News Analysis
Structured Finance
Fine-tuning UK securitisation
FCA and PRA take pragmatic approach to post-Brexit regulations
The FCA’s consultation on UK securitisation regulations suggests there will be some welcome changes to retained regulations ‘onshored’ post-Brexit. But the British government is unlikely to secure the bonfire of regulations it set out to achieve.
The FCA published its plans last week (SCI 7 August), two weeks after the PRA released its consultation and less than a month after the government presented its “near-final” statutory instrument and policy note (SCI 13 July). The consultation period closes on 30 October, with implementation set for 2Q24.
Ian Bell, ceo at PCS, says the overall approach of both the FCA and the PRA has been to fine-tune existing European regulation, rather than adopting a “root and branch” approach to change. This, he says, makes much sense as the European structure is working on the whole and “does the job it was supposed to do”. Instead, the FCA appears to be making a conscious effort to identify key areas that require fixes, with small and uncontroversial - albeit meaningful - changes. It is, Bell says, a sensible approach.
Indeed, DLA Piper’s head of knowledge management Mark Daley also notes in a recent briefing that, like the PRA, the FCA is broadly adopting the existing regime. Both are proposing “tweaks” relating to restrictions on resecuritisations, the delegation of investment management decisions, cherry-picking and the like, Daley says. In a similar briefing, Clifford Chance also notes a mirroring of adjustments related to risk retention on non-performing exposures securitisations, disclosure timelines and risk retention technical standards.
“This is not 1986, Margaret Thatcher and a bonfire of regulations,” says PCS’s Bell. “It is not a case of clearing the decks and having a free-for-all, where everybody's able to do these STS securitisations and all this retention stuff is dropped. It is a fine tuning and technical fixing of practical problems that need fixing - identifying what is not working very well, what needs clarification or what needs a little bit of tweaking.”
No bonfires please
It is less clear whether the FCA and PRA’s approach to this project is proving as ambitious as the UK government appears to have been hoping for, Bell suggests. The political will is to revert to a pre-GFC world, where London served alongside New York and Hong Kong as one of the “great international suppliers of capital market services”. Instead, the regulators appear to view the UK’s place in the context of the modern, more regulated international capital markets.
“When it comes to securitisation, the FCA has looked at the regulation and appears to have found that, try as it may, there's not a great amount it can do to turn Britain into this global capital marketplace,” says Bell. “European securitisation is always going to get done and be regulated in Europe and US securitisation is always going to get done and be regulated in the US. The FCA is just regulating the UK securitisation market. I'm somewhat skeptical about the capacity of the FCA or the PRA to deliver what the government thinks they can deliver because the world has changed. We're not in 1985.”
Furthermore, Bell says the government’s decision to delegate “great powers” and “leave huge discretion” to the regulators was not an obvious path, considering its stated aims. It is an approach reminiscent of the way the City of London operated in the 1960s, 1970s and 1980s. It is also in stark contrast to the EU, he explains, where “pretty much everything is set out in legislation” with “very little real rule-making discretion” handed to the regulatory bodies.
“This is where the dynamic tension arises,” Bell says. “The politicians want to deregulate and be much more competitive. But the PRA hasn't signed up for a bonfire of regulations at all, and I don't think the FCA has either. They are conservative institutions, particularly the PRA, and especially when it comes to securitisation.”
He adds: “The general impression is that the FCA is perhaps willing to be a bit more proactive in terms of fixing problems. But there is no indication at this stage that a bonfire of regulations is the direction of travel.”
Homogeneity and coherence
A consideration covered by the FCA that was not in the PRA consultation is homogeneity, given that STS falls within the FCA’s remit. On this too, DLA Piper’s Daley highlights that the FCA proposal mirrors that of the EBA in its final draft homogeneity regulatory technical standards, published in February this year (SCI 14 February).
More specifically, insofar as relevant underwriting approaches and servicing procedures are similar, loans to many corporates will be considered homogeneous with loans to individuals. Where underwriting and servicing procedures differ, such as mixed pools of owner-occupied and buy-to-let mortgage loans, these will typically not be considered homogenous. These are the type of ‘fixes’ cited by PCS’s Bell.
However, despite the apparently pragmatic approach being followed, there remain some areas of uncertainty for market participants. In its briefing, Clifford Chance points to concerns around increased complexity for UK market participants in transitioning from a single piece of legislation to “three overlapping sets of rules” by the government, PRA and FCA.
