The European Commission's Green Paper on Building a Capital Markets Union (CMU) explores ways to help unlock funding for European businesses and boost growth across the EU, through identifying and removing barriers to raising finance (particularly for small- and medium-sized enterprises (SMEs)), creating a true single market for capital, building sustainable securitisation markets, boosting long-term investment and developing European private placement markets. Two key Consultation Documents were released alongside the Green Paper, which provide further detail on the Commission's plans for upgrading certain parts of the existing European capital markets landscape to reflect the strengthened regulatory environment and reduce barriers to cross-border funding:
● Consultation Document on "Simple, Transparent and Standardised" securitisation
This fairly brief Consultation Document represents the Commission's aim to develop a framework for securitisation that better reflects the different characteristics of securitisations within the strengthened regulatory environment, using a two-step approach which: (i) identifies sound instruments based on clear eligibility criteria; and (ii) adjusts the regulatory framework to allow a more risk-sensitive approach. Noting the differentiated regulatory treatment already provided for insurance investors in securitisation transactions through the Solvency II Delegated Act and for banks' Liquidity Coverage Ratios through the LCR Delegated Act which designates certain securitisations as "High Quality Liquid Assets", the Commission is seeking to complement those developments by (based on feedback to this Consultation Document) developing a proposal for how to build a sustainable securitisation market. Raising a number of specific questions about the identification of criteria for 'qualifying' securitisations (i.e. 'qualifying' as simple, transparent and standardised (STS)), the Commission proposes a "modular" approach (similar to that taken by the European Banking Authority and Basel Committee / IOSCO in their earlier proposals - see the Feature Piece in this Edition of the SCM Briefing and the Feature Piece in Edition 12 of this Briefing) whereby a set of "foundation" criteria are supplemented by additional, more specific risk factors that focus on (e.g.) sectoral investors such as insurance firms. The Consultation Document goes on to ask specific questions about the extent to which criteria identifying STS securitisation should be developed for short-term instruments such as ABCP (which other consultations on 'qualifying' securitisation have not included), suggests removing the "indirect approach" to risk-retention (whereby investors verify the risk-retention) for 'qualifying' securitisations, proposes the development of a standardised EU securitisation structure and streamlined disclosure requirements (and seeks comment on whether adjustments to existing loan-level reporting requirements are needed), asks whether alternatives to credit ratings could be used, and whether there is a need to further develop the market infrastructure for securitised products. Importantly, the Commission does not propose its own set of Criteria, rather it seeks market comment on the aspects that should formulate the Criteria (thus, for the first time, giving the market the opportunity to say what criteria it considers should be applied to STS securitisations). Focusing on the prudential treatment for banks and investment firms, the Consultation Document seeks feedback on whether the Capital Requirements Directive IV and Regulation (CRD IV / CRR) framework adequately reflects the risks attached to securitised instruments, whether the Basel Committee's recently-published Revisions to the Securitisation Framework (see the Feature Piece in this Edition of the SCM Briefing) set an appropriate baseline for securitisation capital requirements, and whether (crucially) a separate regulatory treatment should be applied to 'qualifying' securitisations. Specifically seeking comment on whether the EU should closely follow the international developments, the Commission also seeks feedback on the regulatory treatment of insurers investing in securitisations, and asks whether and how the institutional investor base for securitisation could be expanded. Interestingly, the Commission also asks whether a harmonised, single set of pan-EU "umbrella" securitisation legislation should be developed in order to help contribute to the development of European securitisation markets (however unlikely this would be!). Finally, the Commission seeks comment on the specific development of SME securitisation, and asks whether a degree of standardisation (of underlying assets and/or structures) would reduce issuance costs and promote further investment. The Consultation Document is generally positive about securitisation, and the express acknowledgement that securitisation can provide effective risk transfer, as well as an effective funding mechanism, has been widely welcomed by the market. Further, with the Commission attempting to establish an EU set of "High Quality Securitisation" criteria in advance of the finalisation of the Basel Committee / IOSCO STC proposals, it is to be expected that the EU will effectively be implementing the "high-level principles" of the Basel / IOSCO STC Criteria through its own, existing legislative framework (the CRR), and perhaps even ahead of time.
