When the European Commission’s targeted consultation on the EU Securitization Regulation (EUSR) framework was released in October, a wave of euphoria swept the market.
“This is it, this is the solution,” said Ian Bell, CEO of Prime Collateralised Services (PCS), upon the release of the consultation. Bell is one of the leading advocates for lighter regulation in the sector.
Just over a month later, the high may have worn off. With just days to go before the consultation closed on December 4, Bell recognised that change was “going to be a battle”.
“This is not going to be plain sailing,” Bell says. “This is not just going to be a triumphal march towards a better place for securitization.
“We are going to have to fight and make our case. That’s new in the sense that when Draghi, Lagarde, Macron and Scholz were coming out [in support of regulatory changes], there was a moment when we thought we may just move ahead to an easy victory. It is now clear that the boys will not be home for Christmas.”
After the consultation period ends, the Commission will work with the European Supervisory Authorities (ESAs) to draft a legislative proposal for the European Parliament.
A public draft is not expected until the end of March 2025. From there, the proposal should land with the European Parliament by the end of August.
By EU standards, this is warp speed. Indeed, the fact that EUSR reform has stayed on the agenda even through EU elections in June 2024 is a sign of just how high a priority revitalising securitization is.
All or nothing
Nor is it being done half-heartedly — though this seems to increase the pressure.
“The good thing about the consultation is that it’s extremely comprehensive, even including details on p-factor, risk-weight floors and so on,” says Andrew South, S&P’s head of structured finance research for EMEA. “But it’s a double-edged sword: because everything is on the table, it feels like it’s now or never for change to happen.”
This is not just going to be a triumphal march towards a better place for securitization — we are going to have to fight and make our case
Indeed, the consultation document is notable for its breadth and depth. There are 167 questions across 11 sections, covering everything from due diligence and reporting requirements to the simple, transparent and standardised (STS) framework and prudential treatment rules.
Bank of America called it the most important consultation “for a decade” in October. And it feels like a once-in-a-generation moment.
On one hand, the exhaustive nature of the Commission’s paper is a cause for euphoria. As Bell says, “nothing is off the table at this stage. But some things are clearly much more likely than others.”
Yet it is also the main source of tension. If nothing is off the table, everything is on it too — including the rules and requirements that market participants believe stifle the industry.
“The member states themselves are trying to figure out what exactly their position is now,” Bell says. “We are revisiting this for the first time since 2015. It has been a while, and the world is a very different place.”
Though the direction of travel is being quietly signalled, until the draft proposal legislation is released it will be hard to predict the contents.
It’s not easy to prioritise what the industry wants. The problems are akin to a series of blockages in a plumbing network: fixing one part doesn’t necessarily fix another.
Veronique Ormezzano, chair of the European Financial Regulation Committee at trade association Paris Europlace, says a combination of measures is needed to revitalise securitization.
“We struggle explaining that what is needed is a package of targeted amendments because securitization is a vast ecosystem with different types of structures, different types of stakeholders, issuers, investors, market makers and so on,” she says. “You need all of them to be unlocked if you really want the flow of the market to be revived.”
Thierry Sessin-Caracci, senior policy expert on securitization and rapporteur of the Joint Securitisation Committee, European Securities and Markets Authority, agrees it is not simple.
“There is no silver bullet to revive the market,” he says. “Instead, we need a combination of measures to increase the regulatory incentives for the market participant to engage.
“The market is quite weak when it comes to true-sale [deals]. The proportion of transactions that are placed with investors is certainly the weakest part of the market. It’s between €60bn and €80bn that’s placed, when before the [2008 financial] crisis it was over €300bn.”
However, he says change of some sort is certainly on the way.
“My understanding is that it’s highly likely there will be a revision combining both the Securitisation Regulation and the prudential framework, keeping in mind that the extent of these revisions will ultimately be decided by the European co-legislators.”
Slow turning circle
However, Bell and others see the EU regulators as strongly opposed to changes to prudential rules. In particular, the prospect of securitization’s LCR treatment changing from Level 2B to 2A could be the most difficult reform to get through — although Bell agrees that technical elements of the regulation are up for reform.
“There is strong opposition to much being done on prudential rules,” Bell says. “But there is much more willingness to look at disclosure and much more willingness to look at due diligence. Again, they haven’t shown much colour in the sense that we don’t know whether ‘a lot’ on due diligence means changing 5% of the reporting fields or reducing it by 90% overall.”
Salim Nathoo, partner at A&O Shearman, describes a broader philosophical issue at play. The “instinct” of regulators is to write more rules, not fewer.
