Simple Transparent and Standardised (STS) regulation set out in Article 46 of the European Union’s securitization regulation has not led issuance volumes to leap as the European Commission had hoped. However, the European Securities and Markets Authority (ESMA) is keen to get the market talking and improve matters.
STS regulation, which came into force in January 2019, promised to set a gold standard that would revitalise the securitization market. It has singularly failed.
Volumes have struggled to exceed €100bn annually, despite the fact that when the legislation was first unveiled the European Commission “enthusiastically declared the market would grow to €150bn”, said Alexandre Linden, co-head of portfolio management in the securitised product group at BNP Paribas.
Linden was speaking at the Global ABS conference in Barcelona on a panel offering a regulatory review of Article 46.
“Now we are down the line and its clear we’ve not seen this number materialise," said Linden, citing a report published by the Association for Financial Markets in Europe (Afme) showing that the share of STS deals issued in the public domain fell from 37% of total issuance three years ago to less than 20% last year.
Despite strong volume growth in securitization issuance volumes last year, much was not STS compliant. The regulation is “not fit for purpose”, said Linden, noting that changes were needed to bring in more issuers and investors. He added that market participants had set out a long list of points to the supervisory authorities.
Balanced solution required
Still, STS has led to an improvement in issuance in the private market, specifically with regard to the beneficial capital treatment of asset backed commercial paper (ABCP) conduits. This improvement has enabled banks to keep existing clients and bring new ones on board.
However, there is still much to improve in the private market for securitization issuance. In theory, private deals do not need to comply with the same regulatory standards applied to public deals. But according to Merryn Craske, a partner at law firm Morgan Lewis, this is no longer the case.
Reporting, which had been limited to public deals, has now moved to the private market which is also subject to the same transparency templates. These requirements are particularly inappropriate for privately negotiated trade receivable deals, said Craske, who described the overarching regulatory push for data as akin to “using a sledgehammer to crack a nut”.
Craske said she did not believe enhanced reporting was a key factor driving private issuance, and rather thought that issuers had several other incentives to take the private route.
In response, Thierry Sessin-Caracci, a senior officer at the European Securities and Markets Authority (ESMA), said regulators had to be clear and objective on the need for additional information required for private deals.
“The market wants more proportionate data for private deals, there should be a balanced solution,” he said.
Sessin-Caracci said the supervisory authorities were open to a discussion and suggested that a clear definition of “what is and isn’t private,” would provide a good starting point for dialogue. He recognised a “clear call from the industry to commence and recalibrate reporting templates” without delay, suggesting that a fresh consultation was being planned this autumn.
Linden at BNP Paribas said he would “welcome dialogue with ESMA on streamlining the template for private deals,” but questioned whether the rules would apply to the bank’s clients outside the European Union.
He said that a precedent had been set with respect to the simplified ABCP reporting templates in which loan-by-loan data was not required. “I’m grateful we’ve had this talk on private deals because up to now the distinction has not been well understood," he said.
Andrew Bryan, knowledge director at law firm Clifford Chance, was hopeful that a new reporting template for private deals could be developed. “It kills two birds with one stone,” he said, with reference to the need for “light touch” regulation on reporting.
“We don’t need to re-open the text but can feed into what’s already there helpfully and constructively by engaging with Thierry and his colleagues to resolve these problems,” said Bryan.
