The European Central Bank (ECB) and the Bank of
England’s proposals to resurrect the
securitisation market are well intentioned but flawed,
according to lawyers working in the sector.
The discussion paper, released on May 30,
comprises a collection of high-level principles for boosting
These include broad proposals for a so-called qualifying
securitisation, a security with structural safeguards, deemed
safer for investors wary of the product following its role in
the financial crisis.
The paper also calls for wider, loan level disclosure with
cash flow models to be made available to investors. But some
are concerned that additional disclosure won’t be
read, with securitisation prospectuses already hundreds of
"I have heard that many investors who are supplied with loan
level data simply put it on a shelf anyway," said David
Shearer, partner at Norton Rose in London. "They
don’t analyse it or use it to construct a model,"
- The ECB and Bank of England’s joint
discussion paper on encouraging the securitisation market has
received a mixed reaction;
- The paper’s policy suggestions on
issues such as qualifying securitisations are considered
market practice anyway;
- The requirement for loan level disclosure
from issuers has been criticised as unnecessary and
The high status of the ECB and Bank of England means the
paper’s release is still considered positive.
"It’s certainly encouraging that two major players
like this are saying that securitisation is not necessarily
evil. That’s a big step forward," said Shearer.
But Shearer believes that the paper doesn’t go
far enough in its suggestions. "It’s a little
disappointing in the sense of being slightly broad brush and
banal," he said.
Specific policy settings such as reducing capital risk
weightings to corresponding levels for equivalent risked
non-securitised exposures have been omitted.
Other policy points affecting issuers and their
practitioners are absent from the paper.
One such point relates to the ECB’s and
European Commission’s desire to engage with what
constitutes information about individuals, on the basis that
many ABS contain consumer assets.
Although well-written credit contracts and loan documents
contain the correct waivers allowing for disclosure of personal
information, such waivers aren’t always clear on
all consumer contracts.
certainly encouraging that two major players like this
are saying that securitisation is not necessarily evil
Shearer believes that any insistence on loan level
disclosure on securitisation would be difficult to enforce
without provision for confidentially, such as by an amendment
to the Data Protection Directive and relevant bank secrecy and
This would state that any disclosure made for that purpose
is specifically permitted under those regulations.
"At the moment it’s contorted – a
complex analysis is needed to get to the right position," said
Shearer. "It would be preferable if regulation could simplify
this, but this has not been addressed in various proposals to
date" he added.
Both banks are seeking comments to the paper, with a
deadline of July 4.
Why one-size fits all securitisation reform