ABCP programmes in Germany are almost exclusively composed of receivables originated by the real economy (i.e. trade receivables as well as consumer, leasing and auto loans). Some 200 enterprises in Germany currently participate in such programmes with a financing volume of nearly EUR 20 billion. As a result of the experience gained from the financial crisis, the market has grown by around 150% in the past seven years. Investors are typically insurance companies, banks and money market funds, but increasingly include large corporations looking for a safe asset to invest in for the short term.
The Importance of Insurance Companies as Investors in ABCP Programmes
Insurance companies as investors in ABCP programmes are still of minor importance because they are still classified as Type 2 under the existing Solvency II. This does not appear appropriate, however, because fully supported ABCPs are sustained not just by their structure and a widely diversified portfolio – as are other securitisations – but also have full risk coverage from the sponsoring bank (similarly as in a covered bond). That makes them particularly safe for investors. Unfortunately, the current draft Solvency II fails to take this circumstance into account. This is treated differently in the recently reformed Money Market Fund Regulation (MMFR). In response to the introduction of the STS Regulation, it grants the same privileges to such fully supported ABCP programmes as to STS securitisations (see MMFR Article 11.1 (b)).
In this context it is important to note that the new STS Regulation imposes requirements at ABCP programme level which experts agree no ABCP programme can satisfy in all of Europe at the moment because of its internal consistency. This is due to the fact that nearly all individual transactions of a programme must conform to the STS and that restrictive limitations apply to the life of the underlying assets (WAL of not more than 2 years). Consequently, fully supported ABCPs would have to be treated as non-STS securitisations under Section 8 of the draft, which would make an investment totally unattractive for insurance companies.
Proposal for amendment of Article 178 under Solvency II:
Overall, however, insurance companies could be an important pillar in the investor mix of ABCPs in the future, which would directly benefit the financing of the real economy and furthermore support the intentions of the EU capital market union project. To enable this, however, the new draft Solvency II would have to be amended and aligned with the MMFR. We therefore propose to introduce a new Article 3a into Article 178 that reads as follows:
3a. An ABCP issued by an ABCP programme which:
(i) is fully supported by a regulated credit institution that covers all liquidity, credit and material dilution risks, as well as ongoing transaction costs and ongoing programme-wide costs related to the ABCP, if necessary to guarantee the investor the full payment of any amount under the ABCP;
(ii) is not a re-securitisation and the exposures underlying the securitisation at the level of each ABCP transaction do not include any securitisation position;
(iii) does not include a synthetic securitisation as defined in point (11) of Article 242 of Regulation (EU) No 575/2013;
and for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stress(i) depending on the credit quality step and the modified duration of the securitisation position i, as set out in Article 3 above.
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