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How has the European Securitisation Regulation impacted the market?

27 September 2019

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Last week Cliff Pearce, Global Head of Capital Markets co-chaired the recent European Securitisation Regulation Conference, primarily focused on the new STS reporting regime. Below Cliff discusses the new securitisation landscape.

It was my pleasure to co-chair the recent European Securitisation Regulation Conference. The conference was well attended with some respected and veteran personalities stepping up to the panels, keen to share their experiences, wit and wisdom. Many aspects were covered and it it’s clear that there is still a wide degree of variance in the interpretation of ESMA’s STS guideline – it’s pleasing to know that there is now a Q&A web tool on the EBA’s website which is no doubt seeing it’s fair share of use.

The role of securitisation in a post financial crisis world is undeniable with all bodies recognising it’s place in boosting cash flow cycles and economic growth. However, issuance is still a shadow of its former self, 66% down against the 2008 volume of €819bn vs €269bn in 2018. The STS label was introduced at the start of the year through the EU Securitisation Regulation to enhance the safety, liquidity and harmonisation of Europe’s securitisation market and act as a catalyst for reigniting issuance and investment.

Market impact

Since the first STS compliant deal in March, 50 transactions have now benefited from being deemed STS compliant; a busy 6 months. Most verified transactions are in the non-ABCP market, in the traditional asset classes, although it should be noted that the number also includes some legacy issuances. However, the impact of the STS accreditation has yet to be fully felt with both insurers and investors agreeing that it gave no pricing benefit or differential at this stage. Maybe that will change as STS bonds become eligible for liquidity coverage ratio consideration in 2020 and will no doubt be the impetus for more legacy transactions to gain the STS stamp of approval too.

Whilst non-bank investors aren’t demanding the STS accreditation on new issuances, (indeed no-one was contemplating “STS only” funds in the short term), investors say they would give preference to those transactions bearing the label versus those without, that are in the market at the same time, driven by thoughts of future liquidity in the secondary market. Anecdotally issuers are also seeing more investors in the ABS sector, but none felt it was connected to the new STS initiatives. So STS is a positive differentiator but not yet driving the market.

Still question marks

However there are still many challenges to overcome. Not all jurisdictions have appointed National Competency Authorities, leaving issuers to hope that using practices from other jurisdictions as a proxy will be sufficient to gain the STS stamp.

Third party verification agents are seen by issuers as being beneficial versus self-accreditation, particularly in helping issuers navigate the process for their debut STS transactions. Not least with the thought of the penalties for getting it wrong at the front of their minds. The process underlines the importance of keeping comprehensive and accurate data, although variable standards of STS submissions have been experienced by the Agents to date, doubtless experiences will see this improve.

The EBA has been helpful in its guidance but there are still a significant number of areas which require some interpretation. Capital calibration and relief on those eligible securities have a number of complexities to navigate and there are seemingly a number of unintended consequences in certain cases. No doubt this will all be resolved as the guidelines are refined and clarified. Indeed it was welcome to hear that synthetic transactions are now being actively considered for inclusion into STS.

Final thoughts

So, in conclusion, there is still a significant amount of clarification to be rendered in some aspects of a brave new STS world. And the positive impact of the designation still needs to be felt particularly from a more commercial standpoint.

Will this be the panacea to boost the market as intended? That still remains to be seen but there is no doubt that increasing transparency and creating a more level playing field is a welcome move.

We look forward to seeing how this evolves and translates to market activity as STS securitisation affirms its place in investors hearts as the asset of choice. In the meantime we look forward to continuing to support STS issuers through our automated reporting platform, simplifying at least one aspect of the new regime.

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