The launch of the European Commission's consultation on the European Securitization Regulation (EUSR) last week made the hope for radical reform of the industry a tantalising possibility. However, the road ahead is still long and full of danger, and proponents for reform within the industry will have to show maturity and resolve if they are to achieve the change they so desperately crave.
Initial reaction to the consultation has been overwhelmingly positive, with Bank of America's research team, led by Alexander Batchvarov, head of structured finance research, calling it "the most important consultation in a decade".
It is notably serious, open-minded and broad, with almost every aspect of how the market functions up for debate. And, there are clear indications of transformative reforms being on the table, like allowing the senior tranches for simple, transparent, and standardised (STS) securitizations to qualify as Level 2A assets in the Liquidity Coverage Ratio (LCR) rules for banks, up from from Level 2B, which should spur bank treasuries to buy them.
Indeed, as Ian Bell, CEO of PCS told GlobalCapital last week, this is not intended to be one of many small tweaks to the EUSR over the next few years, "this is it". The hope from policymakers' point of view is the new EUSR is broadly fit for purpose from the get-go.
There will be no fall-back options, no big renegotiations. Love it or loathe it, the securitization market will have to eat what it's given.
On the one hand, that makes this consultation one of the most important since the 2008 global financial crisis, and awakens a sense that the market is now mere months away from escaping the regulatory purgatory — or even hell — that it has been stuck in since then.
But on the other, there is a fear that comes with knowing that what comes to pass over the next three or four months will likely be the foundation on which the securitization market in Europe is built for a generation. That's not hyperbole. Quite simply, the stakes could not be higher.
With great power...
Georges Duponcheele, senior credit portfolio manager at Great Lakes Insurance said last week: "Whereas before the industry was heard by the European Commission, this time the feeling is that they are actually listening."
Yet, while that may feel momentous for an industry that has spent the best part of 20 years being told to quit whining, it also requires a great deal of maturity.
It's tempting to think that the winds of change are suddenly on securitization's side, that the blessings of French president Emmanuel Macron and Mario Draghi, the EU's foremost éminence grise, have rendered it free from the clutches of the European supervisory authorities (ESAs), but the reality is never that simple.
Inevitably, there will be a great deal of compromise when EUSR 2 is drafted. Lobbyists for the industry would be wise to remember too, that the ESAs have pretty much been dragged kicking and screaming by their political masters just to get to this point.
Numerous sources have made it clear, it's not the ESAs willing this on and there is an institutional culture of suspicion towards securitization. Equally, the securitization industry is perceived as a bunch of incessant whingers, never satisfied and never willing to accept its role as architects of the greatest financial calamity in a century, rightly or wrongly.
Compromise is key
The consultation is certainly not a supermarket sweep for as many concessions as you can find. There are bits where more, not less, oversight could be under consideration. For example, Section 5 discussed widening the scope of public securitizations into products such as CLOs — but with a more principles-based form of regulation.
Yet perhaps those are the moments where the opportunity for change truly lies.
The Commission has taken huge steps towards the market already and appears genuine in its attempts to drive reform. But in return, the market must remain open to compromise.
In the main, the consultation gives an opportunity to air long-held grievances. It puts radical changes firmly on the table — such as the possible change to LCR classification but also on making due diligence requirements more proportionate, acknowledging legal roadblocks on definitions and helping to get insurance company investors back into the market.
The industry must be willing to give as well as take.