WEBVTT NOTE Created by CaptionSync from Automatic Sync Technologies www.automaticsync.com 00:00:00.436 --> 00:00:05.296 align:middle >> Hello, thanks for joining our webcast today, Reviving European Securitization. 00:00:05.856 --> 00:00:10.556 align:middle My name is Peter Gibson, and I'm responsible for consultant relations at PGIM across EMEA. 00:00:11.166 --> 00:00:15.326 align:middle I'm joined by Kaustub Samant, who leads our Securitized Credit Research Team, 00:00:15.656 --> 00:00:18.286 align:middle and Taggart Davis, head of Government Affairs for EMEA. 00:00:19.216 --> 00:00:24.896 align:middle The securitization market is a vital tool that enables capital markets to function efficiently 00:00:25.186 --> 00:00:28.236 align:middle and also provides businesses with a diverse source of funding. 00:00:29.036 --> 00:00:32.576 align:middle Since the global financial crisis, the U.S. has built a robust 00:00:32.576 --> 00:00:35.156 align:middle and mature market, whereas the Europe has lagged. 00:00:35.726 --> 00:00:39.136 align:middle It has lagged because it's hindered by regulatory barriers 00:00:39.136 --> 00:00:41.646 align:middle to entry, and fragmented market practices. 00:00:41.696 --> 00:00:47.466 align:middle To unlock its potential, Europe needs targeted reforms to enhance investor confidence 00:00:47.816 --> 00:00:51.496 align:middle and pave the way for more dynamic and competitive financial markets. 00:00:52.176 --> 00:00:56.016 align:middle Today we're going to look at how securitization has a role to play in this. 00:00:56.126 --> 00:00:59.656 align:middle So, Kaustub, is it okay if I start with you, please? 00:01:00.286 --> 00:01:05.416 align:middle Perhaps you could take a look at how the securitization markets have evolved 00:01:05.416 --> 00:01:10.666 align:middle and indeed diverged since the global financial crisis in 2008. 00:01:10.946 --> 00:01:13.846 align:middle >> Yeah, thanks Peter, and thanks for -- thanks for having me. 00:01:13.916 --> 00:01:17.996 align:middle So, I think it's worth putting the market in perspective. 00:01:18.146 --> 00:01:23.436 align:middle Obviously the market was at the center of the financial crisis in 2008, 00:01:23.436 --> 00:01:25.566 align:middle and a few things have happened since then. 00:01:26.136 --> 00:01:29.646 align:middle A lot of these have been regulatory changes that have been global. 00:01:29.856 --> 00:01:34.846 align:middle So, things like [inaudible], where issuers have to retain a certain amount of credit risk 00:01:35.306 --> 00:01:37.916 align:middle when they do a securitization, that's been a global change. 00:01:37.916 --> 00:01:41.946 align:middle And some of these have been changes that have happened for individual markets, right? 00:01:41.946 --> 00:01:47.086 align:middle So obviously the mortgage market in the U.S. was, and that was at the heart of the crisis. 00:01:47.186 --> 00:01:52.636 align:middle And so there have been changes made to improve underwriting, improve the credit risk profile 00:01:52.636 --> 00:01:57.456 align:middle of the mortgages [inaudible] in the U.S. And at the same time, you've had structural changes, 00:01:57.456 --> 00:02:01.436 align:middle so there have been changes made in terms of the structural offerings 00:02:01.436 --> 00:02:04.086 align:middle and how these things are packaged into securitizations, right? 00:02:04.086 --> 00:02:10.596 align:middle So there's been sort of this new foundation that has been built for that securitization market, 00:02:10.596 --> 00:02:15.216 align:middle and if you think about what's happened on top of that, post-GFC, 00:02:15.216 --> 00:02:21.376 align:middle if you turn to the next slide what you'll see is issuance has really moved up. 00:02:21.716 --> 00:02:29.976 align:middle So, the U.S., in the U.S. market, if you look at issuance in 2021, it hit almost $750 billion. 00:02:30.246 --> 00:02:35.936 align:middle That's the same level of issuance that we had pre-GFC in 2007. 00:02:35.936 --> 00:02:40.256 align:middle So at least from an issuance perspective, we're back to where we were pre, 00:02:40.576 --> 00:02:42.566 align:middle pre kind of financial crisis around that time. 00:02:42.566 --> 00:02:45.536 align:middle Obviously since then rates have gone up a little bit, so volumes have come down, 00:02:45.886 --> 00:02:49.176 align:middle but that's a very healthy place for the market to be on top 00:02:49.176 --> 00:02:51.626 align:middle of what I said were new foundational changes to the market. 00:02:52.426 --> 00:02:57.246 align:middle And then once you dig deeper into kind of what's being financed to the securitization market, 00:02:57.546 --> 00:03:02.246 align:middle it's a much broader range of assets than has been financed kind 00:03:02.246 --> 00:03:04.086 align:middle of in the years after the GFC, right? 00:03:04.086 --> 00:03:07.166 align:middle So post-GFC we just had sort of your traditional mortgages, 00:03:07.166 --> 00:03:09.186 align:middle your credit cards, your autos, your student loans. 00:03:09.656 --> 00:03:13.816 align:middle You had, you had you know, leveraged loans and you had kind of real estate, right? 00:03:14.546 --> 00:03:19.416 align:middle Over the next, last few years rather, there has been new forms of lending that's happened. 00:03:19.416 --> 00:03:21.306 align:middle So just look at the consumer space. 