Senior regulators: quality label drive will strengthen market long-term
The label schemes for high quality securitization are supposed to attract new investors to the market and strengthen it in the long term, according to two senior policymakers speaking at the Global ABS conference in Barcelona.
“I’m not going to engage in a discussion about whether single jurisdiction, multi-jurisdiction, single currency or multi-currency deals count or not,” said Ashley Kibblewhite, head of structured finance at the Prudential Regulatory Authority, and the former head of Merrill Lynch’s European structured finance business.
“We’re thinking here of new investors in the market, and of building a market where investors can come in with greater certainty.”
David Rule, executive director, prudential policy at the Bank of England, said in his keynote address: “Because one of our objectives is to broaden the investor base, it is important that the Simple Transferable Comparable designation makes things simpler for investors, particularly non-banks.”
Rule continued: “They should be able to place greater reliance on it when conducting their own due diligence on matters covered by the STC criteria, such as risk retention. Investors would thus be in a position to concentrate with more confidence on other existing due diligence requirements, such as in relation to the creditworthiness of the underlying assets and cash flows characteristics.”
The industry itself argues that any new label scheme — and there are several under discussion, with separate proposals from the European Banking Authority, Basel and IOSCO, and the European Commission — should be based on principles, not on crude asset class divisions.
Ian Bell, head of the Prime Collateralised Securities secretariat (a voluntary industry scheme to designate simplicity and transparency) said that a regulatory label should not be “stamp collecting regulation” — meaning a series of detailed specifications of asset classes, with some in the label and some outside.
Fabrice Susini, global head of securitization at BNP Paribas, and chairman of Afme’s securitization board, said: “What we have tried to push is a principles approach, where something is eligible for the label if it ticks the box. A deal should not be excluded just because it is branded a CLO or a CMBS.”
However, he did note that large loan CMBS usually had embedded maturity transformation and refinancing risk — if the loans cannot get refinanced, the bonds will not pay back. More granular deals usually have a long tail period, and the assets behind them usually amortise.
The PRA’s Kibblewhite indicated that he was sensitive to concerns about different and overlapping regulatory regimes.
"Whether we call it SST (Simple, Standardised and Transparent) or STC (Simple, Transparent and Comparable), it all points in the same direction...it allows traders, investors and regulators to identify which securitisations act in a consistent and predictable manner,” said Kibblewhite. “It is not a quick fix initiative.”
He continued: “Where we see real value in the designation is something that works on a harmonised basis across frameworks to allow us to figure out which bonds get a differentiated treatment, in the liquidity coverage ratio.”
The difficulty of gaining clarity on exactly what happens in every circumstance for every deal has been amply illustrated in the ECB’s purchase programme, according to research analysts on a panel on Wednesday morning.
Conor O’Toole, head of European ABS strategy at Deutsche Bank, said that some Spanish RMBS deals had initially been eligible for the ECB’s purchase programme, but that when the asset managers mandated by the ECB did their due diligence, they found wrinkles in the post-event of default waterfall language — meaning the bonds dropped off the list and widened.
“There’s no confidence in whether bonds are actually eligible,” he said.