Financial Services Update: EU Capital Markets Union - Progress on Securitisation?
11 July 2017
In 2014, the European Commission announced the Capital Markets Union (CMU). The CMU would create an integrated, well-regulated single market for capital in the EU by 2019. The CMU’s goal is to remove barriers to cross-border investment, diversify funding sources and reduce the cost of raising capital.
A cornerstone of the CMU is the simple, transparent and standardised (STS) securitisation regime. STS securitisation will provide an EU-wide regime for the originators of loans, often banks, to pool portfolios of their loans into securities. Each security will have different investor risk/reward characteristics and will be made up of homogenous loans/receivables. For example, car loans are pooled with car loans or residential mortgage loans are pooled with residential mortgage loans.
Impact of Brexit
The United Kingdom, particularly the City of London, has traditionally been the leading centre for securitisation in the EU. Until the announcement that the United Kingdom would leave the EU, the Bank of England was a strong supporter of the CMU and the STS securitisation regime. The Commission’s announcement affirms the EU’s continued commitment to the plan. According to the Commission, “[t]he departure of the UK from the single market reinforces the need and urgency of further developing and integrating EU capital markets."
At present, the STS securitisation system requires that each of the originator, the sponsor and the issuer of an STS securitisation be established in the EU. It remains to be seen whether the United Kingdom will be excluded from STS or whether Brexit negotiations will find a way to accommodate them.
Risk retention levels
Following the 2007 financial crisis, the ‘originate to distribute’ model of securitisation was heavily criticised. Under this model, lenders would originate loans (such as residential mortgage-backed loans) to immediately transfer them into securities. As a result, the originator would not be exposed to the risk of the loans defaulting.
The STS securitisation regime will require the originators of the loans to retain a certain percentage of the loans to ensure greater care is taken to avoid defaulting loans. The minimum risk retention threshold is now set to remain at 5%, subject to review by the European Systemic Risk Board. Earlier proposals from the European Parliament to raise the threshold to 10% or 20% have been dropped.
While the proposed text is not yet available for review, it is also understood that proposals for the originator, sponsor and/or the issuer to be regulated entities have now been dropped. Also, investment in STS securities is to be opened to both retail and institutional investors provided certain criteria are met.
In response to the announcement on the STS securitisation regime, Fine Gael MEP Brian Hayes said: “Dublin’s financial services industry is poised to reap the benefits from this agreement. We have almost 800 Irish domiciled securitisation vehicles, valued at about €415 billion. Over 10% of responses to the Commission’s original consultation on the Securitisation Regulation came from Ireland. I am confident that the new framework will boost the securitisation industry all across the EU and we need to be ready in Ireland to capitalise.”
The agreement will be worked into a revised regulation that will go to the European Parliament and Council for formal approval. The new regime is not expected to be implemented until, at the earliest, late 2017 / early 2018.
For more information on this announcement, please contact a member of our Financial Services team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.