The European Securities and Markets Authority (ESMA) has published the responses received to its consultation on amendments to the EMIR Clearing Obligation under the Securitization Regulation. Concerning STS (simple, transparent and standardized) securitizations, Asset manager Amundi wrote that it supports the measures introduced by the EU in order to open new sources for financing the economy and maintain a high level of investor protection. “This balance is key and we think that any amendment must be assessed under these two objectives.” Amundi’s AuM is €1,450 billion of institutional and retail money.
In the reply, Amundi also noted that: “We truly believe that investors in covered bonds and in securitizations should be given full information on the hedging arrangements that are taken in the underlying portfolio. We consider that it should appear as a requirement to benefit from the exemption of the clearing obligation foreseen in EMIR. To be more specific, investors are interested in knowing the hedging policy and its implementation in terms of discretion allowed, resets, maximum acceptable exposure to interest rate or currency risks and, on a regular basis, existing positions.”
True Sale International, a lobby group based in Germany, said that the proposed approach would entail higher costs: “…the financial counterparty would have higher costs due to the fact that the financial counterparty shall provide the variation margin which is not market standard in case of OTC derivatives for securitizations. To mitigate the counterparty risk it is market standard that the financial counterparty has to have an external minimum rating. If the external rating of the financial counterparty falls below the minimum rating then it is market practice to provide collaterals or that a guarantee is provided from a third counterparty that has got a minimum rating.”
True Sale made a proposal to mitigate the counterparty risk, but avoid additional costs for the financial counterparty that at the end would have to be borne by the originator: that variation margin is not posted by the securitization special purpose entity but that it is collected from its counterparty (striking out the original language that this would be done in cash) and returned to its counterparty when due where the rating of its counterparty is or falls below a threshold and where the variation margin is not covered by a guarantee with a counterparty within that threshold.
Other replies came from Finance Denmark, French Banking Federation, Dutch Securitization Association, and Association of the Luxembourg Fund Industry.