It would be hard to find an industry that has taken a sounder beating in the current recession than the securitization market. In addition to dealing with structural reform and pending regulatory waves, the industry has a public relations problem. TS Senior Reporter Cristina Pittelli quizzed Rick Watson, managing director, and Marco Angheben, director of the European Securitisation Forum, on the challenges that lay ahead.
What will the securitization market look like in the future?
Watson: I think it will be smaller. It will be dominated by products which I would call real economy products, which are residential mortgages, commercial mortgages, leveraged loans, [small-to-medium] enterprise loans, auto loans, credit card loans those types of things. We do think eventually there will be a return to secondary trading activity because the structures will be simpler and probably larger, but it is going to take some time for the legacy positions to wind their way down.
Angheben: We are probably not going to see structures as we have seen developing in the beginning of 2007, which might be a bit cumbersome and not straightforward to understand. We are going towards a simpler world where everything is streamlined and there is improved disclosure in terms of the amount of information that is provided into the market.
When do you think the market will come back?
Angheben: Probably towards the end of 2009, maybe 2010. It also very much depends if we see some guarantee schemes being put forward from various jurisdictions. There are a lot of expectations from the industry regarding what can be done from an institutional perspective.
What are the regulatory issues most affecting the securitization community?
Angheben: The key one is the [Capital Requirements Directive], the other one is the accounting changes of how the securities are marked from an accounting perspective (that is undergoing consultation right now). There is the new potential post-trade transparency regime which is being considered with [the Committee of European Securities Regulators] together with [the International Organization of Securities Commissions]. There are also the regulations that will affect the rating agencies.
How has the way the ESF carries out its mission changed since the credit crisis started?
Watson: I think if anything, our relationship with the regulators has been strengthened because we are talking to them more often on a variety of issues, and certainly the industry recognises that regulation of securitization must change in a number of different ways. I'm actually pretty pleased to see that the policy community is aware of how important it is to restart at least some part of the securitization market.
We're in active conversations with a growing number of ABS investors and they are looking at a variety of issues. For example, the new RMBS transparency initiatives are the kinds of things investors like to see because there is more consistency on what they are getting from a variety of different participants. So we are encouraging European originators to use those initiatives and to endorse them.
Angheben: We've been trying to be proactive in reaching out to regulators. We have also been very engaged in all of the discussions and in all of the consultations that have been going on from the regulators themselves. I think it made it also relatively easier for the regulators to interact with us because they know that we were not only representing one side.
The regulators have been much more open and I think that there has clearly been an increase in the number of meetings between the regulators and the industry. One issue that we are trying to always be mindful of is there should be no rush in implementing the regulation. There should be also some time for the implementation [and] some very thorough cost and benefit analysis of all the measures that are to be introduced.
One of the challenges in Europe is that there is not a unique regulator to deal with. So not only are we dealing with the European Commission, we are also talking to a number of pan-European bodies, bodies at the national level for the 27 member states plus the U.K., as well as their own central banks and securities regulators.
How has the investor community changed as a result of the credit crisis?
Angheben: The investor base has become much more vocal and unified in terms of views and what needs to be done to restore confidence. Lately we have seen much more cohesion between the different types of participants.
One of the interesting things we have seen is a lot of the investors who believe in the product have actually had huge opportunities to ramp up their operations. You have seen a lot of people move from the structuring side to the buyside, and from the research side to the buyside. I think that is a very positive sign because it means that investors are investing.