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It’s going to be another Excess Spread going big on regulation, which may not be to everyone’s taste, but you’ll eat your boiled cabbage and enjoy it.

This Tuesday (17 June) saw the official unveiling of the European Commission’s proposals to reform the securitisation market, which genuinely could be a huge deal, with the potential to at least double issuance volumes.

The proposals comes across four prongs: changes to the Capital Requirements Regulation and Securitisation Regulation, which were already circulated in leaked form, changes to the Liquidity Coverage Ratio (which sets the extent to which securitisations can count in the regulatory liquidity calculations for EU banks) and changes to Solvency II (which have been hinted at in a “non-paper” but should be released in late July).

It’s the end of the beginning, rather than an ending in itself, and the rest of the road is LONG.

The other main bodies of the European policymaking apparatus, the Parliament and the Council, need to get their own proposals in order, which can be tortuous in its own right, before getting together in “trilogue” to agree something between the three. With hints from the countries with the Council presidency (Poland at the moment, Denmark from July) that they will look to expedite the file, that still likely takes us through to December 2025 before there’s a Council position, with trilogue likely to begin between April and June 2026, and publication in the official journal perhaps in early 2027.

Implementation could be right away, or it could be delayed, and then there will need to be documents from the ESAs (EBA, ESMA and EIOPA) laying out the relevant Regulatory Technical Standards and Implementing Technical Standards.

So it’s going to be slow, but there’s a few reasons to be cheerful.

The CRR changes aim to make it easier to securitise low risk assets, such as mortgages, for capital relief purposes (not simply the deconsolidation deals we have already seen). If Santander’s Spanish consumer arm can do €2bn a year in cash SRT volume, what’s the right figure once mortgages become economically attractive? €10bn? €15bn? One bank and one geography alone could double euro-denominated RMBS volume!

If there are a lot of new mortgage cash SRTs, that could mean placing a lot of large senior tranches, and here the proposed changes to LCR (Liquidity Coverage Ratio) treatment could help. These proposals (up for consultation for a month) basically remove a couple of annoying elements (a ratings cliff below triple-A, restrictive approach to asset classes) and improve HQLA haircut treatment.

I am sceptical about the extent to which this is really the blocker for EU bank treasuries investing in securitisation (and they really don’t; the EU’s study cites just €43.7bn of securitisation in EU HQLA books, 0.38% of the total).

My doubts come from comparison with the UK, where the regulation with respect to capital and liquidity has been pretty much the same, and bank and building society treasuries from institutions large and small are highly significant participants in triple-A books.

A more likely culprit is culture and institutional inertia. It takes a lot to get going on securitisation investing, and while there’s been little euro product to buy (and little institutional expertise in securitisation) it’s a big hill for mid- and small- sized EU banks to climb.

It might be that a regulatory revamp is more important for the signalling effects, rather than for the actual liquidity haircuts. If the top regulators say “buy securitisation it’s good” that can help loosen institutional blockers to starting it up.

Anyway, don’t take my word for it.

Morgan Stanley’s research team said: “We continue to think that this can lead to a doubling of the securitisation market. The proposals on reforming the Securitisation Reform and bank capital requirements are comprehensive. We await the outcome of the four week consultation on LCR and the final initiative post that. If all these proposed changes are voted through, we estimate the investor-placed securitisation market could grow to €1.2trn (from ~€550bn today) over the next five years.”

One small wrinkle is how this plays through in relative value. In the current regime, going from non-STS to STS cuts the capital floor from 15% senior tranche to 10%.

But if that means going from a CLO senior (Invesco Euro CLO XV at 137bps) to say, auto ABS (Autonoria 2025 at 64bps), you’ve given up half the spread to cut capital by a third.

You can quibble with the comparison (Autonoria is short WAL self amortising, CLO seniors give away more optionality, one month vs three month) but the point is, in basis points per unit of capital, CLOs remain compelling.

Unless, that is, regulators slash capital on STS but don’t match it on non-STS, and, indeed, tie the capital more closely to the risky leveraged loan collateral underlying CLOs, making it more attractive to buy the STS paper from a return on reg cap perspective.

If the LCR changes (smaller haircuts for STS and resilient bonds, broader asset classes, no ratings cliff) work and double the €43.7bn HQLA figure, current market supply in euros can’t absorb that without tightening a lot…in which case the RV picture will go the other way, STS bonds will look silly tight and banks will be more incentivised to do CLOs, even if their regulatory treatment is less favourable.

Which is a long way of saying, nobody knows anything on market impact!

We also want to highlight one very intriguing change which was added between the early leaks and the final versions published on Tuesday.

This was a couple of lines about risk retention — otherwise unmentioned in the reform package (h/t to Clifford Chance and to Mayer Brown for flagging).

Risk Retention (Article 6) Risk retention is waived in case the securitisation includes a first loss tranche that is guaranteed or held by a narrowly defined list of public entities and where that tranche represents at least 15% of the nominal value of the securitised exposures.

There aren’t a lot of deal structures already in existence where a public body guarantees a 15%+ first loss position, as far as we know.

The various public bodies active in securitisation, for example European Investment Fund, invest on market-ish terms in ordinary SRT deals, which would generally feature a much slimmer first loss, and have been happily co-existing with risk retention for years. Or quite often, they just buy bonds.

The best explanation we can think of for adding in this term is a way to future-proof the regulations for the mooted “common European securitisation platform”, mentioned in the Noyer report and the Draghi report.

The proposals are fairly nebulous, but point in the direction of an EU version of Fannie Mae or Freddie Mac — a creator of safe, standardised risk-free assets in Europe, using guarantees, as in the US, to turn the senior tranches from a credit product to a rates product.