“The regulatory approach is typically to solve it with a more complex matrix of regulation rather than moving to a principles-based approach,” Nathoo says. “You do not make investors invest by putting in more rules.
“There is a tension between the different regulatory bodies because the Commission recognises that there is potentially overregulation of the securitization market, but the instinctive response from regulators is to rewrite the rules rather than get rid of them.”
Still, Esma’s Sessin-Caracci does recognise the need for change and, most importantly, for new investors.
“First of all, we need to provide greater clarity and predictability on the requirements within which the market can operate,” he says. “For a typical investor that wants to invest in the EU, like a US or UK investment firm, it’s important to remove any legal uncertainties surrounding the interpretation of the EU regulations.”
Shaun Baddeley, managing director for securitization at the Association for Financial Markets in Europe (Afme), says the reforms will probably follow the path of least resistance.
“Changing aspects of the EUSR and prudential frameworks that don’t require agreement at level 1 legislation is less complex and therefore easier to achieve,” he says. “A reform to the Solvency II capital framework for securitization is the most obvious.”
However, the effects of these reforms are interlinked.
“A reform to Solvency II alone is not going to be enough,” Baddeley says. “Adjustments to the treatment of ABS within the LCR for banks is equally important, as are reforms to the investor due diligence framework (Article 5).
“If the legislative processes impede resolution of these interconnected reforms, the restoration of this investor base, which is so badly needed to meet the EU’s needs, is unlikely to occur.”
Liquid spirit
Many market participants argue that securitization must become more liquid to lure more investors. Perhaps the clearest way to achieve this would be to make it easier for bank treasuries to hold senior tranches of securitizations.
Failure to do that will make it hard to transform the state of the true-sale, publicly placed securitization market that Sessin-Caracci highlights as its main weakness.
There appears to be an almost institutional problem when it comes to the regulators’ perspective on prudential frameworks, one of the key obstacles to greater bank treasury participation. But Baddeley says that, under the right conditions, a change can help securitization become a key component in funding the EU’s long-term ambitions.
“For securitization to contribute to financing the significant capex needs over the next decade, the investment returns on the most senior part of the ABS structure need to be attractive for investors,” he says.
“For this to be the case, the regulatory framework and prudential treatment for banks and insurers need to be proportionate to the risk in this particular securitization product, as evidenced over 30 years of the life of the product.
“The lack of risk sensitivity and proportionality in the EU frameworks makes it exceptionally challenging for an asset manager to create an EU fund focusing only on what is deemed to be the safest part of the capital structure.”
Outside forces
The EU and the securitization market do not exist in a vacuum. Political factors outside of the bloc are also influencing the future framework of EUSR 2.
Nathoo says the UK is determined to ensure Brexit “meant something”. In this spirit, it is pressing ahead with giving the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) powers to adjust financial services legislation without needing to go through parliament at every turn.
Meanwhile, the directive to ensure the UK is competitive remains. Some proposals are already being lined up to open the SRT market to smaller UK banks, for example.
“It introduces a new formulaic p-factor for the securitization [risk-weighted assets] calculation for standardised banks, allows unfunded investors in SRT transactions and provides extra considerations for banks opting for Small Domestic Deposit Taker (SDDT) status,” says Jeremy Hermant, senior adviser at Alantra. “Given the SRT market was opened by another challenger bank this year in the UK, we expect two to five transactions to be closed in 2025 with a strong annual increase, as per what we have witnessed in Europe in the past five years.”
UK regulators are seen as much more thoughtful and co-operative in their policing of financial markets.
The UK has already made clarifications around Articles 5 and 7 of its Securitization Regulation. The intention is to make it easier for UK investors to buy deals from foreign originators.
“Investor due diligence requirements are now de-linked from the Article 7 reporting requirements in the UK,” says Merryn Craske, partner at law firm Morgan Lewis. “Now there is a principles-based approach, and an investor has to get ‘sufficient information’ to enable it to understand the risks of what it is investing in. There is a list of information that needs to be obtained, but it is not as prescriptive.
“It is left to the investor to make a sensible investment decision, and I think that’s really important. It will be interesting to see whether the EU goes down the same route.”
Andrew Lauder, counsel at law firm Weil, Gotshal & Manges, says the UK framework takes a “more principles-based approach” than the EU. The changes also mean there is “more flexibility” for UK institutional investors to invest in US deals, he adds.
For now, regulators are collating feedback.
“A further UK consultation was expected to take place in Q4 2024 or Q1 2025 on the reporting requirements, including reconsidering the distinction between ‘public’ and ‘private’ transactions,” Craske says. “We understand that this has been delayed to early in the second half of 2025, to allow the regulators to carry out a broader review.”
