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ASOCIACION DE MERCADOS FINANCIEROS - AMF

Question 1: Do you agree with identified impediments to the securitisation market?
We agree in general with the identified impediments to the securitisation market. Regulatory uncertainty is one of the key issues that would need to be addressed as soon as possible.
Key points for recovering ABS market are related with rating agencies, credit enhancement and prudential regulation approach to this class of products.
Additionally to the issues mentioned in the Discussion Paper ,central bank collateral programmes have had a side effect, reducing the interest of issuers to place in the primary market just when it started to give signs of recovery. This is especially evident in peripheral jurisdictions where investors and issuers started to come closer. The effect is that the liquidity is reduced and the primary market shrinks, which is not beneficial for a healthy market and pushes away private investors.
Notwithstanding the above, regarding ECB programme, it could be a different kind of approach for tier 1 issuers- as the largest financial entities- and for non regular issuers, which could benefit from ECP purchases programme.
Question 2: Should synthetic securitisations be excluded from the framework for simple standard and transparent securitisations? If not, under which conditions/criteria could they be considered simple standard and transparent?
Synthetic should not be excluded from the definition of simple, standard and transparent securitisations just for being synthetic.
Synthetic securitisations can be perfectly designed in a simple and transparent manner and they might be a key instrument for capital management in the context of transferring this benefit to real economy (SMEs for instance). There are a number of European initiatives (EIB/EIF/etc.) that use simple synthetic structures with the goal of re-activating the European economy, not including this structures in this context would be counterproductive.
In any case and in order to avoid any misunderstanding amongst potential investors, synthetic securitisations should have a specific framework , even if they have been structured simple, standard and transparent. It should be noted that the general criteria the Paper mentions, implicitly excludes synthetic securitisation already (“traditional securitisation”, “true sale”, etc.), so it would probably be needed a different set of specific requirements for synthetic deals.
Question 3: Do you believe the default definition proposed under Criterion 5 (ii) above is appropriate? Would the default definition as per Article 178 of the CRR be more appropriate?
We support the exclusion, at the time of issuance, of non-performing loans but we consider that it should be understood in the sense that underlying loans and receivables should not be in default, as defined in the prudential regulation in order to achieve consistency and promote harmonised implementation. This approach to relate non-performing loans with prudential definition of default has already been taken by EIOPA for its recommendations for type A securitisations under Solvency II.
European prudential regulation, Article 178 of Regulation (EU) No 575/2013 (CRR), considers a loan being in default when the institution concludes that the obligor is unlikely to pay its credit obligations or when the obligor is past due more than 90 days on any material credit obligation. The regulation additionally provides discretion to national competent authorities to replace the 90 days with 180 days for some asset classes – residential or SME commercial real estate- and we consider that this discretion should be disregarded for SST definition to favour harmonisation.
On the other hand, we consider that the additional criteria included as i) and iii) could be redundant and unnecessary as CRR’s default definition already includes the assessment of those events that could make the obligor unlikely to pay its credit obligations.
Question 4: Do you believe that, for the purposes of standardisation, there should be limits imposed on the type of jurisdiction (such as EEA only, EEA and non-EEA G10 countries, etc): i) the underlying assets are originated and/or ii) governing the acquisition process of the SSPE of the underlying assets is regulated and/or iii) where the originator or intermediary (if applicable) is established and/or iv) where the issuer/sponsor is established?
We think that simple, standard and transparent securitisations are not linked to geographical limits and it would impact global institutions securitising in different jurisdictions with the same structure. We understand this type of limits in the context of collateral programmes but not for the purpose of this definition.
Notwithstanding the above, we could favour a label for “EEA SST”, with a certification mechanism that ensures a unique and transparent interpretation of the criteria included in the definition of SST, that would help rebuilding trust. An equivalence procedure could be set for SSTs originated outside Europe that comply with “equivalent criteria” for them to qualify as “non-EEA equivalent SST”.
Question 5: Does the distribution of voting rights to the most senior tranches in the securitisation conflict with any national provision? Would this distribution deter investors in non-senior tranches and obstacle the structuring of transactions?
We are not aware of any national provisions in this respect, although there is new bill on securitisation currently in the Parliament contemplating some sort of creditors board.
In any case, this could impact the position of subordinated tranches if they are left with no influence on the transaction and therefore the distribution in non-senior tranches might be negatively affected.