Agency MBS in the US is specifically exempt from risk retention, and the compliance burden associated would run contrary to this safe-asset creation mission. If the whole point is to build something like a Bund with a variable CPR, a load of forms saying “yes we have definitely checked that this bond as well as the 200 others like it have compliant risk retention structures” are an unhelpful burden.

There are no actual proposals out there for this European securitisation platform, but if something were to come out between now and the next SR revisions (2032?) the last thing European authorities would want to do is reopen the level one text to carve it out from risk retention. Better to slip in a quick clause now?

If there’s a better explanation out there, write in!

The lack of any other risk retention mention was particularly intriguing in the context of the fire drill caused by the joint ESAs report at the end of March.

This outlined a view of risk retention rules at odds with market practice and interpretation of the “entity of substance” rules. The idea is that risk retention pieces can’t just be dumped in an SPV with nothing else going on; it either has to be a fund with other investment activities or a real operating business.

But the ESAs report outlined that, in the views of supervisors, this meant an entity getting 50% at least of its revenues from non-risk retention sources, a standard which CLO risk retention vehicles struggled with.

Given that this issue was very, very live in April, and deals in the market had to scramble to comply, one might have expected the proposals to offer some more concrete guidance — did the ESAs go beyond the intention of the risk retention rules? Perhaps that will have to wait for trilogue.

If you’ve made it to the end of the regulation, relax — we’re going to do the gossip now.

Switching seats

The big move of the week you’d have read first in 9fin9fin, thanks to my colleague Michelle — Laura Coady, global head of CLO origination and head of European securitised markets at Jefferies, is off to Blackstone Credit, in a move which will presumably come as a relief to every other head of CLO origination in the market.

Coady and her team (Luis Leon Carsi and Hugh Upcott Gill are co-heads of EMEA CLO primary) originally moved from Citi to Jefferies in 2020, and built it from a standing start into an absolute powerhouse of CLO arranging.

9fin’s latest European CLO league table has Jefferies second for total issuance this year, just behind BNP Paribas, but a long way ahead in new issuance, with reset mandates pushing BNPP’s total ahead.

As Michelle puts it: “In 2021 the bank skyrocketed to second in European overall CLO issuance and a year later, topped overall and new issuance in the region. On the back of this, Coady was promoted to global head of CLO origination in November 2023. In 2023, the bank led the way in overall and new European CLO issuance, and in 2024 Jefferies was number one for overall European CLO issuance.”

It’s striking, too, that Coady achieved this without buying the market. Jefferies has some CLO equity partnerships, but doesn’t have a native balance sheet that can go toe to toe on price or quantity with the big commercial banks.

The move is also one of the first big appointments made by Dan Leiter as head of international for Blackstone Credit and Insurance (BXCI) since he joined last year. Leiter is another dyed in the wool securitisation person, and ran Morgan Stanley’s securitized products trading and alternative financing globally, as well heading European securitized products.

While the SRT market digested the implications of capital floors and p factor reductions last week, the spicier discussion was where Juan Grana, of Chorus Capital, might be off to.

Grana had been there around three years, joining from ArrowMark, where he set up the London team. Before that, he worked at Nomura and before that, Credit Suisse. The SRT market is clubby enough that he knows everyone, so his absence in Barcelona was certainly noted.

Perhaps because of this, contradictory rumours have been flying.

Firms known to be expanding include Santander Asset Management, which hired Josephine Meertens from M&G earlier this year. The M&G securitisation operation works across products, with no silo between SRT and other asset-backed products, so this could be seen as a statement of intent.

If Grana were feeling particularly public-spirited, we’d suggest he could offer his services to the regulators — at a time when there’s a lot of excess handwringing about SRT leverage, who would be better placed to reassure them and bring a little sanity to the debate?

We also picked up an interesting filing at UK Companies House, for Arxnova Asset Management.

There’s no real detail there, but the directors are Luca Lombardi, formerly head of credit and mortgage trading EMEA at Goldman Sachs, and Jonathan Donne, formerly head of Asia Pacific credit structuring at Goldman (though he’s done other jobs since). Digging through the filings also turns up Enrico Orlandi, who left Goldman’s mortgage team in January last year.

There’s nothing to say exactly what’s going on here — nature of business: fund management — but it sure looks a lot like a new investment firm, and given the backgrounds of those involved, we’d guess it’ll be looking at asset-based product.

Starting a new fund is a tall order. Money might be flooding into the broader asset-based finance sector, but it’s going disproportionately into the megacap funds from the brand name alternative asset managers — a start-up shop with no track record will find it harder to get an audience with LPs.

On the other hand, there’s a fair bit of good business to do with smaller size targets. If anything, once you get above a billion the competition gets fiercer still. A couple of hundred million in commitments and a good chunk of structural leverage might be a higher-returning strategy (and more lucrative for investment firm principals paid on performance) than hoping to grind up to a fund that can go up against Ares or Pimco.

Donne’s roles between Goldman and the new fund might also help get in the room with the right people — he was head of strategic client coverage at Standard Chartered, a gig which presumably involves covering some deep pocketed LP-type institutions.

This is pure speculation, but we feel the flow of firms setting up for asset-backed private credit has been much stronger than firms setting up to buy securitisations with ISINs over the last few years.

Asset-backed private credit in Europe has seen plenty of launches, with firms broadening their offerings into the space. Arini is one high profile name, but you could point to firms like i80 Group, Fasanara Capital, Viola Credit or Vertis Capital Partners as well.

You won’t, however, find these managers crowding the book in a NewDay or Together deal. In the public space, USS stands as a true greenfield launch, while firms like RLAM, Man Group and Challenger Investment Management have dipped in from adjacent areas or amped up their activities. It’s harder to get securities trading up and running, disclosure and regulatory issues are much more severe, and all that for tighter spreads?

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