Despite the recent surge on the secondary front, European trading levels have a long way to go before they reach U.S. secondary volume.
In fact, some market participants believe that it is unfair to compare the two markets given the marked discrepancies that are intrinsic to European countries, as opposed to the more uniformly regulated U.S. "I think Europe is a harder market in that there are different regulatory differences per country in terms of securitization," said one trader. "There are intrinsic differences that Europe will have relative to the U.S. and it's unfair for investors to expect the same type of liquidity out of the European product relative to the U.S. ABS market, which is all under a single country."
Before any significant changes in liquidity occur, however, sources say that Europe would have to submit to a similar blanket regulatory system. Regulatory tags that vary from country to country make these securitizations slightly different, which causes standardization of a structure to be virtually impossible. Analysts suggest that the market should follow the Italian government's lead by providing new securitization legislation (such as that which eliminated withholding tax on Italian securitizations). Once the regulations have been harmonized, the next stage is convincing more investors that transparency is necessary to maintain and improve liquidity.
"The challenge in Europe is to try and do a cross between a Dutch deal, Italian deal and U.K. deal it's quite tough," added one market source. "The ultimate maturity of the market is when we start to get a standardization of a legal environment across Europe. Basel II will help but even then we know each jurisdiction will have their own foibles."
These differences breed national tendencies where secondary liquidity is often cornered to the issuing country investor base. Despite large volumes recorded for European securitization, issuers often securitize with their own local currency and consequently limit a transactions' audience to investors based in that country as well.
The unified monetary unit, the euro, is largely expected to address such nationalist tendencies and encourage more interactions between investors across jurisdictions, said one buyside source. "What we should expect going forward is that transactions will be issued in euros and dollars with euros potentially becoming more liquid that dollars," he said. "Because Europe is now becoming euro based and there us a natural hedge that makes more sense to have the transaction in euro. This naturally improves liquidity."
With a single currency, fractionated liquidity that is promoted by regulatory difference across Europe does potentially offer buyers a greater spread pickup, said on investor. "It's not only European investors fueling this market but also U.S. investors," he said. "U.S. investors are one of the largest new investors that are looking at the European ABS market. These two components are certainly going to help fuel liquidity."
