The last 18 months have been all about Brexit and the Covid-19 pandemic, which together have continued to dominate discussions about the future of the economy and society generally. Although Covid-19 is by no means a thing of the past, there are good reasons to hope that 2022 will allow us to return, in a sense, to “business as usual”. In the context of the European financial markets, we expect that legislators and regulators will re-focus their attention on the European Commission’s (“EC’s”) flagship Capital Markets Union (“CMU”) project, as well as on key megatrends such as the rise of ESG investing and the digitalisation of finance.
Set out below is a brief survey of some of the main regulatory developments which we expect to be of relevance to the European debt capital markets and structured finance sectors in 2022, under three main headings: (i) CMU; (ii) Digital Finance and (iii) Sustainable Finance.
By 1 January 2022, the EC must present a report to the European Parliament and Council on the functioning of the Securitisation Regulation, accompanied, if appropriate, by a legislative proposal. In anticipation of this report, various industry and regulatory bodies have published their views on the implementation of the Securitisation Regulation and areas where it could be improved. Most recently, the European Banking Federation published its proposals in September 2021, the most important being:
- addressing “capital non-neutrality” (ie, the application of significantly higher capital requirements to securitised assets than to equivalent non-securitised assets);
- streamlining and harmonising the significant risk transfer (SRT) process;
- improving the liquidity treatment of securitisations by aligning their treatment (for the purposes of banks’ liquidity coverage ratio) with that of covered bonds; and
- making disclosure requirements more targeted, by amending the disclosure templates to remove disclosure requirements which are considered duplicative or of limited value to investors.
The EC is likely also to have regard to the report on the implementation of the Securitisation Regulation published in May 2021 by the joint committee of the European Supervisory Authorities (the “ESAs”). That report, which we wrote about at the time, suggested certain amendments to the Securitisation Regulation in order to, among other things, (i) exempt certain private securitisations from its transparency requirements; (ii) clarify the means by which in-scope private securitisations must comply with the transparency requirements; (iii) clarify the responsibility of parties to STS (Simple, Transparent and Standardised) securitisations where third-party verifiers are engaged to verify compliance with the STS criteria; and (iv) clarify the jurisdictional scope of the due diligence and risk retention requirements.
In order to further inform its report, the EC launched a consultation on the Securitisation Regulation in July 2021. The consultation invited market participants’ views on several of the issues mentioned above, as well as other topical issues such as the disclosure of information on environmental performance and sustainability.
The publication of the EC’s report, and the progress of any associated proposals to amend the Securitisation Regulation, will be closely followed by the European securitisation industry. Based on the discussions to date, any proposed amendments are likely to be largely welcomed by the industry.
The finalisation of the Basel III requirements will affect the capital treatment of securitisations through the standardised approach and will also affect securitisations under the internal ratings-based approach (IRBA), under which risk weights will increase. This will need to be factored into the discussion about the general review of the securitisation framework.
The main amendments made in March 2021 (which we wrote about here) to the Prospectus Regulation were:
- provision for a new short-form “Recovery Prospectus” for certain equity securities;
- extension of investors’ rights to withdraw their acceptances upon publication of a prospectus supplement, from two to three working days; and
- clarification and relaxation of financial intermediaries' obligations in relation to prospectus supplements.
As it stands, these amendments are scheduled to expire at the end of 2022, at which point the relevant rules would (in the absence of any further legislative intervention) revert to the pre-March 2021 rules. However, the prospectus regime is scheduled for a routine five-year review by 31 July 2022, so some of those amendments may be more permanently adopted in one form or another.
Markets in Financial Instruments Directive (“MiFID”)
As part of the ongoing wider review of MiFID II, the European Securities Markets Authority (“ESMA”) launched a consultation in September 2021 on the rules around transparency, focusing on technical issues relating to post-trade data, including the basis for any future consolidated tape. Responses are invited by 23 December 2021.
The EC will likely introduce proposals for amendments in 2022, particularly following the Wirecard case.
Central Securities Depositories Regulation (“CSDR”)
The EC provided its report on the CSDR to the European Parliament and Council in July 2021. The EC is considering presenting a legislative proposal to amend the CSDR (CSDR REFIT), subject to an impact assessment that will take account the possible solutions in greater depth.
The Settlement Discipline Regime (“SDR”) is part of the third phase of the implementation of the CSDR currently underway. Following some delays, the SDR is currently scheduled come into force on 1 February 2022.
