Structured Finance Thought Leadership

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Reports on European Structured Finance

Eleven reports from credible sources like research firms, consultancies, analysts, governments, and think-tanks that reference the future of the European structured finance market have been presented below.

Principles for Developing a Green Securitisation Market in Europe

  • A position paper published by the Association for Financial Markets in Europe (AFME) explains that green financing and increased sustainability are the key developments that will occur in the near future of the European structured finance market.

Taking the Pulse of the European ABS Market

  • The consulting company TMF Group highlights some key trends expected in the future of the securitisation market in Europe, especially as they relate to securitising non-performing loans.

European CMBS 2.0: How sustainability is the future of the product

  • Law firm White & Case LLP discusses the future of the European securitisation market and concludes that greater sustainability will be the key driver of future changes.

Regulatory Developments in Europe: 2019 Outlook

  • The report published by Blackrock argues that the future of the currently declining European structured finance market relies on the proper implementation of the new Simplicity, Transparency, and Standardisation (STS) Securitisation Regulation.

How to Fix European Banking and Why it Matters

Amazonisation is the Future of European Financial Services

  • The presentation of a report by PricewaterhouseCoopers also argues that finalizing the Capital Markets Union will be instrumental for the future prosperity of structured finance in Europe.

Securitisation: the Impact of New EU Regulations

  • Consulting company Vistra claims in its report that the STS regulation will require market participants to implement significant changes in their operating model.

Securitisation Regulation (“EU SR”)

  • This brief by J.P. Morgan Asset Management explains how the company, acting as an investor in the European securitisation market, will change its operating model to comply with the new EU Securitisation Regulation.

Draft Report on STS Framework for Synthetic Securitisation

  • The European Banking Authority argues that having separate regulations for synthetic securitisation would enable innovative models of structured finance to thrive in Europe, even though it does not state how likely it is that such regulations will be brought into force.

The Role of Luxembourg & FinTech in Securitisation

  • Paperjam, a business newspaper from Luxembourg, published an article about The Role of Luxembourg & FinTech in Securitisation conference, where FinTech companies like CrossLend were presented as a potential new key participant in the European structured finance market.

The Future Drivers of Securitisation

  • Ian Sutton, a funding and securitisation consultant for Phoebus Software published an opinion piece in the Mortgage Finance Gazette, citing distributed ledger technology (DLT) as a key future driver of the securitisation markets, especially in Europe where DLT can help participants comply with the new STS regulation.

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Structured Finance Research Reports - Main Themes

Three key themes in recent research reports on the European structured finance market are the impact of recent regulatory changes, the possible creation of a Capital Markets Union and the shift towards green financing and sustainability.

Adaptation to Regulatory Changes

  • The European securitisation market is in a state of regulatory flux. The new EU Securitisation Regulation that went into force in January 2019 has initially resulted in a significant drop in the issuance of structured finance products. However, the number of deals in the primary securitisation market has picked up in the second quarter, as more players became accustomed to the new regulations.
  • Even though participants are quickly adapting to the new changes, the short-term future outlook for the securitisation market in Europe remains subdued, because market participants are having to deal with the new rules for issuing simple, transparent and standardised (STS) transactions. The European Securities and Markets Authority (ESMA) is aware of the difficulty of implementing the new rules, which is further exacerbated by the fact that a transition period for the new regulations has not been provided.
  • The introduction of such significant regulatory changes has caused a lot of market participants to remain on the sidelines due to an increased level of uncertainty. The uncertainty is primarily caused by the fact that ESMA’s regulatory technical standards have not yet been adopted by the European Commission as of August 2019, which has led some participants to suspect that further changes in the operating model can be expected in the near future.
  • While the new regulations will help make STS securitisations more attractive to investors and help reinvigorate the EU securitisation market, they have also created a need for significant adaptation on the level of the operating model of market participants. This adaptation is mostly related to the increased need for data availability and the new standards for the presentation of information. The regulation specifies the format and templates that are expected to be used for loan-level reporting and investor reporting, which means market participants will need to invest in additional resources, including new software and business processes, to be able to provide information in the form required.

European Capital Markets Union

  • Pierre Gramegna, Luxembourg’s Minister of Finance, stated that the European Capital Markets Union (CMU) is "of the utmost importance" and that progress based on "transparent, simpler and better securitisations" needs to be made as quickly as possible.
  • According to Deutsche Bank, Europe's over reliance on its banking system poses a significant risk to the continent's economy. The banking market is 2.7 times larger than the entire eurozone economy and this is a key weakness of its financial system.
  • Another significant reason why a strong capital markets union is needed is Brexit, because London has traditionally been a financial hub of the EU. A strong capital markets union can reduce "home bias" by creating deeper cross-border markets and it can boost securitisation markets as a source of funding and risk sharing.
  • A more robust securitisation market that will be a result of the new CMU will offer banks a diversified funding source. They will also help them to transfer credit risk away from their balance sheet, resulting in capital relief that can be used to generate new lending to the real economy.
  • PricewaterhouseCoopers argues that he development of the CMU will boost the use of financial technology in capital markets and help develop a more sustainable approach to finance. It also notes that EU’s Digital Single Market project will ease the entry of new participants in the securitisation market, like FinTech unicorns, which are now mostly payment service providers. In the future, such a union will have the potential to significantly streamline the structured finance operating model in Europe.

