The annual Global ABS Conference 2015 was held in Barcelona during 16-18 June 2015. Key hot topics under discussion during the conference included (somewhat predictably) the development within Europe (and globally) of a set of criteria defining "qualifying securitisation", and the consequential regulatory capital treatment of those transactions (see the latest update on this topic provided in Edition 15 of this SCM Briefing, and Edition 14 for a summary of the Basel Committee's plan which is "to consider during 2015" how to incorporate any new definition of "qualifying securitisation" into the existing capital adequacy framework - which, as you will be aware, has been issued in revised form for implementation from January 2018). Among the key regulatory issues discussed during the conference, and some of the key points made by (and direct quotes from) Keynote and Plenary Session speakers included the following:
Market participants are universally pushing for the similar treatment of all investor-types in asset-backed securities (ABS), noting the inconsistency in the regulatory capital treatment of different investors (principally banks, insurance companies and investment firms - see Edition 12 of this SCM Briefing for background on the (punitive) Solvency II treatment of insurance investors in "Type 1" and "Type 2" securitisation transactions versus bank investors under CRD IV) in "qualifying securitisations". As you will be aware, there are several regulatory proposals outstanding for the development of "Simple, Transparent and Standard" (STS), "Simple, Transparent and Comparable" (STC), "Simple, Standard and Transparent" (SST) and "qualifying" securitisation - which we now group together under the banner of proposals for "qualifying securitisation", for ease, but also to denote the fact that the market generally has retreated from assigning a "high quality" label to transactions in favour of (the perhaps less biased term) "qualifying". Numerous panellists referred to the need for a single set of "qualifying securitisation" criteria, and these will apparently be brought together into a single framework (David Rule, Executive Director, Bank of England and Co-Chair of the Basel Committee/IOSCO Taskforce on Securitisation).
Another issue of consistency is the potentially different European criteria for, and capital treatment of, qualifying securitisations versus the treatment by US (and other) regulators. If a global set of rules is developed by the Basel Committee / International Organisation of Securities Commissions (IOSCO), a level playing field will (or at least should) be created at the highest level. However, notwithstanding the need to implement global policy nationally within Europe and the US, with the US operating on a different timeframe, and with a differing approach to (and scope of implementation of) the Basel III framework generally, a global level playing field is unlikely to result in practice, giving rise to cross-border inconsistencies (Jonathan Walsh, Partner, Baker & McKenzie). Despite this, the regulators intend to set a global standard that will draw together (or at least somehow award mutual recognition to) the various "regional" standards (i.e. European, US, Australian and other frameworks) (David Rule, Executive Director, Bank of England and Co-Chair of the Basel Committee/IOSCO Taskforce on Securitisation).
As noted elsewhere in this Edition of the SCM Briefing, among the key next steps in developing the European Commission's Capital Markets Union (CMU) is the publication in September 2015 of a draft legislative proposal establishing (amongst other things) a set of criteria to define qualifying securitisations - this plan and timeframe was confirmed by David Rule. Key to this is getting the single definition of "qualifying" securitisation right, not accidentally excluding any product or structure, and also not demonising the "everything else" category that inevitably results from the distinction - although it is possible that more than one "bucket" for non-qualifying deals is required. Numerous panellists called for a high-level, principles-based framework rather than a detailed, prescriptive set of rules, and one which limits the criteria to the process rather than attempting to restrict (e.g.) the composition of the underlying assets.
It was noted that some 80-90% of existing securitisations would fall foul of some aspect of the qualifying securitisation criteria as it has been proposed in its various forms (see Edition 15 of this SCM Briefing for a summary of the four key proposals for criteria to apply to qualifying securitisations as well as the two iterations already on the EU statute book). Some things are outside of the originator's control, such as the rule precluding defaulted assets in the pool on the day the deal signs, and panellists generally agreed that it will be near-impossible for an originator to know this.
As noted in several of the industry responses to the various STS, STC and SST proposals, several panellists raised the point that synthetic securitisations, collateralised loan obligations (CLOs) and ABCP should be included within the qualifying securitisation framework. The Prime Collateralised Securities (PCS) initiative is currently involved in developing a set of separate "qualifying" standards for synthetic transactions and it was noted generally that PCS (and other standards) already set a good benchmark for "qualifying" securitisation, but how these standards will interact with new the new criteria is currently unclear.
