Regulation: EC lays down the law on securitization


Louise Bowman
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The European Commission demands a comprehensive action plan to right the wrongs by the end of January.

Although many participants in the European securitization market had already drawn a line under a terrible year by early December, those at the European Securitization Forum faced the prospect of Christmas being cancelled altogether. News emerged in early December that a delegation from the European securitization industry’s trade body had been summoned to speak with EU director of financial services David Wright during the first week of December and tasked with coming up with an action plan to tackle the industry’s problems – by the end of January.

This marks an upping of the ante between the European Commission and the ESF. Wright was the keynote speaker at the ESF’s recent symposium on European Securitization Markets, where he said that the EC would prefer to see a market-led solution but urgently needed to see a plan to address questions by regulators on transparency and securitization valuations. Clearly, when he said urgently, he meant urgently.

At the November 19 symposium, Wright also warned that the EC would be "pushed by the political community to intervene in these areas" if the market failed to move swiftly. This is interpreted as suggesting that the EU will move to ban certain types of investor from buying European ABS unless the industry cleans up its act with regard to transparency and valuation. One of those attending the December meeting described it as "very cross".

To be fair, the ESF has put a great deal of work into these areas in recent years, and has launched many initiatives to try to improve the market. As long ago as 2005 the ESF’s Traders Working Group was set up to look into the trading of asset-backed securities and to improve its efficiency. It was behind the launch of an ABS valuation service together with Markit in October of that year.

But the EU is now demanding a new action plan – one that is far more wide-reaching. The plan must cover the implementation of Basle 2 – particularly with regard to Pillar 3 issues of public disclosure and the granularity of information provided by banks complying with the IRB (internal ratings-based) approach. It must also cover transparency and valuations of both ABCP and term financing. Certain terms in common usage in the market (bid, offer, firesale) must be clearly defined and the EC wants high-level guidelines on how highly illiquid securities are priced.

"One of the major issues that the EU is concerned about is the accessibility of information," says Rick Watson, managing director at the ESF in London.

"Issuers are increasingly making information available without password access and this is something that will continue. The market is now much more of an investors’ market and their requests are being taken much more seriously than they were before."

The ESF is clearly keen to be seen to be reacting to the crisis in the securitization market, and issued an exposure draft on a standardized data file format for CDOs on December 12. A similar initiative was launched in the US CDO market in March this year. The idea behind such a move is to allow for more consistency of information and to process data more efficiently. The effectiveness of the US initiative is hard to judge as the market blew up just months later. The ESF was also expected to launch an exposure draft covering standards of post-issuance reporting for the UK non-conforming mortgage market by mid-December. "The securitization market is already transparent but we are actively reviewing disclosure practices in the ABCP and term ABS, MBS and CDO sectors to see if there are any areas for improvement," says Watson. "We are under a lot of pressure from the European Commission. The entire working plan will take time to put together but certain deliverables are expected in January."