At present, securitisation originators holding the subordinated piece of a securitisation, generally referenced as notes below a BB or BBB rating, are less favourably treated in cost-of-capital terms than investors in the same tranches. The rules state that issuers that decide to keep the lowest-rated piece in a securitisation have to hold an equal amount of capital to the subordinated tranche, while investors need to hold only 8% – the current risk weighting measure defined under the Cook ratio, as defined in Basel I. The new French ruling states that all French regulated investors in the subordinated piece of a securitisation will, in future, need to deduct full capital against their holding.
“The original rules on the deduction of capital for holding the subordinated pieces were put into place at a time when the whole of the market consisted of originators holding the subordinated assets,” said Kevin Ingram, partner in the securitisation group at Clifford Chance in London. “But now there is a market for subordinated tranches. The new ruling suggests that investors currently holding the subordinated tranche are suddenly put in a far worse position,” added Ingram, who is also chairman of the European Securitisation Forum (ESF), a major European securitisation body that recently issued recommendations to regulators on securitisations.
But the French memorandum has dismayed people in the industry who claim that French regulators have acted without consulting the rest of the market. “This is a big change from what is currently in place,” said Mark Nicolaides, partner in securitisation at law firm Mayer, Brown, Rowe & Maw, based in London. “The memorandum was released without any consultation with market participants. It seems an ill-considered proposal.”
The confusion over the document was further exacerbated at a meeting of the ESF in Brussels last Thursday, at which Sophie Dignac, a representative of the Commission Bancaire, claimed the original bulletin had been misinterpreted, and that clarification would be issued in a further bulletin next week. However, so far, nothing has been released.
A further problem with the new ruling is whether or not it has been conducted following consultation with the Basel Committee. Although Dignac told RiskNews that the new regulation was not intended to pre-empt the new Basel II Accord, others were more sceptical. Emmanuelle Sebton, co-head of the International Swaps and Derivatives Association’s European office, based in London, said the French law may well be mirrored in regulations being brought out under Basel II, currently planned for 2006. “The French regulators will have issued this memorandum after discussions with Basel, though one is likely to see a more refined version of this under Basel II,” said Sebton.