Reflecting on the regulatory framework for securitisation

At the end of September, the European Commission released its latest action plan for the Capital Markets Union. Acutely aware of the importance of timing as Brexit continues to move in an uncertain direction and as the effects of the pandemic persist, the recent action plan has provided some reassurance, particularly to the organisations who responded to the European Commission’s call for feedback on the development of the action plan back in June. Here, the European Commission has announced that it will “review the current regulatory framework for securitisation to enhance banks’ credit provision to EU companies, in particular SMEs”. By the fourth quarter of 2021, it will also have assessed “whether the listing rules for public markets (both SME growth markets and regulated markets) could be further simplified”. This would certainly serve to deepen the capital market, which is a crucial step toward reducing the uncertainty that Europe’s economy is currently facing.

In this article, we will take a deeper look at what these potential changes would mean for participants within Europe’s economy. Firstly, we will explore how the potential simplification of listing rules might benefit European businesses. Secondly, we will take a deeper look into what a revised regulatory framework might look like. Before delving into the action plan, let’s explore the reasons why the completion of the Capital Markets Union would be beneficial in the first place.

The European motto “united in diversity” stands in line with the goals of the Capital Markets Union, an initiative that has been taking shape since well before the COVID pandemic hit (actually, free movement of capital between member states was already part of the Treaty of Rome). While the EEA is made up of 27 very diverse nations, a single European capital market would be far more resilient than 27 separate national capital markets, according to a recent publication by Germany’s Federal Financial Supervisory Authority, BaFin. In its article, entitled “Capital Markets Union: This is how the hurdles fall” (BaFin Journal September 2020, 15.09.2020), BaFin underlines that while each nation’s contribution to the CMU may possess different qualities, integrating all 27 capital markets will provide financing options that will bring Europe out of the pandemic stronger.

In this vein, the CMU action plan seeks to support European business. As outlined above, one measure proposed in the action plan is the possibility of easing listing rules for Europe’s SMEs. Easing listing rules for SMEs would give small and medium businesses across the economic area a much-needed boost, improving their visibility and providing them with the ability to access debt finance and additional equity capital more easily. Additionally, SMEs would be less reliant on funding from banks. This, alongside increased investor diversification, would provide significant benefits as the region begins its recovery.

When seeking capital, the best fit for an SME may be found in a member state other than the one where the SME is located. Facilitated cross-border lending in the spirit of the Capital Markets Union would open up opportunities for capital to flow to where it is needed. Ultimately, cross-border capital flow can only further strengthen economic unity and growth. In our view, the only way for capital market participants to fully benefit from cross-border investments within the EEA is to provide transparent methods of engaging in cross-border lending. This includes a common legal basis to ensure a smooth handling of investments across jurisdictions as well as clear reporting structures / requirements.

Europe’s businesses need to start benefiting from cross-border lending and they need to start benefiting soon. A common legal basis to facilitate avenues for businesses to seek capital outside of their member state is a strong securitisation framework which provides stable structures and broad regulatory benefits for borrowers and investors. .

Back in July, our response to the European Commission’s call for feedback on the proposed action plan for the CMU focused on establishing a more open securitisation framework, favouring this level of transparency and clear reporting. In our submission, we placed a strong focus on the importance of varied issuances. We also expressed our concerns about the proposed regulatory framework for securitisation, underlining that changing securitisation rules can only make sense by moving away from the current definition of securitisation (involving tranching credit risks and cash flows) towards a simpler risk settlement system involving unitranche issuances. Now that the latest action plan has been released, we are pleased that the European Commission has addressed this concern and plans to revisit its proposed regulatory framework for securitisation. We seek a level playing field where unitranche securitisations are granted similar regulatory advantages to those which are currently granted only to multiple tranched issuances, as defined under the EU Securitisation Regulation (2017/2402). We are looking forward to reading the revised regulatory framework for securitisation and we hope that collectively, other companies and organizations will join us in continuing to emphasise the importance of unitranche issuances alongside traditional tranched issuances. This would allow capital market participants to benefit from the full range of structures available, thus strengthening the CMU.

A potential solution for this has already been included in the recent action plan. In footnote 13 of the plan¹, the European Commission included a statement about its plans to assess the possibility of introducing a dual-recourse instrument named European Secured Notes (ESN). This already broadly discussed instrument would combine the benefits of traditional covered bonds and securitisation. The introduction of ESN would potentially bridge a gap between funding requirements and risk sharing needs, further facilitating lenders across Europe and potentially leading to the broadening of market access. We enthusiastically support this as — of course depending on final definition — unitranched issuances would fall hereunder.

CrossLend is pushing for the opening up of market access more broadly, permitting funds to be allocated between member states more efficiently. We have structured our digital debt platform based on the premise of effectively strengthening the Capital Markets Union. It is our mission to rewire Europe’s lending landscape by providing capital market participants with a transparent approach to cross-border investments within the EEA. As the actions are set in motion, we are looking forward to finding out the next steps that will enhance market integration across the EEA.

Read our full input here: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12498-Action-Plan-on-the-Capital-Markets-Union/F540876

[1]: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2020:590:FIN

Jochen Weiss
Jochen WeissDirector Regulatory and Accounting Solutions

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