Question 6: Do you believe that, for the purposes of transparency, a specific timing of the disclosure of underlying transaction documentation should be required? Should this documentation be disclosed prior to issuance?
The prospectus should contain all material information included in the full set of documents and from a practical point of view it is materially impossible to provide the full set of documents in advance of the issuance since they are not yet finalised.
In any case, we would have no objection to disclose the transaction documents within some reasonable time after issuance.
Question 7: Do you agree that granularity is a relevant factor determining the credit risk of the underlying? Does the threshold value proposed under Criterion B pose an obstacle to the structuring of securitisation transactions in any specific asset class? Would another threshold value be more appropriate?
We agree that granularity is considered to be beneficial in certain structures, especially in relation to the modelling of the cash flows and their statistical predictability. The more granular the portfolio is the more likely it behaves as predicted as a whole.
However, there are many non-granular examples with high credit quality and simple and standard structures. Imposing a threshold could be problematic and could leave out good quality portfolios unintentionally. We should also bear in mind that in many cases there are already implicit limits on the concentration limits of the portfolio. Moreover we consider that if this factor is already included in regulatory approaches to calculate regulatory capital charges (1), it could be redundant to include it as a strict minimum requirement. See answer to Question 8.
Anyway, if inclusion is decided we would like to point out the convenience of adopting a more flexible approach not to hurdle securitisation of certain asset classes. The 1% threshold proposed could pose an issue for certain SME securitisations and it could be raised up to 2-3%.
Question 8: Do you agree with the proposed criteria defining simple standard and transparent securitisations? Do you agree with the proposed credit risk criteria? Should any other criteria be considered?
• We consider that EBA’s discussion paper is a very valuable contribution with regard to the definition of HQS. We fully agree with the approach taken to qualify entire deals, rather than single tranches, following criteria consistent to a large extent with those anticipated in the ECB/BoE discussion paper. Similarly, we welcome the exclusion of external rating requirements from the definition, consistent with the political aim of reducing the excessive dependency on CRAs.
• It is undisputable the advantages of applying a staged approach, as proposed, to the definition. As a first stage, a set of criteria to define SST (Simple, Standard and Transparent) securitisations, intended to be the core definition common to all regulations. As a second stage, additional sets of criteria to qualify for preferential treatment in different rules, if proven necessary to fulfil the objectives of those rules. This would allow SST to be the common standard for the revival of a robust securitisation market in Europe and restore the confidence in this market.
• But consideration should be given to the number of labels necessary, as too many could provoke excessive fragmentation and complexity. A mechanical multiplication of labels along all regulations (SST qualifying/non-qualifying for banking capital, SST qualifying/non-qualifying for LCR, SST qualifying/non-qualifying for Solvency II, etc.) could provoke those undesired effects of excessive fragmentation and complexity.
• In this regard, we have some doubts on the necessity of creating EBA proposed duplication of SST qualifying/non-qualifying, to differentiate those SST that deserve a differentiated treatment for banking capital requirement from those that do not, based on the fulfilment of additional credit risk criteria. On the one hand, SST already includes some criteria related to credit risk (retention rule to align incentives and favour robust origination practices, exclusion of impaired assets at issuance, underwriting criteria), that could be reinforced if considered necessary to strengthen SST definition and avert the risk of subprime inclusion. On the other hand, current banking solvency rules are credit risk sensitive and can assign in general requirements consistent with credit risk both for internal models and standardised approaches, and if this also happens in the case of securitisations, that is, if the securitisation framework is sensitive to the credit risk of the underlying portfolio, it could make redundant the necessity to add minimum credit risk requirements.
Question 9: Do you envisage any potential adverse market consequences of introducing a qualifying securitisation framework for regulatory purposes?
Although we have-in principle- a favourable stance in relation to the proposal, there would likely be a cliff effect caused by the securitisation market being split into “qualifying” and “non-qualifying” securitisations.
Depending on the final definition, and if the points aroused in the questions above are properly addressed, this could be more pronounced or more limited. For instance, final definition should be flexible enough to permit multi issues structures as currently utilized by cooperative banks.
Question 10: How should capital requirements reflect the partition between qualifying and non-qualifying?
Capital requirements should be lower for qualifying securitization taking into account the lower risks involved (model risk, agency risk, servicing risk, etc.). That is, they should be commensurate to the lower risks involved and, consequently, they should seek to reduce the non-neutrality of the capital charges (i.e. the excess of the capital charges attracted by the total tranches of a securitisation in comparison to the capital requirements attracted by the underlying pool).
