LCR and ‘high quality securitisation’ to align?

Author: Danielle Myles | Published: 23 Jul 2014
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There is speculation that the European Commission’s delay in approving the liquidity coverage ratio (LCR) means it will reflect the outcome of the Bank of England (BoE) and European Central Bank’s (ECB) consultation on reviving securitisation.

The LCR and BoE/ECB consultation, titled The case for a better functioning securitisation market in the EU, both envisage preferential regulatory treatment for highly liquid and otherwise high quality instruments.

The Commission’s postponement of its LCR decision from July to September is reportedly due to the size of the legislation and complexity of issues involved. But it’s a cause for optimism in the securitisation industry.

"The fact the Commission has stood back from finalising the liquidity coverage ratio could be because they are waiting for indications from the BoE/ECB consultation on what should be covered off in the ratio," said Jonathan Walsh, global head of securitisation at Baker & McKenzie.

This is consistent with comments by the BoE (and European Banking Authority) at last month’s Global ABS Conference that suggest the consultation was trying to signal to the Commission that the paper’s outcome should be reflected in the LCR.

In this regard, sources highlight the clout of the authorities behind the securitisation consultation.

"They could be waiting for indications from the BoE/ECB consultation on what should be covered off in the ratio

Consistency breeds liquidity

Much of the debate surrounding any 'high quality securitisation’ designation has centered on the LCR.

According to Walsh, the problem in defining 'high quality securitisation’ is that the different regulators could come to different determinations.

While it doesn’t offer any prudential benefits, the prime collateralised securitisation (PCS) label has established a category of well-performing instruments. The market has called for consistency between all classifications; specifically the BoE and ECB designation and the LCR’s 'high quality liquid asset’ definition.

"The worst possible outcome would be six or seven different definitions – an instrument would qualify for one treatment but not another, meaning you have to pick and choose between them," said Walsh, adding: "The ideal would be some form of consistency in approach."

Discrepancies between different regulatory initiatives risk fragmenting the market. This would damage liquidity and reduce the fungibility of instruments, which would help entice investors back to the market.

IFLR understands that technical work on the level 2 proposal of the LCR is still being conducted, and that it will finalised in September.

See also`
What assets should be 'high quality ABS’
Securitisation best practices to encourage workable rules
How to save European securitisation