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Commercial Real Estate Finance Council Europe

Question 1: Do you agree with identified impediments to the securitisation market?
Please see full response document submitted with this form. We broadly agree with the identified impediments. In commercial terms, we would specifically highlight the challenges posed by rating agency eligibility requirements in relation to essential elements of a CMBS transaction such as liquidity facility and hedging counterparties. We would also point out that stigma among some investors is counter-balanced by investor appetite for yield, which CRE debt-backed securities can provide in part thanks to their illiquidity premium.
In regulatory terms, we would emphasise that the problem is not limited to regulatory uncertainty (including around the precise scope of the regulatory definition of “securitisation”). It is also a matter of actual regulatory developments, such as the automatic “Type B” classification of CMBS under Solvency II.
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?
Please see full response document submitted with this form. While it is clear why synthetic transactions are tainted, it is our understanding that European RMBS, CMBS and other ABS have generally performed as expected, and we are not convinced that a blanket exclusion would be appropriate. Synthetic securitisations can be simpler than true sale transactions, particularly for cross-border investments where the complexity and challenges of dealing with Europe’s many different legal systems can be side-stepped. Subject to sensible requirements relating to transparency, information about the underlying loans, servicing procedures and managing conflicts of interest, we would have thought the simple standard and transparent regime should be capable of accommodating some synthetic transactions.
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?
Please see full response document submitted with this form. We agree with proposed criterion 5(ii)(a). However, proposed criterion 5(ii)(b) is unworkable in the context of CRE loans, because it appears to require that the underlying loans are underwritten on a full amortisation basis (so that there is no reliance on realisation of collateral). As explained in the full response document submitted with this form, the majority of CRE loans are not originated on a fully amortising basis (whether they are originated for bank balance sheets, for the covered bond market, for insurer balance sheets or for securitisation). Given the modest reliance of Europe’s CRE debt market on securitisation, the effect of requiring full amortisation would simply be to exclude all CRE debt securitisation from the simple standard and transparent regime without reducing risk overall.
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?
Please see full response document submitted with this form. We would generally favour a global level playing field for securitisation, so would generally regard limits of this kind as unhelpful.
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?
Please see full response document submitted with this form. As a result of the particular nature of CRE and CRE debt as a heterogeneous, concentrated underlying asset class, the CMBS market evolved to attract often very CRE-specialised junior noteholders by offering them relatively extensive rights over work-out and restructuring approaches. We see no justification for regulation to disturb that model, which generally makes sense.
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?
Please see full response document submitted with this form. We have not received industry views on this question, other than to suggest that it might be reasonable to require underlying documentation to be made available on request (or through the listing authority), particularly where there is a limited number of known investors.
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?
Please see full response document submitted with this form. We disagree, as explained in the full response document submitted with this form. Granularity is either not a relevant factor at all, or needs to be approached in a very different way, in the context of CRE debt and CMBS.
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?
Please see full response document submitted with this form. We agree with some of the proposed criteria defining simple standard and transparent securitisation, but believe others to be misconceived, at least in the context of CRE debt and CMBS. We disagree with the proposed inclusion of credit criteria.
Question 9: Do you envisage any potential adverse market consequences of introducing a qualifying securitisation framework for regulatory purposes?
Please see full response document submitted with this form. If the framework were introduced in the way we propose in the full response document submitted with this form, we would not envisage adverse market consequences. If it is introduced as proposed in the DP, we would anticipate:
• No changes to underlying CRE lending practices, but less distribution of CRE exposures through securitisation and greater concentration of the associated risks among CRE debt originating firms
• Distortive incentives for traditional investors in CMBS to invest in less liquid, less transparent whole loans rather than in more liquid, more transparent CMBS
• Reduced transparency about the CRE debt market (including for regulators), which is private and relatively opaque save for that part of it that is securitised
• Distortions in the flow of credit to particular parts of the economy, including the CRE sector that builds and maintains Europe’s towns and cities, and many of the riskier assets and businesses that find themselves excluded by credit criteria
• Overall, failure to meet the intended policy objectives of this excellent initiative.
Question 10: How should capital requirements reflect the partition between qualifying and non-qualifying?
Please see full response document submitted with this form. As explained in that response, the important point is that neither credit considerations nor sub-sector characteristics should preclude ‘qualifying’ status. If that principle is respected, it would always be possible to apply a penalty to a non-qualifying exposure relative to an equivalent qualifying exposure, thereby incentivising simple standard and transparent securitisation without needlessly distorting capital flows with consequences for the real economy and financial stability that are difficult to predict.
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?
We have not received industry views on this question.
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?
We have not received industry views on this question.
Contact name
Peter Cosmetatos