Following the recent leak and the much heralded expectation that today would see the publication of the European Commission’s proposed reforms of the Securitisation Regulation and CRR, imagine our surprise when appeared in our inbox the Commission’s proposals for amending the Liquidity Coverage Ratio rules. The proposals on the LCR rules were anticipated, just not today.
Overall, a quick perusal reveals a lot of positives. The draft does not seek to move securitisations up from category 2B to 2A (and even less to 1). But we have long argued that this category upgrade was not necessary for securitisations to enter bank LCR pools in quantities greater than the current homeopathic amounts.
A very quick read of the draft shows an amelioration of the ratings cliff problem. Eligible securitisations are no longer limited to AAA and can remain in pools down to A-. However, once they drop to A+, the haircut increases to 50%.
Eligibility remains restricted to senior STS tranches. However haircuts are proposed to fall for “resilient” senior STS tranches to 15% so long as the issue size is at or over Euro 250m. For non-resilient senior STS the number remains 25%. However the 35% haircut for securitisations that were not mortgage or autos dissappears. (What is “resilient”? You will have to wait for the full proposal to come out for the definition.)
Also gone are the WAL and the asset class restrictions.
With the removal of the ratings cliff and the better haircuts, this would clearly be a major step toward high quality securitisations achieving a place in LCR pools commensurate with their actual market liquidity. Haircuts could be better aligned to those of covered bonds (7% to 10%) since data shows that senior STS has similar to better liquidity than them. The ratings eligibility might also be more sensibly extended to the investment grade category.
However, these are all points the market will have the opportunity to make since the draft comes with a four week consultation – deadline July 15.
