Turning the Corner on Risk Retention

Just as everyone seems to have made the adjustment to life in securitization with Risk Retention, comes the US Treasury’s announcement that they agree with what most industry insiders have been saying for years.  The 5% Risk Retention model for securitizations may not be necessary and very well could be artificially and unnecessarily limiting the size of the marketplace.

The report, which was released on October 6th, focused primarily on Risk Retention in the US CLO market; probably thanks to the steady effort by the LSTA over the last few years to get their views across.  It would appear that a reduction in the percentage, a partial exemption or even a full elimination of the requirement is on the table for serious discussion.  Momentum builds.

Ironically, all the doomsayers that several years ago predicted a complete collapse of the CLO market, particularly the small to medium-sized CLO manager marketplace, due to the burden of Risk Retention, have been proven wrong.  The US CLO market is actually quite vibrant and there have been plenty of recent news stories about numerous third-party risk retention investors being available to smaller CLO managers.  As we expected, smart people found a way to work with the new rule.  However, we would be the first to agree that there has to be some negative impact on market size that is directly attributable to the additional costs associated with 5% Risk Retention.

We have been on the record for several years about how unnecessary the Risk Retention rules are, as all they accomplish is to add an insignificant slice of skin-in-the-game for issuers or managers that already have much more to lose if their program fails.  Risk Retention sounded like a great sound bite during the post-crisis era but we think you would be hard pressed to find an investor (if they were being honest) who would tell you that they base a any significant portion of their investment decision on Risk Retention.

Maybe it has taken longer than we might have hoped but it would appear that we are in the process of turning the corner on Risk Retention.

Momentum for Fintech Sector Continues to Build

Bloomberg just ran an article summarizing the record pace for financing in the Fintech or Marketplace Lending sector.  Surely, there will continue to be some bumps in the road but this asset class continues to push ahead, seemingly no matter the headwinds.  Clearly, some smart people are betting on this asset class.

Here’s a link to the article….


Will EU Regulators Ever See the Forest Thru the Trees for Securitisation?

This week, Global Capital ran another good article about the seemingly never ending saga related to risk retention and other components of the EU’s Simple, Transparent and Standardised framework, also known as “STS”.  The article once again updates the market on the inability of regulators to get out of their own way when it comes to revitalizing the securitisation marketplace  in Europe.

We found one section to be particularly interesting.  Using the sub-title “What does the EU really want?”, we think the article asks the very basic question that few before have thought to ask.  So much time has been spent relying on big picture pronouncements by EU regulators and politicians about how important a healthy securitisation market is to the welfare of the EU capital markets, while very little time has been spent on evaluating what the regulators are actually doing, as a more accurate yardstick for measuring intentions.  Seven to eight years after the Credit Crisis should be more than enough time for pols and bureaucrats to understand structured finance, yet many of us continue to give them a pass and attribute the currently arcane EU rules to folks that simply do not understand securitisation.  Perhaps they understand perfectly well.  Maybe they really do not want a securitisation market for Europe.

Perhaps this is a harsh assessment but at some point, you would think that we have to rely more on their actions and less then on their words in assessing objectives and intentions.

One of the more recent “rationales” for holding up the process of improving the EU regulations is Brexit; the idea being that we need to better understand the impact of the British exit from the EU before making any substantive changes to the current rules.  That  argument sounds reasonable and safe; perhaps hard to challenge because does anyone really know how this will all shake out?  On the other hand, if the EU waits too long, could the UK eventually become the safe harbor for securitisation in the European theatre.  Certainly the UK regulators have a much more progressive track record, when it comes to creating a commercially attractive environment for innovation in the capital markets.  Perhaps the idea of the EU being left in the dust is not so far fetched.

Fed Comments on the Challenges Facing Blockchain Technologies in Financial Services

At last week’s SFIG Las Vegas 2017 conference, there were several lively discussions about the application of blockchain or “distributed ledger” technologies to structured finance, with many industry participants suggesting that there are many applications suitable for consideration.  Interesting enough, Federal Reserve Governor Jerome Powell was at Yale University last Friday March 3rd to make a speech about the future of finance and the capital markets.  One of the topics that Governor Powell covered was the challenges that the financial industry faces in implementing these Distributed Ledger Technologies or “DLTs”.

