STS agreement good for EU securitisation

Author: Lizzie Meager | Published: 31 May 2017
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European lawmakers have finally reached an agreement on the bloc’s plans for a new regulatory framework for securitisation, with the market welcoming the long-awaited milestone.

The Securitisation Regulation, a central pillar of the EU’s plan to build a capital market union (CMU), was first pitched in September 2015. 

The European asset-backed securities (ABS) market has not bounced back in the same way the US’ has following the crisis, so since 2015 policymakers have been working on plans to boost issuance while ensuring it is appropriately regulated.

"It is clearly a major milestone, and the positive signalling from the European legislative bodies is good for European securitisation," said Kevin Ingram, partner at Clifford Chance.

"Another plus is that key outstanding points – risk retention, private securitisations, third party verifications, for example – appear to have all ended up in reasonably sensible positions."

It’s clear that compromises have been made. Risk retention for example, a key bone of contention for many market participants, has been maintained at five percent. Some members of European Parliament (MEPs) including Paul Tang, who spearheaded the proposal on behalf of the parliament, had proposed increasing risk retention to 20% - which others had said would make originating ABS unappealing.

As was the case in earlier drafts, the simple, standardised and transparent (STS) securitisation label and subsequent preferential capital treatment is only available to securities originated within the EU, and there is no equivalence regime included within the proposals.

KEY TAKEAWAYS

  • European market participants have welcomed the long-awaited agreement of legislators on a new regulatory framework for securitisation, which involves preferential capital treatment for assets deemed simple, transparent and standardised;
  • The proposal looks substantially and materially different to what was first pitched in September 2015, but is broadly sensible;
  • To the great relief of the market, risk retention has been maintained at five percent;
  • There is no equivalence regime at present, which raises some issues surrounding Brexit;
  • Lawyers have stressed the importance of consistency across member states and appropriate timing.

When STS was first pitched there had been significant noise from the US, where market participants complained of a protectionist regime that shut out external markets for no clear reason.

"The US approached securitisation reform in a different way, in broad terms tidying up the market more on the asset side than purely through greater regulation of securitisation itself," explained Ingram.

"Consequently, to then add another layer of qualifying types of transactions is just not a logical direction for them to go in," he added.


"Stringent capital requirements make resecuritisations largely uneconomic anyway"


Plus, the US simply does not need preferential treatment for its securitisation market, which has not suffered the same reputational and regulatory challenges as in Europe.

A much bigger concern surrounding equivalence is of course Brexit. But given the current incredibly early stage of EU-UK negotiations, it makes sense not to tackle equivalence just yet.

Previously included restrictions on cross-border investments have also been dropped from the proposal. This had been a major concern among many market participants.

An expected ban on resecuritisation is also included in the text. Pablo Portugal, advocacy director at the Association for Financial Markets in Europe, said that he never saw the ban as desirable or necessary in the first place.

"Stringent capital requirements make resecuritisations largely uneconomic anyway, so they are rare," he said. "It's understandable that the Parliament wanted to include a ban, subject to appropriate definitions and exemptions, but important facets of this need to be clear in the texts."

Meanwhile David Shearer, securitisation partner at Norton Rose Fulbright in London said he is concerned that the finalised proposal will give member states an opportunity to goldplate their own frameworks – including the possibility of introducing criminal or administrative sanctions.

"If that does occur it will create a web of compliance issues that could discourage cross-border securitisation and runs contrary to the stated aim of the CMU," he added.

While the news has been unanimously welcomed, this is by no means the end of the road for securitisation practitioners. A huge amount of technical work now needs to be done, including developing the level two rules.

Formal signoff is expected in mid-July, and the market should have the final text by the end of this year. The official implementation date is July 1 2018.

Issuance is slowly getting there. Last week Volkswagen placed the largest Spanish auto securitisation since the crisis, at €1 billion ($1.12 billion).

Amendments to risk weight floors under Solvency II, the key regulation affecting European insurers and often preventing them from participating in securitisations, are also due imminently.

Clifford Chance’s Andrew Bryan highlighted the importance of timing here.

"If the two are introduced at the same time, it will have an either neutral or positive effect on the market," he said. "If lawmakers stagger them, with increased bank capital coming before capital relief for insurers, they might just shut it down altogether."

See also

Basel criteria places STC burden on investors
Europe’s £6.2 billion RMBS signals changing tide

 


 

 

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