We’re promoting increased bilateral communication and learning between participants in the U.S. and Chinese financial systems.
Market participants and legal advisers have come to different conclusions on this issue, leading to confusion and uncertainty in the market.
At their core, structured finance and securitization are about increasing the flow of global capital into their respective economies. To achieve this, global coordination is needed. SFA is at the epicenter of this coordination, with outreach and work efforts spanning around the globe.
The European Securitization Regulations, collectively regulated by four separate EU regulatory bodies, came into effect at the start of this year, consolidating a patchwork of existing securitization laws and imposing due diligence, transparency, and risk retention requirements on a broader scope of institutional investors –including, for the first time, Undertakings Collective Investment in Transferable Securities (UCITS) funds who now must comply with the EU securitization rules.
The impact of these new regulations is not isolated to the EU securitization market, however. The requirements on EU investors apply regardless of whether the issuer itself is subject to EU jurisdiction.
Consequently, the regulations impact securitizations issued by U.S. sponsors as well as all other non-EU issuers. For example, without additional clarity or modification to the regulations, there will be consequences on U.S. securitization originators, sponsors and SSPEs as a result of these regulations – with the requirement to provide additional disclosure in order for EU institutional investors to be able to purchase U.S. securitization transactions.
“Given the current difference in the rules that apply to originators/issuers of securitised assets in the U.S. and other non-EU countries versus the EU (in particular with regards to the risk retention requirements), it is unlikely that a UCITS Management Company will be able to meet the EU SR due diligence rules with respect to non-EU securitisations. As a result, for those in scope securitisations issued on or after January 1, 2019, until such time as non-EU securitisation markets, in particular the U.S., evolve to support the EU due diligence requirements, J.P. Morgan Asset Management will not purchase non-EU securitisations for its UCITS funds.” – J.P. Morgan Asset Management
Likewise, asset classes that are fully exempted or have differing risk retention requirements in the U.S., like CMBS and CLOs, respectively, would be required to comply with the 5% EU requirement in order to sell to EU investors.
SFA’s task force on this subject provides market participants a forum to discuss how the industry is interpreting and implementing these new regulations; and, if deemed necessary, engage with the EU regulators to seek additional guidance and/or rule modifications.
As part of this effort, SFA is facilitating communication between European regulators and U.S. issuers and investors to help drive forward a better understanding of differences in regulations.
SFA has been engaged with government officials, trade associations and employees of our member firms operating in China. We recently opened a formal dialogue with the People’s Bank of China (PBOC) and China Banking and Insurance Regulatory Commission (CBIRC) on how to ensure a safe and sound securitization market.
China Market Background:
China has committed to the development of a robust securitization market, and currently has the second largest market in the world. As global markets are all linked, SFA understands the importance of stability in securitization and we are pleased to help work to ensure a safe and sound global system. We look forward to continuing productive engagement with the Chinese regulatory community.
The Chinese securitization market, while underdeveloped relative to the United States, is rapidly coming of age. There are many reasons for this, but the two primary reasons are: one, Chinese banks are incredibly large and have balance sheets that could be made more efficient by the presence of a secondary securitization market, and two, because the Communist Party has said that the development of such a market is a priority in the current Five-Year Plan.
SFA is engaged with government officials, trade associations, and employees of our member firms operating off the mainland and Hong Kong. In the coming years SFA aims to serve as a helpful bridge between domestic U.S. market participants and those in mainland China.
The Chinese securitization market is already the second largest in the world, although the vast majority of its liquidity today comes from onshore investors. As this changes, SFA will be engaged to help with the development of a safe and sound market for Chinese securities that enhances global growth and helps the Chinese to achieve their goal of operating with global standards in a global marketplace.
Did you know?
At YE 2018, RMB2.7 trillion of securitization notes were outstanding, up from RMB1.9 trillion at YE 2017 and RMB32.1 billion YE 2012, making China the largest securitization market in Asia and the second largest in the world behind the U.S.
The mature, stable and robust securitization and structured finance markets in Canada continue to perform well year after year. The emerging trends in this market continue to be determined by consumer behavior, investor demand, pricing and originator funding strategies.
Given the importance of this market and in an effort to enhance global growth, SFA holds an annual conference every year in Toronto. The agenda for this conference is created in consultation with Canadian securitization industry experts and provides a forum to connect and address all of the emerging trends.
“SFA has led the industry’s response to the European regulators, clarifying the impact new European securitization regulations have on U.S. asset-backed securities and advocating on their behalf.”
- Richard Pugh Director, Bank of America
“SFA’s China Market Development Task Force has served as a bridge between participants in the U.S. and Chinese structured finance markets. Task force members visited China to share our experiences and latest market updates with key players. We also stay informed of what is happening in China, understand their interests, listen to their questions. This helps us draw comparisons between market byproducts and identify areas to improve upon and opportunities to develop compared with international standards.”
- Jian Hu Managing Director, Moody's Investors Service