The Global ABS Conference 2013 was held in Brussels during 18-20 June 2013. Within the theme of "delivering funding for growth with stability", the conference once again focused on returning the asset-backed securities market to a functioning state while balancing the need for greater regulation with the need not to stifle innovation and growth. Among the key issues discussed at the conference (with a focus on legal and regulatory topics) were:
Securitisation risk weights: Basel proposals countered
The Basel Committee's proposed revisions to the Basel securitisation framework (see Edition 2 of this SCM Briefing for background) were discussed at length. The industry as a whole is pushing back against these potentially damaging proposals (focusing on its criticisms of the maturity adjustment, the lack of neutrality, the erroneous use of 'tau' as a calculation factor, and the general failure to genuinely capture credit risk, and many other issues, as summarised in the industry responses to the Consultative Document, not to mention the predicted €42 billion in additional capital charges it would generate), and has countered with an alternative proposal. The so-called "arbitrage-fee approach" (AFA) and its simplified counterpart, the "Standardised AFA" (SAFA - see Paper released 24 June 2013) as suggested by the industry (and being considered by the Basel Committee), is based on four common sense principles (objectivity, neutrality, regulatory control and transparency) and is intended to generate neutral capital charges more in line with the on-balance sheet regulatory capital treatment that would otherwise have applied to the exposures had they not been securitised. A fully developed proposal presenting the AFA and SAFA is being prepared for submission to the Basel Committee by the end of the Summer.
Most discussions at the Global ABS Conference about securitisation risk weights also involved the distinction being drawn between the much more favourable treatment of covered bonds, which many see as unjustified (not least given the "encumbrance" issue). While the inclusion (at regulators' discretion) of RMBS in the definition of "High Quality Liquid Assets" under Basel III's Liquidity Coverage Ratio (LCR) is welcome, the fact that covered bonds are also favoured under the LCR framework was also noted.
Article 122(a) Guidance: EBA Draft RTS
The proposals in the European Banking Authority's (EBA) recent Consultation Paper on the draft Regulatory Technical Standards (RTS) that will underpin the risk-retention rules set out in Article 394 of the Capital Requirements Regulation (currently Article 122(a) and set to become Article 405 of the CRR) were much-criticised. Among the guidance provided by the EBA in its draft RTS is clarification that the retention requirement may only be met by one party (originator, sponsor or original lender) and not split between different parties, or devolved to a third party, as some Member States currently allow. As a result, there is no guidance that would relax or indeed clarify how the rules apply to collateralised loan obligation (CLO) transactions, creating a great amount of uncertainty in this one area of the market that appeared to be picking up rapidly in the post-crisis environment, with €2.4 billion of issuance from 7 deals in 2013 (however, see Sharon Bowles' comments further below). Also, given that the EBA's Consultation Paper does not envisage grandfathering, numerous deals that meet the retention requirement pre-RTS may no longer meet it post-RTS and would immediately be deemed to be non-compliant upon the rules taking effect.
A further twist is that, while the existing Article 122a Guidelines (originally) from the Committee of European Banking Supervisors, merely provide guidance, the EBA's RTS will be binding, legislative rules (as per the post-Lisbon legislative process), with sanctions for non-compliance. With the RTSs not due to be submitted to the Commission in final form until 1 January 2014, the uncertainty created in the meantime has the potential to put the brakes on new issuance.
Disclosure and transparency
New disclosures under the Credit Rating Agencies Regulation III (CRA III), which took effect as from 21 June 2013, are among the most difficult for securitisation structures to comply with (although new European Central Bank and other central bank loan-level disclosure requirements themselves present unique difficulties). CRA III requires the publication of information (largely equivalent to the information required by Article 122(a) of the Capital Requirements Directive (CRD)) by issuers, originators and sponsors on an entirely separate website. With technical guidance on the specifics of such disclosure not due until 2014, uncertainty over the precise nature and format of this disclosure, and the entity responsible, remains. CRA III also requires structured finance instruments to be dual-rated and requires issuers to "rotate" the CRAs they use in certain deals (namely re-securitisations). It also places new burdens on CRAs themselves, subjects them to a new civil liability regime, creates a stronger role for the European Securities and Markets Authority (ESMA) in regulating CRAs across Europe, and attempts to limit over-reliance on credit ratings within Europe by restricting UCITS, IORPs and AIFMs from mechanistically relying on external credit ratings and requiring them to conduct their own due diligence. Industry concerns over the possible penalties for non-compliance, and, more generally, over the fact that securitisation disclosure is being regulated via rating agencies, was discussed at length.
Standardisation and transparency are seen (in particular by regulators, not necessarily so much by the investor community) as essential to attract institutional investors (back) to the market. The Prime Collateralised Securities Initiative was widely welcomed as bringing enhanced market best practice, but it was noted that wider issues are hampering the recovery. Questions remain as to the extent to which Agents, Trustees and Servicers can and should help facilitate the reporting of standard data, as well as be involved in new reporting requirements such as those mandated by the CRA III Regulation, reporting to trade repositories under EMIR, MiFID/AIFMD requirements, as well as the new U.S. requirements under FATCA and Dodd-Frank legislation.
