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.

Following the UK’s exit from the European Union, this securitisation regulation was on-shored.

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 regulated entities: “third party verification agents”.  Third party verification agents 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 verificaiton agents 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 strong protection against possible sanctions.

Third party verification agents also assist 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 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, if an independent and regulated third party performed its own due diligence of the STS nature of securitisations and the investor consults this independent report such investor has likely discharged its 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.

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 and CRR/LCR assessments.

The Labels

From the beginning, the heart of the PCS initiative was the PCS Label which  was awarded to securitisations meeting the strict criteria set by PCS. Today, PCS’ STS verification work has superseded the label activities.  However, many extant securitisations have the benefit of a PCS label and the list may be consulted here and here

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