00:03:21.516 --> 00:03:25.516 align:middle In the U.S. you're no longer just borrowing through credit cards, you can now borrow 00:03:25.516 --> 00:03:29.636 align:middle through the buy now, pay later market, you can now borrow through the home improvement market. 00:03:29.636 --> 00:03:31.626 align:middle If you want to put up solar panels on your house, 00:03:31.626 --> 00:03:33.176 align:middle you can borrow for that specifically, right? 00:03:33.176 --> 00:03:37.536 align:middle So there's new forms of lending that's happening, and that is all getting financed 00:03:37.566 --> 00:03:39.236 align:middle through the securitization market. 00:03:39.236 --> 00:03:42.526 align:middle So, the market is providing access to a much broader range 00:03:42.526 --> 00:03:45.596 align:middle of assets than, kind of in years past. 00:03:46.556 --> 00:03:48.956 align:middle And at the same time, from an investing standpoint, 00:03:49.476 --> 00:03:52.416 align:middle all major investor groups are very well represented 00:03:52.416 --> 00:03:53.796 align:middle in the U.S. securitization market, right? 00:03:53.796 --> 00:03:57.256 align:middle So insurance companies are active, money managers active, 00:03:57.256 --> 00:03:59.286 align:middle hedge funds are active, banks are active. 00:03:59.286 --> 00:04:01.006 align:middle In different parts of the capital structure, 00:04:01.006 --> 00:04:04.906 align:middle in different [inaudible] profiles, in different asset classes. 00:04:05.196 --> 00:04:11.376 align:middle But it's still a very vibrant market with a lot of players and a lot of buyers, which is really, 00:04:11.376 --> 00:04:14.836 align:middle really good to see, because that's obviously the very sustainable place for the market to be. 00:04:15.626 --> 00:04:16.566 align:middle Compare that to Europe. 00:04:16.856 --> 00:04:19.696 align:middle Right? So in Europe issuance has obviously also come back 00:04:19.846 --> 00:04:22.066 align:middle since the years after the financial crisis. 00:04:22.066 --> 00:04:25.346 align:middle But on a relative basis, the market has lagged. 00:04:25.346 --> 00:04:28.726 align:middle So in 2024, what this chart shows is 00:04:28.726 --> 00:04:34.446 align:middle that the European public securitization issuance amounts to about 14% of the U.S. market. 00:04:35.166 --> 00:04:39.726 align:middle And pre-GFC that number was a third of the U.S. market. 00:04:39.726 --> 00:04:46.306 align:middle Right, so on a relative basis, European issuance has actually come down relative to the U.S. 00:04:46.806 --> 00:04:48.856 align:middle And so, what has that resulted in? 00:04:49.116 --> 00:04:55.526 align:middle So if you turn to the next slide, what that's done to the European economy is more 00:04:55.696 --> 00:04:59.226 align:middle of the financing is reliant on banks. 00:04:59.426 --> 00:05:00.956 align:middle And direct bank lending, right? 00:05:01.046 --> 00:05:04.126 align:middle So nearly, what this chart shows, more than 50% of lending 00:05:04.126 --> 00:05:06.746 align:middle in some form or the other, is bank driven. 00:05:07.326 --> 00:05:11.496 align:middle And I think that is, on one hand you can argue that it's positive 00:05:11.636 --> 00:05:14.626 align:middle because banks are [inaudible] entities, but I think what's happening 00:05:14.626 --> 00:05:18.116 align:middle because of this is obviously the stuff that's getting financed is something banks want 00:05:18.116 --> 00:05:18.796 align:middle to lend towards. 00:05:19.146 --> 00:05:24.696 align:middle So it may not be some of the newer asset classes, some of the more cutting edge types 00:05:24.696 --> 00:05:28.286 align:middle of lending, types of products that are really needed to sort 00:05:28.286 --> 00:05:29.706 align:middle of drive the European economy, right? 00:05:29.706 --> 00:05:36.226 align:middle So, I think securitization has a part to play to help that process, but obviously if it's -- 00:05:36.406 --> 00:05:38.626 align:middle if it's curtailed because of regulation, 00:05:38.776 --> 00:05:41.626 align:middle then it's harder for that market to help in that process. 00:05:41.626 --> 00:05:45.216 align:middle So I'll turn back to you, Peter. 00:05:45.376 --> 00:05:46.866 align:middle >> Super. Thank you Kaustub. 00:05:47.216 --> 00:05:51.776 align:middle So what do you think's holding back the European securitization market from developing 00:05:51.776 --> 00:05:54.006 align:middle and evolving as much as the U.S.? 00:05:55.476 --> 00:05:58.756 align:middle >> Yeah, maybe I'll take the question a little bit differently. 00:05:58.756 --> 00:06:01.856 align:middle Before we actually go into what's, what's -- what the -- 00:06:01.856 --> 00:06:06.576 align:middle what is kind of holding the market back, let's maybe talk about some of the benefits of kind 00:06:06.576 --> 00:06:09.596 align:middle of opening up the European securitization market, right? 00:06:09.596 --> 00:06:11.566 align:middle Like what is, what is the benefits of that? 00:06:11.856 --> 00:06:19.596 align:middle So, if you think about securitization it really -- it really funds the real economy, right? 00:06:19.916 --> 00:06:22.016 align:middle Securitization is ultimately what is it funding? 