The first European Prime
Collateralised Securities (PCS) labelled
securitisation is expected imminently.
The PCS initiative was launched by the Association for
Financial Markets in Europe (AFME) and the European Financial
Services Round Table in June. It
aims to revive the
regions depressed securitisation market by developing a
label for high quality securitisations.
With securitisation offering a sure-fire way of
increasing lending to the real economy, recession-ridden Europe
cannot afford to dismiss the scheme.
BNP Paribas global head
of securitisation, Fabrice Sussini, spoke with IFLR about his hopes for the initiative and the
regulatory fires Europe will need to fight to lift its stagnant
securitisation market out of decline.
Why is the PCS project
The PCS initiative was borne out of a mixture of
frustration and bemusement at European policymakers
response to the global financial crisis.
With no European subprime equivalent, and no
obvious wrongdoing having occurred in Europes
securitisation market, it seemed strange to market participants
that the pendulum swung back so heavily in the region.
Moreover, that many regulatory measures promoted even by
European regulators, excluding some justified proposals, seemed
disconnected from market realities. The issues that prompted
the crisis were not only primarily localised to the US subprime
market but were also far more linked to how credit origination
was regulated than to the supposed lack of regulation of
securitisation itself. Credit business was much more controlled
than in the US.
So it was evidently a bit frustrating to see
European regulators and policymakers letting securitisation
come to a halt while overlooking the actual performance of the
product ,as well as its necessary contribution to the funding
of the economy.
Alongside other financial institutions and market
participants, BNP Paribas involvement in what were the
origins of the PCS initiative began in 2009. Discussions were
started on the need to revive the product in Europe. It was
clear to us that, irrespective of past usage of the product, as
liquidity constraints and costly regulatory capital
requirements would continue to push banks to deleverage,
securitisation (or its principles) would remain one of the few
viable mediums through which to channel savings and liquidity
back to the real economy and banks customers.
The question for this small working group centred
on how to get it started, how to restore the confidence
lost, what are the lessons we should factor in and the messages
from investors and regulators we should listen to?
Ultimately, the various initiatives taken at
different levels in different countries converged and, under
the leadership of AFME and EFR, the work continued and resulted
in the PCS initiative. Its purpose is to provide the market
with a label, not as a rating or a substitute to the credit
analysis investors must keep performing, but as a reference for
European best practice in terms of transparency, simplicity and
quality of processes. It also recognises comments received from
investors and the new regulatory framework that is taking
The target is real economy assets, such as
mortgages, auto-loans, equipment loans and leasing, and small
to medium-sized enterprise (SME) loans; namely, products that
have demonstrated good resilience during the crisis. The label
will also help rebuild the trust that was destroyed largely by
excesses and also the miscommunication around the role the
It is hoped it will give investors, regulators, and
originators themselves, a better indication of standards for
those products that are clearly connected to the economy.
Its not a one-size-fits-all initiative,
however. After all, were dealing with different European
countries that use different product origination processes. But
in each of these countries you have best practices and that is
what the PCS is trying to encapsulate.
The PCS organisation, under the supervision of its
secretariat headed by Ian Bell, should be completely up and
running by the end of September. All the logistics are falling
into place and we are in the process of finalising the rulebook
and securing a chairman for the PCS board.
From there the PCS Secretariat will monitor the
deal pipeline to identify transactions that fit with PCS
Sensitive products, such as collateralised debt
obligations (CDOs), will obviously be excluded. But 90% of
todays securitisations could easily be eligible because
they are already compliant with a number of rules.
Expectations are that hopefully one PCS transaction
will take place before year-end.
If for the time being PCS is mainly focused on
European practice and assets, the secretariat will perhaps
recommend to the board to expand the initiative outside
Has investor risk appetite
There is some volatility in the US market, but risk
appetite and liquidity remain with a focus on some products
such as collateralised loan obligations (CLO) or commercial
mortgage-backed securities (CMBS).