It states that the sets of rules put forward are “coherent” but not identical to each other. This, it says, is because the PRA has chosen to use the existing UK securitisation regulation as a template, while the FCA has “fully reformatted and redrafted” the rules.
DLA Piper’s Daley appears less concerned, citing reassurances the firm has received from the FCA that it has coordinated its approach with the PRA to “create a coherent framework”. PCS’s Bell sees merit on both sides of the argument.
“From a legalistic point of view, having three bodies involved in this will make it complicated,” he says. “Lawyers will have to ponder over their legal opinions more and it will be annoying around the edges.”
He concludes: “It will be like a slightly ill-fitting suit, where it would be nicer if it just fitted better. But I can't see that it is going to move the dial in terms of market issuance.”
Kenny Wastell
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News
Structured Finance
SCI Start the Week - 14 August
A review of SCI's latest content
Last week's news and analysis
California judge backs investors in clean-up call dispute
Updates on court ruling in RMBS case and S&P dropping ESG indicators
Empirical study reveals blockchain efficiency
Updates on a new BIS working paper and the Medalist-Semper partnership
FCA seeking a 'more proportionate' SecReg
Updates on another UK consultation and ICE’s Black Knight acquisition
Green front
EIF obvious candidate to scale up SRT amid energy transition
Job swaps weekly: New faces for Newmark
People moves and key promotions in securitisation
Risk transfer round-up - 10 August
The week's CRT developments and deal news
Plus
Deal-focused updates from our ABS Markets and CLO Markets services.
Regulars
Recent premium research to download
Emerging UK RMBS – July 2023
The return of 100% mortgages and the rise of later-life lenders herald an evolving UK RMBS landscape. This Premium Content article investigates how mortgage borrowers’ changing needs are being addressed.
Office CMBS – July 2023
The office CMBS market is grappling with headwinds brought about by declining occupancy rates and rising costs of borrowing. However, as this Premium Content article finds, the European CRE market may not be as badly affected as its US counterpart.
CRT counterparty risk – May 2023
Recent banking instability is unlikely to result in contractual changes in synthetic securitisations, but structural divergences are emerging. This Premium Content article investigates further.
‘Socialwashing’ concerns – May 2023
Concerns around ‘socialwashing’ remain, despite recent advances in defining social securitisations. This Premium Content article investigates why the ‘social’ side of ESG securitisation is more complex than its ‘green’ cousin.
European solar ABS – May 2023
Continental solar ABS is primed for growth as governments and consumers seek energy independence. This Premium Content article investigates.
All of SCI’s premium content articles can be found here.
SCI In Conversation podcast
In the latest episode, Pemberton Capital Advisors director Naomi Prasad discusses whether we should we be talking about “ESG” or “sustainability” in the context of the securitisation market and which ESG strategies are proving effective in the CLO management space. She also outlines how sustainability can be better integrated at both the corporate and individual level.
The podcast can be accessed wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’), or by clicking here.
SCI Markets
SCI Markets provides deal-focused information on the global CLO and Australian/European/UK ABS/MBS primary and secondary markets. It offers intra-day updates and searchable deal databases alongside CLO BWIC pricing and commentary. Please email Tauseef Asri at SCI for more information or to set up a free trial here.
SRTx benchmark
SCI has launched SRTx (Significant Risk Transfer Index), a new benchmark that measures the estimated prevailing new-issue price spread for generic private market risk transfer transactions. Calculated and rebalanced on a monthly basis by Mark Fontanilla & Co, the index provides market participants with a benchmark reference point for pricing in the private risk transfer market by aggregating issuer and investor views on pricing. For more information on SRTx or to register your interest as a contributor, click here.
Upcoming SCI events
Esoteric ABS Seminar
12 September 2023, New York
Women In Risk Sharing
18 October 2023, London
SCI's 9th Annual Capital Relief Trades Seminar
19 October 2023, London
European CRE Finance Seminar
28 November 2023, London
News
Structured Finance
SCI In Conversation podcast: Jeff Krohn, Guy Carpenter
We discuss the hottest topics in securitisation today...
In this episode of the SCI In Conversation podcast, Guy Carpenter's md, mortgage and structured credit segment leader Jeff Krohn talks about the recent shape of events in the GSE CRT sector, from the perspective of the capital markets and reinsurance market. He also touches on the topic of recent issuance - or the lack of it - from mortgage insurers and looks as well forward to the prospect of greater issuance in the CRT sector by US banks.
Additionally, we highlight a couple of new articles published by SCI. One story looks at the recent reg cap deal from Scotia Bank, which brings another Canadian bank to the table.
