UK financial regulators propose amendments to capital regulations

12 December, 2009:  UK’s Financial Services Authority has issued a Consultation Paper on several far reaching amendments to Capital Requirements Directives (CRD). Consultation on the Paper will end on 10^th March 2010, and the amendments will finally become effective 2011. 

The 360-page document contains proposed amendments relating to several areas – qualifying conditions for being part of hybrid capital, large exposures, risk management in case of securitisation, idea of a “college of supervisors” for cross-country exposures, higher capital requirements for resecuritisation, upgrading disclosure standards in case of securitisation, etc. 

The major amendments pertaining to securitisation are as follows: 

·         Firms investing in securitized products must do comprehensive due diligence. Those failing to do so with be penalized with heavy capital penalties. There is also a mandate not to invest in transactions where originator risk retention is not at least 5%. This is tune with changes proposed by the EU (see our news here) and similar changes proposed by US regulators (see our news here link).

·         In respect of resecuritisation, the FSA seeks to implement changes proposed in Basel II vide the amendments made in July 2009. This is higher risk weight, and greater chances of impairment losses.

·         Securitisation capital relief will be restricted to cases where firms can demonstrate that there is a “significant risk transfer” (SRT). Criteria are laid down in defining what is SRT. Illustratively, the originator does not hold more than 50% of mezzanine positions, or where there is no mezzanine position; originator does not hold more than 20% of senior positions, and so on. It is not clear how the requirement of SRT marry with the other requirement of originators maintaining a minimum 5% exposure, commonly understood to be 5% horizontal piece. 

Vinod Kothari comments - The securitisation market continues to remain very weak, and regulators’ approach of tackling the instrument, not the malaise, will only contribute to it. Investors will develop apprehensions of regulatory intensity in case of investments in securitized products – thereby deterring investments.

[Reported by: Vinod Kothari]

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