Green securitisation - ECB adds its voice in support of the "green proceeds" approach

The European Central Bank has just published its opinion on the draft EU Green Bond Standard legislation.  Overall an excellent piece, it is notable when it comes to securitisation for its support for a definition of green that encompasses issuance where the proceeds are used by the originator to finance sustainable projects.  This can be found in article 3.1.5 of their opinion.

As our readers will recall, a debate arose as to whether the legal EU definition of sustainable securitisation should be limited solely to securitisations of green assets (eg mortgages of green housing or auto loans for electric vehicles) or could also cover - as is the case for all other capital market instruments - bonds whose proceeds are used to finance the transition to a sustainable economy.  PCS has argued forcefully that the latter is both logically compelling and far better helps achieve Europe's sustainability goals.

In the context of the draft EU Green Bond Standard legislation, the intervention of the ECB is welcome not only for its support for the broader definition but also at a technical drafting level by suggesting a clarification of the text.  As currently drafted, the law may not allow a real "use of proceeds" approach because of the ambiguity of the definition of proceeds for securitisations.  The ECB has rightly suggested the ambiguity be lifted to clarify that proceeds of a securitisation in the hands of the originator may be used for green purposes and not, if one followed a technical narrow reading, only the proceeds in the hands of the special purpose vehicle.

Bank of England and ECB respond to the EU Consultation on securitisation

The Bank of England and the ECB released a joint-response to the European Commission Consultation on securitisation.  In their response they appear curiously to favour issuer self-certification of quality.  This approach, which is not that of the PCS, is quite a bold one in the light of the events that precipitated the financial crisis.  It remains to be seen whether it is one that commends itself to policy makers and investors who suffered the consequences of the sales by issuers of purportedly high quality securitisations that then suffered such dramatic losses.

ECB announces details of ABS PP

The details of the ECB's ABS purchase program have been published. Save for some adaptations for Greek and Cypriot ABS, the eligibility criteria remain those of the Eurosystem collateral rules.  The program also envisages the purchase of a very substantial portion of any deal - up to 70%.  With such a large portion being purchased it seems that the ECB could be the determinant factor of future pricing.

Mario Draghi gives more details on the ABSPP at European Parliament

In his Monday speech to the Economic and Monetary Affairs Committee of the European Parliament, Mario Draghi gave more details on the ECB’s asset backed securities purchase program (ABSPP).  It appears that the ECB will be purchasing senior notes of securitisations that are eligible as collateral under the existing Eurosystem scheme. It is unclear though whether the eligibility criteria will be merely the same as under the existing system or whether, as PCS has advocated, they will be higher thus reflecting the  greater risk taken by the ECB as final purchaser.  PCS very much sees this program as an opportunity to set new standards for the market as a whole, in line with some of the ideas that have been circulated by various regulatory and policy making bodies concerning “high quality securitisations”.

ECB announces an ABS purchase program – but details to follow

Today, Mario Draghi announced the long-awaited ECB ABS purchase program. The President of the ECB said that the Eurosystem would purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector. The detailed modalities of this purchase program (together with those of a new covered bond purchase program) will be announced on or soon after October 2nd 2014. PCS warmly welcomes this confirmation of the strength and quality of high quality securitisations and the acknowledgement of the importance of this financing channel for the European economy. Much, of course, will depend on the actual size and, more crucially, the terms of the purchase program. In particular, whether it will target only senior tranches and how it will define high quality.

Joint ECB and Bank of England report on securitisation is published

A few hours ago, the Bank of England and ECB released the recently announced report on securitisation entitled: "The case for a better functioning securitisation market in the European Union".  PCS is reading the document and will be providing comments as soon as we have digested the contents.  The report may be found here.

Senior IMF official supports the ECB/BoE approach to high quality securitisation

In the first sign that, following the ECB/Bank of England paper, the debate over the regulatory treatment of high quality securitisation is obtaining a foothold on the global agenda, Jose Viñals, a senior IMF official, spoke favourably of the approach championed in the joint communication.  His comments were made in an interview with Borsen Zeitung and picked up by Reuters.  (The Reuters piece may be found here and the original interview in German may be reached through here - but is behind a pay wall).

Joint ECB-Bank of England paper on securitisation is published

Today, the Bank of England and the ECB published the recently announced joint paper on securitisation.  The paper supports strongly the value of high quality securitisation.  Acknowledging the many macro-economic reasons for the low level of current European issuance, the paper also identifies the need to incorporate in the proposed regulatory schemes a single definition of high quality securitisations and to calibrate the prudential rules based on the actual performance of such securitisations.  Reflecting arguments that PCS has been putting forward since its inception, we strongly welcome this short but focused and to the point contribution.  What makes this paper all the more timely and important is that it addresses the global regulatory work being done by the Basel Committee and IOSCO.  Until now, most of the contributions to the high quality securitisation debate had taken place within Europe and concentrated on European approaches (for example, Solvency II).  This paper globalises the issue and puts this European approach squarely on the international regulatory agenda.  The paper may be found here.

Another article in the Financial Times addressing the ECB's desire to see securitisation return

In an article today entitled "Draghi seeks to revive reviled loan bundles to boost credit", the Financial Times speaks of the desire expressed by President Draghi to see a return of high quality securitisation.  The article may be found here (although it lies behind a pay wall).

Draghi calls for regulation to distinguish between good and bad securitisation to revive the market

In his contribution to the panel on the "Global Economic Outlook" in Davos on Friday 25th January, Mario Draghi spoke about possible actions of the ECB.  He strongly hinted that the ECB could buy securitisations but noted that the market, at present, was basically "dead".  However, he also stated that if regulations could distinguish between good and bad securitisations, the market may return.  This indicates an ever increasing held view, amongst European policy makers, that the key to a return on the securitisation market lies, of necessity, in the bifurcation in regulatory frameworks between high quality securitisations and others.  This in very much in line with positions advocated by PCS and the PCS mission.  Mr Draghi's statements may be found here, starting at 18:15 with the key quote at 19:00.