Another recent piece examines the EU decision to halve the punitive p-factor, which has delighted European securitisation bankers.
The episode can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’).
News
Capital Relief Trades
Risk transfer round-up - 17 August
The week's CRT developments and deal news
Pipeline update
August is living up to its reputation as a low point of activity for the capital relief trades market and the financial markets as a whole. With no deals expected to close this month, the sector is slowly but surely getting ready for year-end.
“August has been strangely calm; calmer than usual, I would say,” notes one CRT issuer. “However, there is definitely a substantial number of transactions currently in the pipeline, which should make for a dynamic rest of the year.”
Indeed, one investor expects the market to experience a significant pick-up, starting in September. “I’m not aware of any deals pricing in August. Generally, the way the market operates is that banks tend to send out information in July on deals they are looking to close in Q3 before they go off on holidays,” he says.
He adds: “Although most are at very different stages, I would say that there are around 20-25 visible trades at the moment. I expect quite a few deals to close in September, followed by a rush before year-end.”
In terms of whether any new issuers are expected to tap the market, the investor notes: “There is no one completely new that can I think of or have heard of. But there is one issuer, which hasn’t issued in the past 4-5 years, that is targeting a deal for Q1 next year.”
Similarly, the issuer doesn’t anticipate any novel asset class to appear in the near future. “Many asset classes have already been covered by the SRT market. However, a clear trend to emerge last year - and even more so this year - has been reference portfolios comprising capital call facilities.”
CRT new issue pipeline
| Originator |
Asset class |
Asset location |
Expected |
| Banco Sabadell |
Corporate loans |
Spain |
2H23 |
| Deutsche Bank |
Leveraged loans |
Europe, US |
2H23 |
| Eurobank |
Corporate loans |
Greece |
2H23 |
| Intesa Sanpaolo |
Corporate loans |
Italy |
2H23 |
| JPMorgan |
Corporate loans |
US |
2H23 |
| JPMorgan |
Leveraged loans |
Europe |
2H23 |
| LBBW |
CRE loans |
Germany |
2H23 |
| Lloyds Bank |
SME loans |
UK |
2H23 |
| mBank |
Consumer loans |
Poland |
2H23 |
| Unicredit |
Residential mortgages |
Italy |
2H23 |
SCI SRTx indexes
For more information on the Significant Risk Transfer Index (SRTx), click here.
Market Moves
Structured Finance
Prelios acquisition agreed
Market updates and sector developments
ION subsidiary X3 Group is set to acquire Prelios from Davidson Kempner Capital Management. Established in 1990 in Milan, Italy, Prelios has more than €40bn of assets under management across non-performing loans, unlikely-to-pay exposures and real estate funds. Since investment funds advised by Davidson Kempner acquired the business in 2018, Prelios has grown its revenue from €100m to over €300m while significantly improving profitability.
UniCredit, Intesa Sanpaolo and BNP Paribas led the consortium of banks - also including Banco BPM, Standard Chartered Bank and Mediobanca - that are providing financing to X3 for the transaction. Completion of the acquisition is subject to the authorisation of the relevant authorities.
In other news…
ABS CDO transferred
TCW Asset Management Company has assigned its rights and obligations as investment adviser for Inman Square Funding II to Dock Street Capital Management, pursuant to an assignment and assumption agreement. Effective as of 14 September, the assignment will not affect the current ratings of any notes issued by the ABS CDO, according to Moody’s.
Vesttoo injunction inked
The US District Court for the Southern District of New York has temporarily frozen Vesttoo’s assets in New York, following an injunction brought by Aon’s White Rock Insurance (SAC) vehicle, pending arbitration of its claims of a “large-scale fraud scheme” surrounding letters of credit provided by Vesttoo to collateralise reinsurance transactions facilitated by White Rock (SCI 2 August). A court hearing is scheduled for tomorrow (15 August), in which Aon is seeking the return of US$136.7m in collateral that it distributed to Vesttoo under the agreements.
Market Moves
Structured Finance
Job swaps weekly: TCW snaps up American Century securitisation head
People moves and key promotions in securitisation
This week’s roundup of securitisation job swaps sees TCW Group appoint a successor to its recently departed global co-head of securitised products. Elsewhere, ARC Ratings has hired a European industry veteran as non-executive director, while Guy Carpenter has appointed a senior marketing and business development executive as md.
Los Angeles-headquartered asset manager TCW has appointed American Century Investments’ Peter Van Gelderen as global co-head of its securitised products division. The development comes a little less than two months after Harrison Choi left the position, as was revealed in a TCW fund prospectus supplement issued in mid June.