00:06:22.016 --> 00:06:25.936 align:middle It's directing financing mortgages, so it's directly financing homeowners, 00:06:26.406 --> 00:06:29.636 align:middle directly financing kind of credit card loans, auto loans, 00:06:29.636 --> 00:06:32.036 align:middle directly financing consumption in the economy. 00:06:32.036 --> 00:06:35.416 align:middle You can argue it's financing real estate to the commercial real estate market, 00:06:35.746 --> 00:06:39.806 align:middle it's providing for access to credit to kind of small and medium enterprises, right? 00:06:39.806 --> 00:06:43.996 align:middle So it's funding hard assets and it's funding the real economy. 00:06:44.326 --> 00:06:50.666 align:middle And then for investors what's happening is it's, is it's providing kind of higher spread 00:06:51.496 --> 00:06:53.996 align:middle and so better relative value, we would argue. 00:06:54.076 --> 00:06:59.876 align:middle If you look at kind of same duration, same credit profile, securitized assets trade wider 00:07:00.316 --> 00:07:03.046 align:middle than kind of comparable assets maybe in the corporate market. 00:07:03.046 --> 00:07:04.636 align:middle So that's having a huge positive. 00:07:04.706 --> 00:07:06.366 align:middle And then when you dig into it, 00:07:06.366 --> 00:07:10.206 align:middle but what's driving your credit profile if you buy securitization. 00:07:10.206 --> 00:07:16.716 align:middle It really isn't, it really isn't single name risk to specific issuer. 00:07:16.716 --> 00:07:20.966 align:middle So for example, if you buy an auto loan ABS, you're maybe a little bit less -- 00:07:21.146 --> 00:07:25.726 align:middle your credit risk is less correlated to how that auto manufacturer's going 00:07:25.726 --> 00:07:26.996 align:middle to perform from a credit perspective. 00:07:26.996 --> 00:07:32.066 align:middle And it's really your credit profile's going to be driven by how each consumer is choosing 00:07:32.066 --> 00:07:34.776 align:middle or not choosing to pay back their auto loan, right? 00:07:34.776 --> 00:07:38.276 align:middle So from a credit profile you get access, you can tap different parts of the market 00:07:38.496 --> 00:07:40.956 align:middle that are actually very, very difficult to access. 00:07:41.436 --> 00:07:44.046 align:middle I think for policy makers the benefits is 00:07:44.046 --> 00:07:46.846 align:middle that it provides transparency into the economy, right? 00:07:46.846 --> 00:07:51.836 align:middle So it basically tells [inaudible] policy makers, okay, how are borrowers performing? 00:07:51.836 --> 00:07:54.046 align:middle How's consumers performing when it comes 00:07:54.046 --> 00:07:56.646 align:middle to paying back their car loans, paying back their auto loans? 00:07:56.906 --> 00:07:59.016 align:middle How are small and medium enterprises doing, right? 00:07:59.016 --> 00:08:02.986 align:middle So loans that would otherwise be just stuck on bank balance sheets or in sort of held 00:08:02.986 --> 00:08:06.526 align:middle to majority [inaudible] elsewhere, are now being publicly, 00:08:06.686 --> 00:08:09.846 align:middle that performance is now being publicly disseminated. 00:08:10.046 --> 00:08:12.546 align:middle So I think policy makers have a real-time view 00:08:13.086 --> 00:08:17.326 align:middle into how these key parts in the economy are functioning. 00:08:17.326 --> 00:08:19.556 align:middle Which I think has a tremendous amount of benefit. 00:08:19.686 --> 00:08:23.556 align:middle And so, I think maybe just to -- just to hand it over to you, Taggart, 00:08:23.756 --> 00:08:31.486 align:middle how do you think these benefits tie into kind of Europe's broader economic goals? 00:08:32.676 --> 00:08:36.166 align:middle >> Well thank you, Kaustub, and thanks to you and Peter for having me today. 00:08:36.416 --> 00:08:39.456 align:middle Well I really agree with your synopsis there Kaustub, 00:08:39.456 --> 00:08:43.696 align:middle but maybe just putting our political hats on for a minute, I think it's worth mentioning 00:08:43.696 --> 00:08:48.976 align:middle that securitization can also really help the EU realize its political goals, 00:08:48.976 --> 00:08:52.156 align:middle especially around competitiveness. 00:08:52.156 --> 00:08:56.896 align:middle We had the Draghi Report last year, where Mario Draghi set out the need for the EU 00:08:56.896 --> 00:09:01.556 align:middle to enhance its competitiveness, especially in the areas 00:09:01.556 --> 00:09:05.026 align:middle of innovation, defense, and renewables. 00:09:05.096 --> 00:09:08.256 align:middle And securitization can really help with all three of those goals. 00:09:08.786 --> 00:09:15.056 align:middle Ultimately, the EU economy benefits through opening channels of capital to finance growth, 00:09:15.056 --> 00:09:19.286 align:middle whether it's for its technology ambitions, its infrastructure ambitions, 00:09:19.286 --> 00:09:21.756 align:middle its defense or renewable ambitions. 00:09:22.136 --> 00:09:26.576 align:middle Maybe just to give one nice example in the decarbonization space, 00:09:26.656 --> 00:09:31.806 align:middle last year we saw the first heat pump asset backed finance initiative in Germany, 00:09:32.166 --> 00:09:37.856 align:middle that really helped to make installation of heat pumps more affordable for homeowners. 00:09:37.916 --> 00:09:42.556 align:middle So this helps the EU deliver on its decarbonization goals as well 00:09:42.556 --> 00:09:44.806 align:middle as reduce its energy dependencies. 