Europe's ABS principles positive but flawed

Author: Tom Young | Published: 4 Jun 2014
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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 the market.

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 pages long.

"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," he added.


  • 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 unhelpful.

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.

" It’s 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 confidentiality laws.

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.

See also

Why one-size fits all securitisation reform won’t work