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.

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.

PCS responds to the Joint-Committee's Consultation on Sustainable Disclosure for STS

PCS has responded to the Joint-Committee of the European Supervisory Authorities on its consultation regarding the optional disclosure relating to sustainability of the assets securitised through an STS transaction.

Our response can be read here.

Acknowledging the very narrow mandate that had been given the Joint-Committee and the challenges this posed, PCS nevertheless believes that this was the wrong mandate, at the wrong time for far too narrow a sub-set of capital market instruments.  Through no fault of the committee, this feels like another siloed regulatory endeavour that risks again punishing unnecessarily securitisation and tilting yet further an already unlevel playing field away from allowing securitisation to recover and play a full role in financing the transition to a sustainable economy.

To understand our approach, we invite you to read only the General Considerations section of our response.  It covers merely three pages.  (Although hard core players are welcome to read the full thirteen page document, of course.)

PCS’ response to the EBA consultation on synthetic securitisation: not just for securitisation nerds

PCS was glad to respond to the EBA’s consultation on the possibility of introducing an STS regime for synthetic securitisations. It may be found here.

Notwithstanding that this topic may seem highly technical and of interest only for the hard-core enthusiast, we believe that it is – in fact – possibly one of the most important financial files in front of policy makers today.  Even if you have little interest in the detailed responses to the specific proposals, we would invite everyone to read our general comments at the start of our response. (They are only three pages long).

Broadly, the EBA discussion paper is a good starting point and much in the approach is to be commended.  Where PCS has some concerns are first the importation of significant risk transfer (SRT) requirements when these erode the quality of the STS standard without commensurate benefit for the integrity of the prudential regime and secondly the, for us, inexplicable lack of any proposal for an appropriate capital benefit when such benefit is fully justified both by the data and by the fundamental analysis.

We look forward though in further discussions with the regulatory community on this important topic.

PCS responds to EBA and ESMA consultations

PCS has filed a response to the EBA’s consultation on the “homogeneity” criterion in the STS Regulation.

The EBA’s general approach as disclosed by the consultative document is broadly sound and sensible.  There is however some concern over how the fourth part of their suggested test (the “risk factors”) would work.  In particular, PCS has some concerns over how issuers, investors and third party certification agents will be able to achieve a sufficient level of confidence in the choice of the relevant risk factor or risk factors. Our response does provide a possible solution which we think is both workable and reasonable.  In addition, PCS has suggested some clarification regarding some key terms.

PCS has also filed a response to the ESMA’s consultation on the information to be provided by entities seeking to be regulated as third party certification agents. Since PCS has made no secret of its intention to become such a regulated third party certification agent, we have a direct interest in the outcome of this particular consultation.  As with the EBA consultation on homogeneity, PCS feels ESMA’s overall approach is sound and our response is mainly concerned with technical aspects.

PCS responds to a disappointing Commission consultation on STS and LCR

PCS has filed a response to the European Commission’s consultation on possible changes to the Liquidity Coverage Ratio regime.  The heart of the Commission’s proposal is the replacement of the current Level 2 securitisation assets with STS securitisations.

As outlined in PCS’s response, this seems to us a disappointing suggestion.  It is one that is difficult to reconcile with the intrinsic quality of STS securitisations on which the Commission itself and the European Parliaments and Council have worked so hard  and with the desire of the European Union, through the Capital Markets’ Union project, to revitalise securitisation to fund European growth.  PCS is also concerned that, as currently envisaged the proposal could damage investors and the still weak European securitisation market without a discernible commensurate regulator benefit.

However, we are grateful for, and heartened by, the fact that the Commission has launched this consultative process.  We are therefore optimistic that, working together with the Commission and stakeholders, solutions can be found that both reinforce the prudential framework for the banking sector and the prospects for the new STS regime.

PCS files its response to the Commission's consultation

Last week, the PCS response to the Commission's securitisation consultation was filed.  PCS is strongly supportive of the Commission's approach.  In our response we recommend that the process of crafting the definition of "simple, transparent and standardised" securitisation be anchored in the excellent work of the European Banking Authority.  Our response also focuses on the issue broached by the Commission regarding the operationalisation of the potential new regulatory scheme.  PCS had expressed the view that the success of the new regulatory scheme in revitalising a European securitisation market on a safe basis would depend not only on the definitions and rules of such scheme but on the practical issues of how the scheme could be operated.  In particular, the regulatory framework should not  unnecessarily deter investors from investing.  Following our earlier paper, "the illusory promise of self-attestation", we have set out in great detail how the proposed regulatory scheme could be made to work in an annex to our response.  In particular, in the section entitled "Questions that should be frequently asked", we deal with some of the legitimate concerns with our proposals.

PCS files its response to the BCBS/IOSCO consultation on simple, transparent and comparable securitisations

PCS files its response to the BCBS/IOSCO consultation on simple, transparent and comparable securitisations.  We view this work stream by the Basel Committee and IOSCO as a major and positive move towards a global approach to securitisation that is in line with our own analysis and the positions taken by the European stakeholders in the asset class, including many European policy makers.  PCS very much hopes that this work will lead to a new global regulatory approach to securitisation that will help in the return of a strong worldwide securitisation market free from the build up of systemic risk that occurred prior to 2007.  Such a market would facilitate the cross-border mobilisation of capital to fund the real economy and growth.

PCS files its responses to the EBA consultation on simple, standardised and transparent securitisations

PCS filed yesterday its response to the EBA consultation on simple, standardised and transparent securitisations.

This consultation marks a very strong and positive step towards the creation of a robust regulatory framework built around a definition of high quality securitisations.  PCS welcomes the consultation and is supportive of the approach outlined by the EBA.

PCS responds to the ECB/Bank of England joint consultation

Last Friday, PCS filed its response to the ECB and Bank of England's excellent joint consultative document.  The PCS Response to BoE/ECB consultation welcomes the proposed approach of defining high quality securitisation and providing some role for such a definition in the regulatory schemes.  PCS also is broadly supportive of the principled based approach adopted by the Bank of England and the ECB.  However, PCS also expressed its concern that the very weak securitisation market needs urgently a sense that new regulatory proposals are progressing in the right direction. Although we understand that the process of crafting regulations is a time consuming one and we further understand that some of the forthcoming rule making (such as Solvency 2 and the LCR requirements) may have to be enacted in sub-optimal form due to timing constraints, it is vital for the survival of the securitisation market that policy makers indicate clearly that these rules are effectively in an interim stage and that further work will be done, with all required speed, to create a safe regulatory environment that reflects the intrinsic strengths of quality securitisations.