Transatlantic challenges

Transatlantic challenges

Thursday 8 October 2020 10:20 London/ 05.20 New York/ 18.20 Tokyo

Contributed thought leadership by Mayer Brown

Complying with EU and US CRT rules simultaneously

A number of law firms have developed excellent synthetic securitisation practices in Europe, but few firms are at the forefront of developing synthetic securitisation in the US, and even fewer have a practice which can navigate EU and US synthetic securitisation rules at the same time. Mayer Brown stands out as the firm which can advise clients on complying with EU and US synthetic securitisation rules as part of the same transaction.

Each of Carol Hitselberger and Julie Gillespie in the US, and Edmund Parker in London advise on the most complex capital relief transactions and demonstrate deep knowledge of how the regulatory rules work in both theory and practice. SCI spoke to these three Mayer Brown partners about the challenges of getting deals which must comply with EU and US rules simultaneously over the line.

Q: Tell us about the clients you see which are looking to get capital relief on both sets of rules?
EP
: We are seeing European banks which have a number of synthetic securitisation transactions under their belt looking to do transactions covering their US obligations; for example, a US SME loan portfolio of the US subsidiary of a European bank.  To get the desired capital relief, the bank and the transaction need to comply with both EU and US rules. This means that our clients will have a transatlantic team in place and, ideally, their law firm should too.

Q: Why is this happening now?
CH
: The US has not seen the volume of synthetic transactions that we have had in Europe, but that seems set to change. The first transactions have, and are, getting comfortable with the regulatory, accounting and tax issues attendant to these transactions. Banks with established synthetic securitisation teams in Europe are looking at how they can share and leverage that expertise with their US teams and gain capital relief on US assets.

Q: What about US banks? How interested are they in synthetic securitisation?
JG
: US banks are very interested in synthetic securitisation and barely a few days goes by without a new enquiry. US banks, as one would expect, want to release capital held against their high quality loan portfolios, and US capital rules let them do that.

There are a lot of intricacies to getting that capital relief though (see Mayer Brown's Structured Finance Bulletin Series on the key issues here: https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2020/02/capital-relief-trades-part-123.pdf), with Dodd-Frank and Commodity Pool Regulation; consideration relating to characterisation of credit-linked notes and similar contracts as ‘swaps’ or other commodity interests; Volcker Rule, insurance and bank guarantee issues all to consider, before you even get onto the US operational criteria to be satisfied for the desired capital relief.

Q: And what about those operational criteria?
CH: Well, there is a lot of complexity there too; the rules aren't as spelt out as the European ones, and a lot of analysis is required. For example, we have spent a lot of time on the restructuring credit event, its necessity and breadth; as well as settlement mechanics and timing.

Q: Which asset classes are you seeing interest in?
EP
: Looking at Europe, the most popular asset classes for CRTs have been SME loans, commercial real estate and corporate loans. With the new transatlantic transactions, we are seeing the same asset classes, but also a proportionally stronger interest in the credit card, residential mortgages and trade receivables asset classes - perhaps reflecting the strong investor base for these underlying assets.

Q: Any final thoughts?
JG
: We think that the floodgates are going to open for these types of transactions: not just the transatlantic ones, but the pure US ones too. The European market can only be helped by the new STS rules on the horizon. Exciting times are ahead and we can only see ever-greater integration between European and US teams, both for our clients and us as a firm.


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