EU ABS regs proposal is just the start
The European Commission's long-awaited proposal to overhaul the EU's securitisation regime is a step in the right direction but may need to be tweaked in key areas if it is to revitalise the market, lawyers have told IFR.
The commission said "a stronger and simpler securitisation framework can help channel more investments into the real economy – supporting economic growth, innovation and job creation across the EU".
The Association for Financial Markets in Europe welcomed the proposals, which include adjustments to banks' capital requirements and efforts to simplify due diligence and transparency requirements, but the industry group warned that legislators would have to be careful to ensure the package achieves its aims.
"Overall, this is a helpful proposal,” said Tom Falkus, a London-based partner at White & Case, who highlighted positive aspects such as the simplification of reporting for private securitisations and the move towards a principles-based approach for investor due diligence.
The draft proposals published on Tuesday appear to be broadly in line with documents leaked in May, which had given market participants a preview of the proposed reforms, according to Falkus and Dennis Heuer, a Frankfurt-based partner at White & Case.
But while market insiders have been generally receptive to the package, they have also spotted potential problems.
Invasion of privacy
“We have some concerns, and I think these have already been expressed by the market in response to the leaked draft, in particular the broadening of the definition of public securitisations,” said Falkus. “In large part that offsets the helpful move to simplify the reporting requirements for private securitisations."
According to Merryn Craske, a partner at Morgan Lewis, having a distinction between private and public deals is helpful in principle. “The issue is that the definition [of public securitisation] is very broad,” she said. Making private transactions report to a repository was an additional hurdle, she said.
Several lawyers also flagged an additional challenge in requiring EU investors in some non-EU deals to obtain reports using EU templates, and for the reports to be submitted to a repository.
Julia Tsybina, a partner at Clifford Chance, said issuers outside the EU, such as in the US, could potentially opt out of selling to EU investors altogether.
The introduction of administrative sanctions on investors for violations of regulations could also undermine the goal of encouraging investor participation.
The sanctions, amounting to up to 10% of annual revenues, are likely to worry existing investors and could deter new entrants. "This change would be particularly concerning for smaller and non-bank players within the investment community,” said Tsybina. “This is likely to cause a lot of unease."
The introduction of a new "resilience" label for calculating capital requirements, in addition to the existing simple, transparent and standardised category, is viewed by some as an unnecessary layer of complexity. STS securitisations already benefit from more favourable treatment under capital requirement rules.
“The framework is already super complex and differentiates between STS and non-STS,” said Heuer. “They have kept this mechanism – good and bad – as they seem to see it and they have introduced more exceptions to the rules with the category of resilient securitisation. This is a missed opportunity for simplification.”
The commission proposals are likely to be amended during the legislative process, known as trilogue, which involves the Council of the European Union and the European Parliament, as well as the European Commission.
Proposals to adjust Solvency II rules for insurers investing in ABS are due to follow in the coming weeks. The EC has also launched a consultation on the impact of securitisations on banks’ liquidity buffers.
“All of this is a package,” said Craske. “That’s a good thing, but it is difficult to assess the impact until we have the full picture.”