EFAMA s position paper on securitisation

Transcription

1 EFAMA s position paper on securitisation Executive summary EFAMA 1 is strongly supportive of the efforts deployed by the Commission towards restoring economic growth in Europe. We consider that the development of an improved framework for simple, transparent and standardised (STS) securitisation is a crucial element in order to reach this objective. We are consequently particularly keen to bring our constructive contribution to this initiative to ensure that the proposed model meets the needs of end investors. Whilst we are supportive of the development of a STS framework, we are of the view that some elements in the Commission s proposals should be improved, in order to encourage more investors to purchase STS securitisations. These include: Due diligence and disclosure Rules relating to ABCP Third-country provisions Sanctions regimes Grandfathering and transitional periods Capital charges Rules pertaining to CLOs. The attached position paper sets out the details of the asset management industry s views on the above points. 1 EFAMA is the representative association for the European investment management industry. EFAMA represents through its 27 member associations and 63 corporate members almost EUR 19 trillion in assets under management of which EUR 12.1 trillion managed by 55,700 investment funds at end September Just over 29,500 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds, with the remaining 26,100 funds composed of AIFs (Alternative Investment Funds). For more information about EFAMA, please visit rue Montoyer 47, B-1000 Bruxelles Fax info@efama.org VAT Nr BE

2 Page 2 of 9 EFAMA s detailed position I. Due Diligence and disclosure a. Required third-party certification As explained through Recitals 20 and 23 of the legislative proposal, the European Commission is of the view that the proposed regulation should only foresee a mechanism of self-certification to qualify a securitisation as STS (Simple, Transparent and Standardized). It also adds that the assessment of the risk should in priority and in first instance be made by the investors. We understand the willingness of the Commission to impose prime responsibility for assessing and monitoring whether transactions are compliant with the STS framework on originators and investors, in order to avoid over-reliance on external parties and to prevent investors from limiting their risk assessment to self-certification by originators. From our investor s perspective, we disagree with relying uniquely on self-certification and we consider this requirement as insufficient to qualify a securitised instrument as STS, even if we welcome the willingness to avoid overreliance on third parties. We are of the strong opinion that self-certification alone could result in: Increasing the risk of conflicts of interest between the originator and investors or between the issuer and investors; Offering less protection to the investors Reducing the number of issues due to the legal liabilities imposed on originators / sponsors / original lenders; Leading to lack of homogeneity in the interpretation of the criteria; Giving rise to market fragmentation 2 and a diminishment of the liquidity in the securitisation market. Such drawbacks, combined with the severe sanctions for breaches (even when those are not intentional) may greatly restrict the development of the STS securitisation market in Europe. We note also that, in its Recital 23, the European Commission recognises the benefits of a third-party certification. Considering those elements, EFAMA requests a mechanism of mandatory third-party certification. 2 There are 53 criteria in the STS proposals, which will apply to 28 Member states comprising 70 different regulators. There is a risk that this will mean that there will inevitably never be a single interpretation of what actually constitutes STS. Large scale market fragmentation could therefore be inevitable, discouraging crossborder investment.

3 Page 3 of 9 In order to reach this objective, we recommend modifying Recital 23 to add certification by a thirdparty certificate provider to the self-certification mechanism described in Recital 20. We are of the view that the exercise of the certification by a third-party service provider should remain at the cost of the originator (as it currently is the case through e.g. PCS 3 ) and can be done by: A dedicated market-originated entity; Auditors; or Any other market player willing to offer similar certification. However, we want to insist on the fact that neither a mandatory third-party certification nor a streamlined approach of information should become an opportunity to create monopolies in this new domain of certification. We also want to insist on the fact that the third-party certification should be imposed on originators as they are the ones having all the relevant data to justify the STS qualification. The third party certification process should also not become a way to indirectly raise the issuance cost of securitised instruments. Should there not be a restriction in charging back these costs, STS would become less attractive to investors. Finally, we deem it crucial to reiterate that, regardless of the method of certification selected, investors will continue to perform all necessary due diligence prior to investing in any securitisation, whether the instrument is certified as STS securitisation or not. b. Clarification of who may carry out the required due diligence EFAMA fully agrees with the requirement for the investors to perform due diligence in addition to certifications by originator / sponsor / original lender. Many institutional investors delegate the management of their assets to an asset manager, either through a segregated mandate or a fund vehicle. In this instance, the asset manager will perform the due diligence on any securitisations purchased on behalf of the institutional investor. However, the legislative proposal currently requires the institutional investor to perform the due diligence itself (Art. 3). When an institutional investor delegates the management of their assets to an asset manager, the institutional investor should be able to perform oversight of the asset manager s due diligence and not be required to conduct the due diligence itself. 3 Please refer to the PCS website for further information.

