A decade since the depth of the financial crisis, markets have come a long way. As well as contending with political uncertainty across Europe, market participants have faced the introduction of regulation across practically every aspect of finance and investment business.
These regulations are intended to minimise risk and increase transparency as well as reinvigorating industries post-crisis.
In Europe, the European Securitisation Regulation, which came into effect on 1 January 2019, aims to help increase securitisation issuance in the EU, and attract a wider and deeper investor base into the market.
As we approach the half-year point, we examine the key factors around the Regulation and the broader securitisation environment:
1. New regulation has the best of intentions
The global securitisation market has undergone extensive transformation over the past decade as regulators around the world have sought to reform and encourage the rebuilding of a sector that was central to the global financial crisis.
A revised and enhanced regulatory framework with greater transparency and simplicity, the Securitisation Regulation aims to breathe new life into what were often complex and opaque structures.
The primary purpose of the Securitisation Regulation is to update and codify the existing EU rules for securitisation transactions and create a new EU framework for simple, transparent and standardised (STS) securitisations.
Those securitisations that satisfy certain criteria will benefit from the resulting STS label, and possibly from a preferential regulatory capital regime. This will hopefully make STS securitisations more attractive to investors and help reinvigorate the EU securitisation market.
2. The market faces serious headwinds
The reality is that the European securitisation market remains subdued and is still some way off recovering to levels seen before the 2008 financial crisis. While European issuances peaked in 2008 at €818bn, the following years bought tremendous decline. In 2018, only €269.4bn of securitised product was issued in Europe – although this was still an increase of 14% from 2017.
Out of the total issuances in 2018, residential mortgage-backed securities (RMBS) represented 42%, followed by asset-backed securities (ABS) at 26% and collaterialised debt and loan obligations (CDO/CLO) at 19%.
On the upside, 2018 saw an improvement in placement of securitisation – up to 50.5% from 47% in 2017. However, there was fall of 8% in RMBS issuances from €123bn in 2017 to €113.3bn in 2018.
Added to this mixed picture, figures for the first quarter of 2019 have seen significant decline in securitisation issuances.
3. The new regulation creates need for significant adaptation
While it aims to harmonise existing rules and introduce the STS regime, the Securitisation Regulation also places some potentially onerous requirements on market participants that are likely to have an impact on the EU securitisation market in a number of ways. We believe the following factors will be key:
Availability of data
The Regulation requires that, prior to pricing an STS securitisation, the originator and sponsor need to make certain historical data available to potential investors. This includes a minimum of five years’ worth of static and dynamic default and loss performance data of receivables substantially similar to those to be securitised. Without such data, a transaction won’t be able to obtain an STS designation.
Presentation of information
The Regulation also specifies the format and templates that are expected to be used for loan-level reporting and investor reporting. In order to comply with these requirements, market participants may need to invest in additional resources – including new software and business processes – to be able to provide information in the form required.
Availability of technical standards
The technical standards that are required to interpret and implement the Securitisation Regulation are yet to come into force.
4. Brexit still casts a cloud
As we approach the date set for Brexit – 31 October 2019 – political changes are constant in the UK and there are still multiple possible outcomes. These include: a no-deal Brexit; a Brexit with a fully negotiated and ratified withdrawal agreement; an additional extension and further negotiation over a withdrawal agreement; or a unilateral revocation of Brexit.
This Brexit-related uncertainty may impact European securitisation and covered bond markets. The way Brexit ultimately plays out may possibly impact new issuances and possible shifts in the performance of related assets viz. housing and secured funding markets
In relation to Brexit and its impact on the Securitisation Regulation, it is also hoped that transitional period will be envisaged in the withdrawal agreement.
The Securitisation Regulations usher in a new era of risk management and transparency which requires the market participants to adapt and align.
With it has come complexities and increased administrative needs. This coupled with the general political and economic environment means the coming months will be key to see how the regulation is implemented, the true delivery of positive outcomes of increased securitisation issuance in the EU, and a wider and deeper investor base.
At Vistra we strive to find the answers to these complexities and continue to navigate the regulatory landscape for our clients.
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