00:09:45.676 --> 00:09:49.576 align:middle >> So Kaustub, coming back to you then, what reforms do you believe are needed 00:09:49.576 --> 00:09:51.896 align:middle to revive the European securitization market? 00:09:53.286 --> 00:09:56.376 align:middle >> Yeah, so I think this has been a key sort of focus of ours. 00:09:56.376 --> 00:10:01.896 align:middle And if you go to the next slide, let's maybe talk about some other reforms that are needed. 00:10:01.896 --> 00:10:07.986 align:middle So there's been a lot of talk about bank capital and changes to the banking regulatory framework 00:10:07.986 --> 00:10:09.896 align:middle and how that can improve access to securitization 00:10:09.896 --> 00:10:10.976 align:middle and improve the securitization market. 00:10:11.066 --> 00:10:14.106 align:middle I'm not going to -- I'm not going to go through that here because I think 00:10:14.106 --> 00:10:17.146 align:middle that conversation has been -- has been had pretty, pretty well. 00:10:17.736 --> 00:10:20.596 align:middle Let's maybe focus more on the insurance side. 00:10:20.796 --> 00:10:25.366 align:middle So the insurance buyer base in the U.S., especially in recent years, 00:10:25.366 --> 00:10:31.376 align:middle has been very active, especially in kind of the mortgage market and the ABS market and so on. 00:10:31.376 --> 00:10:34.196 align:middle And we just don't see that same level of activity in Europe. 00:10:34.406 --> 00:10:38.856 align:middle And so I think it's really important that insurance companies be more active 00:10:38.856 --> 00:10:42.926 align:middle in the European market simply because they have, they have preferences 00:10:42.926 --> 00:10:46.126 align:middle for certain duration profiles and credit risks, that -- 00:10:46.126 --> 00:10:49.536 align:middle that can be well-served by securitization. 00:10:50.056 --> 00:10:52.556 align:middle But I think what's holding it back simply is just capital, right? 00:10:52.556 --> 00:10:55.026 align:middle Because ultimately what banks and insurance companies try 00:10:55.026 --> 00:10:57.126 align:middle and maximize is this return on capital. 00:10:57.126 --> 00:10:59.996 align:middle So, just these capital rules I think 00:10:59.996 --> 00:11:03.146 align:middle for insurance companies have to be better calibrated. 00:11:03.146 --> 00:11:09.456 align:middle So what we see in this chart here is, and I just focused on the CQS1 step, 00:11:09.456 --> 00:11:13.226 align:middle and look at the capital regulations there, right? 00:11:13.226 --> 00:11:20.526 align:middle So on CQS1, there is -- there is capital that is differentiated between sort of STS and non-STS. 00:11:20.706 --> 00:11:26.386 align:middle STS just stands for certain securitizations that meet the Simple Transparent 00:11:26.486 --> 00:11:29.066 align:middle and Standardized framework in Europe. 00:11:29.226 --> 00:11:31.456 align:middle And fortunately that's not a big part of the market. 00:11:31.636 --> 00:11:36.416 align:middle But as you can see, there are lower capital requirements for STS seniors, 00:11:36.486 --> 00:11:38.766 align:middle than for STS non-seniors, which makes sense 00:11:38.766 --> 00:11:41.166 align:middle because STS seniors are more [inaudible] than non-seniors. 00:11:41.596 --> 00:11:45.916 align:middle But when you go to the non-STS market, which as I said is the bigger chunk of the market, 00:11:46.186 --> 00:11:47.726 align:middle there is no such differentiation. 00:11:48.066 --> 00:11:53.586 align:middle We are basically at 100% capital, regardless of whether you buy a super safe, 00:11:53.646 --> 00:11:57.136 align:middle super short duration bond, or whether you buy the equity bonds. 00:11:57.366 --> 00:12:01.426 align:middle So naturally if you're an insurance company, you're probably not going to buy a lot 00:12:01.426 --> 00:12:05.036 align:middle of non-STS products simply because the capital doesn't work and the return doesn't work. 00:12:05.556 --> 00:12:09.036 align:middle And so these the are types of things that need to be addressed, and capital regulations have 00:12:09.036 --> 00:12:15.606 align:middle to be better risk calibrated to address the kind of the needs of the insurance community. 00:12:15.606 --> 00:12:18.726 align:middle Because that's kind of an important buyer base, that's there in the U.S. 00:12:18.726 --> 00:12:20.476 align:middle and that's maybe less active in Europe. 00:12:21.296 --> 00:12:26.036 align:middle And I think Taggart is going to talk about sort of broader reforms in terms of due diligence 00:12:26.036 --> 00:12:29.876 align:middle and transparency and so on, but before we go there, if you just go to the next slide, 00:12:30.356 --> 00:12:34.506 align:middle what I want to touch on is maybe sort of a framework maybe that's needed when we think 00:12:34.506 --> 00:12:35.976 align:middle about this sort of investor community, right? 00:12:36.456 --> 00:12:42.546 align:middle So, if you think about European investors in the securitization market, right, because of a bunch 00:12:42.546 --> 00:12:47.986 align:middle of regulations that are put around this, they currently have access to about 1.1 trillion 00:12:47.986 --> 00:12:49.836 align:middle of available assets globally, right? 