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.

2023 - The STS Year in Review

Welcome!

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

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

Market data – Looking back at 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)

Commentary

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
RMBS2625-4%
Auto3343+30%
Consumer1314+7%

Commentary

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).

Jurisdictions

Commentary

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.

October 2023 Newsletter

Welcome

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.

Conclusion

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]

New PCS Member

It is a great pleasure to announce that Piraeus Bank, a leading systemic Greek Bank, has become the newest member of the PCS Association. We welcome them to the PCS family and look forward to their participation and input.

PCS files its response to the Financial Stability Board's request for feedback

PCS filed its response to the FSB's request for feedback on the success or otherwise of the G20 reforms of the rules surrounding securitisation.

Although the FSB is a body with a global remit, in line with our social purpose and our area of expertise, PCS' response deals with the impact of securitisation regulations in Europe, including both the European Union and the United Kingdom. In view of the very short time provided by the FSB for comments - a mere three weeks - our piece is short and provides a high-level view of the impact of the current regulations together with broad conclusions as to both why the current regulatory framework does not appropriately reflect the actual risk profile of European securitisations (especially STS) and what could be done to remedy this state of affairs.

PCS' argument is not that we should roll-back the reforms that emerged from the G20 work plan. Many, even most, were necessary and beneficial. On the contrary - and as we have written elsewhere - there is a need to complete those reforms so as to reflect the legislative removal of agency risk via the Securitisation Regulation and the creation of the STS standard.

New PCS Member

It is both a pleasure and an honour for us to announce that Attica Bank has become a member of the PCS Association.  Headquartered in Athens, Attica Bank shares PCS' commitment to the growth of the securitisation market both in Greece and throughout Europe.

New PCS Members

PCS is honoured to receive three new members to the PCS Association.

These are Alpha Bank, Eurobank and Waselius & Wist.

Alpha Bank and Eurobank are two leading banks in Greece, both active in the securitisation market on the synthetic side. Waselius & Wist is a prominent Finnish law firm based in Helsinki and also active in securitisation having represented the biggest players in the market.

We welcome them to the growing PCS family and look forward to their contributions to PCS’ continued mission of assisting European securitisation grow as an essential tool for the funding of the economy.

June 2023 Newsletter

Welcome

Welcome to this pre-Barcelona conference edition of the STS Newsletter by PCS, keeping stakeholders up to date about market and regulatory developments in the world of STS.

In this edition, we review the final text of the EU Green Bond Standard Regulation and seek to discern what it means for green securitisation.

We also explore a question that is often asked of PCS: "When does an amendment to an existing transaction that has been notified STS require a new notification to ESMA?".

In our regular features, we share updated data on the STS securitisation market and, in the people section, we present Lauren Shirley, the newest member of the Outreach 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.

EU Green Bond Standard Regulation.
Where does it leave green securitisation?

The final agreed text of the proposed EU Green Bond Standard Regulation has been published.  (You may find it here).  What does it hold for securitisation?

The EU GBS

The EU GBS is a proposed green designation for bonds.  It is voluntary.  The regulation contains no prohibition on marketing as “green” or “sustainable” a bond which does not meet the requirements of the EU GBS and so far, no such prohibition is being proposed.  The EU GBS is a designation that can but need not be chosen by an issuer seeking to tap the market for green investments.

Secondly, and differently from the STS standard for example, the use of the EU GBS designation is not limited to EU issuance.  UK, US, Australian, Chinese bonds, etc,,, can be marketed in the EU with a EU GBS label.

Skipping over the details – and, as with all things green in the EU, there are many, many details – the essence of the EU GBS is two-fold: first, use of proceeds and secondly, external independent verification.

To meet the EU GBS standard, the proceeds of the bond must be used for green purposes.  “Green purposes” are basically defined as those complying with the EU Taxonomy.

Also, to meet the EU GBS standard, the terms under which the proceeds will be used for taxonomy compliant purposes must be the subject of a verification by a new type of regulated verification agent.  The EU GBS text contains extensive rules for the regulation of these  agents by the European Securities and Markets Authority (ESMA).

What about securitisation?

First, securitisation is not only mentioned in the final text but has fairly extensive and specific rules attached to it.  This means that there can be no doubt that a securitisation can be awarded EU GBS designation.

Secondly, the big question regarding securitisations under the EU GBS has been answered definitively.  Should an EU green securitisation be a securitisation of green assets or a securitisation whose proceeds go to fund green purposes?  PCS has written about this extensively and, for reasons this is not the place to rehearse, emphatically supported the latter approach. We are therefore happy to report that the EU GBS final text now makes it clear that a securitisation will be eligible for EU GBS status based on the use made by the originator of the proceeds generated by the securitisation irrespective of the "greeness" of the assets.  This aligns the securitisation rules with those for all other bonds thus maintaining a level playing field.