Regulatory capital treatment of securitisation generally
Notwithstanding the long-awaited revision of the securitisation framework under the Basel III rules (which takes effect from 1 January 2018), some panellists suggested that the changes being brought about by the application of the Liquidity Coverage Ratio (LCR) on a phased-in basis from 1 October 2015 will have a bigger negative impact on ABS given the narrow set of ABS and RMBS eligible as "High Quality Liquid Assets". The differential (and much more lenient) treatment of covered bonds (and not just in the LCR framework) was referred to several times. A single, international standard is preferred by the majority of market participants (Jonathan Walsh, Partner, Baker & McKenzie), with lower capital requirements applied to "qualifying" securitisations (on which David Rule of did not wish to comment as to the level of any "discount", but noted that "there should be a distinction" between the capital treatment of "qualifying" and "non-qualifying" deals. Based on this, the Basel Committee is expected to issue a paper outlining lower risk-weights for qualifying securitisations in the second half of 2015 (David Rule, Executive Director, Bank of England and Co-Chair of the Basel Committee/IOSCO Taskforce on Securitisation).
An audience poll showed that (the current lack of) regulatory clarity is the biggest impediment to the securitisation market's recovery.
As noted in Vincent Keaveny's panel which discussed the impact of the European Central Bank's (ECB) ABS Purchase Programme (ABSPP) on the ABS market, the ECB had (as of the 5 June 2015 reference date) bought just over €8 billion of ABS via the ABSPP in the last six months - more than any investor in the ABS market to date (making it the most influential price-maker in the ABS market). The programme is viewed as a real commitment to the ABS market, and it was noted that Mark Carney's support for ABSPP in his recent Mansion House speech was widely welcomed by the market (Vincent Keaveny, Partner, Baker & McKenzie).
However, the ECB is still taking a cautious approach to ABS purchases (levels were compared with the €87 billion of covered bonds purchased over broadly the same period), with detailed due diligence being carried out prior to purchasing decisions being made. Benefits of the ABSPP include the better understanding of the ABS market that the programme has brought, which is helping to remove the stigma associated with ABS in the post-Global Financial Crisis market (Vincent Keaveny, Partner, Baker & McKenzie). Interestingly, it was suggested that the ABSPP participation rules could be tweaked to target new lenders only, rather than established originators / issuers, as a means to help revive new issuance levels. We note elsewhere in this Edition of the SCM Briefing that the ECB has issued some helpful "guiding principles" in terms of the ABS it will purchase under ASBPP.
The effective closure of the Bank of England's Funding for Lending Scheme (to ABS) has also allowed the public ABS market to pick-up, as banks seek alternative funding sources and a return to public issuance. Despite this, the use of ABS as collateral for ECB repo operations still remains at a high level, and it was noted that, if ECB repo-eligibility was "switched off", this would in turn help stimulate the primary market. There could be a critical role here for the development of specialist, non-bank lenders who meet the needs of the real economy (e.g. the provision of mortgages and loans to small- and medium-sized enterprises), as the banking sector has not been providing this (Vincent Keaveny, Partner, Baker & McKenzie).
As Dr Fernando Gonzalez of the ECB had confirmed in his earlier remarks (for further detail on which, please see below), no additional ABSPP criteria are being considered by the Governing Council of the ECB - a small point, but one that nevertheless was much to the audience's relief, as there are already numerous sets of eligibility rules and criteria (both existing and proposed) with which the industry is grappling.
Securitisation - "guilty until proven innocent"?
Still struggling to overcome the stigma attached to the market in the post-Global Financial Crisis era, securitisation markets remain "guilty until proven innocent" and panellists generally agreed there is still a sense of regulatory overkill. Despite this, as noted by several panellists and numerous conference participants, the market is picking up across the collateralised debt obligation (CDO), residential mortgage-backed securities (RMBS) and SME-loan securitisation markets, and internationally, with new deals having recently been issued from Portugal, Spain and Ireland (Vincent Keaveny, Partner, Baker & McKenzie). In relation to CLOs, the risk-retention issue is thought to be largely settled in Europe (notwithstanding proposals to revise the framework, as noted by the European Banking Authority and European Commission, and remaining questions over the equivalent US treatment), but while the market has picked-up, there is a deficiency in available assets which may limit how many deals can realistically be completed in the near future.
The ECB as an investor is helping to buoy the market, yet two-thirds of all issuance was retained in the last year. From pre-crisis levels of £3 trillion in available ABS, the level is now £600 billion in available assets. The US securitisation market has bounced back much quicker than the EU, it was widely acknowledged, partly due to the success of Government initiatives supporting the revival of ABS markets.
