James McEvoy, head of structured finance at Alter Domus, applauds regulatory recognition of the benefits of securitisation to the real economy

An increasing appreciation of how securitisation can help fund the real economy seems to be finally gaining traction, after a number of years of limited activity throughout Europe.

The European Commission's green paper on building a Capital Markets Union published earlier this year set securitisation as a key pillar in creating a fully integrated single market for capital and funding the EU economy. The Commission is aiming to encourage a new class of high quality, transparent ABS and is now moving forward in proposing new regulations to lower capital charges imposed on banks originating ABS by a quarter.

Securitisation has become increasingly streamlined, transparent and balanced. This has occurred via a combination of regulatory developments - such as the Capital Requirements Regulations and Directive (CRR/CRD) - industry initiatives (such as Prime Collateralised Securities (PCS)), rating agency requirements and not least investor demand. Solvency 2 is now also playing a key role in setting capital requirements (a regulatory capital regime) in respect of investments in securitised assets.

Certification
While broadly positive, some elements of the draft law have been received with scepticism, with investors raising concerns over the requirement (or ability, depending on one's perspective) of issuers to self-certify that portfolios meet the regulation-dubbed 'STS' (simple, transparent and standardised) criteria. While questions can arise of whether creating a 'high quality' securitisation implies all others are by consequence not, certification of securitisation transactions is not a completely new concept.

The Prime Collateralised Securities Association provides a PCS Label to the most senior tranches of securitisation transactions meeting certain criteria under the headings of quality, simplicity, transparency and liquidity. Although the PCS Label is not compulsory, it has gained strong traction with investors and issuers since its establishment and the association has been an active voice in the STS debate, also pointing to the need for independent certification. No doubt debate on this point will continue.

Non-bank securitisation
In the meantime, non-bank lending has become a major driver of the financing market, bringing major investment managers to the centre of the lending sector and securitisation as a tool along with them in the form of CLOs. This asset class - in its new guise of 'CLO 2.0', since issuance began taking place post-crisis - remains robust, no doubt helped by the solid performance of pre-crisis vintage deals.

CLOs form a key part of credit managers' strategies in the US and Europe and while not fitting as neatly into the Commission's plans, these activities are certainly benefitting the real economy, with a number of CLOs issued this year solely backed by loans to SMEs. While the regulatory landscape for securitisation is not yet bedded down and will no doubt need continuous tweaking - particularly as a full Capital Markets Union starts to take shape - after over five years of uncertainty, it is very encouraging to see industry and regulators coming to the same conclusions - almost.