European supervisors call for more coherent securitisation framework

European policymakers must design a more coherent due diligence framework if they wish to foster growth in the securitisation market, according to a report by the three European supervisors.

Boosting the securitisation market is one of the stated goals of the current European Commission, previously identified by financial stability commissioner Jonathan Hill as one of the areas where the Capital Markets Union could reform standards.

A joint report by the European Supervisory Authorities (ESAs) – the European Insurance and Occupational Pensions Authority, the European Securities and Markets Authority and the European Banking Authority – notes the differing due diligence and disclosure frameworks for those investing in the securitisation market, depending on whether they were regulated through Solvency II, the Alternative Investment Fund Managers Directive (AIFMD) or the Capital Requirements Regulation for banks.

“Due diligence requirements should be well-aligned with the practices of these different investor types and where possible consistent,” the report says.

“Common due diligence requirements across investor types should be introduced where possible.”

The ESAs suggested it would be important for policymakers to understand fully the links between due diligence needs and investor practices – for example, if they were speculative, buy-and-hold investments or used for hedging.

“This would allow for the development of a more coherent conceptual framework and, in turn, tailored due diligence requirements for different investor types, dependent on where they sit in the framework,” they said.

Steven Maijoor, chair at ESMA, said the measures proposed in his report would improve the functioning of the securitisation market.

“Implementation of these measures, supported by an appropriate supervision and enforcement framework, will contribute to restoring investor confidence in this sector while increasing its efficiency,” he said. 

ESMA previously found that credit ratings agencies were only conducting “unsatisfactory” assessments of asset-backed securities, which left them unable to assess whether assets were of sufficient quality.