00:12:49.836 --> 00:12:52.076 align:middle So, I would argue that that's a pretty big market, 00:12:52.076 --> 00:12:54.476 align:middle I think most would say that's a pretty large market, which is great. 00:12:54.906 --> 00:13:01.486 align:middle But, there's another 2.5 trillion that's sitting out there that is not compliant 00:13:01.646 --> 00:13:04.616 align:middle with European regulations and so cannot be, 00:13:04.616 --> 00:13:06.916 align:middle cannot be accessed by the European investor base. 00:13:06.996 --> 00:13:13.896 align:middle Right? And that's a shame, and I think what it does is by limiting market access 00:13:13.926 --> 00:13:20.436 align:middle to this entire market, naturally in some way will reduce interest in this market, right? 00:13:21.006 --> 00:13:24.676 align:middle For Europe to have an active securitization market you need active issuers 00:13:25.016 --> 00:13:26.426 align:middle but you also need active investors. 00:13:26.646 --> 00:13:33.546 align:middle And an investor base that can only invest in a small chunk, or maybe a subset I should say, 00:13:33.946 --> 00:13:36.816 align:middle of the broader market is naturally not going to be as interested in securitization 00:13:36.816 --> 00:13:39.986 align:middle versus let's say corporates, or equities, or some other broader asset class. 00:13:39.986 --> 00:13:44.816 align:middle So we need asset allocators, people that think about whether I need to be in corporates, 00:13:44.816 --> 00:13:48.086 align:middle or whether I should be in securitized products, or whether I should buy government bonds. 00:13:48.596 --> 00:13:51.726 align:middle These people, they need to think and those are ultimately our clients, 00:13:51.726 --> 00:13:56.516 align:middle our clients need to have access to I think entire securitization market globally, 00:13:57.116 --> 00:13:58.836 align:middle just to make this market more appealing. 00:13:58.836 --> 00:14:00.806 align:middle And I would argue that's ultimately going to help Europe. 00:14:01.016 --> 00:14:04.856 align:middle Because if you have a domestic investor base that is very active globally, 00:14:05.256 --> 00:14:09.846 align:middle you're going to then bring out issuers that want to tap into that investor base, right? 00:14:09.996 --> 00:14:15.536 align:middle And so, that's just something that we hope isn't lost to regulators as they think 00:14:15.536 --> 00:14:19.586 align:middle about what regulatory forms are need in Europe for securitization. 00:14:19.736 --> 00:14:23.696 align:middle So with that, I guess that broad overview, I want to turn it to Taggart, and Taggart, 00:14:23.696 --> 00:14:26.966 align:middle maybe you can talk about some of the specific changes that we've advocated 00:14:27.036 --> 00:14:29.996 align:middle for within securitization for issuers and investors. 00:14:32.676 --> 00:14:34.216 align:middle >> Well sure, thank you Kaustub. 00:14:34.216 --> 00:14:38.126 align:middle I think there are a few other areas where the EU has kind of come 00:14:38.126 --> 00:14:43.066 align:middle down with a very heavy regulatory footprint, and I'll mention a couple of those. 00:14:43.066 --> 00:14:50.236 align:middle One is due diligence, in Europe, securitization is singled out as a special asset class 00:14:50.236 --> 00:14:52.836 align:middle that needs extra investor due diligence. 00:14:53.076 --> 00:14:57.216 align:middle And this really kind of makes Europe an outlier but not in a good way. 00:14:57.696 --> 00:15:03.046 align:middle So we have sectoral legislation in Europe, like UCITS that governs mutual funds, 00:15:03.046 --> 00:15:06.936 align:middle AIFMD that governs all -- governs alternative funds, IORP, 00:15:07.426 --> 00:15:09.756 align:middle which deals with workplace pensions, 00:15:09.926 --> 00:15:15.046 align:middle and all of these regulatory frameworks have pretty detailed risk management frameworks 00:15:15.046 --> 00:15:19.506 align:middle and due diligence frameworks that ensure investors carry out due diligence 00:15:19.506 --> 00:15:21.926 align:middle on all the investments in their portfolio. 00:15:22.396 --> 00:15:30.856 align:middle And so, it's duplicative and onerous to have this extra layer of due diligence that focuses 00:15:30.856 --> 00:15:33.206 align:middle on securitization investment only. 00:15:33.576 --> 00:15:36.976 align:middle Especially given the strong track record of the asset class. 00:15:37.956 --> 00:15:43.106 align:middle When we think about due diligence at PGIM, whether we're carrying out due diligence 00:15:43.106 --> 00:15:48.866 align:middle for a U.S. investor or a European investor, really it's identical for us. 00:15:48.866 --> 00:15:55.366 align:middle We do really detailed and robust risk assessments in each instance and we won't invest 00:15:55.446 --> 00:15:58.616 align:middle in an asset if we can't properly assess the risk profile. 00:15:58.616 --> 00:16:03.816 align:middle But what's different in Europe is when we're investing here, there's a lot of documentation 00:16:03.816 --> 00:16:08.706 align:middle and paperwork that's involved, given the regulation demands it. 00:16:09.106 --> 00:16:15.296 align:middle And we are, at PGIM we're a larger asset manager, so we can handle the compliance costs, 00:16:15.396 --> 00:16:19.966 align:middle and we can do all this pretty quickly, but for a smaller asset manager, 00:16:19.966 --> 00:16:25.326 align:middle this can really be a barrier to entry because of the high cost and the time involved. 