ALFI s response to the European Commission consultation document for an EU framework for simple, transparent and standardised securitisation.

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1 Luxembourg, 12 May 2015 ALFI s response to the European Commission consultation document for an EU framework for simple, transparent and standardised securitisation. The Association of the Luxemburg Fund Industry ( ALFI ) is the representative body of the 3,250 billion Euro Luxembourg fund industry. It counts among its members not only investment funds but also a large variety of service providers of the financial sector. There are 3,888 undertakings for collective investment in Luxembourg, of which 2,523 are multiple compartment structures containing 12, 545 compartments. With the 1,365 single-compartment UCIs, there are a total of 13,910 active compartments or sub-funds based in Luxembourg. 67% of UCITS that are engaged in cross-border business are domiciled in Luxembourg. As one of the main gateways to the European Union and global markets, Luxembourg is the largest cross-border fund centre in the European Union and, indeed, in the world. ALFI welcomes the opportunity to comment the European Commission s consultation document for an EU framework for simple, transparent and standardised securitisation. Question 1: A. Do the identification criteria need further refinements to reflect developments taking place at EU and international levels? If so, what adjustments need to be made? Yes. Further guidance on practical application of the criteria will need to be developed. The Commission should emphasise on the harmonisation of STS criteria across different regulations and propose STS criteria that underline the importance of STS securitisation for the economy and support the revival of the securitisation markets. In this context, the Commission should link its activities at least to the efforts undertaken by EBA and BCBS-IOSCO to develop securitisation criteria. Both, EBA and BCBS-IOSCO, inquired securitisation stakeholders and have received important and detailed feedback that should be considered as a building block for STS criteria. We propose that all actions in setting STS criteria should be undertaken with the objective of identifying robust and simple criteria practically useful for harmonising regulations across industries and regulatory purposes. In order to provide a harmonised set of STS criteria further guidance on practical application of the criteria will need to be developed to reduce complexity for all securitisation stakeholders in an international context. B. What criteria should apply for all qualifying securitisations ('foundation criteria')? Considering the pending efforts undertaken by various regulatory bodies no further proposals are provided. Question 2: A. To what extent should criteria identifying simple, transparent, and standardised short-term securitisation instruments be developed? What criteria would be relevant? Short-term securitisation instruments may provide an important funding source for the European economy, mainly trade receivables, but also short-term loans or leases or other short term assets. The Commission should undertake efforts to develop one single set of STS criteria only and integrate short- 1

2 term securitisation instruments, such as ABCP, into the catalogue of STS criteria without being distinctive for long-term or short-term securitisation instruments. B. Are there any additional considerations that should be taken into account for short-term securitisations? Harmonised criteria and reduced complexity are key for the further development of criteria of STS. Question 3: A. Are there elements of the current rules on risk retention that should be adjusted for qualifying instruments? We are of the view that precisely because they are simple, transparent and standardised, no risk retention requirements should apply to the qualifying securitisation instruments. B. For qualifying securitisation instruments, should responsibility for verifying risk retention requirements remain with investors (i.e. taking an "indirect approach")? Should the onus only be on originators? If so, how can it be ensured that investors continue to exercise proper due diligence? Should our approach be followed, no one should be responsible for verifying risk retention as such risk retention rules would be abolished for qualifying securitisation instrument. Otherwise we are of the view that current responsibility (i.e. being on the investors) should remain. Question 4: A. How can proper implementation and enforcement of EU criteria for qualifying instruments be ensured? Clarity, certainty and confidence might be given to investors that the eligibility criteria were being met via certification system. Public accountants, statutory auditors and legal counsels are well equipped to carry this task. Implementation of certification by public accountants/ auditors/ legal counsels neither requires additional infrastructure developments, nor puts significant additional cost pressure on investor. B. How could the procedures be defined in terms of scope and process? Issuer should be in a position to confirm that it has received comfort from its public accountant / auditor /legal advisor. C. To what extent should risk features be part of this compliance monitoring? Risk features should not be part of this certification procedure. Question 5: A. What impact would further standardisation in the structuring process have on the development of EU securitisation markets? 2

