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* EU Parliament votes to move forward with STS draft
* Opts for nuanced approach to ABS risk retention
By Mariana Ionova
LONDON, Dec 8 (IFR) - European lawmakers gave initial
backing to tougher regulation for the securitisation market on
Thursday, but offered an olive branch to the industry through a
more nuanced approach to risk retention rules.
Members of the European Parliament voted to move forward
with a set of proposals that aim to recast the rules around
securitisation and encourage "simple, transparent and
standardised" (STS) transactions by rewarding them with better
At the centre of the draft regulation was a controversial
call to raise the current level of risk retention from 5% to
potentially as high as 20%, in a bid to better align the
interests of issuers with those of investors.
But lawmakers signalled a softer stance on the issue on
Thursday, voting for a proposal that laid out a tiered system
for "skin in the game" dependent on how retention is achieved.
For transactions with revolving collateral and for trades
where the slice of risk is held "vertically" across the capital
stack, originators would be required to hold at least 10% of the
deal under the current proposal.
But if only the equity chunk is retained in a "horizontal"
or first-loss arrangement, they would have to hold at least 5%
of the risk, which is in line with current rules for the sector.
These more nuanced rules were a departure from proposals
made by MEP Paul Tang in June, which called for a four-fold hike
to risk retention requirements for potentially all ABS deals,
signalling that lawmakers are keen to take a more toned-down
approach to securitisation.
"Theoretically, what they've proposed makes sense because
the risk profile of a vertical slice is very different from that
of a horizontal slice at the equity level," said Edward Panek,
head of ABS investment at Henderson Global Investors.
"Once Tang came out with the 20% in June, it was always
likely that there would be some compromise from the 5%. But I
also think this compromise shows there is probably significant
support for the asset class in the Parliament."
Yet the approved draft also leaves the door open for the
European Systemic Risk Board (ESRB) or the European Banking
Authority (EBA) to be "mandated to increase required retention
rate to 20% in light of market circumstances".
Under the proposal, the EBA will develop draft "regulatory
technical standards" and revise them every two years to specify
the level of risk retention, ranging from 5% to 20%.
Some said opening the door for more tinkering with risk
retention rules will damage the recovery of the European
securitisation market, which remains about half the size it was
The Association for Financial Markets in Europe noted in a
statement on Thursday the proposal threatens to make ABS
"prohibitively burdensome in Europe", undermining the EU's plan
to help banks free up more capital and increase lending to the
"We welcome the fact that the European Parliament and
Council have now endorsed the establishment of an STS
framework," said Richard Hopkin, head of fixed income at AFME.
"However, we are concerned that many aspects of the
proposals run counter to the objective of reviving
securitisation in Europe and, if adopted as currently proposed,
will discourage the use of securitisation as a funding and risk
Even 10% risk retention would make it difficult to move
assets off balance sheet and achieve capital relief. More risk
retention would also be particularly punitive for parts of the
market that aim to capitalise on the arbitrage between asset and
"Where it's going to hit hard is CLOs and portfolio asset
deals," said Simon Schiff, of counsel in Baker & McKenzie's
securitisation practice. "It would be really negative to
increase the level of retention in those deals."
"But the vote is just a proposal and the Council seems very
much behind the 5% level. There is still a long way to go before
a final decision is made. And I don't think we can assume that
the 10% is what it will be in the end."
The European Parliament and the European Council will in
January move forward with informal negotiations on the draft.
(Reporting by Mariana Ionova, editing by Robert Smith and