Van Gelderen will take up the position in early October and work alongside existing global co-head of the division Elizabeth Crawford, who has been in the role since 2020. He leaves his position as senior portfolio manager and head of securitised markets at American Century after two years with the business, having previously spent eight years with Guggenheim Partners.
Choi left TCW at the end of June after 14 years with the firm. The appointment of Van Gelderen coincides with TCW holding a US$400m final close for its latest CLO fund, TCW CLO 2023-2, which is principally secured by broadly syndicated first-lien loans. The group’s CLO activity is managed from within its US$70bn integrated global credit platform.
Meanwhile, European structured finance-focused ratings agency ARC Ratings has appointed Anne Le Hénaff as non-executive director. Le Hénaff previously spent seven years in Moody’s structured finance division, where she rose to become managing director and co-head of its European CDO team.
Following her spell at Moody's, Le Hénaff held partner roles at EY and Advantage Reply, leaving the latter in February of this year.
Squarepoint-capital-owned European credit manager Arini Capital has continued the buildout of its structured finance capabilities with the appointment of Rothschild & Co’s Ben Rothberg in its London office. Rothberg has a track record in CLOs and leveraged finance, and joins Arini as an investment professional after seven years with Rothschild where he was director of credit research.
Rothberg’s appointment comes 12 months after Arini hired BNP Paribas’ former head of ABS and CLO trading, Mehdi Kashani, as a senior structured credit trader. It also follows last month’s hiring of chief risk officer James Howard, a Credit Suisse veteran of 22 years who most recently served as global head of fixed income investor products.
Greg McBride has joined Guy Carpenter as an md, based in Philadelphia. He was formerly head of marketing and business development at Mt Logan Re, having previously worked in ILS and reinsurance-related roles at Markel and JLT Re.
Chicago-headquartered law firm Katten Muchin Rosenman has promoted Manny Mevs to partner in its structured finance and securitisation practice. Mevs works across both public and private transactions. His experience spans prime and subprime automobile loans and leases, dealer floorplan receivable securitisations and warehouses, secured warehouse lending facilities, revolving credit facilities and structured term loans.
Law firm Walkers has hired Carey Olsen’s Lucy Le Cornu as a senior associate in its banking and finance practice. Le Cornu leaves her role as associate at Carey Olsen after five years with the firm. She is based in Walkers’ Jersey office and works across a range of areas including securitisation and structured finance deals.
Crédit Agricole CIB has promoted Charles Tabet to the role of international coordinator in its real estate structured finance team. Tabet is based in Paris and joined the bank in 2018 as a finance analyst.
And finally, EY’s Christopher Sullivan has taken up a new role as structured finance manager based in the agency’s New Orleans office. Sullivan joined EY in 2018 and is promoted from the role of senior structured finance analyst.
Market Moves
RMBS
UBS to pay US$1.4bn over pre-crisis RMBS
Market updates and sector developments
UBS has agreed to pay US$1.435bn in penalties to settle a case relating to historical alleged misconduct surrounding the underwriting and issuance of RMBS pre-financial crisis. The US Department of Justice filed a civil action in 2018 alleging that UBS defrauded investors in connection with the sale of 40 transactions between 2006 and 2007 by making “false and misleading statements” about the characteristics of underlying mortgage loans.
The DOJ said in a statement that the settlement brings the total amount of RMBS-related civil penalties paid by banks, originators and ratings agencies to more than US$36bn. The investigations have been carried out by the RMBS Working Group, comprised of around 200 attorneys, investigators, analysts, and staff from state and federal agencies.
Federal Housing Finance Agency (FHFA) inspector general Brian Tomney said in the statement: “The [FHFA] office of inspector general, together with our RMBS Working Group partners, investigated and held accountable those who sought to victimise Fannie Mae, Freddie Mac and investors by selling fraudulent mortgage-backed securities.”
UBS says the settlement has been “fully provisioned” in prior periods.
In other news…
Vesttoo files for Chapter 11
Vesttoo has commenced Chapter 11 bankruptcy protection proceedings in the US District Court for the District of Delaware, with the intention of emerging with a more sustainable capital structure. The firm says the move will also provide a platform from which to “aggressively pursue” all parties that harmed its business. Meanwhile, Aon has reportedly expanded its attempt to freeze Vesttoo’s assets with a petition in the Tel Aviv District Court relating to the firm’s holdings in Israel (SCI 14 August).
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