Our response focuses on the operational issues that will arise from the current rules. In particular we focus on those that will prevent market access, or create operational burden without systemic risk reduction.
We believe that the rules on covered bonds should be extended to securitisations – as detailed in our response, and that from AFME which we have contributed to. Also, we believe that the third party solution being offered is effectively the role that is played currently by the swap counterparty themselves. This is because they have to find the funding to collateralise their hedge, and they take credit risk to the Covered Bond (albeit carefully managed). Therefore, we see the use of third parties as adding unnecessary complexity to the existing process.
Additionally, we believe that the swap counterparties are adequately protected in the existing mechanisms, and therefore should be exempted from the rules.
We feel that the protection of proprietary information will mean that IRB approaches are very difficult to use in practise, giving rise to many disputes. Therefore we expect most participants to fall back to ECAIs
We feel that concentration rules will reduce market access for some participants with non-diverse asset pools, and will increase operational burden without reducing systemic risk. Please see our response for details.
We believe that other jurisdictions may allow rehypothecation in a way that will work, and therefore we suggest that an outright ban in the EU is not appropriate.
Nick Steele