Thirdly, and somewhat unfortunately, the co-legislators have seen fit to add specific and additional burdens on securitisations seeking to be EU GBS compliant.  First, a limited set of financial assets connected to fossil fuels cannot be securitised under the EU GBS banner.  (The list is in article 13(c)).  Secondly, notwithstanding that the “greenness” of a securitisation is based on the use of its proceeds, the co-legislators have mandated additional disclosure as to the sustainability of the securitised assets, to the extent that the originator has this information.

PCS is opposed in principle to such additional rules falling solely on securitisations as, in our opinion, they unfairly tilt the playing field.  In practice though, we suspect that they will not be a material impediment to the growth of an EU GBS securitisation market since (a) there are very few, in any, securitisations of fossil fuel receivables and (b) disclosure is only required in cases where the originator actually has the information.

In a provision that is bound to disappoint some market participants though, synthetic securitisations are explicitly prohibited from achieving the EU GBS designation.

So what next?

Now that the text has been agreed by the Parliament and Council, it will proceed to a vote.  Although nothing is impossible, it is exceedingly unlikely that this will not pass on the text that has been published.  This should occur sometime in the next few weeks.  So, the EU GBS will come into force, in all likelihood, around mid-2023.  But it will not be applicable, and so EU GBS bonds could not be issued, until 12 months later – by mid-2024.

However, we note that EU GBS bonds cannot be issued unless they are verified by an ESMA authorised verification agent.  But the text provides ESMA with 24 months to come up with drafts of key provisions without which it is not possible to authorise green verification agents.  Providing an additional 3 months from ESMA’s presentation of these drafts to the draft becoming a level 2 law, then time for aspiring verification agents to digest the requirements and apply – at the very least, another 3 months – and we could easily not see a fully authorised verification agent for 30 months. The rules do allow aspiring verification agents to operate without ESMA authorisation for 18 months from the EU GBS regulation becoming applicable (ie 12 months after coming into force). But they must do this on a "best efforts" basis of complying with the law. Whether they are volunteers for this somewhat nebulous obligation and liability remains unanswered.

So, unless ESMA accelerates their drafting, we could possibly wait until early-to-mid 2026 for the first EU GBS.

Finally, some question marks hang over the whole endeavour: meeting the EU GBS standard is onerous.  It requires amongst other things, wading through the complexities of the taxonomy, getting a verification, reporting via mandatory templates and becoming liable to sanctions.  But it is currently a voluntary standard.  Will issuers seek it or will they market green bonds on other standards already accepted by investors?  Will investors insist on this standard and the EU taxonomy, or elect to craft their own? Will there be volunteers to become verification agents?

This, in turn, leads one to ask how long the EU institutions will leave the EU GBS as a truly voluntary standard?

Conclusion

For securitisation (excepting synthetics), although the EU GBS final text is not perfect, it is as good as could be hoped for.  It provides a broadly level playing field that should allow securitisations to find their place in the ecology of EU GBS issuance and fully play their role in financing the transition of the European economy to a sustainable structure.

For green issuance though, there is very little visibility both as to timing and the shape of the EU GBS path forward.

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.

  • The numbers show that this first half of the year has been good for true sale securitisations with 45 issues.  Last year saw the final count come in at 100, but one should bear in mind that European securitisations are usually backloaded with more than 60% of the transactions coming in the second half.
  • Of course, pessimists would point out that last year also started very well for true sale securitisations (ending the full year at 100) before very choppy spread movements and rate concerns dramatically turned the spigot down in the second half with originators postponing or cancelling deals.  Optimists, for their part, will point out that the strong decline of true sale issuance in 2H2022 was the product of unpredictable macro-events which have no reason to repeat in 2023.
  • Placed issuance in true sale securitisation last year ended at around €88 bn.  This year, on current trends, we expect around €120bn of placed true sale, assuming no unexpected events.  We leave it to your general life outlook as to whether you expect the unexpected…
  • The driver of the growth in STS true sale issuance is the delayed adaptation of larger banks to the ending of central bank QE.   As free central bank money had to be returned, banks returned to more traditional forms of funding.  Although covered bonds remained the favoured funding channel, large and strategic banks decided not to have all their eggs in the same covered basket and revived securitisation programs that had been placed in suspended animation.  This was very noticeable in the UK and with RMBS.  This explains the larger share of UK deals in the STS mix. Originally, this development had been anticipated for 2022 but… unexpected events. We expect this continued return of UK banks to the STS true sale market to continue in the second half.
  • Will EU banks also revive their true sale programs?  Our educated guess is that they will but later.  Let us not forget that the ECB’s free TLTRO cash fell to be repaid later than the BoE’s. So we are anticipating more EU deals in the second half of the year, maybe the first half of next.
  • The other notable fact emerging from the data is the low number of synthetic STS transactions.  So far, we have only seen 10 notifications to ESMA, compared to 41 for the full 2022.  STS synthetics do tend to be issued more in the second half and so the imbalance is not as meaningful than the bare numbers suggest.  Also, 10 is statistically a low number so limited statistical conclusions can be drawn from it. But still, one would have expected more.  Because synthetic transactions are private, it is difficult to quantify how much of the decline is a decline in overall synthetic securitisations and how much a shift in the balance between STS and non-STS.
  • However, conversations around the market draw attention to the fact that insurance companies have been very active in writing credit protection in the form of insurance policies rather than guarantees or swaps.  But insurance companies writing insurance contracts are not in the habit of cash collateralising their obligations – ask next time you renew your house contents insurance.  Unfortunately, for reasons that have never been in our view adequately explained, STS requires cash collateral.  So, these insurance synthetics chose not to go the STS route.  This would appear to be another unintended consequence of an STS synthetic regime that was trying to do too many things with the same rule set.

