Referring to the criteria for Prime Collateralized Securities as “a living construct,” the PCS initiative today said it had revised what determines whether a securitization receives this label of high-quality or not.

Perhaps the boldest move was to remove the requirement for any given rating level.

“It seems inappropriate to import in a fairly arbitrary way the credit analysis component from some third party such as an agency selected to rate a particular transaction,” PCS said in a report.

A requirement for two ratings, however, remains in place.

The changes are a response to PCS’s evolving understanding of best practices in the securitization market. 

“In our 18 months of operation…PCS learned may lessons about its criteria,” the organization said in a report. “Some criteria that seemed at first sight to add important components, when examined closely end up not truly to reflect the concept of high quality securitisations.”

Still, the organization pointed out that the modifications do not meaningfully change the principles and rules behind the label.

“The vast majority of the criteria remain untouched,” PCS said.

Among the changes was a much more explicit restriction to only deals backed by homogenous pools — apparently this rule had not been clear enough originially — as well as a definition of “residential mortgages” that embraced all kinds. PCS also now requires two lead managers.

The criteria also now include standards set forth by other organizations that have, since the inception of PCS, issued their own ideas of best practices. Most of these approaches were already in the PCS standards, but some were not. The organizations issuing these standards are the European Insurance and Occupational Pensions Authority (EIOPA), which has defined high-quality securitization for capital requirements under Solvency II; the European Central Bank (ECB) and Bank of England (BoE).

PCS now has disclosure rules that are aligned with those of the ECB and BoE.

A summary of changes is available here.

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