Green Financing and Sustainability

  • The Association for Financial Markets in Europe (AFME) claims that, even though demand for green securitisation bonds is relatively low at present, investors are expressing increased interest for investing into green assets because this is aligned with the policy goals of various investors like sovereign wealth funds, sovereigns and supranationals.
  • According to AFME, green securitisation can help investors meet their policy goals, while playing an important role for the EU as a whole. To meet its climate and energy targets by 2030, the EU needs to close the yearly investment gap of almost 180 billion euros and for this it needs to allow debt markets to fund projects that contribute to environmental stability.
  • In order for the above to be achieved, regulations and guidelines need to be set forth that would "clearly and simply" define green securitisation in European markets. Several important steps in the right direction have already been achieved with implementing the New Securitisation Framework and Green Bond Principles acts, but more specific regulation is expected to come in the future, such as regulation that establishes the key contractual provisions that will need to be contained in a green securitisation transaction.
  • A Technical Expert Group on Sustainable Finance has been formed by the EU in 2018, and it published its final report on a taxonomy for Green Bonds in June 2019. This taxonomy, which is applicable to a wide range of investment approaches is a key step in providing greater clarity to the sustainable investing landscape.
  • According to White & Case LLP, sustainable development goals identified by the United Nations General Assembly can help drive the demand for commercial mortgage-backed securities (CMBS) in Europe. In the future, European CMBS deals will be structured around those goals by mapping the types of commercial real estate to specific sustainable development goals. For example, the Clean Water and Sanitation goal could be achieved by securitising mortgages on water treatment plants, sewer and septic systems, or the Responsible Consumption and Production goal can be helped by creating CMBS using mortgages on recycling plants and composting facilities as collateral.
  • "Driven by client demand, especially institutional investors, new product innovation, as well as increased scrutiny and regulatory initiatives, sustainable investing will continue to grow and to move from niche to norm," PricewaterhouseCoopers stated in its report.
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Structured Finance Reports - Participants

In the near future, market participants will likely structure deals to circumvent compliance with new EU securitisation regulations. On a more longer-term basis, they will change operational processes to adapt to the new regulations and possibly also adopt distributed ledger technology to help them in that regard. Experts predict that some new market participants like marketplace lenders and Securitisation-as-a-Service platforms are likely to emerge in the European securitisation market.

Structuring Deals to Circumvent Compliance With the New Regulations

  • White & Case LLP expects that, in the near future, originators will structure transactions so that they fall outside of the Securitisation Regulation regime altogether, at least until more clarity is provided by the governing bodies on the implementation of the new regulations. The EU Securitisation Regulation transparency requirements "require that originator retainers demonstrate that they have a broader business purpose (beyond acting as retainer) and experienced decision makers in order to pass the "not sole purpose" test." To comply with the requirements, the special purpose vehicle (SPV) issuer is typically designated as the reporting entity whilst the master servicer and the delegate servicer are contractually obliged to assist the issuer with the reporting required by the EU Transparency Requirements.
  • To avoid having to comply with the transparency requirements and to enable the originator of the transaction to not have to hold risk retention for the life of the transaction, securitisation deals are purposefully structured so that they fall outside the new EU regulations. For example, the Westfield Stratford City Finance No.2 Plc transaction deal saw the issuer issue one tranche of £750 million commercial real estate loan-backed notes. Because no tranching was involved, the Westfield deal was, by the EU definition, not a securitisation for the purposes of Article 2 of the Securitisation Regulation.
  • As another example, J.P. Morgan Asset Management, that typically acts as an investor in securitisation transactions, stated just before the new regulations were enacted that it will not purchase non-EU securitisations for its UCITS funds because "it is unlikely that a UCITS Management Company will be able to meet" due diligence requirements with respect to non-EU securitisations.

Changing Operations to Comply With New EU Regulations

  • The EU Securitisation Regulation requires that the originator and sponsor need to make certain historical data available to potential investors. Without providing at lest five years' worth of static and dynamic default and loss performance data of receivables substantially similar to those to be securitised, a transaction cannot be classified as a simple, transparent and standardized (STS) securitisation.
  • Additionally, the regulation sets a specific format and templates that are expected to be used for loan-level reporting and investor reporting. Finally, the technical standards required for the proper interpretation and implementation of the new regulations have come into force much more recently than the regulation itself.
  • Because of all the above factors, market participants will have to dedicate significant resources in the near future to compliance with the new regulations, and they are likely to adopt new business processes and additional software to help them meet the reporting requirements.
  • Some experts predict that the use of distributed ledger technology will help market participants more easily meet the demands for greater data provision. This technology also has the potential to increase operational efficiencies of market participants, especially as it gets more commonly applied in synthetic securitisation transactions.

Emergence of New Participants

  • Marketplace lenders are a new type of participant in the European structured finance market. While their involvement in the market is currently limited, industry players are expecting that marketplace lenders will rice to prominence in the near future.
  • Marketplace lenders are using securitisation techniques to fund their businesses. For example, Younited Credit recently issued the "first-ever marketplace lending securitisation in Europe" and was able to attract 156 million euros in financing with a triple-A rating for its senior notes.
  • FinTech companies offering Securitisation-as-a-Service are another type of new participant that has recently started gaining traction in the European securitisation market. One such company is CrossLend, a B2B FinTech company founded in 2014. The company introduces new financing options to small and medium-sized businesses across Europe by transforming loans into bonds on a 1 loan:1 bond basis. This new securitisation model allows investors to build diversified portfolios of loans from across Europe, with an emphasis on providing risk transparency.
  • By offering securitisation products across European borders, CrossLend is perfectly positioned to profit from the European Union Commission's plan to establish a Capital Markets Union. Additionally, "by helping lenders to diversify and mitigate their risk at the single loan level, CrossLend will allow funds to flow to the real economy and unleash the true European economic potential," Olivier Selis, CEO of the Lux Future Lab startup incubator, commented.

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