20 May 2015

Reviving Europe’s securitisation markets: one step forward, two steps back?

Richard Hopkin, AFME's Head of Fixed Income, reflects on the European Commission's proposals for simple, transparent and standardised securitisation.

We have recently replied to the European Commission’s carefully thought-out and constructive consultation document ‘An EU framework for simple, transparent and standardised securitisation’.

The paper is a clear indication that the Commission recognises the positive benefits of securitisation for the functioning of the financial markets. The seven years that have passed since the onset of the financial crisis have provided strong evidence of how well most European securitisations have performed, and we are pleased to respond comprehensively and constructively.

The Commission’s work is the culmination of a long process of steadily building positive support for the rehabilitation of ‘qualifying securitisation’ so it can play a key role in a capital markets union. It is therefore disappointing that the Joint Committee of the European Supervisory Authorities (‘ESAs‘) has published recommendations that single out securitisation and which, if implemented, will have precisely the opposite effect and hinder the recovery of Europe’s securitisation markets.

The recommendations focus on due diligence and disclosure. We fully support thorough and clear disclosure and the Joint ESAs’ calls for greater harmonisation and consistency, especially across different types of investors. However, our members are very concerned that there has been no consultation with issuers to determine the practical feasibility of implementing the recommendations, and that there will be a myriad of grey areas around enforcement issuers and regulators will need to resolve. These new proposals also appear only a matter of months after the Commission and ESMA published supposedly final ABS disclosure requirements in the regulatory technical standards for CRA 3.

In mandating so many new qualitative and quantitative disclosure requirements, the recommendations go far beyond both the information and tools that are reasonable and legitimate for an issuer to provide on the one hand, and the amount of disclosure investors need to perform their due diligence and analysis, on the other. Additionally, they create uncertainty around originator liability under securities laws, which could discourage issuers from using securitisation altogether.

It is difficult to understand why this excessive focus on disclosure in securitisation persists. The historical reality is that disclosure in qualifying securitisation in Europe has always been robust – before, through and since the crisis. It is even better today following new regulations and the pro-active engagement of our members in various market-led and regulatory-led initiatives.

Revival of the European securitisation markets is not being prevented by lack of disclosure. The problems are overly harsh capital and liquidity requirements, and the lack of a level playing field with covered bonds – of which this singling out of securitisation is only the latest example.

While we support the Joint ESAs’ call for greater clarity and consistency in European ABS disclosure, most investors in European ABS find current standards of disclosure more than acceptable. Adding stricter, more onerous requirements that may be difficult for issuers to comply with, and which investors neither need nor want, will only hinder the revival of securitisation. To the extent there remains areas for improvement, we will of course continue to engage with investors and others to address them.