Background
On 9 October 2024, the European Commission (the "Commission") published its Targeted Consultation on the Functioning of the EU Securitisation Framework (the "Consultation"). This follows the 2022 Report on the Functioning of the Securitisation Regulation, subsequent stakeholder engagement and most recently the report of former ECB President, Mario Draghi (the "Draghi Report"), which identified relaunching the securitisation market as a means of increasing the EU's competitiveness.
The securitisation framework as described in the Consultation consists of the Securitisation Regulation ((EU) 2017/2402), the Capital Requirements Regulation ((EU) No 575/2013), the Solvency II Delegated Act (Regulation (EU) 2015/35) and the Liquidity Covered Ratio Delegated Act (Regulation (EU) 2015/61).
The Consultation focuses on identifying and quantifying barriers to issuance and investment, including transparency and due diligence requirements as well as capital and liquidity treatment of securitisations.
The criticality of this piece of work to the EU securitisation market - which is perhaps belied by the two-month period for responses - cannot be overstated. Initial views from market participants have been uniformly positive. Many will welcome the Consultation as an overdue opportunity to nudge the regulatory pendulum back towards proportionality and right the balance between investor protection and a functioning market. The breadth and complexity of topics covered and the decision to address particular questions (for example, on compliance costs) to specific stakeholders demonstrates a new willingness on the part of the Commission to understand grievances of market participants and also to scrutinise regulatory requirements that have stifled securitisation in the EU.
In this advisory, we provide an overview of the proposals outlined in this highly significant Consultation for our market.
Overview of proposals
The key topics addressed in the Consultation can be summarised as follows.
Effectiveness
Setting the scene with a broad question to start, the Consultation asks whether the securitisation framework has been successful in achieving the policy goals of the capital markets union across a number of areas including, differentiating as between simple, transparent and standardised ("STS") securitisations and more complex transactions and tackling regulatory inconsistencies.
Scope
Almost six years after entry into force of the Securitisation Regulation, the next set of questions tackle the central issues of jurisdictional scope and the legal definitions of "securitisation" and "sponsor". In relation to the meaning of "securitisation", proposals include extending the definition to capture structures that could be considered securitisations from an economic perspective and conversely, narrowing it to exclude specific types of transaction. It is proposed to expand the definition of "sponsors" to apply to alternative investment fund managers (AIFMs) established in the EU. Stakeholders will welcome the opportunity to clarify the position of securitisation parties located outside of the EU and a clear delineation of which transactions are within scope of the Securitisation Regulation.
Due diligence
Stakeholders have consistently highlighted due diligence requirements under Article 5 as disproportionate. Requirements apply equally to all types of securitisation and are more onerous than those that apply to other financial instruments with similar risk characteristics. In this regard, views are sought on, amongst other things, applying different due diligence requirements based on different characteristics and underlying assets of securitisaitons and whether the requirements should be made on a more principles-based and less complex basis, more prescriptive or if they should stay the same. The Commission is also seeking information from market participants in relation to the costs of compliance with the current regime.
Transparency and public securitisation
Challenges levelled at the disclosures regime under Article 7 include excessive prescriptiveness and lack of tailoring to actual investor needs. On the other hand, by virtue of the definition of public securitisations – i.e. where a prospectus is published - only a subset of economically public deals fall into scope for Article 7, which arguably reduces overall market transparency and supervisory effectiveness. Stakeholders are invited to respond to 21 questions under this heading, including in relation to compliance costs, the introduction of reporting obligations for private securitisations and extending the definition of "public securitisation" to apply to notes admitted to a trading venue and transactions marketed to a broad audience where the terms are non-negotiable.
Supervision
Some securitisation transactions, where parties are located in different Member States are subject to supervision by several national competent authorities. Noting that different supervisory approaches between Member States can create uncertainty and increase cost for supervisors and securitisation parties alike, proposals target streamlining and co-ordination of supervision, including the setting up of "supervisory hubs" and, in the case of cross-border transactions, appointing one lead co-ordinator for supervision.
STS
A number of criteria for STS transactions (for example, homogeneity, exclusion of exposures of credit-impaired obligors) have been labelled as burdensome or otherwise hampering the development of the STS market. Respondents are asked to consider, amongst other things, factors holding back the development of the STS standard and how it can be bolstered. In particular, the Commission has sought feedback on whether unfunded credit protection arrangements should be eligible for STS and if the homogeneity requirements are too burdensome.
Securitisation platform
Tracking the Draghi Report, the Consultation explores setting up a dedicated securitisation platform backed by targeted public support, such as public guarantees for the first-loss tranches and the creation of a new common EU "safe asset" to increase the attractiveness of securitisation in the EU. Views are sought in relation to targeted objectives, asset class, guarantees and potential challenges.
Prudential and liquidity risk treatment
The European Supervisory Authorities ("ESAs") on one hand and investors and issuers on the other, take disparate positions how prudential and liquidity treatment impacts the securitisation market.
It is therefore not surprising that this section runs to 49 questions, tackling risk weight floors and the p-factor, limitations of the SRT framework, application of the LCR Delegated Regulation and transitional arrangements for the output floor.
Specific sectors
The Consultation also considers insurance companies' limited appetite for investment in securitisation positions; impediments to SME loan securitisations; and the prudential treatment of securitisation positions held by certain pension funds.
Next steps
The Commission has invited feedback via its consultation portal by 4 December 2024. Output from the Commission, once it has gone through the responses to the consultation, is expected in Q2 2025.
There is a large volume of complex material to address in a relatively short period. We would therefore urge market participants to begin their consideration of the Consultation as soon as possible. The Consultation is a decided effort by the Commission to grapple with the regulatory and legal burdens inherent in the EU's securitisation framework. Considered feedback from market participants to the Consultation will be integral to efforts to recalibrate securitisation framework and revitalisation of the market.
Other expected developments
Market participants can also expect further progress on various fronts in the coming months including:
- The 2nd Article 44 report on the functionality of the Securitisation Regulation is expected to be issued shortly the Joint Committee of the ESAs following its consultation earlier this year regarding the general functioning of the Securitisation Regulation, STS, green securitisations and internal bank processes.
- ESMA feedback statement on its latest Consultation in relation to potential amendments to its regulatory technical standards and implementing standards with reporting templates and disclosures is expected to be issued this quarter.
- ESMA is also expected to launch a consultation in the coming weeks in relation to guidelines on the due diligence requirements in Article 5 of the Securitisation Regulation.
- The Irish Department of Finance's Funds Review 2030: A Framework for Open, Resilient & Developing Markets – Final Report is expected to issue in the coming weeks and, following a lengthy consultation and industry engagement process with key stakeholders, it is anticipated that this will include some useful insights and findings in relation to Irish Section 110 vehicles operating as SSPEs.