4 Page 4 of 9 Therefore, the proposed text should be modified, adopting the oversight responsibilities of institutional investors 4 as defined in the modified Shareholder Rights Directive instead of requiring the institutional investors to perform such activities themselves. This should not preclude an institutional investor from performing the due diligence itself where it manages the assets directly. c. Clear disclosure of compliance with the STS criteria We fully support the criteria of (i) simplicity; (ii) transparency; and (iii) standardisation to define high quality securitisation. However, those criteria, as currently described in the legislative proposal, could be subject to interpretation. Therefore, we strongly believe that these criteria should be complemented by a checklist and a clear and brief description of how the STS securitisation complies with each criteria. These check-lists and description of the criteria are the most reliable means to allow: the authorities to control that the "STS" securitisation is meeting the criteria and deserves to qualify as such; the investors to understand the structure of the securitised instrument and compare it with other securitised instruments. We see the originator s prospectus as the preferred source to publish the details regarding STS compliance. Compliance with each criterion should be explained in two or three sentences and should not consist in a "tick-box approach". This document should form part of the prospectus and should become standard market information. This would afford investors additional protection, as it would be subject to the prospectus liability regime. However, the description of each criterion should not be forced in a prescriptive format to avoid shifting to another type of "tick-box" approach. This form of standardisation would also allow third-party data providers like Intex, Bloomberg or WM Daten to then be able to publish the information through established interfaces and data licenses. 4 Art. 1 (f) of the Shareholder Right Directive:" (f) institutional investor means an undertaking carrying out activities of life assurance within the meaning of Article 2(3)(a), (b) and (c), and activities of reinsurance covering life insurance obligations and not excluded pursuant to Articles 3, 4, 9, 10, 11 or 12 of Directive 2009/138/EC of the European Parliament and of the Council(7) and an institution for occupational retirement provision falling within the scope of Directive 2003/41/EC of the European Parliament and of the Council(8) in accordance with Article 2 thereof, unless a Member States has chosen not to apply that Directive in whole or in parts to that institution in accordance with Article 5 of that Directive;"

5 Page 5 of 9 Should this approach be insufficiently consistent or leading to interpretation issues, we are of the opinion that there would need to be a single body (such as ESMA) that could provide Level 3 guidance. d. Determination of the disclosure regime applicable to potential investors and third-country securitisations EFAMA is largely in agreement with the proposed disclosure regime for STS securitisations, however we believe that the existing text could be improved. The amount of required information may be difficult to obtain in the precise format required by Article 5 for third-country securitisations (see the point on third-country issues below). Additionally, the existing text refers to information disclosure to holders, which would exclude any disclosure to potential investors. If information is only disclosed to holders, this could lead to a situation where investors in a securitisation are in possession of material non-public information, and making investment decisions on the basis of that information could create legal uncertainty around market abuse rules. To avoid this pitfall, we encourage the EU Parliament and the European Council to refer in Art. 5.1 to institutional investors, removing entirely the references to holders. If this is not done, potential institutional investors may not be able to receive sufficient information to conduct a proper due diligence or oversee that this is correctly done by the asset manager working on their behalf. If the detailed STS information is an integral part of the prospectus all potential investors should have sufficient information to perform the legally required due diligence. II. Rules relating to ABCP EFAMA welcomes the inclusion of Asset Back Commercial Papers (ABCP) in this regulation (Art ) however we have concerns that the STS criteria as proposed by the EU Commission do not sufficiently recognise the structural specificities of ABCP programs. In our mind, the proposal assumes that ABCP programmes are structured largely like term ABS, which is not the case. Currently, the bank sponsors play a central and ongoing role in ABCP programmes by providing both credit and liquidity support (covering any credit or maturity mismatch risk in the underlying assets). This is recognised in the programme-level criteria, however, for the programme to qualify, each underlying transaction must qualify as STS, and we see this as problematic.

6 Page 6 of 9 Should the text remain as currently written, activities such as securitisation of pools of auto loans or pools of leases would not qualify as STS. According to some of our members estimates, this would effectively prohibit approximately 60% of the ABCP market from potentially obtaining a STS designation. Consequently, excluding these instruments will deprive investors of liquid instruments and the real economy of direct financing. To avoid this unintended consequence, we strongly believe that the EU Parliament should propose some amendments to two articles of the proposed regulation, recognising that ABCP is a different instrument than Term ABS. Therefore: The bank sponsors should comply with Art. 12 and Art. 13: - The ABCP criteria as currently drafted misunderstand the risks that an investor in CP is exposed to. - That is the primary risk to the bank sponsor of the CP as a counterparty and not exposure to the underlying transactions in the asset pool to which the bank sponsor is exposed. - As such the risks set out in the transaction criteria will be relevant considerations for the bank sponsor and not for the CP investor and should only affect the capital provisioning made by the bank sponsor - The provision with regards to life time of underlying exposures in Art. 12 (2) are too short and should be extended at least to 5 years for remaining weighted average life and to 7 years for residual maturity - In addition, the current pool-level contractual WAL for each pool in an ABCP conduit should be reported in investor reports. As the bank sponsors take the credit and liquidity risk from the underlying pools, the overall programme should not lose its STS status because the individual transactions do not meet STS requirements this should only affect the sponsoring bank s capital treatment. Therefore, we believe that Art should be deleted. III. Third-country provisions The risk retention rules stem out of the 2008 Pittsburgh G20 commitments. Many third countries have implemented securitisation regimes consistent with these commitments. However the specific requirements can differ slightly from jurisdiction to jurisdiction (e.g. how an originator is permitted to hold the retained piece, which parts of the securitisation can fulfil the 5% retention requirement, etc.). We have concerns that, by not recognising these potential differences, the Regulation as drafted could unintentionally restrict investment choices for EU investors. Consequently, we believe that there should be a third country equivalence provision for risk retention based on adherence to the G20 principles instead of the specific risk retention requirement set in this proposed securitisation