00:16:25.606 --> 00:16:29.516 align:middle And when you take this market wide, we're concerned that all 00:16:29.516 --> 00:16:33.916 align:middle of this daunting documentation can really dampen demand in the overall market. 00:16:34.126 --> 00:16:39.746 align:middle So, what we've suggested is really significantly streamlining investor due diligence 00:16:39.746 --> 00:16:41.066 align:middle for securitization. 00:16:41.996 --> 00:16:45.896 align:middle We suggest to policy makers that they take the sectoral legislation, 00:16:45.896 --> 00:16:52.756 align:middle UCITS or AFIMD for example, and look at the due diligence there and then think very carefully 00:16:52.756 --> 00:16:59.306 align:middle about any extra due diligence that you put on top of that, given the extra cost involved. 00:16:59.306 --> 00:17:03.196 align:middle We really encourage policy makers to take a principles-based approach 00:17:03.536 --> 00:17:07.926 align:middle to the extra due diligence that they have to do when investing in securitization. 00:17:08.626 --> 00:17:12.146 align:middle A second issue that I wanted to raise was reporting. 00:17:12.876 --> 00:17:18.296 align:middle The reporting that issuers in Europe have to comply with is much more detailed 00:17:18.296 --> 00:17:20.846 align:middle than what issuers face in other parts of the world. 00:17:21.146 --> 00:17:27.956 align:middle There are literally hundreds of data fields that issuers must report that add a lot of cost 00:17:27.956 --> 00:17:32.796 align:middle to issuing in Europe, as well as being a large investor in securitization, 00:17:32.796 --> 00:17:36.466 align:middle PGIM is also a top issuer of collateralized loan obligations, 00:17:36.956 --> 00:17:45.356 align:middle and we estimate that the cost associated with EU reporting on our CLOs is between 10,000 euros 00:17:45.356 --> 00:17:48.976 align:middle and 31,000 euros per CLO per year. 00:17:49.536 --> 00:17:54.106 align:middle And that's just additional cost that just doesn't exist in other parts of the world, 00:17:54.446 --> 00:17:58.996 align:middle making European products more expensive and potentially muting supply 00:17:58.996 --> 00:18:04.936 align:middle as some issuers just might be turned off by those, those additional costs. 00:18:05.676 --> 00:18:10.836 align:middle When we think about this, our -- the investors in our CLOs really value the transparency 00:18:10.836 --> 00:18:12.996 align:middle that they get from trustee reports, 00:18:13.086 --> 00:18:17.866 align:middle and they don't request the additional detail in the ESMA templates. 00:18:17.866 --> 00:18:21.416 align:middle We've actually password protected some of that ESMA reporting 00:18:21.676 --> 00:18:25.316 align:middle and we haven't had investors even ask us for the password, 00:18:25.656 --> 00:18:29.016 align:middle so that suggests that they don't really need all that information. 00:18:29.266 --> 00:18:32.616 align:middle Now perhaps supervisors want some additional information, 00:18:32.866 --> 00:18:37.266 align:middle but we think they should take what investors use as a starting point 00:18:37.266 --> 00:18:41.166 align:middle and then think really carefully about what additional information they need, 00:18:41.166 --> 00:18:47.136 align:middle knowing that those additional data fields come with extra cost. 00:18:47.136 --> 00:18:52.066 align:middle So we, again, we think this is an area where some simplification of the regulation is needed. 00:18:52.126 --> 00:18:55.936 align:middle A last issue that I wanted to raise was around UCITS. 00:18:56.116 --> 00:19:02.676 align:middle We think that securitization could comprise a greater part of the portfolios of UCITS funds 00:19:03.016 --> 00:19:10.086 align:middle but investors are held back both by regulatory pressures and supervisory pressures. 00:19:10.336 --> 00:19:16.586 align:middle So on the regulatory side, the UCITS directive limits funds from holding more than 10% 00:19:16.946 --> 00:19:19.406 align:middle of issuance of a single bond issuer. 00:19:19.676 --> 00:19:24.936 align:middle And that might make sense in the context of a corporate issuer or a sovereign issuer, 00:19:24.936 --> 00:19:28.356 align:middle where you wouldn't want one investment fund to have a sort 00:19:28.356 --> 00:19:31.506 align:middle of undue influence in that single entity. 00:19:31.506 --> 00:19:36.726 align:middle However, in the case of securitization, which is a diversified pool of assets, 00:19:36.996 --> 00:19:38.926 align:middle we just feel this rule doesn't make sense. 00:19:39.246 --> 00:19:45.346 align:middle So we've advocated that policy makers just think 00:19:45.346 --> 00:19:51.186 align:middle about exempting securitization pools from that single issuer limit. 00:19:51.366 --> 00:19:57.656 align:middle The other issue that I wanted to talk about in the UCITS context was supervisory pressure. 00:19:57.656 --> 00:20:02.896 align:middle So we've just noticed that some national [inaudible] authorities looked a bit dubiously 00:20:02.896 --> 00:20:07.966 align:middle at securitization and place pretty strict limits on investments in the asset class. 00:20:08.046 --> 00:20:15.436 align:middle And we just feel that the data and evidence doesn't really justify that skeptical approach. 