In the end…a new beginning…
Way back in the summer of 2012 we wrote in our blog Picking up the PieCeS about a newly launched industry initiative to develop a set of best practice criteria for European ABS, awarding those deals that met the conditions with a label of qualification. This initiative was in response to calls from regulators for the securitisation industry to set new standards following the criticism it had received for its perceived part in the financial crisis; even though in reality European ABS performed very differently from its US cousins and experienced virtually no realised losses due to the high credit quality of the underlying assets.
Following this market-led initiative, the regulators themselves began a long and arduous process of developing their own set of rules, along similar lines, for a qualifying standard that could be used not just as a best practice label but also as the lead regulation for the implementation of eligibility and capital charges across the wider regulatory landscape (such as the LCR and CRR for banks and Solvency II for insurers). They are also at the heart of the European Commission’s Capital Markets Union project to develop a broader market for financing across Europe, allowing investors outside the banking industry to participate in the funding of asset classes such as mortgages and consumer lending, which have traditionally been the preserve of the banks, and thereby leading to a revival of securitisation markets as a broad funding tool for the real economy.
Finally, after five years of deliberations, numerous consultations and iterations, those new rules were voted through the European Parliament last week. Dubbed STS (“Simple, Transparent and Standardised” securitisation) they embrace a similar best practice label concept alongside some overarching standards for all securitisations. There will be some asset classes and deals that won’t qualify for the new label, but that doesn’t mean they are bad; just non-qualifying. The label, as its name suggests, is designed for the most vanilla assets and structures but a non-STS market will also continue to exist and grow alongside it, buoyed by the standards the new rules set but without necessarily having the restrictions of meeting all the criteria.
Whilst the new rules still need some fine tuning and technical clarification in places, which will take place over the next year or so before they come into force in January 2019, they now provide a great platform for the future development of the market which, whilst still functioning, has seen subdued levels of public issuance over the last 10 years, with many banks instead retaining issues on their balance sheets rather than selling them publicly due the plethora of ultra-cheap central bank funding schemes that have been available to them.
So what do these new regulations mean for investors?
Well, we don’t expect there to be a tidal wave of new issues, but it should gradually lead to a greater level of issuance across a broad range of asset classes and jurisdictions, and in addition many of those retained transactions could also be sold to the public market as the cheap central bank stimulus is gradually removed. This will mean more choice for investors and more diversification in portfolios. Spreads, which have been gradually squeezing tighter over the last few years as demand has outstripped supply, should stabilise, maintaining value for investors but at a level that allows economically sustainable issuance for originators.
All in all, this is a really positive development for the growth of the European securitisation market, and whilst for those of us (and at TwentyFour we have been part of this development process throughout) who have been involved for what seems like an eternity, it really could be that we do finally have the advent of a new beginning…
Following this market-led initiative, the regulators themselves began a long and arduous process of developing their own set of rules, along similar lines, for a qualifying standard that could be used not just as a best practice label but also as the lead regulation for the implementation of eligibility and capital charges across the wider regulatory landscape (such as the LCR and CRR for banks and Solvency II for insurers). They are also at the heart of the European Commission’s Capital Markets Union project to develop a broader market for financing across Europe, allowing investors outside the banking industry to participate in the funding of asset classes such as mortgages and consumer lending, which have traditionally been the preserve of the banks, and thereby leading to a revival of securitisation markets as a broad funding tool for the real economy.
Finally, after five years of deliberations, numerous consultations and iterations, those new rules were voted through the European Parliament last week. Dubbed STS (“Simple, Transparent and Standardised” securitisation) they embrace a similar best practice label concept alongside some overarching standards for all securitisations. There will be some asset classes and deals that won’t qualify for the new label, but that doesn’t mean they are bad; just non-qualifying. The label, as its name suggests, is designed for the most vanilla assets and structures but a non-STS market will also continue to exist and grow alongside it, buoyed by the standards the new rules set but without necessarily having the restrictions of meeting all the criteria.
Whilst the new rules still need some fine tuning and technical clarification in places, which will take place over the next year or so before they come into force in January 2019, they now provide a great platform for the future development of the market which, whilst still functioning, has seen subdued levels of public issuance over the last 10 years, with many banks instead retaining issues on their balance sheets rather than selling them publicly due the plethora of ultra-cheap central bank funding schemes that have been available to them.
So what do these new regulations mean for investors?
Well, we don’t expect there to be a tidal wave of new issues, but it should gradually lead to a greater level of issuance across a broad range of asset classes and jurisdictions, and in addition many of those retained transactions could also be sold to the public market as the cheap central bank stimulus is gradually removed. This will mean more choice for investors and more diversification in portfolios. Spreads, which have been gradually squeezing tighter over the last few years as demand has outstripped supply, should stabilise, maintaining value for investors but at a level that allows economically sustainable issuance for originators.
All in all, this is a really positive development for the growth of the European securitisation market, and whilst for those of us (and at TwentyFour we have been part of this development process throughout) who have been involved for what seems like an eternity, it really could be that we do finally have the advent of a new beginning…