European Parliament comes to securitization's aid

The European securitization market has a new friend — the European Parliament.

In the past the Parliament has often taken harsh positions on securitization, blaming it for the 2008 financial crisis and calling for strict regulation.

But the pendulum has swung. Now the European Commission is trying to ease constraining rules on the market and the Parliament wants it to go further.

Market participants have spent this week digesting the Parliament’s draft amendments to the Commission’s proposals to reform the Capital Requirements Regulations and Securitization Regulations.

The Parliament and Commission's views will then have to be reconciled with those of the Council of member states' governments, in a process that could take much of next year.

Some in the market say the Parliament has not gone far enough to achieve the Commission’s goal of "relaunching" the European securitization market, which remains a shadow of its pre-crisis self.

But the general consensus is that the Parliament's amendments are closer to what market participants want than the Commission’s proposals from June.

The Parliamentary Reports on CRR and Sec Regs are drafts written by Ralf Seekatz, a German Christian Democrat who is the rapporteur on the issue.

His views may not be shared widely in Parliament — that will become clear once the house finalises its amendments by May 5 (although this is a self-imposed deadline which could be extended).

The Council is set to release its amendments to the Commission’s proposals on Friday December 18, although they have already been widely circulated informally.

The main area where Parliament appears keener to deregulate than the Commission is the Capital Requirements Regulations.

They determine how much capital banks must hold as issuers of or investors in securitizations, compared with holding the same portfolio of assets unsecuritized.

For the absolute risk of the least risk-sensitive securitization tranches — those classified as Simple, Transparent and Standardised (STS) and resilient — the Parliament's draft is the most ambitious.

It sets a minimum risk weight floor for these tranches of just 4%, compared with 5% from the Commission and 6% from the Council.

The risk weight floor is the absolute minimum risk weighting, even if a bank's internal model suggests the risk weight should be lower.

“This is looking positive,” said Shaun Baddeley, managing director of securitization at the Association for Financial Markets in Europe. “We were hoping it would be slightly lower to fully unlock certain lower risk portfolios, such as mortgages, but it’s still positive.”

The proposed new floors would be a big change — the risk weighting floor is now 10% for an STS securitization and 15% for a non-STS one.

The 'resilient' qualification is not acknowledged in the current rules as it was only introduced by the Commission’s proposals in June.

The 'resilient' category is being added because the STS label does not have any credit criteria — a single-B rated securitization can be STS.

STS just signifies that the securitization is structured a certain recognised way. Resilient tranches are meant to be of the highest quality and therefore should qualify for lower risk weightings.

One of the problems market participants perceive with the Commission’s proposals for calculating risk weights is that certain tranches with different risk sensitivities, like STS resilient and STS non-resilient, and non-STS resilient and non-STS non-resilient, were given the same scalar values for calculating risk weights.

The scalar is a multiplier used in the formula for calculating the risk weight of a securitized asset.

The risk weighting of the underlying, unsecuritized pool — for example 35% for residential mortgages under the standardised risk modelling approach — is multiplied by the scalar value.

The Commission proposed a scalar value of 10% for STS resilient and non-resilient tranches, and 15% for non-STS resilient and non-resilient tranches.

The absolute risk weight floors would increase to 5%, 7%, 10% and 12%, respectively.

The Council is going to propose 7%, 9%, 12% and 15%, going from STS resilient to non-STS non-resilient tranches, with the risk weight floors set at 6%, 8%, 10% and 13%, GlobalCapital understands.

“The Council has been more ambitious than the Commission in terms of the scalar in the risk weight floor formula but more conservative in the absolute risk weight floors, and more consistent in terms of risk sensitivity to the securitized assets' risk weights,” said Georges Duponcheele, senior credit portfolio manager at Munich Re.

“This is because the scalar values and absolute floors are progressive from the lowest risk classification, STS resilient tranches, to the highest risk classification, non-STS and non-resilient tranches.”

The Parliament’s draft amendments would put a scalar value of 7% for STS resilient and STS non-resilient tranches, and 12% for resilient and non-resilient tranches, with the risk weight floors similar to the Commission’s proposals, progressively increasing to 4%, 7%, 10% and 12%, respectively.

“The draft amendments from Parliament are more ambitious than the Commission on both the scalar values for all classifications and the absolute risk weight floor value for STS resilient securitizations,” said Duponcheele, “but the scalar values are not as progressive as the Council, as securitizations with different risk profiles are given the same scalar values, and this results in the risk sensitivity to the securitized assets risk weight [not being] consistent across classifications.”

The broad takeaway is that the Parliament and the Council are being more ambitious than the Commission, and the Council is more consistent, as it applies different scalar values, depending on whether an asset is considered resilient or not.