European Parliament v European Commission - Cognitive dissonance
Clear differences in the rhetoric behind Keynote speeches presented by Sharon Bowles MEP (Parliament, ECON Chair) and Emil Paulis (Commission, Director, DG-MARKET) show that there is a wide disparity of thinking between the two entities. Parliament's message was clear that banks appear to have been circumventing rules and regulations for some time, especially in the securitisation space. In particular, Parliament is pushing for simpler structures, fewer-tranche deals (3-tranche deals were put forward as the preferred option) and clearer risk-retention responsibilities, with sell-offs of retained pieces to investors (particularly CLO investors or asset managers) and/or SPVs to be strictly outlawed (see references to the EBA draft RTSs above, which are, according to the Parliament, intended to bring back the spirit of Article 122(a) to the Guidance supporting it). In relation to the hot topic of CLO risk-retention, which the EBA draft RTSs make more difficult, while Bowles did suggest that CLO managers and their arranging banks could perhaps split the retention requirement between them, she simply suggested that this avenue could be explored with the EBA and made no further comment on the practicalities of this. Parliament's view is that there will be no relaxation of the European legislation already brought in to the securitisation market even if transactions do not return in volume.
Contrast this with Emil Paulis' much more positive and pragmatic messages from the European Commission which focused on reviving the ABS market in order to help drive the recovery in the real economy (through lending to households and SMEs), filling the €43-46 trillion global funding gap from 2012-2016 (in which securitisation is expected to play a large part), and attracting institutional investors (back) to European securitisation markets. Responses to the Commission's recent Green Paper on funding the long-term economy (see Edition 4 of this SCM Briefing for background) are expected to show widespread support for the securitisation market as a potential funding tool for the real economy. If anyone was unsure previously as to why much of the European legislation we have seen introduced in the last few years has taken so long to negotiate and finalise, one need only consider the differing negotiating positions of the Parliament and Commission as outlined above. However, given the Commission's moderately encouraging remarks as regards the securitisation market, the industry may take some comfort that at least one element of the "trialogue" appears to understand the importance of securitisation as a real economy funding tool.
European legislative approach
A further interesting avenue of discussion was the increasing volume of European legislation that is being set at "Level 1" (Directives and Regulations) as opposed to that set at "Level 2" (so-called Delegated Acts that can take the form of Regulatory Technical Standards and Implementing Technical Standards). While the European Commission's intention has been to draft "detail-light" Level 1 framework measures, leaving the technical detail to be contained in Level 2 measures, this has not always been possible (e.g. CRD IV and CRR are both Level 1 measures which are as (if not more in the case of the CRR) detailed than the RTSs that will eventually underpin them). Since it is much more efficient to correct fundamental mistakes (and/or make quick, technical changes to the text) in Level 2 measures (as they do not require the level and degree of consultation and national transposition as, say, a Directive would), the intention in future is to try to keep the Level 1 measures in framework format, with the detail all set out at Level 2 and below. As hinted at by Emil Paulis in his remarks (see above), since regulators often do not think through the consequences of new legislation (particularly in the securitisation space), it does not always make sense to embed flawed regulatory objectives into Level 1 legislation as it becomes more difficult to make changes to those measures further down the road.
The sheer volume of rules and regulations affecting securitisation structures and market participants provided a familiar backdrop to many of the discussions. With delays to Solvency II (the broad equivalent to the CRD capital rules for insurers), uncertainty over the precise impact of MiFID, EMIR, the European Financial Transaction Tax and other legislation (see the Legislative Status Update Table for the latest on all of these measures), not to mention the equivalent (or indeed otherwise) U.S. rules, overall compliance as well as individual transaction-level compliance, is increasingly important. The lack of clarity caused by delay and uncertainty is continuing to hamper the market, which is seeing many investors limiting themselves to small positions.
While originators/issuers appear to be better able to cope with the flow of new regulation, and are finding ways around the more limiting aspects of regulation, the greater impact is felt on the bank investor side. Any limitation on bank investment, however, shifts the focus to non-bank investors who are also subject to greater regulatory requirements. If insurance and pension funds are locked out of investing in the securitisation market (whether due to general regulatory uncertainty or specific legislative and regulatory factors that limit their involvement), there is even less "real money" interest in the industry to support its recovery. An oft-repeated sentiment was that the amount and efficacy of regulation is irrelevant if there are no market players.
A further regulatory theme was regulators' focus on so-called "shadow banking" and the potential impact of further regulation (of structures, entities and vehicles) on the securitisation market. In both the U.S. and the EU, it appears that moves are being made towards restricting money market funds from investing in securitisations. A European Commission Consultation Paper on money market funds is due to be released in September (in conjunction with further proposals for shadow banks) that would restrict their investments to only the most liquid products (i.e., only the safest securitisations if at all), such that the industry is facing yet more potentially damaging proposals restricting investment in securitisation - in particular in ABCP conduits.