AFME highlights EU Securitisation Regulation challenges
14 June 2023 UK
Image: Diki/stock.adobe.com
The Association for Financial Markets in Europe (AFME) has published a report outlining challenges around investor due diligence requirements under the Securitisation Regulation in the EU and UK.
Under Article 5, the report states, investors are likely to conservatively interpret ambiguous provisions. As a result, they will anticipate disproportionately high costs to their business.
Additionally, agility and flexibility in the investment process are considerably reduced under the new regulation. This will lower the number of investment opportunities available to new investors, AFME says, impacting secondary market liquidity and making the market less efficient.
The association proposes that the barriers that these requirements create will deter investors, with even seasoned credit investors finding it harder to build a business case for participation in the asset-backed securities market.
AFME plans to release a second report on this topic later in the year, including guidance for relevant competent authorities to clarify to investors how the requirements should be interpreted.
Shaun Baddeley, managing director of securitisation at AFME, says: “Revival of the securitisation markets relies upon targeted changes to various elements of the Securitisation Regulation and corresponding prudential frameworks. One crucial element with potentially material impact relates to regulatory obligations imposed on investors relating to due diligence. AFME has frequently referred to the lack of risk sensitivity embedded within specific areas of legislation. Article 5 that covers investor due diligence is a good example of this.”
Janet Oram, head of asset-backed securities at USS IM, adds: “The asset-backed securities market has made a huge effort to adopt the requirements of securitisation regulations over the past few years. However, during this time it has become apparent that implementation has not been consistent between institutions due to differing interpretations of rules which is detrimental to the aim of a well-functioning market. Volumes have largely stagnated despite this being an important source of funding for the real economy.”
Under Article 5, the report states, investors are likely to conservatively interpret ambiguous provisions. As a result, they will anticipate disproportionately high costs to their business.
Additionally, agility and flexibility in the investment process are considerably reduced under the new regulation. This will lower the number of investment opportunities available to new investors, AFME says, impacting secondary market liquidity and making the market less efficient.
The association proposes that the barriers that these requirements create will deter investors, with even seasoned credit investors finding it harder to build a business case for participation in the asset-backed securities market.
AFME plans to release a second report on this topic later in the year, including guidance for relevant competent authorities to clarify to investors how the requirements should be interpreted.
Shaun Baddeley, managing director of securitisation at AFME, says: “Revival of the securitisation markets relies upon targeted changes to various elements of the Securitisation Regulation and corresponding prudential frameworks. One crucial element with potentially material impact relates to regulatory obligations imposed on investors relating to due diligence. AFME has frequently referred to the lack of risk sensitivity embedded within specific areas of legislation. Article 5 that covers investor due diligence is a good example of this.”
Janet Oram, head of asset-backed securities at USS IM, adds: “The asset-backed securities market has made a huge effort to adopt the requirements of securitisation regulations over the past few years. However, during this time it has become apparent that implementation has not been consistent between institutions due to differing interpretations of rules which is detrimental to the aim of a well-functioning market. Volumes have largely stagnated despite this being an important source of funding for the real economy.”
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