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"For the Capital Markets Union to live up to the dream, the unparalleled securitisation expertise of London needs to play a role."

Europe is giving securitisation a second chance - but where does London fit in?

28 Mar 2018

While Europe celebrates another step forward with the Capital Markets Union, London is left wondering exactly how it can fit in post-Brexit. As Managing Director of Ocorian UK, Alan Booth brings us up to speed on developments.

Somewhat ironically given its role in the global financial crisis, the US capital market has been showing signs of recovery of late while its European counterpart continues to be subdued. And that’s something the European Commission won’t stand for.

Recognising the need for a shot in the securitisation arm, the Commission began to talk of a Capital Markets Union (CMU) back in 2015, putting the first pieces into action almost a year ago with a package setting out criteria for simple, transparent and standardised securitisation (STS). That deal is one of the cornerstones of the CMU, the Juncker Commission’s pivotal project to build a single market for capital in the EU, unlocking up to EUR 150 billion of additional funding to the real economy.

There’s one problem, though: the heart of Europe’s capital markets lies in London, a city that soon will no longer be part of the union - of Europe, or of its capital markets - thanks to Brexit.

The UK represents a good portion of the current EU securitisation market, however small and subdued that market may be, but Brussels wants an integrated, stronger EU capital market with limited access for a post-Brexit UK. In recent weeks, a growing number of financial players have stood up to say that simply won’t work, and we’re inclined to agree. For the CMU to live up to the dream, the unparalleled securitisation expertise of London needs to play a role.

What is the Capital Markets Union? On face value, the CMU project aims to open up capital flows and investment in the EU. However, digging under the surface reveals regulation that has a decidedly protectionist bent. Those in charge of the project have been quick to state the departure of London makes the CMU “more challenging, yet more important”, but the conflicting message coming from those involved says there is a “need and urgency” to further develop EU capital markets as a direct result of Brexit. Perhaps those at the helm of the CMU are worried about competing with both the UK and the US?

The Commission believes the CMU will help to revive the EU’s securitisation market, broadening investment opportunities for investors and boosting lending to Europe’s households and businesses. The aim is to build a sound and safe securitisation market in the EU, bringing real benefits in terms of investment, jobs and growth, and freeing-up bank lending so that more financing can go towards supporting companies and households.

Its new regulatory framework sets out a risk-sensitive, transparent and prudential treatment of securitisation while ensuring an appropriate capital treatment of securitisation instruments in general.

Can London have a role in the CMU? One very real outcome for the UK post-Brexit is that it will be forced to rely on access provisions in current EU law, such as AiFMD’s third-country passport and the concept of equivalence, which allows countries with similar enough legislation to the EU to operate under their own rules without forcing firms to comply with two sets of laws.

Of course, the UK indicates it wants special treatment in this area as well as all others as part of the exit deal, and nothing is yet set in stone when it comes to the post-Brexit landscape. Plus, the Commission is tightening the screws on how other jurisdictions can obtain equivalence, and therefore access to EU clients, particularly when countries are deemed to be “high impact”, such as the UK and US. It’s worth noting the final securitisation rules agreed in May 2017 do not include a third-country framework.

While the two parties continue to negotiate the terms of the UK’s extraction from the EU, London’s financial districts, The City and Canary Wharf, are watching closely. When the vote to leave the EU first happened, there were some very aggressive predictions of tens of thousands of job losses in London, with analysts firm that the financial sector would simply decamp to the continent.

Even if those jobs aren’t lost over the Channel, there is a very real possibility that new job creation will become stagnant in The City, particularly as the CMU takes hold and begins to give the European securitisation market the shot in the arm it so dearly needs. It really comes down to a question of expertise vs single market access, and no one knows what will emerge as the most important factor in the coming year.

If not London, the emerging likely candidates for the new heart of European securitisation appear to be Frankfurt, established already as a financial capital, Amsterdam with its history of trust work, and Dublin, which could emerge the winner thanks to its attractive corporate regulation and its English language.

While it’s clear that Brexit will have a major impact on Europe’s securitisation markets, exactly what that impact will be remains a mystery. Regulation is emerging as the EU puts the CMU project into first gear, while London is preoccupied with the more wide-ranging impact Brexit will have on its business environment. There is little we can do now to meaningfully anticipate Brexit in the context of the capital markets, but we continue to watch the CMU developments with a close eye.

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