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