07 July 2014

AFME: Response to The case for a better functioning securitisation market in the European Union

A broad area on which AFME and its members commented is to note that the term "securitisation" used in its CRR sense, is a very broad term and the criteria suggested, while broadly sensible, do not always take full account of this. An example of an important area that may not have been given full consideration by the Central Banks is asset-backed commercial paper. Although ABCP conduits are "securitisations" in the regulatory sense, they do not fit the paradigm of a securitisation we imagine the Central Banks will have had in mind when developing the criteria in Box 3. As a result, ABCP would not be a QS under the Central Banks' proposals despite the fact that it delivers many of the benefits of securitisation outlined in the DP (e.g. funding trade receivables and other real economy assets, diversification of funding sources for non-bank clients and warehousing of assets for later ABS transactions), its robust structure (featuring, e.g. significant overcollateralization and retention by originators of a dynamically adjusted first-loss tranche) and the fact that most conduits are supported by strong sponsor banks. Alternatively, AFME would urge the Central Banks to adjust the criteria to recognise positively the special structural considerations associated with the ABCP market.

A key aspect of an effective regime for qualifying securitisations is that there should be certainty surrounding the categorisation of each transaction. Given the importance of the mooted effects of being a qualifying securitisation (or not), parties to a securitisation transaction need to be able to have a high degree of certainty early on as to whether the transaction is likely to fall within that category. Equally, it is crucial that investors know early in the investment decision process whether they are reviewing a qualifying securitisation or not and that they should be able to rely on that categorisation absent a subsequent change in the transaction itself (e.g. the failure of the transaction parties to provide ongoing asset disclosure). Another key aspect of an effective regime for qualifying securitisations is that determinations should be timely. The categorisation process should not unduly delay the overall issuance process and it should be clear at the beginning of the marketing process for any securities whether a securitisation will be a qualifying securitisation or not.

AFME recommends as a general matter that the criteria should be clear and precise so that, so far as possible, a "tick box" approach to compliance can be used. Clearly, a level of discretion and judgement will be required in order that any new innovation in the securitisation market should not immediately cause transactions to fall out of the category of qualifying securitisations. AFME would urge the Central Banks to bear the above in mind when formulating a mechanism for categorisation of transactions. See our response to question 7 below for more detail on this point.

Full AFME response

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