The Association for Financial Markets in Europe (AFME) and the European Financial Services Round Table (EFR) today announced the launch of Prime Collateralised Securities (PCS) ‐ an industry‐led, nonprofit project to develop a label for high quality securitisations which meet best practice in terms of quality, transparency, simplicity, and standardisation. With the first label expected to be granted by the PCS Secretariat towards the end of this year, a number of key milestones have been reached:
- establishment of the PCS Association and the PCS Secretariat as bodies to respectively govern and operationally administer the PCS label;
- the appointment of the Head of the PCS Secretariat;
- identification of asset classes and structures which are eligible and not eligible for the label;
- compliance with required loan by loan reporting standards of the ECB and Bank of England;
- the fundraising target was fully achieved.
Access to securitisation markets for issuers is becoming increasingly important to overcome a real economy funding shortfall1 in Europe. Asset Backed Securities can be an important component of the instruments that investors have available to them, especially as they do not use up the same credit line capacity as other investments, such as corporate bonds and covered bonds. Yet, despite the very strong underlying performance of European asset backed securities since 2007, a smaller investor base and the reduced level of issuance over this period could have knock on effects for companies reliant on capital markets funding, as well as Europe’s broader economic recovery.
The PCS initiative ‐ developed by a broad group of market professionals comprising issuers, investors arrangers, and other market participants, in collaboration with other European industry associations, as well as observers such as the European Central Bank, European Investment Bank and Bank of England ‐ will comprise a two‐tier governance structure:
- a PCS Association, comprising independent non‐industry directors, as well as a mix of industry professionals;
- a PCS Secretariat, led by experienced industry professional Ian Bell, responsible for the day‐to‐day administrative and managerial operations.
The PCS Secretariat will grant the PCS label to securities, certify a transaction and monitor the label after it is issued.
Recent estimates show that €650 billion of senior unsecured and covered bond funding will mature in 2012 for European banks; for sovereigns, funding of over €900 billion will be needed and that an additional €1.5 – €1.9 trillion of funding will be needed to power any growth. Sources: Bloomberg and BAML Global Research Dec 2011, Standard & Poor's May 2012.
PCS is more than just a positive label for eligible securitisations – it provides the basis for a definition of agreed market standards, as well as an enforcement mechanism of these agreed standards, based on a label which can be granted and withdrawn depending on compliance and as verified by the PCS Secretariat.
Rick Watson, Head of Capital Markets at AFME, commented:
“Investors and regulators need a clear reference point, setting out best practices around which to build investment guidelines and regulations, which, in turn, will encourage issuance as well as investment and support the real economy. Combining the expertise and market coverage of both AFME and EFR members has resulted in the ability to move forward on this very important initiative.
“PCS will bring added quality, transparency and standardisation to the market, which will deepen the securitisation investor base in Europe and, in turn, improve overall liquidity. Europe needs a healthy securitisation market and we are confident that this initiative, alongside regulatory changes, will provide a significant boost to the market.”
Sebastian Fairhurst, the EFR’s Secretary‐General, commented:
“The PCS label will be awarded on a deal‐by‐deal basis and subjected to a verification process by the newly established PCS Secretariat. It will be granted to transactions backed by asset classes that have performed extremely well through the financial crisis and are of direct relevance to the real economy, including European auto, residential mortgage, SME, consumer and credit loans. “Issuers will need to provide high quality reporting on an ongoing basis, in accordance with the relevant ECB and Bank of England reporting standards.”
Ian Bell, PCS’s newly appointed Head of Secretariat, commented:
“It’s exciting to be part of such an important industry initiative, which has seen so much support from investors, issuers and policymakers alike. With commitments to fully fund PCS’ first two years of operations from over 30 institutions in the industry, PCS demonstrates the seriousness of the industry’s intent to establish a vibrant, yet robust European securitisation market capable of funding the growth Europe so badly needs."