● Consultation Document on a review of the Prospectus Directive
The Commission's plans to review the Prospectus Directive (PD) (ahead of a scheduled, formal assessment of the Directive which is required by 1 January 2016) are intended to ensure that a prospectus is only required when it is truly needed, that the approval process is as smooth and efficient as possible, that the information included in a prospectus is useful and not burdensome to produce, and that barriers to seeking cross-border funding are reduced. Key questions raised by the Commission include whether the current principle (whereby a prospectus is required whenever securities are admitted to trading on a regulated market or offered to the public) is still valid (or whether different treatment should be granted to the two purposes), with the Commission seeking views on the costs of producing prospectuses. Further questions are broken down into the following three key headings:
● A: when is a prospectus needed: examining the scope of the requirement to prepare a prospectus, the Commission seeks views on a possible recalibration of the existing exemption thresholds (including the €5,000,000 total consideration limit, the €75,000,000 repeated non-equity securities threshold, the 150 persons limit and the €100,000 denomination per unit minimum), as well as the favourable treatment granted to debt issuers using high denominations (€100,000) per unit (whether it is detrimental to liquidity and should be maintained, removed or adjusted). Questions are also raised about whether the obligation to draw up a prospectus should be mitigated for "secondary issuances" of the same securities, whether a prospectus should be required when securities are admitted to trading on a multilateral trading facility, whether an exemption should be introduced for certain types of closed-ended alternative investment funds, and whether the scope of the exemption provided to employee share schemes should be extended to non-EU, private companies.
● B: what information should a prospectus contain: the Commission seeks feedback on whether the proportionate disclosure regime is used in practice, whether it has met its original purpose of improving efficiency and taking account of issuer size, and whether it should be modified to improve its efficiency, or extended to other types of issuer or securities. Questions are raised about whether a bespoke, simplified prospectus regime for small- and medium-sized (SME) issuers should be introduced, whether the "incorporation by reference" mechanism should be made more flexible to incorporate other information, whether the disclosure requirements of the PD and related Transparency Obligations and Market Abuse Directives should be better streamlined, whether the content of prospectus summaries should be reassessed given the interaction with Key Information Documents (KIDs) (and how to deal with the overlapping information requirements generally), and whether a maximum prospectus length should be imposed and if so, how. Liability and sanctions are also examined, with questions raised about improving (and possibly harmonising) the liability and sanctions regimes.
● C: how are prospectuses approved: since the scrutiny and approval of prospectuses is handled differently across EU Member States, the Commission seeks feedback on whether the scrutiny and approval process should be streamlined, made more transparent, and, specifically, whether marketing could be allowed by the issuer in the period between first submission of a draft prospectus and approval of the final version. Comment is sought on the role of the national competent authorities in scrutinising and approving prospectuses, particularly in relation to the passporting mechanism. Specific questions are also raised about the approval procedures for base prospectuses, and whether the "tripartite regime" (separate approval of a registration document, securities note and summary note) could be improved to provide greater flexibility. As to the determination of Home Member State (for non-equity securities), comment is sought on whether the dual regime should be amended. Additional questions relate to whether an all-electronic system for the filing and publication of prospectuses should be implemented, whether an "equivalence" regime should be introduced for third-country (i.e. non-EU) prospectuses, whether certain terms in the PD could be better defined, and whether there are other areas or concepts in the PD that would benefit from further clarification.
Responses to all three of the Commission's documents are requested by 13 May 2015, and the Commission will communicate the next steps in developing these aspects of the CMU once the consultation period has closed and responses have been received.
European Commission Green Paper
European Commission Consultation Document on STS Securitisation
European Commission Consultation Document on Review of the Prospectus Directive