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

When is new "new" and when is it just the same old stuff?

One question PCS has been asked not unfrequently concerns amendments to transactions that have already been notified STS. Does a new STS notification and verification need to be done following the amendment? Can PCS confirm the changes will not have a negative impact on the existing STS notification or will the now amended securitisation have to be notified (and verified) anew?

There is no simple answer to or test for this problem. There is, however, an approach which should yield the answer or, at the very least, get you much closer to one.

To get some warnings out of the way first, we would stress that this issue is one of legal interpretation and PCS is not a law firm. Therefore, nothing here is legal advice and a chat with your lawyers is highly recommended should you face this question.

That said, this is a question we have encountered a number of times and about which we have had many chats with lawyers. The starting point is the Securitisation Regulation. More specifically, article 18 which reads:

“Originators, sponsors and SSPEs may use the designation ‘STS’ …for their securitisation, only where: (a) the securitisation meets all the requirements of [STS] and ESMA has been notified…; and (b) the securitisation is included in the [ESMA] list.”

So, what is “the securitisation” that needs to be notified and included in the list? Turning to the definition in article 2 yields little of use: “‘securitisation’ means a transaction or scheme, whereby…” tranched investors take asset risk.

In our view, the simple question that must be answered (albeit one that rarely yields a simple answer) is: "following the amendments to the proposed transaction, do we have a new transaction or scheme or merely an amended existing “securitisation”?”

If one has a “new transaction or scheme”, it seems uncontroversial that this new securitisation will need to be notified as a such.

Although less immediately obvious, the wording of the Securitisation Regulation and the intent of the co-legislators does not suggest that any amendment to a transaction, however trivial, should result in a new notification. (Please note that we are making no comment here on the obligations to file amendments to the original ESMA notification if an amendment invalidates an entry in the original notification – that is a different issue).

Once that conclusion is reached though, the Securitisation Regulation ceases to provide any useful pointers as to when amendments are such as to create a “new securitisation”. For this, one must therefore turn to the laws that governs securities generally; specifically, the laws of the jurisdiction governing the securities issued under the securitisation or, in the case of a synthetic securitisation, the contract that creates the credit protection.

The question that must be answered becomes: “Under the laws governing securities in my jurisdiction, are the proposed amendments to the existing securities of such a nature as to terminate those existing securities and create a new set of securities?” For synthetics or loans (such as warehouses), replace the word "securities" by "contract" or "financing".

Sometimes one is fortunate and local law will have fairly clear rules as to the types of amendments that are deemed to create new securities.

Often though, there is little by way of explicit rules. Then one must start to look at other ancillary aspects of the laws of obligations. For example, if one had securities secured over assets by way of charge and such charge needed to be registered, would amendments like the ones proposed be such as to require such a charge to be re-registered? Under insolvency law, if there are – as they almost always are – periods prior to insolvency during which certain transactions can be set aside (“hardening periods”), would the amendments be such as to trigger a re-set of the clock on those periods? If the issuance of certain types of securities in your jurisdiction has tax consequences, would those consequences be triggered by entering into this type of amendments? Are there other aspects of the local law of securities or contracts that help determine when issuance of new securities or the conclusion of a new contract has taken place?

There is no one-size fits all answer, but lawyers should be able to determine whether “new securities” or a "new contracts" emerge from the proposed amendments. And, in this context, “new securities” or "new contracts" means a “new securitisation”, and a new notification.