Even with the delay, the UK is being looked upon favourably. Many market participants see the delay itself as further evidence of a practical and sensible approach.
“I think the UK has reserve to a greater flexibility around legislative change,” says A&O Shearman’s Nathoo. “There is a willingness to demonstrate that Brexit did mean something, with some sort of deregulatory initiative. But I am not sure how far the UK is going to go.”
Craske says it feels like the UK is “truly listening”, and that it could also be dragging the EU along with it. Like Craske, several market participants already suspect that regulators are aware of what the other has planned.
“When you look at the [EU] consultation, they are asking about taking a principles-based approach to investor due diligence, and looking again at the distinction between public and private,” she says. “Those possibilities were rejected last time. It’s great if the regulators are talking to each other. It looks like the UK is having an influence.”
Coming up Trump
What the UK does is not the EU’s only concern. After Donald Trump’s election victory, the direction of travel on financial regulation in the US may also shift.
Indeed, the EU’s broader reform agenda was first conceived out of a realisation that in an increasingly volatile world — as highlighted by Trump’s first election victory and Brexit back in 2016 — that it needed a more productive and competitive economy.
Ultimately, EU leaders such as French president Emmanuel Macron and former Italian prime minister Mario Draghi believed that Europe had to be able to stand on its own two feet, without depending on now unreliable allies.
In the aftermath of Trump’s victory, Mohamed El-Erian, former Pimco CEO and president of Queen’s College Cambridge, wrote on LinkedIn: “The US election’s economic message to Europe is crystal clear: it is even more urgent for Europe to implement structural reforms to enhance productivity and growth.”
El-Erian wrote that Draghi had provided political leaders with a “roadmap”.
“If the UK encourages rejuvenation of [its] securitization market, and with Trump now re-elected and likely to push deregulation in the US, [it] might create additional emphasis within the EU to match this — or risk getting left behind and subject to competitive disadvantage,” Lauder says.
At the very least, Trump’s second term increases the pressure on the EU to get its house in order — and securitization could be near the top of the agenda.
Don’t stop believing
Though uncertainty abounds and stakes could hardly be higher, the hope and optimism that the market is on the brink of greater regulatory freedom is not unfounded. Securitization reform remains politically easy —at least when compared with other reform items such as ESMA turning into an EU version of the US Securities and Exchange Commission.
“Securitization is seen as the low-hanging fruit of the new savings and investment union,” says Ormezzano in Paris, “not because it’s easy, but because the rest is even more difficult.
“The nice thing is we know what needs to be done. There are a number of things, but they are very targeted on specific aspects in various legislations.”
In 2025, industry advocates will focus on convincing a new audience. The Commission is clearly onside, but winning over MEPs and smaller EU countries will also be necessary for legislative progress.
“One of the key issues will be to be able to convince the smaller member states, in particular those from central and eastern Europe, that securitization, if appropriately reformed, will work for them as well,” Ormezzano says.
Georges Duponcheele, senior credit portfolio manager at Great Lakes Insurance SE (Munich RE) but speaking in his capacity as a member of Paris Europlace, agrees.
“In practice, it means to make sure that the standardised approach [SA] for securitization is fixed and workable, which it isn’t at the moment,” he says. “Because if all the efforts are concentrated on the IRB [internal ratings based] banks, we will lose the support from the CEE countries which have mainly SA banks.”
Ormezzano’s sentiments are shared by Bell, whose attention is on what he calls the “non-aligned” within the EU’s political machine.
“What worries me is those who haven’t made up their mind yet,” he says. “The regulators are not going to change [the] Commission’s views because it has been well aware of the regulatory position for quite a while. Or the French or the Germans. But many others are up for grabs and that’s where the regulators can move the needle.”
There is also an argument, propagated by the likes of the EBA, that any securitization reform should wait for the next Basel agenda.
However, that argument should be dismissed soon, as the upcoming Basel work is not expected to include securitization in its agenda, Ormezzano says. Therefore, a body like the EBA cannot argue that reform should wait for Basel, as that would be at least another three years of waiting.
Additionally, Ormezzano says, “Basel is unfortunately much weaker now that Trump is elected, so the EU has to take its decision for itself.
“We really have to get it right this time and I think we have all the ingredients for that, [both] in terms of momentum and in terms of technical proposals,” she adds. “I tend to be optimistic, or determined, to keep pushing. It’s not going to be easy.”
Much work is still to be done in 2025, but the market is cautiously hopeful. How big the battle will be is still unclear, but securitization won’t stop believing.
