A Feature Piece in Edition 14 of this SCM Briefing summarised a Consultative Document released by the Basel Committee on Banking Supervision (Basel Committee) and International Organisation of Securities Commissions (IOSCO) which proposed a set of 14 criteria for identifying "simple, transparent and comparable" (STC) securitisations. With the European Commission also now having issued its own consultation on identifying criteria for "simple, transparent and standardised" (STS) securitisations within Europe, we take this opportunity to review the status of the various proposals for "high quality securitisation" (HQS) and consider regulators' next steps in developing a prudential framework for HQS. By way of summary, the key proposals issued to date (in chronological order of issue) are:
- The Bank of England / European Central Bank Discussion Paper on "The case for a better functioning securitisation market in the European Union" (released May 2014, comments requested by 4 July 2014);
- The European Banking Authority's Discussion Paper on "Simple, Standard and Transparent" Securitisations (released 14 October 2014, comments requested by 14 January 2015);
- The Basel Committee / IOSCO Consultative Document on Criteria for Identifying Simple, Transparent and Comparable Securitisations (released 11 December 2014, comments requested by 13 February 2015); and
- The European Commission's Consultation Document on a EU Framework for Simple, Transparent and Standard Securitisation (released 18 February 2015 as part of the "Capital Markets Union" (CMU) proposals, comments requested by 13 May 2015).
First, we note that regulators generally have retreated from the concept of "high quality" securitisation in preference for "qualifying" securitisation (i.e. "qualifying" as simple, standard and so on), wishing not to attach a "quality" label to transactions but rather to denote their compliance with a particular set of criteria, based on structural robustness and simplicity (although we retain the use of "HQS" throughout this Feature Piece, to differentiate the range of potentially "qualifying" transactions from those that are "non-qualifying"). The release of differing global, European and national proposals for HQS appears to somewhat undermine the long-established (or at least, well-understood) hierarchical order around the global implementation of prudential regulation: EU legislation implements global policy; national rules transpose EU legislation. To reverse-engineer this natural order risks establishing an EU-wide (or national) regime for HQS that is then subject to amendment as global principles are established. Given that the global investor community will be seeking a degree of comfort from the HQS designation (in terms of only investing in tranches of securitisations, or whole deals that are "signed-off" - however that is done - as HQS), a single, globally-accepted definition of HQS, and the criteria that denote it, must be established.
Second, the consultation periods on all but the European Commission's STS Consultation Document (on which the comment period remains open until 13 May 2015) are now closed. Key industry associations and market participants have responded to the various papers, demonstrating significant support for the proposals, while raising a wide range of issues including the need to provide standard definitions and key terms within the framework that will have global application (and related issues around comparability), the inclusion (or otherwise) of specific deal-types such as synthetics and short-term instruments such as ABCP, and the need to harmonise the various requirements for HQS that have been released to date. The important question of which entity should deem a securitisation as HQS (with the self-certification option, which some have suggested, unlikely to be acceptable to regulators) also remains outstanding. Those who are yet to respond to the European Commission's STS Consultation Document are encouraged to do so, since the wide-ranging questions suggest that the Commission is thinking beyond a simple HQS designation, by considering whether further enhancements could be introduced into the securitisation space to help re-start the market (see further below).
One point on which all respondents appear to agree is that preferential regulatory capital treatment is essential for HQS. While this is really only within the Basel Committee's gift (notwithstanding Europe's ability to introduce separate and diverging capital requirements), the commitment in the Basel Committee / IOSCO Consultative Document to "consider in 2015 how to incorporate [the proposed STC Criteria] into the securitisation capital framework" to allow improved regulatory capital treatment, gives some comfort that the recently-finalised Basel III capital framework for securitisation transactions (see the Feature Piece in Edition 14 of this SCM Briefing for a detailed summary) will not be the last word on capital treatment for HQS transactions. We expect that the Basel Committee will issue a further Consultative Document during 2015 setting out a proposal for the revised application of the new securitisation framework to HQS transactions. With the new securitisation capital framework not scheduled to take effect until 1 January 2018, there is ample time for the Basel Committee to consider, consult upon and implement an appropriate capital framework that recognises the lower risk and greater simplicity and transparency of HQS transactions.
Third, it is important to note that there are two iterations of "HQS" already on the statute book in Europe, in the form of the Delegated Regulations supplementing (i) the Capital Requirements Regulation with regard to the Liquidity Coverage Ratio (the LCR Delegated Regulation) and (ii) the Solvency II Directive (the Solvency II Delegated Regulation), each of which establish preferential treatment for "high quality" securitisations. In the LCR Delegated Regulation, certain types of securitisation can qualify as "High Quality Liquid Assets" (HQLA) for the purposes of the LCR, providing a detailed set of requirements (set out in Article 13) is met. Securitisations meeting these requirements can qualify as "Level 2B Assets" and thus can be used (held) by banks to meet the new rule under the LCR that requires them to hold a stock of unencumbered, HQLAs equal to their potential losses during a 30-day market crisis. The Solvency II Delegated Regulation distinguishes between "Type 1" (high quality) and "Type 2" (all other) securitisations, with the European Commission explicitly having introduced "special requirements for high quality securitisation" into the legislation such that insurance companies investing in Type 1 deals will be subject to significantly lower capital charges than those investing in Type 2 deals. Both Delegated Regulations take effect later in 2015, and with both having been published in final form in the Official Journal of the EU, their provisions are now effectively set in stone. However, differentiated (and very detailed) requirements as to what comprises "Type 1" securitisations and "HQLAs" leaves the market with several definitions of the concept which are inconsistent at best and confusing at worst.
As noted above, and in our earlier Feature Piece, the European Commission's Consultation Document on STS securitisation consults on questions much wider than the issue of establishing criteria for STS transactions, suggesting a review of existing European risk-retention rules, the introduction of a harmonised EU securitisation structure and legislative framework, as well as streamlined disclosure requirements. This suggests that the future EU framework for HQS may incorporate some additional improvements and enhancements that would help reinvigorate the market by making HQS transactions even more attractive for investors, despite the effective bifurcation of the securitisation market that the development of HQS transactions will inevitably create.
European Banking Authority Discussion Paper
Bank of England / European Central Bank Discussion Paper
Basel Committee and IOSCO Consultative Document
European Commission Consultation Document on STS Securitisation
LCR Delegated Regulation (Regulation 2015/61)
Solvency II Delegated Regulation (Regulation 2015/35)