3 It will help to build the new market of standard simple product for unqualified investors. B. Would a harmonised and/or optional EU-wide initiative provide more legal clarity and comparability for investors? What would be the benefits of such an initiative for originators? Yes such initiative should give more trust in securitisation. It should however be seen as an additional tool for securitisation and should not become the only form of securitisation. Wider securitisation types should be able to survive this regime. C. If pursued, what aspects should be covered by this initiative (e.g. the legal form of securitisation vehicles; the modalities to transfer assets; the rights and subordination rules for noteholders)? Please see answer B above. No regulation of single legal form or further detailed regulation is necessary for the market. Flexible approach with minimum fixed eligibility criteria should be sufficient. Issuers should be free to choose the form of vehicle which best suits their needs. D. If created, should this structure act as a necessary condition within the eligibility criteria for qualifying securitisations? No. Please see above. Question 6: A. For qualifying securitisations, what is the right balance between investors receiving the optimal amount and quality of information (in terms of comparability, reliability, and timeliness), and streamlining disclosure obligations for issuers/originators? As a basic principle, there should be no specific law or regulation to define the information to be provided to the investors as the market will regulate this. However, a more standardised reporting as described in the delegated act 2015/3 is appreciated and will be used as a good basis for a market practice for qualified securitisations. As there are many types of assets classes and also different securitisation structures, there is no one-size-fits-all information which fits for every asset class and provides the investor with useful information. The information listed in the delegated act 2015/3 is already very exhaustive and only professional investors will develop the tools to draw the necessary conclusions out of the provided data. Agreeing on the proposal that securitisations providing an exhaustive disclosure should benefit from lower capital requirements. However, it should be allowed that there are also securitisations in this asset classes not being STS and therefore not being obliged to disclose all this information. B. What areas would benefit from further standardisation and transparency, and how can the existing disclosure obligations be improved? A standardised investor reporting would increase the trust in qualified securitisations. There should also be some standardised aggregated data required on the basis of the proposed reporting. In addition, to increase the trust in that data, the process of the standardised investor reporting should be certified or audited. C. To what extent should disclosure requirements be adjusted especially for loan-level data 15 to reflect differences and specificities across asset classes, while still preserving adequate transparency for investors to be able to make their own credit assessments? 3

4 As mentioned above, the proposed reporting tables should be more tailored for most of the common securitisation transactions. Voluntary additional fields which could be defined individually are encouraged. 15 For example, securitisation encompassing revolving underlying assets (e.g. credit card receivables), compared to static pools (e.g. residential mortgages) Question 7: A. What alternatives to credit ratings could be used, in order to mitigate the impact of the country ceilings employed in rating methodologies and to allow investors to make their own assessments of creditworthiness? B. Would the publication by credit rating agencies of uncapped ratings (for securitisation instruments subject to sovereign ceilings) improve clarity for investors? Question 8: A. For qualifying securitisations, is there a need to further develop market infrastructure? The proposed investor reporting tables can be reported on the ECB website, using the same system than the statistical reporting. This avoids individual investments and ensures the immutability of the data reported. B. What should be done to support ancillary services? Should the swaps collateralisation requirements be adjusted for securitisation vehicles issuing qualifying securitisation instruments? No need for further regulation. C. What else could be done to support the functioning of the secondary market? If trust is rebuild on qualified securitisation secondary market will develop. Question 9: With regard to the capital requirements for banks and investment firms, do you think that the existing provisions in the Capital Requirements Regulation adequately reflect the risks attached to securitised instruments? 4

5 Question 10 If changes to EU bank capital requirements were made, do you think that the recent BCBS recommendations on the review of the securitisation framework constitute a good baseline? What would be the potential impacts on EU securitisation markets? Question 11: How should rules on capital requirements for securitisation exposures differentiate between qualifying securitisations and other securitisation instruments? Question 12: Given the particular circumstances of the EU markets, could there be merit in advancing work at the EU level alongside international work? We welcome the various international and European initiatives and the European Commission should definitely continue to work on this topic alongside the other organisations, notably in order for EU to move forward even in case international discussions slow down. However in order to shape a coherent framework, it is crucial that the different international and European organisations establish cooperation and communication channels, in particular in order to avoid the adoption of inconsistent approaches or criteria. Question 13: Are there wider structural barriers preventing long-term institutional investors from participating in this market? If so, how should these be tackled? Please refer to question 15(B) Question 14: A. For insurers investing in qualifying securitised products, how could the regulatory treatment of securitisation be refined to improve risk sensitivity? For example, should capital requirements increase less sharply with duration? B. Should there be specific treatment for investments in non-senior tranches of qualifying securitisation transactions versus non-qualifying transactions? 5