00:20:15.706 --> 00:20:22.626 align:middle So we just hope that the current review of the regulation also maybe focuses regulators' minds 00:20:22.626 --> 00:20:29.186 align:middle and encourages a bit more open-mindedness to the asset class based on the evidence of the -- 00:20:29.556 --> 00:20:31.846 align:middle of the, and their proven track record. 00:20:32.766 --> 00:20:37.076 align:middle Just one sort of final point that I think kind of brings this all together, 00:20:37.276 --> 00:20:42.196 align:middle it's not just about what policy makers do, it's also about how they do it. 00:20:42.196 --> 00:20:46.446 align:middle If they really want this effort to succeed where past efforts have fallen short, 00:20:46.756 --> 00:20:50.726 align:middle they need to approach these reforms with really the right mindset. 00:20:50.916 --> 00:20:58.356 align:middle To be honest, we just, we need to look at this comprehensively, but we also need to really look 00:20:58.356 --> 00:21:01.986 align:middle at it boldly and ambitiously as we reform this market. 00:21:02.606 --> 00:21:07.656 align:middle This is the third time that EU policy makers have really had a crack at this agenda, 00:21:08.006 --> 00:21:11.926 align:middle and if we don't get it right this time, there might not be a fourth shot at it. 00:21:11.926 --> 00:21:15.476 align:middle So, we see this as kind of a now or never moment 00:21:15.566 --> 00:21:19.126 align:middle to set the securitization agenda on a more positive path. 00:21:19.486 --> 00:21:23.576 align:middle All that said, I'm feeling quite positive that we can get it right this time, 00:21:23.576 --> 00:21:27.506 align:middle given the strong political momentum to improve this market. 00:21:27.626 --> 00:21:29.046 align:middle >> Thank you, Taggart. 00:21:29.126 --> 00:21:33.666 align:middle So you've alluded to working with the financial regulators across Europe. 00:21:33.746 --> 00:21:38.896 align:middle Could you give any indication on where we are in that legislative process? 00:21:38.896 --> 00:21:43.836 align:middle And also, any indication of potential reforms that you think might start coming through? 00:21:44.296 --> 00:21:46.666 align:middle >> Yeah, thanks so much, Peter. 00:21:46.666 --> 00:21:49.886 align:middle But before we even get into that, first I might talk a little bit 00:21:49.886 --> 00:21:52.806 align:middle about why we're so engaged in this debate. 00:21:52.806 --> 00:21:57.486 align:middle Firstly, it's because well, we're just one of the largest investors globally 00:21:57.486 --> 00:22:00.866 align:middle in securitized assets, so of course we take an interest in it. 00:22:00.996 --> 00:22:05.536 align:middle But secondly, it's because we're very invested in and committed to Europe. 00:22:05.536 --> 00:22:11.046 align:middle We have 750 professionals working across 11 European jurisdictions, 00:22:11.046 --> 00:22:13.846 align:middle so we take interest in the European market. 00:22:13.846 --> 00:22:20.046 align:middle And lastly, kind of related to that, and I hope this doesn't sound trite, because it's very true 00:22:20.416 --> 00:22:25.056 align:middle that we take a long-term and holistic view on the markets in which we operate. 00:22:25.106 --> 00:22:29.666 align:middle So we don't just look at our own performance, but we really also think a lot 00:22:29.666 --> 00:22:35.506 align:middle about the broader ecosystem and the health of the broader ecosystem in which we're operating. 00:22:36.726 --> 00:22:39.226 align:middle So where are we, getting back to your question. 00:22:39.226 --> 00:22:44.956 align:middle The European Commission consulted late last year and we expect the European Commission 00:22:44.956 --> 00:22:48.576 align:middle to propose legislation on the 17th of June. 00:22:48.576 --> 00:22:50.956 align:middle So it's coming up very shortly. 00:22:51.366 --> 00:22:57.146 align:middle But that June publication is only the start of a political process. 00:22:57.206 --> 00:23:00.226 align:middle And that's the political process of the EU codecision. 00:23:01.026 --> 00:23:05.786 align:middle Essentially the European Parliament and the EU member states and the counsel have 00:23:05.786 --> 00:23:09.856 align:middle to take the European Commission's proposals, debate and amend them 00:23:09.856 --> 00:23:14.276 align:middle in their respective institutions and then finally, they have to come together 00:23:14.466 --> 00:23:18.746 align:middle and reach a final compromise between those respective positions. 00:23:19.736 --> 00:23:25.796 align:middle There's political momentum to move quickly on this agenda, but we also can't ignore the fact 00:23:25.796 --> 00:23:28.816 align:middle that there's political stigma around securitization, 00:23:28.816 --> 00:23:31.136 align:middle especially in the European Parliament. 00:23:31.136 --> 00:23:34.826 align:middle One senior EU policy maker said to me very recently 00:23:34.826 --> 00:23:37.866 align:middle that we're still haunted by the ghosts of the past. 00:23:38.426 --> 00:23:41.506 align:middle And she was alluding to the global financial crisis. 00:23:42.406 --> 00:23:45.586 align:middle So, what does that mean as far as timing is concerned? 