Luxembourg, 11/09/2015 (Agence Europe) - The draft legislation expected at the end of September to breathe new life into the market for simple and transparent securitised financial products will be three-pronged, based on making securities issuers responsible, close supervision and firm penalties.
EU Financial Services Commissioner Jonathan Hill said that he would be unveiling a three-pronged approach combining responsibility on the part of issuers and investors, closer supervision by regulatory bodies and strict penalties for breaking the rules. He was speaking at a conference organised by the Eurofi thinktank in Luxembourg on Thursday 10 September.
The draft legislation awaited at the end of September when the European Commission unveils its action plan on a Union of Capital Markets (UCM) will list a series of criteria for identifying simple, transparent and standardised securitised products (see EUROPE 11355). Securitisation is a financial technique allowing banks to package the loans they've issued and sell them as financial securities in order, in part, to diversify risk and also to reduce bank capital requirements. Although accused of encouraging the spread of the subprime mortgage crisis in 2008, securitisation is also a way that banks can lend more to the real economy.
The Commissioner explained that one of the basic criteria will be that the assets bundled into securitised instruments must be simple. This means that the assets included in a securitisation process must be sufficiently similar to one another so securitisation of securitisation will not be considered simple, transparent and standardised. He said the new rules would not cover over-risky products such as synthetic securitisation whereby risk transfer is achieved using derivatives. The Commissioner said that issuers must ensure that their securitised products comply with the criteria set out in the legislation.
The Commission is pursuing the most ambitious approach possible when it comes to the degree of capital requirement easing that banks will enjoy if they make use of simple, transparent securitisation.
With the UCM project to boost non-bank financing for companies, the Commission hopes to give a great boost to risk-capital markets and revised the prospectus directive to make it easier for small and medium-sized companies to raise capital. The lifting of obstacles to the cross-border sale of investment funds will be the subject of a Green Paper to be unveiled before the end of the year. (Mathieu Bion)