Two key developments affecting the securitisation industry are moving closer towards finalisation, and we take this opportunity to provide a brief update on progress in finalising the Basel Committee's revisions to the securitisation framework, and on efforts to agree a definition of "high quality securitisation", in advance of key progress which is expected to made on both developments before the end of 2014, or in very early 2015.
Revisions to the securitisation framework
Further to publication of the Basel Committee's second Consultative Document on a proposed new risk-weighting framework for securitisation transactions within the Basel III framework in December 2013 (see our Feature Piece in Edition 8 of this SCM Briefing for a detailed summary of the proposals), progress on finalising that framework has stalled somewhat during 2014 due to the extremely negative market reaction to the proposals, and also as a result of the securitisation industry's (and regulators') push towards developing a definition of (and possibly a more beneficial regulatory treatment of) "high quality securitisation" (HQS). The Basel Committee is expected to release its third (or perhaps even final, with no consultative period) set of revisions to the securitisation framework in December 2014, and is widely expected to stick close to the December 2013 proposals which included a new hierarchy of approaches to measuring securitisation exposures and a punitive 15% minimum risk-weighting for securitisation transactions. It is expected that banks will be allowed sufficient time to implement the final proposals, which will be implemented via amendments to the Capital Requirements Regulation within Europe. However, the proposals are (unhelpfully) not expected to address the issue of HQS (specifically, we expect that lower capital charges would/could be applied to HQS), but will "leave the door open" to incorporating this concept once it has been fully developed (see immediately below), despite the fact that the Basel Committee is working on this at the same time as developing the final securitisation framework.
Developing a definition of "high quality securitisation"
The Basel Committee is currently working with the International Organisation of Securities Commissions (IOSCO) to develop a set of criteria for HQS (although they do not call it this specifically, mentioning only "simple and transparent structures") by end-2014, and has noted that it will consider, during 2015, how to incorporate this new HQS criteria into the revised securitisation capital adequacy framework. The results of IOSCO's recent Survey of securitisation market participants are also due to be issued towards the end of 2014, and those results may further inform the Basel Committee / IOSCO HQS workstream. You will recall that there are several ongoing strands to the possible development of HQS: the European Banking Authority's (EBA) Discussion Paper on "Simple, Standard and Transparent Securitisations" which proposes a definition of "qualifying securitisations" (which was summarised in detail in Edition 12 of this SCM Briefing); the Bank of England and European Central Bank's Discussion Paper on "Improving the functioning of securitisation markets" which also proposed the appropriate regulatory treatment of "qualifying securitisations"; the insurance industry's distinction between Type 1 (high quality) and Type 2 (all other) securitisations in Solvency II; and the criteria for "Level 2B securitisations" in the Basel III Liquidity Coverage Ratio (LCR), which distinguishes certain securitisations as "High Quality Liquid Assets" (see our Feature Piece in Edition 12 of this SCM Briefing for further details and background on the LCR and the eligibility of certain securitisations). Other proposals and comments made in relation to HQS include the think-tank Eurofi's proposals for "Prime High Quality Securitisation". Developing a single, globally-accepted definition of "qualifying" or "high quality" securitisation will be essential to the future success of the securitisation market, and despite the EBA appearing willing to align its proposed framework with that of the Basel Committee / IOSCO, the EU may decide to press ahead and adopt an EU-wide definition of HQS based primarily on the EBA proposals, particularly if international developments stall. Comments on the EBA Discussion Paper are required by 14 January 2015, with a "final" paper expected to be released in the first or second quarter of 2015 (which will be submitted to the European Commission by way of the EBA's advice on the topic of HQS). The final paper may be expected to take into account detailed comments to be made by industry associations including the Association for Financial Markets in Europe in their responses to the Discussion Paper. Specifically within Europe, the European Commission is reported to be considering whether (further) regulatory changes are needed to boost the securitisation market, in a document entitled "Roadmap for Securitisation" which was discussed by EU Finance Ministers at a meeting in Milan in September 2014. That document has not yet officially been released to the market, but press reports suggest that it will list 19 initiatives underway in Europe and globally to revive the securitisation market, and it is expected (amongst other things) to set out the Commission's view of the possible future regulatory treatment of HQS.
We look forward to providing you with further updates during 2015 on these important developments and their impact for the securitisation industry.
European Banking Authority Discussion Paper
European Central Bank / Bank of England Discussion Paper
Delegated Regulation supplementing the Solvency II Directive
Delegated Regulation supplementing CRR with regard to the Liquidity Coverage Ratio
Eurofi Document on PHQS of SME loans