00:23:45.906 --> 00:23:51.646 align:middle It means it might be ambitious to expect a political agreement before late 2026, 00:23:51.646 --> 00:23:55.246 align:middle or early 2027, and those rules wouldn't actually come 00:23:55.246 --> 00:24:00.836 align:middle into force probably before late 2027 or early 2028. 00:24:00.836 --> 00:24:06.936 align:middle An MEP said to me just last week that he would prefer to take the time to get this right, 00:24:07.066 --> 00:24:09.156 align:middle rather than rush through proposals. 00:24:10.456 --> 00:24:15.916 align:middle We've put a tentative time table together, which is this slide that you're looking at now, 00:24:16.196 --> 00:24:20.846 align:middle but I would remind folks that this is a political process 00:24:20.846 --> 00:24:24.066 align:middle and so you really can't predict these things with too much accuracy. 00:24:24.906 --> 00:24:25.486 align:middle >> Thank you. 00:24:26.236 --> 00:24:30.836 align:middle And just one final thing to say before we wrap up, can you give some examples 00:24:30.836 --> 00:24:36.106 align:middle of how you're actually engaging in this review process? 00:24:37.216 --> 00:24:38.446 align:middle >> Sure, absolutely Peter. 00:24:38.446 --> 00:24:44.786 align:middle And we do have a final slide which is really, this is kind of a non-exhaustive list 00:24:44.786 --> 00:24:47.336 align:middle of the many government and regulatory bodies 00:24:47.336 --> 00:24:50.106 align:middle that we've been engaging with already on this topic. 00:24:50.106 --> 00:24:55.416 align:middle So, despite this being non-exhaustive, it looks a little bit exhausting, 00:24:55.416 --> 00:24:57.016 align:middle because there's quite a few on there. 00:24:57.276 --> 00:25:02.226 align:middle But just to kind of give a little overview, we engaged with the European Commission extensively 00:25:02.226 --> 00:25:04.976 align:middle in advance of their consultation paper last year. 00:25:05.356 --> 00:25:10.246 align:middle We responded to the consultation, but we also published a public white paper 00:25:10.476 --> 00:25:14.876 align:middle on reviving securitization to really set a marker down on this issue 00:25:15.156 --> 00:25:17.896 align:middle and start a dialog, start conversations. 00:25:18.156 --> 00:25:22.976 align:middle We continue to engage with the European Commission, even last week we sat 00:25:22.976 --> 00:25:29.006 align:middle down with them, as well as other stakeholders, the European supervisory authorities, 00:25:29.006 --> 00:25:34.466 align:middle IOPA and ESMA in particular, EU member state finance industries, 00:25:34.626 --> 00:25:38.956 align:middle regulatory bodies across Europe, and of course the European Parliament. 00:25:38.956 --> 00:25:44.346 align:middle As I mentioned previously, just last week we hosted a panel event in Brussels, 00:25:44.506 --> 00:25:50.286 align:middle with a Spanish MEP called Fernando Navarrete, who is widely speculated 00:25:50.286 --> 00:25:52.706 align:middle to play a key role in these discussions. 00:25:53.106 --> 00:25:57.846 align:middle That was quite a successful event, we had nearly a hundred participants join us. 00:25:58.386 --> 00:26:04.876 align:middle But looking forward, as we look beyond the June publication of the legislative proposals, 00:26:05.066 --> 00:26:10.026 align:middle we'll start intensifying our advocacy with the European Parliament and member states even more. 00:26:10.026 --> 00:26:15.126 align:middle And of course in addition to the direct advocacy that we do with policy makers, 00:26:15.236 --> 00:26:20.746 align:middle we've also marshaled a number of our byside [phonetic] associations to engage on our behalf 00:26:20.746 --> 00:26:22.606 align:middle and on behalf of the industry as a whole. 00:26:23.056 --> 00:26:28.676 align:middle So that's a bit of a summary, but I'll leave it there, Peter, and hand back to you. 00:26:28.776 --> 00:26:31.286 align:middle >> Smashing, thank you Taggart, and thank you Kaustub as well. 00:26:31.536 --> 00:26:36.216 align:middle We've covered quite a lot of ground in the past, past 30 minutes or so, 00:26:36.216 --> 00:26:38.476 align:middle so I'd like to give a quick recap before we sign off. 00:26:38.846 --> 00:26:43.796 align:middle So we've explained how the U.S. securitization market is a lot more dynamic, 00:26:43.796 --> 00:26:49.296 align:middle it's got wider breadth and is more robust than Europe, and we feel that change does need 00:26:49.296 --> 00:26:52.026 align:middle to happen within the European securitization market. 00:26:52.316 --> 00:26:56.116 align:middle Indeed, we believe that the lack of development 00:26:56.116 --> 00:27:00.726 align:middle of the European securitization market is perhaps holding back the European financial system. 00:27:01.046 --> 00:27:04.206 align:middle May also be hindering European economic growth. 00:27:04.826 --> 00:27:09.946 align:middle We've also mentioned how we believe change is needed, and we're lobbying hard for this change. 00:27:10.606 --> 00:27:15.126 align:middle And if you're interested in this topic, or want to discuss it further, please reach out to one 00:27:15.126 --> 00:27:18.856 align:middle of your existing PGIM contacts, or as Taggart's just mentioned, 00:27:19.176 --> 00:27:21.266 align:middle we do have a white paper on our website. 00:27:21.696 --> 00:27:22.306 align:middle Thank you. 00:27:22.616 --> 00:27:22.866 align:middle Goodbye.