When supervisory formula approaches are used for capital requirements for securitisations, as for instance in the case of the current SFA or the new Basel proposals for the SE-IRBA and SE-SA, regulators could calibrate the level of departure from risk-neutrality and set a lower charge in the case of qualifying securitisations than for non-qualifying ones. That is much more difficult to achieve when external rating approaches are used, as is currently the case in CRR, due to the fact that the level of non-neutrality achieved ultimately depends ultimately depends on the changing methodologies and criteria applied by the rating agencies (as the EBA discussion paper indicates, the application of capital requirements currently in force to the new structuring standards leads to a material departure from the neutrality of the capital requirements).
Consequently, it could be sensible to delink the determination of minimum capital requirements from external based methodologies and move to a formula-based approach to capital charges calculation with a specific calibration for “qualifying” securitisations. In this sense, we consider that the proposal for an European SSFA, exposed in a recent paper by a group of industry professionals( ), is a valuable contribution on the way forward to set a preferential treatment to robust securitisation in Europe in the short-term.
When rating based approaches are used for capital requirements, as currently the case in Europe but not in US where supervisory formulas are used, regulators face a difficulty to control departures from non-neutrality and this can be highly penalising and volatile – as evidenced by EBA’s analysis - depending on a large extent on the credit rating agencies rating practices and induced tranching structures. Nevertheless, calibration could be attempted for qualifying securitisations based on their historical behaviour for different rating levels. It would convey new the tables with lower Risk Weights for qualifying securitisations. Requirements should be set based on ratings, but excluding the undue effect of certain ceilings included (refer also to answer to Question 12).
With regard to risk floors, we consider that they should also be calibrated specifically for qualifying securitisations, and would be lower than for non-qualifying transactions. In this sense, we consider that the 15% floor proposed could be too high and is not supported by the historical behaviour of senior tranches of European securitisations.
Question 11: What is a reasonable calibration across tranches and credit quality steps for qualifying securitisations? Would re-allocating across tranches the overall capital applicable to a given transaction by reducing the requirement for the more junior tranche and increasing it for the more senior tranches other than the most senior tranche be a feasible solution?
Refer to answer to Question 10.
Question 12: Considering that rating ceilings affect securitisations from certain countries, how should the calibration of capital requirements on qualifying and non-qualifying securitisations be undertaken, while also addressing this issue?
As a preliminary note we believe that the publication of uncapped ratings would help to avoid the problem with the country ceilings. We also consider beneficial last Basel proposals with approaches less dependent on the external ratings to avoid this rating volatility.
Nevertheless, if Rating Based Approaches are to be used, special attention should be given to the impact of the changing nature of credit rating agencies’ methodology and applied criteria for assessing risk, and particularly the use of rating ceilings.
We consider important that credit rating agencies are encouraged to publish additional information to complement heading ratings and help investors assess the effect on securitisation ratings of sovereign and counterparty caps, included in the rating methodology of several agencies.
We understand that it is agencies’ prerogative to decide on the methodology to be used to assess risk. Likewise, it is prerogative of the authorities to use those ratings in regulation or introduce certain corrections to them to achieve their objectives, deserving special attention the mitigation of systemic risks and the consolidation of the banking union to help alleviating the banking-sovereign risks feedback.
In the case of securitisation rating, we consider that certain practices followed by credit rating agencies are questionable and give rise to potential systemic risks. This would be the case of the practice of constraining ABS ratings by the rating of the corresponding sovereign, which could deter ABS issuance in stressed economies, preventing the viability of a complementary channel to finance real sectors when most needed. We consider that this practice may induce double counting of risk, if country risk is already and adequately being captured in the credit risk assessment of the pool and third parties to an ABS transaction.
Following this, we would recommend going beyond encouraging additional information, to establish a mandatory disclosure, for credit rating agencies assessing ABS, of the rating in the absence of the sovereign ceiling. Besides providing more transparency for investors, allowing them to filter out the sovereign cap if they wish to do so, it would enable regulators to consider this rating as the reference in regulation instead of the currently considered heading ratings. This would help to neutralize the negative effect of the raise of capital requirements of ABS with underlying assets located in stressed countries irrespective of their overcollateralization, largely due to rating agencies practices that translates to ABS ratings the sovereign ratings’ downgrades. Moreover, this would help moving towards the overall objective of the global regulatory reform of reducing mechanistic reliance on credit rating agencies.
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