Europe Securitization Rule May Curb Markets It Aims to Boost

(Bloomberg) -- Proposed rules for European asset-backed bonds have provoked fears it may become impractical to sell some types of securities.

From January, asset-backed bonds sold to European investors need to comply with the new Securitisation Regulation, aimed at supporting the market and making it easier for investors to understand risks. However, details of the European Securities and Markets Authority proposals have come under fire for including reporting requirements that might be impossible to achieve or require months of preparation among participants.

“There is a real danger that the new requirements could shut down issuance for some market sectors,” says Richard Hopkin, head of fixed income at the Association for Financial Markets in Europe, which represents many market participants. “The industry has always been very happy to provide investors with the information they need, we have nothing to hide. But under these proposals some forms of securitization simply won’t be able to comply.”

European regulators and policymakers have sought to jump-start the region’s securitization market with the rules, which introduce a new category of ‘simple, transparent and standardized’ asset-backed securities that can qualify for preferential capital treatment. But, and not for the first time, there are fears new European regulations risk stifling appetite for ABS securities rather than encouraging it.

European regulators and policymakers set the task of fleshing out the reporting framework to ESMA, which has been consulting on the changes over the last year.

Templates

In its final report on the technical standards, published Aug. 22, ESMA detailed its proposals. These included many different templates for various types of securitization. The templates require information for the bond and the underlying collateral, and there are, for example, 181 data fields necessary for commercial real estate transactions.

The report did acknowledge market participants’ concerns about the requirements, and ESMA head Steven Majoor explained to parliamentarians on Aug. 29 how ESMA had sought to ensure a high level of transparency, limit any additional regulatory burden, as well as a process allowing for missing data.

However, the securitization industry remains unconvinced. A position paper published by AFME in October, and seen by Bloomberg, includes the following claims:

  • The proposals demand that private securitizations disclose similar information to public deals; “our members cannot create data that does not exist, and cannot force borrowers or sellers to ABCP conduits to provide disclosure where issuers or sponsors do not have the contractual right to do so”
  • Time will be needed to adjust given that “the standard of compliance with the detailed data templates has been significantly tightened and much practical flexibility has been removed”
  • The proposals create “particular difficulties” for NPLs and CLOs
  • “Will create a severe cliff edge which could cause issuance in some sectors (for example, ABCP conduits) to cease altogether from 1 January 2019 and at a minimum will create a hiatus in other sectors while changes are made to internal systems”

Asked for comment, a representative for ESMA said it is “working, together with all our stakeholders, on appropriately addressing these issues”.

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Revival?

Ahead of the new regulation, parts of Europe’s ABS market have become more active. Issuance of commercial-mortgage backed securities has bounced back this year, analysts at Bank of America Merrill Lynch noted this week, after being decimated by a wave of restructurings and losses following the global financial crisis. Meanwhile, issuance of leveraged-loan-backed CLOs has set a new post crisis record, according to data compiled by Bloomberg.

Total issuance of asset-backed bonds is up on last year, with more than 150 billion euros ($171 billion) of securities placed in the year to the end of September, according to data compiled by Bloomberg. But that’s a fraction of the size of the market prior to the crisis, and is also far smaller than the U.S. market, where total ABS issuance volumes this year are approaching $400 billion, according to data compiled by Sifma.

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Next steps

Both the AFME and its loan market equivalent, the LMA, have asked for extra time. In a letter to ESMA and the European Commission, the LMA said it supported ESMA’s earlier proposal for a 15 to 18 month phased implementation period to help the region’s issuers put in place the systems and resource needed to comply with the rules.

In its Aug. 22 report, ESMA says “the present reporting arrangements could potentially apply with a gradually-increasing degree of compliance” and it considers a 15 to 18 month transition period to “appear necessary”.

Phased implementation has been granted on other EU legislative initiatives, but any decision on a timeline is a matter for the European Commission, ESMA has said.

It is also in the Commission’s hands to determine whether any amendments can be made to the final report; it can either approve the rules as they currently stand, or ask ESMA to make further changes, according to AFME’s Position Paper.

“We and others have continued to make the case for grandfathering and a sensible transition and implementation period, which gives the industry time to adjust and recognizes the challenges for legacy deals and assets,” AFME’s Hopkin said.

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