European lawmakers have finally reached
an agreement on the bloc’s plans for a new
regulatory framework for securitisation, with the market
welcoming the long-awaited milestone.
The Securitisation Regulation, a central pillar of the
EU’s plan to build a capital market union (CMU),
was first pitched in September 2015.
The European asset-backed securities (ABS) market has not
bounced back in the same way the US’ has following
the crisis, so since 2015 policymakers have been working on
plans to boost issuance while ensuring it is appropriately
"It is clearly a major milestone, and the positive
signalling from the European legislative bodies is good for
European securitisation," said
Kevin Ingram, partner at Clifford Chance.
"Another plus is that key outstanding points – risk
retention, private securitisations, third party verifications,
for example – appear to have all ended up in
reasonably sensible positions."
It’s clear that compromises have been made.
Risk retention for example, a key bone of contention for many
market participants, has been maintained at five percent. Some
members of European Parliament (MEPs) including Paul Tang, who
spearheaded the proposal on behalf of the parliament, had
proposed increasing risk retention to 20% - which
others had said would make originating ABS unappealing.
As was the case in earlier drafts, the simple, standardised
and transparent (STS) securitisation label and subsequent
preferential capital treatment is only available to securities
originated within the EU, and there is no equivalence regime
included within the proposals.
- European market participants have welcomed the
long-awaited agreement of legislators on a new regulatory
framework for securitisation, which involves preferential
capital treatment for assets deemed simple, transparent and
- The proposal looks substantially and materially
different to what was first pitched in September 2015, but is
- To the great relief of the market, risk retention
has been maintained at five percent;
- There is no equivalence regime at present, which
raises some issues surrounding Brexit;
- Lawyers have stressed the importance of
consistency across member states and appropriate
When STS was first pitched there had been significant noise
from the US, where market participants
complained of a protectionist regime that shut out external
markets for no clear reason.
"The US approached securitisation reform in a different way,
in broad terms tidying up the market more on the asset side
than purely through greater regulation of securitisation
itself," explained Ingram.
"Consequently, to then add another layer of qualifying types
of transactions is just not a logical direction for them to go
in," he added.
requirements make resecuritisations largely uneconomic
Plus, the US simply does not need preferential treatment for
its securitisation market, which has not suffered the same
reputational and regulatory challenges as in Europe.
A much bigger concern surrounding equivalence is of course
Brexit. But given the current incredibly early stage of EU-UK
negotiations, it makes sense not to tackle equivalence just
Previously included restrictions on cross-border investments
have also been dropped from the proposal. This had been a major
concern among many market participants.
An expected ban on resecuritisation is also included in the
text. Pablo Portugal, advocacy director at the Association for
Financial Markets in Europe, said that he never saw the ban as
desirable or necessary in the first place.
"Stringent capital requirements make resecuritisations
largely uneconomic anyway, so they are rare," he said. "It's
understandable that the Parliament wanted to include a ban,
subject to appropriate definitions and exemptions, but
important facets of this need to be clear in the texts."
David Shearer, securitisation partner at
Norton Rose Fulbright in London said he is concerned that
the finalised proposal will give member states an opportunity
to goldplate their own frameworks – including the
possibility of introducing criminal or administrative
"If that does occur it will create a web of compliance
issues that could discourage cross-border securitisation and
runs contrary to the stated aim of the CMU," he added.
While the news has been unanimously welcomed, this is by no
means the end of the road for securitisation practitioners. A
huge amount of technical work now needs to be done, including
developing the level two rules.
Formal signoff is expected in mid-July, and the market
should have the final text by the end of this year. The
official implementation date is July 1 2018.
Issuance is slowly getting there.
Last week Volkswagen placed the largest Spanish auto
securitisation since the crisis, at €1 billion ($1.12
Amendments to risk weight floors under Solvency II, the key
regulation affecting European insurers and often preventing
them from participating in securitisations, are also due
Clifford Chance’s Andrew Bryan highlighted the
importance of timing here.
"If the two are introduced at the same time, it will have an
either neutral or positive effect on the market," he said. "If
lawmakers stagger them, with increased bank capital coming
before capital relief for insurers, they might just shut it
Basel criteria places STC burden on
Europe’s £6.2 billion RMBS signals changing