Оn 30 September 2015 the European Commission provided a significant legislative push in order to achieve its Capital Markets Union agenda as set out in February this year, which is designed to unlock funding for businesses in Europe and promote growth among the member states by creating a truly single market for capital. As a next step to design more integrated and developed capital markets, the Commission has published its Action Plan on Building a Capital Markets Union which sets out an ambitious and long-term strategy for the overhaul of the current legislative and regulatory barriers to credit, together with the maintenance of safe capital markets.
А vital part of the Capital Markets Union Action Plan is the published Proposal for a “Regulation laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation” (the “Proposal”) which aims to jumpstart the European asset-backed securities (“ABS”) market. As the Commission explains: ‘’the objective of this proposal is to restart a sustainable securitisation market that will improve the financing of the EU economy, while ensuring financial stability and investor protection. To revive the market the proposal aims at taking away the stigma that securitisations face, to create more consistency and standardisation in the market and to put in place a more risk-sensitive regulatory framework.’’
Considered a part of the so-called shadow-banking sector, securitization and its mechanics of securitization have remained virtually non-regulated, with some exceptions such as the requirement of the sponsors or originators to retain part of the risk of the asset-backed securities issue (as first mentioned at the 2009 G20 Summit in Pittsburgh). This is the first attempt to make an exhaustive definition of a pan-European standard for such a product. The Commission explains that its interest in regulating such a nebulous area is because of the chronic lack of ABS issues across Europe.
The Proposal deals with both the capital and money markets. Other than due diligence requirements for institutional investors and transparency obligations for sponsors, originators and SPVs (defined as a 'Securitisation Special Purpose Entity' or 'SSPE'), a standard for “simple, transparent and standardised securitisation (“STS”)” is provided for both ABS and asset-backed commercial papers (“ABCP”) issues, respectively.
The aim of the Proposal is not to impose a single obligatory standard for asset-backed securities, but rather to provide a non-binding criterion that could facilitate the issue of such products across the EU. The European Securities and Market Authority (“ESMA”) will act as the European institution providing technical standards for the compliance of the asset-backed product with the European regulations.
The Proposal aims to achieve two main objectives: 1) to remove the stigma from investors and regulatory disadvantages for simple and transparent securitisation products; and 2) to reduce or eliminate unduly high operational costs for issuers and investors. If the first objective is achieved, there should be an immediate effect on the price of STS versus non-STS products “with STS products being more highly valued than non-STS ones by investors." This should also trigger an increase in the supply of STS products and a growth in the issuance of STS versus Non-STS products. Success meeting the second objective can also be measured by the price for STS products and the increase in the volume of their issuance (as a decline in operational costs should translate into a higher issuance of STS products). The degree of standardisation of marketing and reporting material and feedback from market practitioners on the evolution of operational costs would also indicate achievement of the second objective.
With the exception of some efforts by local banks, nearly a decade ago, securitisation has never been fully utilised by Bulgarian credit institutions as a way to provide more liquidity and to free regulatory capital. If transparent and structured in a proper way to mitigate the risk from the underlying assets, securitisations (both traditional and synthetic) can function as a tool to recycle already originated loans and to free the balance sheets of banks and other originators, including Bulgarian banks. If the European Commission’s Proposal is adopted, it will be directly applicable in Bulgaria and may be a harbinger of more deals with this product in the coming years.