Historical Background

As the crisis unfolded in 2007/2008, the asset backed securities market came under substantial criticism as some securitised products played a major role in the financial difficulties. Badly underwritten products, opaque structures and over-leveraged issuance performed very badly and weakened the world financial system. Yet the vast majority of European securitisations came through the crisis unscathed.  They were the proof that simple, transparent and quality securitisations are a healthy and robust part of finance.

Today, most public bodies, regulatory authorities and policy makers have come to recognise the crucial importance to the future health and resilience of the European economy of a strong yet safe securitisation market.

The PCS initiative was launched in 2012 to help define the type of strong securitisation products that could assist in maintaining a healthy financial flow of credit to consumers, SME’s and corporations without creating systemic risks for the European financial system.  Since then PCS has worked with European banks, finance companies, investors, trade bodies, regulatory authorities and policy makers to shape a legal and regulatory environment that recognises the benefits that simple, transparent and standardised securitisations can bring to the European economy without sacrificing the overriding requirement of avoiding systemic risk.

The passage in December 2017 of the EU Regulation on “simple, transparent and standardised (STS) securitisations” and the attendant changes to the capital requirements for banks purchasing such securitisations, was a milestone towards achieving a positive environment for safe securitisations.

True to its mission statement, PCS will continue to support all securitisation stakeholders in successfully implementing the new STS regime whether through its verification functions, advocacy or continued involvement with regulatory bodies.

The STS Regime

In December 2017, the European Parliament and Council passed a regulation creating a new category of securitisations: “simple, transparent and standardised securitisations” also known as STS securitisations.  This Regulation came into force on January 1, 2019.

Third Party Verification Agent

The STS Regulation requires originators or sponsors to certify the STS nature of securitisations which they wish to be so treated.  This certification comes with potentially severe penalties for any certification that was negligently or deliberately incorrect.  To assist with the certification process, however, the Regulation also provides that originators and sponsors may engage with a newly created category of regulated entities: “third party verification agents”.  These regulated entities will be able to verify the issuers’ own STS certifications.  As these third party verification agents must, by law, be independent and demonstrate to the regulatory authorities competency, the employment of such certification agents will powerfully demonstrate that the issuer has not been negligent in its own certification.  For this reason, the third party verification agents provide originators and sponsors with very strong protection against possible sanctions.

Third party verification agents also will play a role in assisting investors.  Investors are allowed to put some reliance on the originators’ own STS certification but, by law, cannot rely solely and mechanically on such certification.  Therefore, they will have to demonstrate to their own regulator that they have relied on some additional and reliable information in determining the STS nature of their holding.  Again, the existence of an independent and regulated third party that has performed its own due diligence of the STS nature of securitisations an investor holds should provide comfort that such investor has discharged its own legally required due diligence.

In line with its mission to strengthen the securitisation market as a sustainable investment and funding tool for both investors and originators, in March 2019 PCS became authorised by the Financial Conduct Authority in the United Kingdom to verify STS compliance pursuant to article 28 of the STS Regulation.  PCS also obtained a similar authorisation in June 2019 in France from the Autorité des Marchés Financiers.

Together with the verification of STS criteria, PCS will also provide CRR assessments and LCR assessments, where it will check transactions against the additional criteria in the CRR rules and LCR rules to provide the regulatory benefits to STS securitisations.

In doing STS Verifications and CRR/LCR assessments, PCS will be able to draw on its extensive involvement over the years with the design of the STS criteria – some of which are indeed the original PCS Label criteria.

To assist market participants, PCS will, upon request, also provide issuers and/or investors an STS Report setting out any discrepancies between existing securitisations and the requirements of the law.

Although issuers pay for any STS verification, CRR/LCR assessments or STS Reports, PCS is a not-for-profit operation. Therefore, all revenue generated from these activities goes solely to covering the costs of running PCS.

We strongly advise all visitors to this site to read our “Disclaimer” for a better understanding of the nature of STS verifications, CRR/LCR assessments and STS Reports.

The Labels

From the beginning, the heart of the PCS initiative was the PCS Label. The PCS Label – which, with the introduction in 2017 of our Risk Transfer Label, became our True Sale Label –  can be awarded to securitisations meeting the strict criteria set by PCS. Transactions which have been awarded and maintain a PCS Label can be found listed here (for True Sale transactions).

These criteria embody the PCS mission. They focus on issues of quality, transparency and simplicity. They were designed to be a visible demonstration of the type of securitisation that could form the backbone of a safe and transparent European securitisation market and, when we first started issuing such labels in 2012, the starting point of a discussion around a better European regulatory framework around securitisation generally.

We strongly advise all visitors to this site to read our “Disclaimer” section for a better understanding of the nature of a PCS Label.

Risk transfer securitisations (also sometimes known as “synthetic securitisations”) do not involve the sale of financial assets but a contract under which capital market investors agree to pay a financial institution if certain loans held by that financial institution default.  Risk transfer securitisation operate very much like insurance policies.  By allowing financial institution to transfer risk they are a powerful tool for reducing systemic risk.

For a variety of reasons, during the debate on crafting a better regulatory framework for securitisations, the issue of risk transfer securitisations was not broached and currently they do not have a place in the STS regime.

However, the potential value of such securitisations has now been recognised.  In the European Regulation creating the STS regime, the European Parliament and the European Council have explicitly requested the European Commission to investigate how risk transfer securitisations could be incorporated into the STS regime.

With all this in mind, in 2017 market participants asked PCS to assist in framing the debate around the type of simple, transparent and robust risk transfer securitisations that could benefit from a more appropriate regulatory treatment.

In response to this request, PCS introduced a Risk Transfer Label.  As with our True Sale Label, our Risk Transfer Label can be awarded to securitisations meeting the strict criteria set by PCS. Transactions which have been awarded and maintain a PCS Risk Transfer Label can be found listed here.

Although issuers pay for any label, PCS is a not-for-profit operation. Therefore, all revenue generated from its activities goes solely to covering the costs of running PCS.

We strongly advise all visitors to this site to read our “Disclaimer” for a better understanding of the nature of all PCS Labels.

Further information