In a letter recently submitted to the European Central Bank, The Bond Market Asso-ciation and the European Securitisation Forum commented on the Bank’s Public Con-sultation Paper on Measures to Improve the Collateral Framework of the Eurosystem.
The Association and the Forum said they support the Bank’s efforts to explore ways to widen the pool of assets considered eligible for use as collateral, and made recom-mendations for the expansion, including which assets should be eligible for use as col-lateral and procedures for disseminating information on the eligible assets.
Markus Sgouridis, European Legal Counsel of the Association, commented, “The on-going growth in demand for collateral is driven by its use in risk management, and we anticipate the demand will continue to increase significantly going forward. Broaden-ing the pool of assets that can be used as collateral will allow market participants to efficiently optimise use of their collateral assets in a cost-effective manner, and speed-ing up the time it takes to determine if assets are eligible as collateral would also be tremendously beneficial.”
The Association and the Forum said they believe it would be useful to move to a sin-gle, expanded list of assets eligible to be used as collateral rather than continuing to use the current two-tier system. The increased availability should prevent the rising demand for collateral from driving up collateralization costs, but the process of ex-panding the pool may require additional criteria to determine eligibility. Additionally, all counterparties should be enabled to access the relevant collateral to ensure a level playing field.
Instruments that the Association and the Forum have listed that should be eligible for use as collateral include bank loans and equities; instruments currently categorized as tier two marketable assets; debt instruments issued in Euros by issuers established in the non-European Economic Area (EEA) G10 countries; and asset backed securities issued through special purpose vehicles located in the EEA. With respect to bonds is-sued by securitization vehicles, the Association and the Forum have pointed out the need to know how the results of the securitization will be taxed, since uncertainty on tax treatment detracts from the rating quality of the bonds, and propose extending fa-vorable regulatory treatment to bonds issued by non-EEA/non-G10 securitization vehi-cles for ten years.
In the letter, the Association and the Forum also encourage the Eurosystem to review its collateral eligibility criteria and procedures regarding securitization issuances. Al-ternatively, if eligibility criteria were such that their application could be more easily ascertained, market participants would know from the outset that certain assets (for ex-ample, a proposed ABS issuance) would be eligible. The Association and the Forum also find distinctions made between ABS that are cash securitizations and ABS that are synthetic securitizations to be inappropriate.