Inter-institutional negotiations will continue in Strasbourg on Tuesday 16 May on the legislative proposal to breathe new life into the markets for securitised financial products by introducing criteria to allow such products to be classed as ‘simple, transparent and standardised’ (STS).
Although there are several sizeable political questions outstanding (re-securitisation, risk retention threshold, third-country equivalence), various parliamentary sources on Friday 12 May referred to the possibility of a political agreement on this dossier. The Maltese Presidency of the Council of the EU did not, however, share this optimism.
Securitisation is a technique that allows banks to reconfigure the loans it grants (mortgages or consumer lending) into financial securities, in order to resell them on the markets. It is controversial as it was a factor in the credit risk during the sub-prime financial crisis of 2008.
One year after the Council reached its negotiating position (see EUROPE 11445) and following several months of tough negotiations between the political group, the European Parliament reached its position in December 2016 (see EUROPE 11685) on the proposal presented by the European Commission in autumn 2015 in the framework of the Capital Markets Union project (see EUROPE 11400).
Although several compromises of a technical nature could have been reached at previous inter-institutional negotiation sessions, other stumbling blocks, of a political order, persist.
Ban on re-securitisation. In their position, the MEPs decided to introduce a ban on securitisation on the basis of instruments already securitised (‘re-securitisation’). This ban, and accompanying sanctions for any infringement, aim to “improve transparency, reduce complexity, promote alignment of interests and deter threats to financial stability”, according to a working document of the Maltese Presidency dated 8 May and of which EUROPE has had sight.
Although all parties have already agreed to a ban on re-securitisation for STS transactions, the question is whether it should also be banned outside that framework.
In its note, the Maltese Presidency states that the “Council is strongly opposed to a total ban on re-securitisations as proposed by Parliament”. Arguing that this option “would not be proportionate to the risks presented by re-securitisations”, and that it would “disregard the positive uses for re-securitisation in particular contexts”, it puts forward two alternatives for consideration during discussions on the subject.
The first option would be to authorise re-securitisations outside STS, on the grounds that the associated risks would already have been taken into account by other regulatory measures, in particular by the banking prudential rules revised in 2014.
The second would be to seek a compromise allowing only certain re-securitisations to be used “legitimately”. In order to determine whether a re-securitisation falls within the scope of this exception, the Council could propose to award the competent authority of each member state discretionary powers to authorise a re-securitisation on the basis of examples provided upstream by the future European legislation. The national authority would then have to notify the European Securities Markets Authority (ESMA).
On top of this, the Council may add a grandfathering clause banning the acquisition of new re-securitisations, but allowing banks to hold existing transactions and buy back existing transactions to close them down.
Although this solution is not ideal, the Presidency document states that it would appear to be a pragmatic compromise.
Risk retention threshold. The member states took on board the obligation upon issuers of securitised assets to retain at least 5% of the credit portfolio, a provision that is included in the initial text and is also recommended by the European Banking Authority (EBA).
The MEPs agreed on a figure of 10%, with a few exceptions (if the EBA so decides, if market conditions so require).
Equivalence for third countries. In its position, the European Parliament brought in the possibility of granting access to the European market to issuers of STS securitised products established outside the EU, subject to a regulatory framework equivalent to that of the EU. Germany and France are reported to have misgivings about such a provision, with the EU soon to launch Brexit talks with the UK.
Other matters, such as the competencies to be granted to the European authorities, have yet to be discussed. (Original version in French by Marion Fontana)