Reviving Europe's asset-backed securities markets is a long-term project and attempts at a short-term fix would be a mistake (David Rule, Executive Directive, Bank of England and Co-Chair of the Basel Committee / IOSCO Taskforce on Securitisation - see David Rule's full Speech). A lowering of the securitisation capital charges set out by the Basel Committee in its Revisions to the Securitisation Framework (for "qualifying securitisations") will help. The question was also raised (in the ABSPP panel) as to whether the ECB would in fact buy a great deal more "qualifying" ABS, once the criteria are established.
The ECB's Gonzalez's comments in greater detail
Some of the comments made by regulators were interesting, particularly those made by Dr Fernando Gonzalez, Head of Risk Strategy, ECB. Gonzalez confirmed, as outlined in the ECB's original plan (see Editions 13 and 14 of this SCM briefing for background on the ABSPP) that the ABSPP would continue until September 2016.
He stressed that "the ECB is not a regulator", and should be realistic in its ability to influence global policy-setters, but agreed (in his personal view) that capital charges for securitisations should:
- properly and accurately reflect the risks to investors in securitisation transactions;
- be lower for "STS" (or "qualifying") transactions, whatever the moniker;
- be consistently applied to all investor-types; and
- be lower than those applied to the underlying assets.
The question of which (if any) body should designate any given transaction or series of notes as "qualifying" came up repeatedly throughout the conference, as mentioned above. Self-attestation with supervisory oversight is the best way to achieve this, in Gonzalez's view (although others disagree, commenting that this may not have the credence that third-party attestation would). The ECB is keen to move away from "labelling" and more towards a system of market-policing of qualifying securitisations. At the same time, investors should have easier and more timely access to standardised information such as investor reports, with harmonised templates for these not an unachievable goal.
As for the issue of the forthcoming ineligibility for the ECB's repo facility of leasing receivables "with residual value leases" (please see Edition 15 of this SCM Briefing), Gonzalez confirmed that the ECB is concerned mainly with the market risk (of selling the car for a particular price) rather thancredit risk. While it may be possible to model this risk (and thus price it into the haircut, presumably), it goes against the philosophy of the ECB's collateral policy. However, Gonzalez did not expand further on this topic and the rule (in its ambiguous form) is scheduled to be applied from 1 September 2015.
Implications of "Brexit"
An interesting presentation by Raoul Ruparel of Open Europe considered the myriad issues related to the UK's promised in-out referendum on EU membership which will take place by 2017, including the impact on UK GDP and on the ABS markets more specifically of the UK leaving the EU (so-called "Brexit"). The risks for the securitisation market appear to be minimal, as the market has effectively operated in national silos historically. UK banks would still be able to access European capital markets. Transactions backed by UK assets would remain attractive to foreign investors, and a level of diversification may result that proves to be helpful to the ABS investor base.
Current polls generally show that the risk of Brexit currently stands at 19% (i.e. 81% voting to stay in the EU). The worst case scenario is a 2.2% loss of GDP, with the best case a 1.55% growth in GDP. High cost implications include the costs of establishing a new UK customs border, rising tariffs and efforts to re-implement a large swathe of EU law that the UK must retain in order to stay competitive as against the rest of the EU. However, the benefits of deregulation in financial services, and the opening up of free trade, are expected to outweigh the potential costs of Brexit.
An audience poll showed that two-thirds of attendees were in favour of the UK remaining in the EU.
The Trustee-focused discussion featuring Simon Porter (Partner, Baker & McKenzie) provided an excellent round-up of Trustee hot topics, from investor expectations of the Trustee's role and duties (compared to the Trustee's fiduciary duties), to practical steps to deal with communication issues, to the exercise of the Trustee's discretion and waivers. In the post-Global Financial Crisis market, the question of what happens when an event of default is declared is key (with enforcement not always the natural result), as are issues of indemnification, with Trustees increasingly seeking directions, even from sub-groups of investors, although there is a difference between the UK and US position, with the UK approach more likely to involve whole groups of investors acting together rather than forming activist groups as is more common in the US (Simon Porter, Partner, Baker & McKenzie).
The key question arose of whether an ABS Trustee could play a role in designating transactions as "qualifying" securitisations (or, more generally, whether the development of the new criteria will have an impact on the role of the Trustee). It was generally agreed that Trustees should not be tasked with assigning any qualifying "label" to ABS, partly as this is not their role in the transaction, but also since the Trustee should not be assuming any responsibility that could conflict with its fiduciary duties under the transaction documentation.
We will be following-up on current hot topics for Trustees with an in-depth Feature Piece in a forthcoming Edition of the SCM Briefing.