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December 14, 2018  

STS Labels Suddenly Imminent in Europe

Designations for “simple, transparent and standardized” securitizations in Europe could be around the corner.

The European Banking Authority this week finalized the requirements for so-called STS treatment. Meanwhile, the not-for-profit Prime Collateralized Securities appears to be within days of receiving approval from the U.K. Financial Conduct Authority to certify for issuers that individual deals qualify for that label.

The developments mark a major step forward in the implementation of the STS rules, a key component of Europe’s regulatory overhaul for securitizations. Following a series of delays, it previously appeared unlikely that STS designations would be available before the new regulations took effect on Jan. 1 — and possibly not until May. Such a scenario would have sent issuers to the sidelines in early 2019. Now, the word is that some are seeking a PCS stamp for deals in January.

Anticipating its approval by the Financial Conduct Authority and the resulting flow of applications from issuers, the PCS has added staff in its London headquarters in recent weeks while taking steps to open an office in Paris. Among the recruits are Max Bronzwaer, who is splitting his time between London and Paris, and the London-based Fazel Ahmed.

As treasurer at Obvion from 2002 to this August, Bronzwaer supervised the Dutch mortgage lender’s securitization program. Ahmed was a managing director on the securitization-banking team at UniCredit from 2007 to 2015. He also has spent time at ING, CIBC and UBS.

The opening of the PCS office in Paris is intended, in part, to allow the operation to continue reviewing deals should the U.K. move ahead with its planned exit from the European Union. To that end, it has applied to the French Financial Markets Authority to assign STS labels there — with approval expected by the end of March.

The PCS was formed in 2012 by a group of companies with ties to the securitization industry as a sort of self-policing effort that followed the global financial crisis, and since then has been applying its own label to less-risky securities. The expectation is that there will be considerable overlap between those products and STS transactions, primarily mainstream asset-backed bonds and prime-quality mortgage offerings.

Ian Bell, who heads the PCS, said fees for the STS stamp will be similar to what the operation already charges for its certification: an initial €12,000 ($13,600), plus €6,000 annually, paid by the issuers.

True Sale International of Frankfurt, meanwhile, has applied to Germany’s Federal Financial Supervisory Authority for approval to grant STS designations.

The STS stamp mainly identifies securities that would be eligible for lower capital-reserve requirements under the Bank for International Settlements’ Basel 3 accord. If the labels hadn’t been ready, the concern was that banks would shun investments in new offerings — thus dampening the potential for new deals.

What’s more, European Parliament unexpectedly added in July that, effective around mid-2020, only STS securities could be used to fulfill liquidity-coverage ratios, with no grandfather clause for existing holdings. With the STS blueprint yet to be finalized at the time, that raised the possibility that banks might respond to the timing mismatch by scaling back their structured-product investments even longer.

As long as STS designations are available, however, those institutions would know which of today’s offerings are eligible for liquidity-coverage purposes. The Association for Financial Markets in Europe estimates banks buy about one-third of all high-quality securitizations in the region, with roughly €40 billion on their books to satisfy liquidity-coverage requirements.

Europe’s broader re-working of its securitization rules has been dogged by delays and retrenchment by regulators. The European Securities and Markets Association, for example, still hasn’t finalized compliance templates for new disclosure rules — potentially disrupting privately-placed offerings and commercial-paper conduit deals.

The templates are expected to become available during the first half of 2019. In the meantime, issuers could move forward with STS transactions while furnishing the anticipated disclosures on their own. ?