The SDR is designed to improve the safety and efficiency of securities settlement, particularly for cross-border transactions, by ensuring that buyers and sellers receive their securities and money on time and without risk. The SDR provides a set of measures to prevent and address failures in the settlement of securities transactions (‘settlement fails’), including cash penalties, mandatory buy-ins and monitoring and reporting measures to be taken by the CSDs.
On 23 September 2021, ESMA sent a letter to Mairead McGuinness, Commissioner for Financial Services, requesting that consideration be given to modifying the implementation schedule for the SDR because market participants have serious difficulties regarding the buy-in regime.
From 1 January 2023, newly issued transferable securities that are admitted to trading or traded on a trading venue will be required to be represented in book-entry form, as immobilisation or subsequent to a direct issuance in dematerialised form. From 1 January 2025, this requirement will apply to all in-scope transferable securities in issue on that date. While the requirements will not apply until 2023 at the earliest, issuers who may be affected will need to consider the impact of the requirements on their issuance processes.
The equivalence decision for UK central clearing counterparties expires on 30 June 2022. As we wrote about recently, on 16 September 2021 a group of finance industry associations representing a wide range of market participants sent a letter to Commissioner McGuinness requesting an extension of the recognition of UK central clearing counterparties (“CCPs”) “in order to prevent negative financial, commercial, operational and level playing field effects on EU counterparties and clearing members and to enable continued access to global pools of liquidity after 30 June 2022”.
The associations asked the EC to provide clarity well in advance of March 2022. Given the risk involved, the associations asked the Commission to consider granting this further extension for a longer period of time than the current equivalence decision, in order to avoid uncertainty for EU clearing members and their clients.
On 10 November 2021, the EC published a statement by Commissioner McGuinness announcing the proposed way forward for central clearing. From the EC announcement:
"The [EC] remains of the view that over-reliance on UK-based [CCPs] for some clearing activities is a source of financial stability risk in the medium term. It will therefore pursue its work to develop the capacity of EU-based CCPs as a means to reduce such over-reliance. However, to address possible short-term financial stability risk, linked to an abrupt interruption in access to clearing services, the [EC] will propose, in early 2022, extending equivalence for UK-based CCPs. The extension of equivalence should be long enough to allow the [EC] to revise the EU CCP supervisory system."
As we wrote about here, LIBOR publication will cease at the end of 2021, with the exception of the overnight and 12-month US dollar LIBOR settings, which will cease immediately after 30 June 2023.
From 2022, ESMA will directly supervise the administrators of EU critical benchmarks. Following the discontinuation of EONIA, as of January 2022 EURIBOR will remain the only benchmark recognised as critical in the EU, and ESMA will have direct supervisory responsibilities over its administrator, the European Money Markets Institute (“EMMI”). Natasha Cazenove, executive director of ESMA, said in a speech on 8 October 2021 that ESMA’s supervisory focus will be on EURIBOR’s representativeness of the underlying market and that ESMA will actively engage with EMMI in this regard.
From January 2022, ESMA will also be the competent authority for third-country administrators under the Benchmark Regulation (“BMR”) recognition regime. ESMA’s initial focus will be on the finalisation of the registration of third-country administrators applying for recognition and ensuring that applicants meet regulatory requirements and the objectives of the BMR. In that context, ESMA will also supervise the application of the BMR’s specific requirements on climate benchmarks provided by third-country administrators.
Market Abuse Regulation (“MAR”)
ESMA published its final report on MAR in September 2020. The report is expected to contribute to the ongoing review of MAR by the EC.
2. Digital Finance
The collection and analysis of market data continues to be a key focus of financial regulators. In the speech on 8 October 2021 referred to above, Natasha Cazenove also discussed ESMA’s role as a data-driven regulator. Ms Cazenove stated that there has been a notable improvement over the years in the quality of the data reported pursuant to the European Market Infrastructure Regulation (“EMIR”), and that the implementation in 2020 of an equivalent reporting regime for securities financing transactions pursuant to the Securities Financing Transaction Regulation (“SFTR”) was relatively seamless, despite going live during the disruption of the Covid-19 pandemic.
However, Ms Cazenove underlined, there is still work to be done to improve the quality of data collected from market participants by EU regulators. ESMA’s data quality report in April 2021 highlighted several ongoing issues, including data not reported by counterparties and delays in reporting. The issues highlighted in the report will be among the future key areas of focus for ESMA and the relevant national competent authorities (“NCAs”). A lot of work has already been on implementing systems and increasing the volume of data reported, but quality of data has been identified as an EU strategic supervisory priority. ESMA and the NCAs have instituted data quality engagement frameworks and action plans for EMIR and SFTR, as well as MiFID/MiFIR.