Here is an excerpt from his March 3rd presentation wherein he highlights five significant challenges facing the industry:

Distributed Ledger Technologies

“Let’s turn to another type of new technology that may have important implications for the payments and financial systems: distributed ledger technology, or DLT. Bitcoin helped bring this technology to public attention. Using blockchain technology–which employs a form of DLT–and an open architecture, Bitcoin allows for the transfer of value (bitcoins) between participants connected to its ecosystem without reliance on banks or other trusted intermediaries. This feature has led some to predict that DLT will in the long run render parts of the banking and payments system obsolete, as the intermediation of funds through the banking system will become unnecessary.

Faced with these dramatic predictions, we have seen banks and market infrastructures collaborate with technology firms to explore the use and further development of DLT. In 2016, there was widespread experimentation. Efforts by financial institutions often focused on evaluating the technology, identifying potential uses, and conducting proofs of concept. Prominent examples included the use of distributed ledgers to store transactional data and records in tamper-proof ways, as well as the use of the technology as a primary means to hold and transfer money or assets. By the end of 2016, a few major U.S. clearing organizations had announced plans to use distributed ledger technology in limited ways.

As we have followed developments over the past year, a few lessons have come into better focus.6 First, in contrast to Bitcoin’s open architecture, work by the financial industry has focused on the development of “permissioned” systems, which establish criteria to determine who is permitted access to particular systems, ledgers, functions, or information. In the near term, this approach seems more likely than fully open systems to provide the needed governance and management to address operational, security, and financial risks. Indeed, access is typically permissioned in situations that require the protection of systems and information in the financial and other industries. Even in permissioned systems, some key issues will remain, including whether finality of settlement is to be determined by a central trusted party or by a majority of participants, and whether participants are able to view information on other parties’ transactions. Some argue that movement away from open systems undermines the potential efficiency and the spirit of DLT. At least for now, in payment, clearing, and settlement, safety and confidence must also weigh in the balance.

Second, firms are still grappling with the business case for upgrading and streamlining payment, clearing, settlement, and related functions with DLT. Promoters of DLT offer a vision of streamlined processes that lead to faster processing, reduced reconciliation, and lower long-run operating costs. Some argue that in certain markets, faster and more predictable processing will also reduce the capital and liquidity costs of operations. But upgrades are often costly, lengthy, and risky, particularly if the technology is still being proven, as is the case for DLT. Network effects can also affect adoption, since multiple firms may all need to adopt a particular implementation of DLT in order to justify its use in a specific market.

Third, technical issues remain. Practical issues such as whether a particular version of DLT will work for the intended purpose are still being explored. Issues of reliability, scalability, and security remain very important. Beyond these issues, standardization and interoperability across different versions of DLT will need to be addressed to allow technology integration and avoid market fragmentation. In general, industry members and technology providers recognize these important issues and have taken initial steps to address problems. It will be important to keep these challenges firmly in mind as we move beyond experimentation and into the development and deployment of new products and processes.

Fourth, governance and risk management will be critical. For individual firms or clearing houses that adopt DLT as an internal technology upgrade, the governance and risk-management processes are likely to be internalized within existing organizations and be akin to other technology upgrades. However, if new networks of bilateral payment, clearing, and settlement are established, the new technology may involve tightly coupled protocols and operations. The safety of the overall design will depend on a highly interdependent framework. If automated risk management, smart contracts, and similar tools are deployed across a network, cascades of rapid and hard-to-control obligations and liquidity flows could propagate across a network and the financial system in response to events. This interdependence will likely call for creative organizational thinking to address the need for governance and strong risk management.