7 Page 7 of 9 regulation. This would also allow them to comply with their own equivalent retention rules, but yet not restrict the ability of EU investors to invest. With regards to information provision, there is no legislation outside of the proposed EU securitisation regulation which mandates a given format. In order to allow investors to continue to purchase non-eu securitisations, there should be a general obligation to provide information on securitisation without a specific requirement to use the EUmandated format. For example, if an US securitisation fulfils the legally required local US retention rules (amount and form), EU investors should still be able to invest provided that they perform the EU due diligence requirements. We are of the opinion that non-eu securitisation should be subject to an assessment by the institutional investor which should aim for equivalence of outcome in terms of investor protection standards for both EU and non-eu securitised instruments. However, this assessment should not only consider the regulatory framework between the EU and the relevant third country, but should also reflect on the enforcement of these rules in local practice as an uneven enforcement could ultimately lead to lower investor protection standards for EU investors. IV. Sanctions regime We consider that the complexity of the rules requires some proportionality in the application of the sanctions. Indeed we believe that the rules could be breached without the willingness to do so. The good faith of the market participants should be recognised through a proportionate application of the sanctions, taking into consideration of the nature of the breach. Additionally, we believe that the qualification of STS should remain during the entire life of the securitised instrument in the case of a good faith breach. Should this no longer be the case (i.e. the STS criteria are no longer fulfilled), the change in qualification of STS should immediately be communicated by the originator to the market authorities to assess the impact and possible remedies. Finally, we consider that there should be no situation of forced seller if a securitisation loses the STS label, in reference to the regime in AIFMD (Article 54 of the delegated regulation). We also think that the change of STS qualification during the lifetime of the issue as a result of good faith breaches should not impact the applicable solvency ratios.

8 Page 8 of 9 V. Grandfathering and transitional provisions The grandfathering clause used in AIFMD 5 should be inserted in this proposed regulation. Additionally, we are of the strong opinion that a transitional period must be applied with the following criteria: The transitional period should be of 1 year; The starting day of the transitional period should be 12 months after the entry into force of the level 2 measures; VI. Modification of Solvency II rules Another crucial issue relates to the qualification of securitisation in other legislations. The existing Solvency II regime bases its risk weighting on securitisations either meeting the requirements of a Type 1 or Type 2 6 securitisation. While there are some similarities to the STS criteria, the Solvency II criteria are fundamentally different. With Solvency II going live as of 1 Jan 2016, insurers are faced with having to implement the Solvency II due diligence and risk weighting requirements, and then needing to re-adapt these to reflect the considerable changes that the STS Regulation will bring. Adapting systems and internal controls to reflect the differences will not be a minor change. We would therefore ask the Commission to give some clarity over their intent as to how STS securitisations are meant to fit with the existing Type 1 Type 2 rules in Solvency II: will STS rules replace, or add to Solvency II rules; or should the STS rules change the current article 177 in Solvency II? Additionally, we urge the European Commission to concurrently propose a modification to the Solvency II rules concerning securitisation rather than wait until the Securitisation framework is agreed. Should this not be the case, insurers may decide to exit the securitisation market permanently. VII. Rules pertaining to CLOs Collateralized Loan Obligations (CLOs) invest in a pool of broadly syndicated senior secured loans, covering a wide range of issuers and industries. 5 For reference, Article 55 of the AIFMD delegated regulation applies the securitization provisions to (a) new securitisations issued on or after 1 Jan 2011 and (b) securitisations existing after 31 December 2014 where new underlying exposures are added or substituted after that date. 6 See Solvency II, art. 177.

9 Page 9 of 9 However, CLOs are often managed by independent asset managers and as such usually do not have an "originator" or an original lender from whom the portfolio is purchased and who is raising capital through the sale of the portfolio from its balance sheet. Nevertheless, the STS Securitisation Regulation keeps the CRR definition of sponsor, which includes either a credit institution or an investment firm. Thus, whether a CLO manager qualifies as a sponsor under the CRR will depend upon the MiFID authorisations (or permissions) that the collateral manager holds from its EU home country supervisor. However most of EU national supervisors do not consider UCITS managers nor AIFMs as investment firms. Consequently, our recommendation is to open the Sponsor definition to non-mifid asset managers: this would: Enable non MIFID asset managers to act as sponsor for the purpose of the retention, rather than requiring them to act as originators as is currently the case; Create a common level playing field for all market participants as asset managers would be allowed to act as sponsors in both European and US environments. Brussels, 17 December 2015 *** [ ]