It remains to be seen whether legislators propose any significant amendments to existing reporting regimes (or the introduction of new reporting regimes) in 2022. However, it seems clear that the timeliness, accuracy and consistency of data reporting will continue to be a top priority for ESMA and NCAs in their supervisory actions and their engagements with industry.
Markets in Crypto-Assets (“MiCA”) Regulation
The draft MiCA Regulation part of the EU’s Digital Finance Strategy, proposes a EU-wide regulatory framework for crypto-assets and crypto-asset service providers (“CASPs”) operating in the EU. Once the regulation comes into force, the regulatory regime will be operational only after an 18-month period, during which CASPs will be required to obtain a licence from their relevant competent authority. Issuers of e-money tokens and asset-referenced tokens will not have the benefit of this 18-month transitional period. Once registered, CASPs will be able to passport their services throughout the EEA.
The MiCA Regulation will be considered by the European Parliament and the EC. Major revision of its provisions is not expected at this stage.
Digital Operational Resilience Act (“DORA”) Regulation
The DORA Regulation is designed to consolidate and upgrade information and communications technology (“ICT”) risk requirements throughout the financial sector to ensure that all participants are subject to a common set of standards to mitigate ICT risks for their operations.
The regulation covers a broad range of financial institutions, including credit institutions, payment institutions, e-money institutions, investment firms, cryptoasset service providers, central securities depositories, administrators of critical benchmarks and crowdfunding service providers. Many entities that have not previously been subject to specific ICT regulations come within the proposed scope of the DORA Regulation.
The proposed regulation is currently being examined by the European Parliament and the EC.
Distributed Ledger Technology (“DLT”) Pilot Regime
A proposed regulation (“DLTR”) on a DLT pilot regime was published in September 2020. The European Parliament’s report on the proposal was published in August 2021. The European Parliament will now proceed with trilogue negotiations with the EC and the Council.
The DLTR creates a legal regime for the practical application of DLT in post-trade services and provides a regulatory framework for the development of DLT multilateral trading facilities and DLT securities settlement systems. The original proposal provides that the DLT pilot regime should last five years, after which the EC would assess the costs and benefits of extending the regime. Although the DLTR is still at a relatively early stage, its progress through the EU legislative process will be closely watched by market participants during 2022 given the potentially significant impact that distributed ledger technology could have on the financial services industry.
3. Sustainable Finance
Sustainable finance has been a dominant topic of discussion in 2021, and this can be expected to continue into 2022 amidst strong investor demand for green financial products. Matheson’s ESG Advisory Group has written about many of the most significant recent developments in this area, as well as developments relating to social and governance issues in investing.
Sustainable Securitisation Framework
In March 2021, the Securitisation Regulation was amended to, among other things, include a new Article 45a, requiring the European Banking Authority (the “EBA”), in close cooperation with ESMA and the European Insurance and Occupational Pensions Authority, to publish a report on developing a specific sustainable securitisation framework for the purpose of integrating sustainability-related transparency requirements into the Securitisation Regulation (the “EBA Report”). Article 45a also requires the EC, based on the EBA Report and in conjunction with its general review of the Securitisation Regulation (discussed above), to submit a report to the European Parliament and the Council on the creation of such a framework (the “EC Sustainability Report”). The EC Sustainability Report shall, where appropriate, be accompanied by a legislative proposal.
As of the date of this briefing, the EBA Report is not publicly available. We expect that both the EBA Report and the EC Sustainability Report will be eagerly awaited and closely followed by the securitisation industry. To date, we have seen substantial interest from investors and managers in ESG securitisations, particularly in the area of CLOs. Many managers have agreed to provide investors with transparency around the ESG characteristics of their portfolios on a voluntary basis. 2022 may be the year we see the emergence of a formal regulatory framework for such disclosures.
Interestingly, Article 45a specifically states that the EBA Report should, where relevant, mirror or draw upon certain key provisions of the Sustainable Finance Disclosures Regulation (“SFDR”). Consistency between the sustainable securitisation framework and SFDR would be welcomed by market participants, who are already looking to SFDR as a source of standards for sustainability disclosure in some ESG securitisations.
European Green Deal
In April 2021, the EC published a communication entitled "Directing Finance Towards the European Green Deal" .
The communication discusses various endeavours, including a proposal for a Corporate Sustainability Reporting Directive (“CSRD”). The CSRD extends the scope of reporting to all large private companies and all companies listed on EU regulated market. This will significantly broaden the rules laid down by the Non-Financial Reporting Directive (“NFRD”), which itself set out standards for large public companies in terms of disclosures relating to environmental protection, social responsibility, employee welfare, anti-corruption and boardroom diversity.