6 Question 15: A. How could the institutional investor base for EU securitisation be expanded? Please refer to question 15(B). B. To support qualifying securitisations, are adjustments needed to other EU regulatory frameworks (e.g. UCITS, AIFMD)? If yes, please specify. Relevant disclosures to be inserted in the offering documentation of STS securitisation may be useful to facilitate the assessment and due diligences to be conducted by investment managers and investment funds willing to invest in STS securitised instruments. Indeed, the AIFM Directive (and depending on future regulation, the UCITS Directive) provides for several requirements to be complied with (including as regards risk retention) in order to invest in securitised positions. Adequate disclosures supporting the eligibility of any such instruments should facilitate the investment in securitised instruments and therefore expand the base of potential investors. Question 16: A. What additional steps could be taken to specifically develop SME securitisation? The amounts typically borrowed by SMEs are, in comparison to capital market standards, very low. Unfortunately, the current legislative framework does not specifically cater for the repackaging of small and/or medium size loans. The formalities that need to be complied with are the same irrespective of whether the loan to be repackaged is in the region of EUR1,000,000 to EUR5,000,000 or whether such loan is in the region of a couple of hundred millions. For instance, Commission Regulation 809/2004 (as amended) requires a full description of the SME borrower to be included in the stand alone prospectus or the base prospectus. It is currently not permissible to include the description of such SME borrowers into final terms (to be used in connection with a base prospectus). The authorities even refuse that supplements are used to include SME borrower descriptions into a base prospectus as a large number of supplements (there would be one supplement for each SME borrower) would affect the readability of the relevant base prospectus. The size of the loans to be repackaged and the costs related to the establishment and approval of a prospectus make the repackaging of SME loans financially not viable. The costs for the SME borrower (composed of the interest payable on the borrowed amount plus the costs related to the repackaging (i.e., costs relating the prospectus establishment and approval)) often exceed the SME borrower s financial means. In order to develop the securitisation of SME loans, it would be essential that the description of SME borrowers could be included into final terms that provide investors will all relevant information about the SME borrower. Those final terms should be based on a pre-established standard that ensure that investors receive all relevant information and that allow investors to compare their potential investment with other offers. In the context of pan-european SME loan securitisations, another way to reduce costs for the set-up of such securitisation platforms would be to have a single vehicle for the relevant pan-european transactions. 6

7 Currently, banking regulatory hurdles (yet even other regulatory hurdles) often prohibit foreign vehicles from acquiring loans originated in specific EU jurisdictions and therefore multiple vehicles are required for this type of transactions. It would therefore be sensible to create a harmonised regime (such as an EUwide exemption from banking licence requirements for securitisations, for instance) that would no longer permit country-by-country regulatory restrictions and therefore facilitate pan-european securitisations. B. Have there been unaddressed market failures surrounding SME securitisation, and how best could these be tackled? C. How can further standardisation of underlying assets/loans and securitisation structures be achieved, in order to reduce the costs of issuance and investment? See A above D. Would more standardisation of loan level information, collection and dissemination of comparable credit information on SMEs promote further investment in these instruments? Standardisation in the loan level data to be provided to investors is likely to contribute to the promotion of SME securitisations. However, this potential positive impact needs to be balanced against the costs that are triggered by such standardisation. The collection and dissemination of standardised information triggers important costs and in a business with (very) low margins, costs quickly render a transaction nonviable. To enable the development of SME securitisations, only limited loan level information should be required. Question 17: To what extent would a single EU securitisation instrument applicable to all financial sectors (insurance, asset management, banks) contribute to the development of the EU's securitisation markets? Which issues should be covered in such an instrument? Complexities and inconsistencies are an important hurdle to the development of the European securitisation market. Market participants look for clarity and consistency. The current situation discourages an important number of market players to engage in securitisation transactions (be it on the seller side or the investor side). The applicable regulation is far from being clear and there are important inconsistencies. In addition, the various regulators adopt different approaches and some are very reluctant to provide any guidance. The market players are currently very concerned that they commit a breach of law in this over regulated and complex area. This climate of uncertainty (or even anxiety) definitely prevents the development of a successful European securitisation market. The SFS securitisation instrument should include clear provisions and criteria to which sector specific legislation could refer to avoid (or at least considerably reduce) inconsistencies. In addition, it would be crucial that the authorities undertake to provide guidance in a quick and efficient manner in the case of uncertainty in this complex area. 7

8 Question 18: A. For qualifying securitisation, what else could be done to encourage the further development of sustainable EU securitisation markets? B. In relation to the table in Annex 2 are there any other changes to securitisation requirements across the various aspects of EU legislation that would increase their effectiveness or consistency? ********* 8