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Letter from Brussels: Securitisation snared

Legislative efforts to boost European securitisation are facing headwinds. A regulation proposed in September 2015 is still being scrutinised by the European Parliament’s Economic and Monetary Affairs Committee which has suggested over 100 amendments.

The development of a standardised securitisation market constitutes a building block of the Capital Markets Union. The European Commission estimates that a new securitisation regime could generate €100-150bn in funding.

Parliament’s lack of urgency can be attributed to its rapporteur, Paul Tang, a Dutch socialist, who is said to be sceptical about securitisation and the entire package because of the role it played in the financial crisis. 

But according to the Commission, EU securitisation markets withstood the crisis well. In an explanatory memorandum for its proposal, the Commission noted that default rates of EU residential mortgage-backed securities (RMBS) never rose above 0.1%. In contrast, US AAA-rated RMBS reached default rates of 16% for sub-prime tranches.

The divergence was greater for BBB-rated products where US RMBS default rates peaked at 62% and 46% (sub-prime and prime), while EU-product default rates peaked at 0.2%.  

One brake on the legislative progress is the need for consistency with existing regulation, including Capital Requirements Regulation, the Solvency II Directive, UCITS and AIFMD. 

Now pressure to get on with it is coming from eight representative groups in the financial sector: PensionsEurope, the Association for Financial Markets in Europe (AFME); the European Banking Federation, Eurofinas, representing consumer credit providers; LeaseEurope for the automotive sector; DSA for direct selling; EFAMA for investment management; and ICMA, the International Capital Markets Association.

These bodies are well aware of the EU’s legislative process, which involves opinions from national parliaments, input from the European Economic and Social committee (recent, and positive in this case), a draft report in Parliament, and a vote in committee (not yet achieved). Then will come trialogue meetings, unlikely before January 2017, submission to plenary in Parliament, consideration by national governments, and adoption, perhaps by mid-2017. Hence, the encouragement by the eight interest groups should be of no surprise. Their message highlights “the importance of securitisation for jobs and growth in Europe”. 

It continues: “Securitisation, whether undertaken by banks, finance companies or corporates, meets the needs of important investors outside the banking system, such as insurance companies and asset managers investing on behalf of pension funds. It enables them to gain exposure to real-economy consumer and corporate assets in an efficient manner. 

“Investors seek diversification of investments as part of their risk-management duties towards their clients. With an appropriate calibration of the respective prudential regimes, securitisation can offer high-quality diversified investments with attractive risk-return profiles when compared to other asset classes.”

For its part, PensionsEurope has been pushing for the safeguard of third-party certification. It seeks third-country certification of compliance with the ‘STS’ (simple, transparent and standardised) criteria. In addition, it warns against duplication in the due diligence process.

PensionsEurope also warns legislators to guard against situations where multiple jurisdictions or competent authorities are involved. Here, the European Securities and Markets Authority needs to be given binding powers of interpretation. As for a proposal for a European Securitisation Data Repository, the eight signatories recommend building on existing infrastructure – for example, a European data warehouse. They strongly support risk retention, that is, the issuer has to retain a 5% share. 

No doubt the Commission will be relieved when this legislation is passed.

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