the industry argued for a bifurcated regulatory scheme that treated high quality securitisation fairly and after many twists and turns, the new regime has finally seen the light of day. (As a technical matter, the law still requires the final signature of the Council, expected next week and publication in the Official Journal, expected within a couple of weeks.)
Overall, we believe that - whilst no more perfect than any other complex legislative outcome - the new regime is workable, if somewhat complex, and provides the basis for a revival of a safe and robust securitisation market in Europe. Some last minute wobbles concerning self-certified mortgages and due diligence requirements (known to the cognoscenti as the "Article 17 issues") were to a large extent successfully resolved in the final text.
But the new Regulation, whilst laying solid foundations for a new securitisation market, still requires some additional construction fully to fulfil its potential. In that sense, the industry's long march may not yet be completely over. First, the STS criteria remain frighteningly vague in part and will only acquire solidity after the EBA's guidelines and recommendations as to their interpretation. All industry eyes are now turned to the EBA, therefore, to fill in the blanks. Secondly, without a change to the Solvency II securitisation calibrations for insurance companies, the only benefits of STS are for bank investors (and, to some extent, money market funds). So industry also turns to the Commission for Solvency II amendments, which PCS understands are being prepared. Changes to the Liquidity Cover Ratio (LCR) rules would also be enormously helpful and entirely logical.
Two final thoughts on the new regime.
First, regulation can only provide the framework for financial markets. Whether, in the appropriate framework, markets thrive depends on the traditional elements of willing sellers and willing buyers agreeing on price. Therefore, whilst the STS regime is an important, if not essential, component of a strong European securitisation market, its normalisation remains crucially dependent on the overall monetary policy of central bankers. Put bluntly, so long as financial actors can obtain free money from their central bank there will remain little incentive to access more expensive funding sources such as securitisation. So it is with great interest that we await today's ECB statement on a possible taper.
Secondly - Brexit. As a Regulation, the STS regime will, upon publication in the Official Journal, become UK law by direct applicabillity. Depending on the final terms of the withdrawal bill currently before the British Parliament, it is likely that the STS regime will remain UK law after Brexit. However, to the great disappointment of PCS, the European lawmakers rejected any extra-EU dimension to the STS regime. This leaves us with the possibility of two identical STS regimes, operating in entirely separate, watertight spheres. PCS hopes that, in due course, this anomaly will find a sensible solution.
European Parliament agrees the text on STS securitisation
This morning, the ECON Committee of the European Parliament voted on its compromise text for the draft STS securitisation legislation. This text is not the actual legislation but is an amended version of the original European Commission text. This amended text will now be brought together with the Council text agreed last December and the two will be subject to a reconciliation process involving the Commission, the Council and Parliament - the trilogue negotiation. The result of this negotiation will be the final text to be voted on and become the STS law. The trilogue will, in all likelihood, begin in late January or early February. It is difficult, however, to estimate how long it will last as this depends on the speed at which politically contentious issues can be resolved.
It should be noted that today's vote showed a solid consensus within ECON for this text - with 44 votes in favour, 4 against and one abstention. Also of note, it was agreed that the text would not be brought to a plenary session vote and so is now final.
We expect the official version of this text to be published in the coming days.
Rapporteur report on STS securitisation is published
Today, Paul Tang, as Rapporteur, published his preliminary report on STS securitisation. This report will form the basis for the discussions that will now take place within the European Parliament, starting with the first exchange of views amongst ECON Committee members next Tuesday.
Rapporteurs and some shadow rapporteurs are appointed by the European Parliament
Today the S&D and the EPP groups have appointed the rapporteurs and shadow rapporteurs on the two key securitisation files to be dealt with in 2016. On the STS securitisation file, as expected, the rapporteurship went to the S&D group in the person of Paul Tang, the Dutch MEP. The EPP shadow rapporteur will be Mr Karas, from Austria. On the CRR file, dealing with changes to the capital requirements for banks investing in securitisations, the rapporteurship will be held by the EPP in the guise of Pablo Zalba Bidegain from Spain. The S&D shadow rapporteur on the CRR file will be another Spaniard, Jonas Alvarez. The other groups are expected to nominate their shadow rapporteurs very soon. This will allow the Committee on Economic and Monetary Affairs to start work on these two key files as soon as the Parliament reconvenes after the break.
Delegated Acts for Solvency II adopted but the Parliament still has some questions
Upon the expiration of the deadline for objections on January 10th, the Solvency II delegated acts were adopted. These include, of course, the division of securitisations into two types and the calibrations that are now well known and still considered by many insurance companies as still too high. Of interest however is also the letter from the European Parliament to Commissioner Hill. In the letter, the Parliament asks for a speedy review of the calibrations for infrastructure investments. Although not immediately relevant to securitisation, this is a good sign nevertheless. With the EBA work being done on a definition of "simple, standardised and transparent securitisations", the letter indicates that the Parliament is open – at least in principle- to an early revision of calibrations. This reinforces the belief of PCS that a revision of the securitisation calibrations in Solvency II before the coming into force of the rules in January 2016 remains entirely possible.
European Parliament proposes positive amendments to the draft money market funds legislation
The complete set of amendments proposed by members of the European Parliament to the draft money market funds legislation has just been published. As readers will recall, the original draft was extremely restrictive as to the types of securitisations that could be purchased by MMFs - basically short dated corporate loans. A number of key MEPs have now tabled amendments. Particularly notable were the extension of the types of securitisations that MMFs could purchase proposed by Jean-Paul Gauzes, Wolf Klinz and Sharon Bowles. All three amendments request ESMA to define the types of securitisations that MMFs can invest in. Especially important to us was the very straightforward amendment by Mr Klinz requiring ESMA to draft a definition of "high quality securitisation"; a position very consistent with his proposed draft response to the Commission's Green Paper on Long-Term Funding (see our earlier post here). These amendments are to be welcomed as a sign that the concept of regulation based on "high quality securitisation" together with a desire for a harmonised approach to this issue is making strong progress. The text of the amendments may be found here.
In a draft report on long-term financing, the European Parliament recognises the importance of securitisation and calls for a definition of "high quality securitisation"
In its draft report on long-term financing of the European economy the European Parliament's Committee on Economic and Monetary Affairs has made key positive statements regarding securitisation and called for a definition of "high quality securitisation". In particular, the report stated: the Committee "believes that securitisation can play an important role in financial intermediation; encourages efforts to securitise high-quality assets while avoiding structures of high complexity; notes that there is scope for more standardisation and transparency; calls on the Commission to follow closely the activities of the International Organisation of Securities Commissions-Financial Stability Board working group on securitisation and to develop a definition of ‘high-quality securitisation’" The Committee also welcomed the Commission's request of EIOPA to revisit certain calibrations that would impede long-term finance. Finally, the Committee called "on the Commission to assess carefully the cumulative impact of already concluded and ongoing financial regulation of long-term investment" reflecting a concern regarding the cumulative unintended consequences of regulatory proposals and rules on the European economy.
Reflecting many of the key positions of PCS, especially in the call for a definition of "high quality securitisation", this report marks an important contribution to the debate on long term funding of the European economy. The full draft report may be found here