Finally, the legal foundations supporting DLT will need attention. Deployments of DLT will involve firms, perhaps in different jurisdictions, with systems that record and transfer information and assets under existing legal frameworks. Which bodies of law apply to the particular firms, assets, and activities will determine the associated rights and responsibilities when transfers are made, cleared, and settled. For example, whether and how banking, payments, securities, or commodities laws apply in a given context are likely to be important in designing systems and services and understanding their properties. And, as with any new technology, things may go wrong. We will need a thorough analysis of how DLT fits into current legal frameworks and what gaps need to be filled by contractual agreements or new laws and regulations. A robust legal basis that provides certainty across relevant jurisdictions is essential for building strong governance, risk management, and operations.”

More than 6,000 Securitization Professionals to Gather in Las Vegas Next Week

This coming weekend, thousands of industry professionals will begin to gather for next week’s SFIG Vegas 2017 conference at the Aria Resort in Las Vegas.  Co-hosted by the Structured Finance Industry Group (“SFIG”) and Information Management Network (“IMN”), this year’s event is expected to acknowledge the progression to mainstream securitization for several newer asset classes including marketplace lending and solar energy.  Another topic that will certainly be front and center, at least for US market participants, will be the potential impact of changes to the US regulatory regimen, resulting from the recent national elections.

The fact that more than 6,200 names already appear on the conference pre-registration list, is a strong indication that the structured finance industry is alive and well. We wouldn’t be surprised to see that final attendance numbers top more than 7,000.

Marketplace Lending Securitization Comes of Age

An excellent summary of the fast maturing market for the securitization of marketplace loans, or fintech loans as they are also commonly known, has been prepared by S&P Global Market Intelligence.

Here’s a link to the full article……


Euro Securitisation Issuance on the Rise?

Good short summary recapping recent securitisation market activity on ftseglobalmarkets.com yesterday.

A couple of items that jumped out at us from the below chart:

  • Despite the anchor that the continued lack of clarity and commercialism in EU regulations for securitisation has created, there is a steady tend upward in the Euro market.  Nevertheless, it is hard not to notice just how far the market has to go to return to pre-crisis issuance levels.
  • On the other hand, US issuance levels seem headed to either matching or getting close to equaling 2007 issuance levels in 2017.

One is left wondering what the results might look like if EU regulators were to finalize a rationale approach to securitisation structures in their market.

European securitised transactions rise 26% in last quarter says AFME

Friday, 27 January 2017
European securitised transactions rise 26% in last quarter says AFME.  In the fourth quarter (Q4) 2016, €59bn of securitised product was issued in Europe1, an increase of 26.9% from Q3 2016 (€46.5bn) and a decrease of 19.0% from Q4 2015 (€72.8bn).  In the fourth quarter (Q4) 2016, €59bn of securitised product was issued in Europe1, an increase of 26.9% from Q3 2016 (€46.5bn) and a decrease of 19.0% from Q4 2015 (€72.8bn).  Some, €31.1bn was placed in Europe, accounting for over half (52.7%) of overall volume, compared to €21.5bn placed in Q3 (representing 46.2% of €46.5 bn) and €15.7bn placed in Q4 2015 (representing 21.6% of €72.8bn).

Pan European CLOs led placed totals followed by UK RMBS and UK Auto ABS. Pan European CLOs increased from €4.6bn in Q3  to €9.2bn in Q4 2016.  UK RMBS increased from €4.1bn in Q3 to €5.6bn in Q4, while UK Auto ABS increased from zero in Q3 to €2.9bn in Q4.

EU Securitisation Volume 2007-2016


Values in EUR BN      2007       2008      2009      2010      2011      2012      2013      2014      2015      2016

EU Placed                    419.2        105.5       24.7         89.8       88.9      87         75.9        78.2       83.2      96.4

EU Retained                175.7         713.2     399.3     288.1     287.9    170.9    104.8      138.8    133.2    141.2

EU Retention (%)       30%          87%       94%        76%       76%       66%      58%        64%       62%       65%

Total EU                       594.9        818.7     423.9      378        376.8    257.8    180.8      217        216.4     237.6

Total US                        2080.5    934.9     1385.3    1203.7   1056.6   1579.2  1515.1    1131.5   1617.5   1746.3

Source: AFME January 2017