Securitisation industry tries to put bad old days behind it
LONDON, Nov 14 (IFR) - An industry initiative to distinguish top quality European securitisations from US subprime RMBS goes live on Wednesday, amid hopes that regulators will make good on their hints to spare these bonds from the most punishing effects of Basel III and Solvency II.
The Prime Collateralized Securities initiative will certify securitisations that meet set standards of transparency, reporting quality and market best practice.
The initiative has been developed by the Association for Financial Markets in Europe (Afme) and the European Financial Services Roundtable (EFR), two banking and financial services trade bodies, with the aim of distancing high quality European consumer securitisation - with realised losses below 1% - from US subprime mortgages, and demonstrating to regulators and investors that the industry is willing to embrace moves to transparency.
The PCS organization will review the documents and reporting procedures of new ABS issues it receives, granting or refusing its endorsement. It will also monitor securities throughout their life to ensure reporting remains up to standard.
Some version of the initiative has been under discussion since at least 2009, but was only formally launched at the beginning of the Global ABS conference in Brussels in June this year. A chair, Ian Bell, formerly of S&P, was appointed for the PCS Secretariat, the operational body handling day-to-day operations.
However, further detail remained to be confirmed - including membership of the PCS Board, the governing body of the initiative, and final criteria for each European asset class.
PCS Board members will include Francesco Papadia, the Director General for Market Operations at the ECB, Professor Jose Manuel Campa, professor of financial and economics at IESE business school and former Spanish Secretary of State for Economic Affairs, Anneli Peshkoff, former director of treasury at EIB, and Mirco Bianchi, head of group finance at UniCredit.
Key industry figures include Gaelle Viriot, head of ABS at Axa Investment Managers, Gregor Gruber, member of the investment management board at Allianz IM, Richard Bartlett, head of EMEA Corporate Finance at RBS, and Michaela Ulrici, chair of the board of NautaDutilh, a Dutch law firm.
A final Rulebook for PCS will also be released Wednesday, as well as three "screening partners" - organizations which will handle the outsourced documentation and reporting review required to grant 'PCS' status. These will be KPMG, True Sale Initiative, and the Irish Stock Exchange.
The securitisation industry has been focused on the PCS as a potential way of navigating a way out of two initiatives likely to hurt the sector. Exclusion from bank liquid asset buffers under CRD IV was set to squeeze bank treasury investment in securitisations, while the capital charges for securitisations under Solvency II were almost prohibitive for insurance investors.
It is also hoped that PCS will help investors get credit approval for more securitisations, or even pick up PCS-only mandates.
However, since the launch of the initiative, more optimism has infected the industry irrespective of PCS. Bank treasuries are now the major investors in securitisations, which have tightened more than 100bp tighter since PCS was launched, and some observers detect more optimistic tone from regulatory authorities.
The European Banking Authority has committed to look at evidence of market-based liquidity when assessing assets for bank regulatory liquidity, and has said it will look at RMBS, equities, and gold as possible additions to liquidity buffers.
The European Central Bank's collateral policies are also a focus for the industry. As it stands, even the best-quality, most transparent securitisations attract a 16% haircut - far more than comparably rated covered bonds.
A way to differentiate better quality, more transparent securitisations may help the ECB reduce haircuts applied to ABS - a move which could channel more than EUR100bn into peripheral banks overnight.
The presence of the ECB's Papadia on the Board suggests support from the central bank, though not necessarily for lower haircuts.
"Europe needs a healthy securitisation market and we are confident that this initiative, alongside regulatory changes, will revitalise the market as a source of funding for the real economy," said Papadia in a statement released on Wednesday.
Some elements of PCS have been well telegraphed ahead of time. The backers of the project are keen for it not to be seen as a rating, nor as an endorsement of credit quality.
However, some level of quality judgement is implicit in the label. It explicitly excludes certain forms of securitisation, including CMBS, CDOs, re-securitisations, and non-conforming residential mortgages.
Irrespective of credit enhancement, only senior tranches of securitisations will be PCS-eligible. Other conditions, such as maximum LTV, are specific to each eligible asset class and jurisdiction.
Further detail is expected Wednesday morning when the Rulebook is sent out.
(Reporting by Owen Sanderson; Editing by Alex Chambers and Julian Baker)
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