The European market, in contrast, has developed
into a very limited playing field. The investor profile changed
significantly in Europe post-crisis, with many market
participants disappearing. Todays transactions can gather
between 40 and 50 investors - substantially less than
pre-crisis days but more importantly, tickets are much
smaller. Whats more, a number of these investors are
actually European arms of US institutions.
Given the good performance of the assets, the
profile of new transactions - simpler and safer - and the
demise of once unquestionable high quality and liquid assets
such as certain sovereign bonds, we have seen appetite among
some European investors such as insurers, some hedge funds and
private equity investors. Nevertheless, interest remains patchy
and on the whole, the market remains very fragile and on the
You will have no problem at all selling your
AAA-rated tranche, depending on the sovereign it relates to.
But selling lower rated tranches is much more challenging than
it was in the past.
Policymakers must focus more on what can be done to
ensure that there are enough investors, in terms of numbers and
volumes, and that these investors are incentivised to buy into
How do you expect Basel III
capital requirements to affect the market?
European banks are being asked to hold more and more capital
on their balance sheets, which makes both raising capital and
ensuring decent yield more difficult. At the same time, through
banking as well as insurance regulation, investors are
disincentivised to invest in structured products; but not
apparently because of the nature of the underlying risks.
We are waiting for the new risk weighting within
Basel III. Once this is finalised there may well be elements
within it that the market needs to discuss with policymakers.
Until then, we can expect the reluctance of many players to
remain; too many uncertainties are not good.
Once rules such as CRD IV and Basel III are finalised and enforceable my fear
is that there will be a disconnect between the perceived
consequences of the regulation - seen by IMF or Basel Committee
economists as pretty lenient - and the possible true impact it
The problem, largely, is inconsistency. You have so
many different players pushing for the introduction of one rule
or another at different times. But from my perspective the main
issue relates to the lack of positive and clear measures that
would encourage investors to buy securitisation, which would
allow the market to fund the economy.
The uncertain regulatory environment in Europe is
partly to blame. Investors are sitting on the fence they
simply dont know if they should invest in the market.
Even where you have clarity around rules, its
not always very helpful. Solvency II is a very good example here. There
are some elements to the regulation overall that are perfectly
defined, that would make securitisation a bit more complex and
a bit more expensive perhaps but that are ultimately
Nevertheless other aspects havent been
thought through. Take the penalisation of resecuritisation, for
example. It is understandably intended to cover the CDO
practices that took place before the crisis and market
participants have nothing against that.
However the resecuritisation definition is blurred
to the point that it could potentially encompass conduits where
you are funding receivables from corporates.
Ultimately the industry is generally not asking for
the regulation to be pushed back. It is simply asking that
policymakers make sure that there is a proper consideration
given to the unintended consequences of some of the proposed
Beyond Solvency II, which could be a total market
killer, the mandatory credit rating agency (CRA) rotation
proposed in the new CRA3 proposal is also totally unworkable.
Thats another example of a well-intended rule, which
creates competition among rating agencies, that has morphed
into a framework impossible to work with.
That said we can see, in some cases, from the
principles behind most regulations proposed that we are moving
in the right direction. But we still have a long way to go.
Its critical to react and keep engaging and
discussing with policymakers and regulators. Obviously
frustration can push some market players to simply walk away
and exit the market, but I dont think thats an
option. There is too much at stake and if our worst concerns
were to come true we would lose a lot of time and credibility
in trying to tidy it up again, and at great expensive to the
economy. What happens on the investors side is much more
critical in the European market today than it ever was before;
including before the deleveraging and increased
disintermediation of financing pushed by the new framework.
In fact, its goes beyond securitisation.
Ultimately, we may not win on all the points but we
should get there. We are not trying to push back on all
regulation but rather to make sure that initial regulatory
targets are met without killing the product entirely.
For the full interview, see The
2012 guide to Securitisation & Structured
Finance out from September 25 in
IFLR magazines October issue.