While this does look encouraging for the market, it is too early to tell whether these changes will meaningfully increase banks’ securitization activity.

“It’s quite hard to figure out right now how changes around the P-factor, scalar values and risk weight floors will really impact the securitization market, because some rigorous models will need to be run over the next few weeks to work out the true impact across a diverse range of banks and asset classes,” said Ian Bell, chief executive of PCS (Prime Collateralised Securities), a non-profit organisation that verifies deals' eligibility for the STS label.

Some of the biggest victories for the market from the Parliament's draft report are not necessarily things it has added to the Commission’s proposals, but things it has taken away from the Securitization Regulations proposals.

These rules cover due diligence, definitions and concepts of public and private securitizations, risk retention and rules around STS qualifications.

One of the more controversial proposals from the Commission would add investors into the group which could face sanctions for due diligence breaches under Article 5 of the Securitization Regulation.

The fines can be huge — up to 10% of a firm’s annual net turnover.

Investors do not intend to break the rules, but could easily be put off by fear of being fined for an unintentional breach.

The Parliament wants to lower the fines to a maximum of twice the invested amount, which will almost always be lower than the Commission’s proposals, although still a substantial penalty.

“Parliament’s draft of a fine of two times the exposure value of a securitization remains disproportionate,” said Baddeley. “A size of pecuniary sanction linked to the profit derived from that exposure would be more logical.”

The Parliament did clarify that there would be no duplication pf sanctions for due diligence breaches.

It would be up to each member state to sanction its investors, with the Securitization Regulation sanctions only being used if a state did not have a process for punishing due diligence breaches.

Many in the market want a clearer definition of what counts as a private securitization, as the current definition of a public deal is thought to be too broad, increasing the reporting burden for private transactions.

“The industry has been asking for the reporting requirements to be made less onerous for a very long time now,” said Merryn Craske, partner at Morgan Lewis in London. “The prospect of a dedicated template for private transactions was raised in the Commission’s report in October 2022, and it was hoped that such a template would come into effect shortly after that.

“However, it’s now looking like this template may not come into effect until 2027 or later. It is difficult to assess the ultimate impact of the revised reporting regime, as the details of the revised templates are some way off.”

The Commission did set out a possible criterion for defining what count as public and private securitizations, although the Parliament cut this out in its draft amendments, instead favouring the current concept of public and private deals.

Under the existing Securitization Regulation, a public securitization is any deal which requires a prospectus to be drawn up under the Prospectus Regulation. A private securitization does not.

“In one sense, this development may be seen as positive, because the definition of public securitization proposed by the Commission in its proposed amendments in June 2025 was considered by many to be too broad,” said Craske. “Industry participants will already be familiar with the concept set out in the Parliament’s proposed definition.”

Some transactions like CLOs are considered private by the regulator, even though they generally function more like public deals. They require more data reporting, which will have to be incorporated when the regulator designs new private securitization reporting templates.

“The limited scope of the proposed public securitization definition could also present a challenge in designing the simplified reporting template for private transactions, because that template will need to cover a wide range of transactions,” said Craske. “It would be unfortunate if the required data cannot be significantly reduced for truly private deals, with a small number of investors who can negotiate the terms with the originator and obtain information from it directly.”

This means that when a new private securitization template is designed it may be only slightly shorter than the current template which the European Securities and Markets Authority requires, as opposed to a simplified one page template, and therefore will not move the needle in reducing the regulatory burden.

One of the Commission’s proposals which the Parliament has removed from its draft is the requirement for private transactions to be reported to data repositories.

The market argues that private transactions already have to be reported to their national competent authority, so forcing them to be reported to a repository would be redundant.

Market players resent the financial and administrative burden of this reporting, as well as having to share private information with third parties.

“Private deals having to [be reported] to repositories has been an issue for some Afme members as there are concerns around confidentiality,” said Baddeley, “for instance if a bank were doing a deal with a defence contractor, where there would be additional concerns around highly confidential information being held by a third party. So it’s good Parliament is trying to correct this.”

The Council is expected to present the final form of its amendments by the end of 2025.

The deadline for Parliament to discuss the draft amendments is January 27. By May 5 it should present its finalised amendments.

In theory the 'trilogue' discussions between the Commission, Parliament and Council should start in May, although this timeline is self-imposed and could be delayed.

There is no set timeline for how long the trilogue period will last, although it is expected to be finished towards the end of 2026, depending on how easy the three co-legislators find it to agree.

The changes to CRR and the Securitization Regulation would then be implemented either towards the end of 2026 or at the beginning of 2027.

The Commission also has reforms in the works for Solvency II and the liquidity coverage ratio treatment of securitizations, but since these are changes to level legislation the Council and Parliament can only approve or reject them.