(For the avoidance of doubt, we are not writing here of new issuance out of an unamended scheme that contemplated from the beginning the issue of additional securities. You clearly do not have a “new securitisation” whenever you roll over ABCP, for example).

Hopefully, even if no simple and straightforward answer can be provided, this article has helped clarify the approach to this problem.

News you may have missed

GlobalCapital Lifetime Achievement Award
PCS was honoured when Ian Bell, who has headed the institution since its inception in 2012, was given a Lifetime Achievement Award at the GlobalCapital Securitization 2023 Awards on May 4th.

EBA Consultation on synthetics
The EBA launched a consultation on its proposed guidelines for synthetic STS issuance. This is a very detailed set of guidelines and we strongly encourage those with an interest in synthetics (STS or otherwise) to read the paper and respond by the deadline of July 7th. If your interest is only in true sale, a quick perusal may not go amiss, since the EBA are taking the opportunity to add to and modify some of this existing true sale guidelines. PCS is drafting its response as we write and will always welcome the views of market participants so do not hesitate to contact us to discuss.

PCS Symposia Series 2
After the success of its first symposia series – over 1,100 attendees in 12 cities – PCS has begun its second of what we intend to be an annual set of events, with its very well received Warsaw Symposium on 20th May. For the full list of upcoming events, click here.

Australian Securitisation Forum
Our friends from the Australian Securitisation Forum will visit London on June 12th (on their way to Barcelona) and will be hosting a presentation. If you have an interest in Australian securitisation or are just curious, sign up here.

Draft RTS on sustainability disclosures

the Joint-Committee of the ESA's published the final draft of the RTS on sustainable disclosure (here). This draft, extremely likely to become law, sets out the mandatory format of the optional sustainability disclosures to be made by originators of STS securitisations.

Reaching 400.
PCS is proud to have reached our 400th STS verification. We want to thank all the originators and arrangers who have mandated us since we started in 2019, all the investors whose trust underpins all we do and all the lawyers with whom we have engaged, sparred, and argued but always with the shared goal of “getting it right”. Thank you!

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 Lauren Shirley, Events Manager and newest member of the Outreach Team.

Lauren Shirley

Lauren is an accomplished marketing professional specialising in corporate conferences and networking events. She joined PCS in January of 2023 in order to manage our European Symposia series. Within 9 business days of her start date, Lauren already had 2 of our symposia under her belt. She now has 8 and is in the depths of organising a further 12 events for our newly launched series 2.

Before falling into the world of corporate events in 2020, Lauren was a seasoned Jewel House and White Tower warden at the Tower of London, her duties ranged from security and operations, to tours and private events.

Lauren is a keen host who enjoys spending time with family and friends over a glass of wine. She is keeping her event management skills honed outside of working hours as a blushing bride to be, planning her upcoming 2024 spring wedding.

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]

2022 - The STS Year in Review

Welcome !

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

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

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

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

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

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

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

The big picture

(Hover over the sections for legends)

Commentary

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

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

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

Asset classes

Public Transactions20212022YoY
RMBS2327+17%
Auto3732-14%
Consumer1213stable

Commentary

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

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

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

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

Jurisdictions

Commentary

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

Synthetics/on-balance-sheet transactions

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

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

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

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

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

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

2022 – a game of two halves

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

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

Synthetics were going strong to add to the upbeat outlook.

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

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

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

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

Miscellaneous observations on 2022

Securitisation is part of fixed income…

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

…but that is not the whole story

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

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

Privatisation: no need to panic

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

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

The liquidity story

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

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

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

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

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

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

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

The fundamentals are still favourable to STS

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

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

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

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

But the headwinds are rising

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

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

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

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

Conclusions?

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

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

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

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

Britannia rising

The new dispensation

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

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

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

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

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

Securitisation proposal

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

The draft can be found here.

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

The definition of “securitisation” remains unchanged.

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

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

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

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

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

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

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

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

News you may have missed

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

Celebrations and season's greetings

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

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

November 2022 Newsletter

Welcome !

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

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

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

As ever, we very much welcome any feedback.

Regulatory state of play

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

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

EC report on the functioning of the Securitisation Regulation

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

Some General Points

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


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


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


What the report does deal with are the following topic:

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

Risk retention

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

Investor due diligence

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


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

Private vs public transactions

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


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


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


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


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

STS equivalence

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


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

Green securitisation

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

Third party verification agents

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

Limited licensed banks

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

The jurisdictional scope

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


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


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


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


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


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


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


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

Other stuff

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


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


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

Conclusions

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


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


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


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


We could not have put it better ourselves.

Market data

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

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

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

News you may have missed

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

PCS European Symposia Series and new PCS website

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

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

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

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

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

Our people

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

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

Max Bronzwaer

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

Contact information

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

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