The Future Drivers of Securitisation

01 July 2019

By Ian Sutton, funding and securitisation consultant, Phoebus Software Ltd

I recently attended the Asset Backed Securities conference in Barcelona and there were two areas that many attendees were discussing – imminent improvements for investors and the potential for technology to benefit investors and lenders.

Investor confidence is improving as they see solid credit performance and the potential of more transparent securitisation vehicles. The principal driver for delivering the latter will be simple transparent and standardised rules (“STS”). Investors in STS certified securitisations benefit from constraints in underlying risk exposures: floors for originators’ risk retention; the removal of the eligibility of all self-certificated loans and swathes of credit-impaired loans; and widening the reach of reduced capital requirements for many investors.

Feedback in Barcelona on STS rules was that the implementation has been “troublesome” – many transactions closed before the end of last year, creating a lull in transactions at the start of 2019. Nationwide notified the first UK STS in April this year, raising £1bn and so far, 13 other STS transactions have been notified.  Momentum is expected to build after the autumn when delays to full detailed regulations from the EU are resolved. Currently the European Securities and Markets Authority have implemented an interim STS register.

Longer-term drivers should come from wider use of DLT to drive efficiencies.  In its most basic form, DLT is a record (ledger) of data and transactions made available (distributed) to an unlimited number of participants which can be updated only by an algorithm of consensus of participants.  All participants may obtain identical copies of the ledger at the same time and all data and transactions are certain and verifiable. Prevalent platforms in the Financial Services industry will be “permissioned” to a limited number of approved, known participants.

First-generation DLT is crypto-currency.  Second-generation bring smart contracts which allow reduction of intermediaries’ involvement, hence reducing (or even removing completely), cost. Second generation can code the terms of the transaction into blockchain, for example, and update smart contracts by adding external information such as cash receivables.

Last year, DLT underpinned the negotiation of a “synthetic” securitisation between BBVA and Madrid Regional Council.  Over time, the scope of DLT can extend in the securitisation arena and bring streamlined and cost-efficient processes that service the terms of the securitisation.

So what does this mean from a technical perspective? To generate legitimacy, next generation systems must demonstrate they ensure the terms of the securitisation are respected without loss of data security. Next generation DLT need solutions for governance of personal data and for permitted but controlled updates reporting loans’ status within the SPV.

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