The Association for Financial Markets in Europe (AFME) has released a report that puts the spotlight on the challenges faced by institutional investors in meeting due diligence requirements under Article 5 SECR. According to the report, although many in the industry agree that due diligence requirements are necessary to instil confidence in the securitisation market, uncertainties in how to interpret them have been “undermining the very purpose they seek to serve”.
Feedback gathered from buy-side participants for the report reveals that many are struggling with the burden of compliance – the requirement to demonstrate compliance is a cause of significant administrative bottlenecks in the investment process. Other issues that were put forward include the lack of clarity in the scope of due diligence requirements, and that the requirements seem designed for only credit institutions, and do not accommodate more complex investment structures such as multi-asset funds or segregated mandates.
According to AFME, these issues could limit flexibility and agility in the investment process. The increased compliance costs and administrative burden could reduce the attractiveness of securitisation for investors, especially those targeting positions below a certain size. With less investors able or willing to participate, it is unlikely that a deep and liquid securitisation market could develop in the EU and UK.
AFME is seeking feedback from market participants to compile a Q&A for the relevant authorities. Those interested may submit their contributions by 14 July 2023. Read the full report here.