Forming an additional part of the Prime Collateralised Securities (PCS) Initiative's response to the European Commission's Green Paper on "Building A Capital Markets Union" (CMU) and accompanying Consultation Documents on developing an EU framework for Simple, Transparent and Standardised (STS) securitisation and on a Review of the Prospectus Directive (see the Feature Piece in Edition 15 of this SCM Briefing for further background), the PCS has published a Paper which considers the practical aspects of how to "operationalise" the regulatory scheme that is currently being developed for STS securitisation. PCS highlights the following key issues: the various proposed criteria (including the European Commission's STS criteria, the Basel Committee / International Organisation of Securities Commission's "STC" criteria (see the Feature Piece in Edition 14 of this SCM Briefing for background), and the European Banking Authority's "SST" criteria (see Edition 12 of this SCM Briefing)) are fairly complex and are not all straightforward to meet; there will be a "stark" difference in the prudential treatment of "STS" and "non-STS" transactions with potential "cliff effects" between the two types; any revival of the European securitisation market will require a substantial number of new investors who must not be deterred by additional costs; the single definition of "STS" must be capable of being used by all investor-types and maintain its universal applicability over time; and responsibilities (on investors to conduct due diligence, and on originators to accept legal and moral responsibility) should be appropriately allocated. Raising operational issues including pricing (in both primary and secondary markets), the PCS also focuses on the need for effective "common currency", the possibilities for which include "self-attestation" by originators (that any given securitisation meets the definition of STS), although this is not the PCS's preferred option, as it introduces moral hazard, or "third party certification", which could be provided by regulators or private sector bodies (the PCS's preferred option, which would be not-for-profit, funded by the securitisation industry, subject to a code of conduct and overseen by regulators). The PCS also recommends the use of a "master list" of STS transactions that will be made available (hopefully electronically) to all investors. The Paper goes on to address some questions that the PCS envisages will arise, which deal with possible over-reliance, the risks of third-party certification, the risk of removing investor due diligence, issuer liability and dependence on certification agents. It is to be expected that the European Commission will address the issue of certification in its forthcoming legislative proposal due in September 2015.
Prime Collateralised Securities (PCS) Initiative Paper