November 2022 Newsletter

31/10/2022

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]
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