Legislative proposals on the Capital Markets Union (CMU) are coming in thick and fast. Following last week’s presentation of two action plans on sustainable finance and financial technology (see EUROPE 11977), the European Commission presented a package on Monday 12 March, containing four further legislative proposals, which were announced in its mid-term action plan (see EUROPE 11804), aiming to remove the final obstacles to cross-border investments.
These programmes are accompanied by a political communication, the title of which sets the tone: ‘Completing the Capital Markets Union by 2019 – time to accelerate delivery’ (see the text at: http://bit.ly/2p4DqcS ).
By May 2018, the Commission aims to have presented all the initiatives set out in its 2015 action plan (see EUROPE 11399) and is now urging the Council of the EU and the European Parliament to do their share of the work.
“Building the Capital Markets Union is a shared responsibility, and the Commission cannot do it alone. As of today, we have tabled 12 legislative proposals on CMU, but only three have been adopted”, the European Commissioner for Financial Services, Valdis Dombrovskis, told a press conference.
He also referred to two critical deadlines: adopting these initiatives before the European elections of May 2019, but also before the United Kingdom leaves the EU, which is scheduled to take place on 29 March 2019.
A European covered bonds label
The first legislative proposal - a directive - supplies the first common definition of covered bonds, namely a debt issued by a bank and guaranteed by a separate cover pool of assets, to which investors have direct course as preferred creditors in the event of the issuer’s default.
The proposal also defines the structural characteristics of the instrument, such as dual redress, the quality of the assets covering the bond or liquidity and transparency requirements. Covered bonds with these characteristics will be able to bear the European covered bonds label.
The aim is only “minimal harmonisation”, based on the best practices of the member states, a European source explained, adding that “it is not about disturbing the existing markets, but building on what already exists”.
It is worth noting that loans to SMEs and loans to finance infrastructure will not meet the requirements of this directive, as they are riskier assets. The Commission is therefore currently assessing the possibility of bringing in another instrument for loans of this kind, to be known as the ‘European Secured Note’ (or ESN), which will have largely the same basic characteristics as covered bonds.
This directive is added to by a draft regulation modifying the European regulation (CRR) governing capital requirements. Covered bonds already benefit from preferential prudential treatment under this regulation but, in line with the new common definition, the Commission’s proposal brings in additional requirements.
The main change introduces a minimum level of over-collateralisation, in other words a level of guarantee that goes beyond the cover requirements. This level is set at 2% and 5%, depending on the assets in the cover pool, on the basis of a nominal calculation method.
Although lower than the new Basel standards, this level would make the product safer and increase the level for most of the member states in which the minimum level required is currently lower, the Commission text explains.
With an exposure of €2.1 trillion, covered bonds currently represent one of the EU’s largest debt markets and the Commission considers that these proposals should bring about an annual saving in the order of €1.5 to €1.9 billion.
See the proposals at: http://bit.ly/2Ing0HJ (directive) and http://bit.ly/2Ing0HJ (regulation).
Simplified cross-border distribution of investment funds
Next, the Commission is tackling harmonised investment funds in the EU, the market for which is worth nearly €14.3 trillion. Even so, 70% of all assets under management are currently held by investment funds accredited or registered for distribution on their national market alone. Only 37% of UCITS and around 3% of alternative investment funds (AIF) are registered for distribution in more than three member states.
The proposal on this aim is to remove these obstacles for all types of investment funds, to make their cross-border distribution “simpler, faster and cheaper”.
Here again, the aim is not to revolutionise the functioning of the market, as a marketing passport already exists for these funds. Instead, the Commission is laying emphasis on transparency and simplification.
To do this, the proposed regulation provides for an alignment of the national requirements on sales and regulatory costs. It makes the way in which these regulatory costs are set more standardised and also harmonises the procedure and requirements on the verification of the advertising communication materials by the national competent authorities.
In addition to the regulation, there is a directive that harmonises the conditions under which an investment fund may withdraw from a national market. It brings in the opportunity for asset managers to stop selling an investment fund in one or more host member states, in well-defined scenarios. It also allows European asset managers to carry out pre-sales activities to gauge the interest of potential professional investors in new investment strategies.
The Commission estimates that these measures could help save €440 million a year.
See the proposals at: http://bit.ly/2Ghgj6c (directive) and http://bit.ly/2pa2ApJ (regulation).
Clarification of the law applicable to certain cross-border transactions
Finally, the Commission intends to remedy the lack of clarity concerning the enforceability of assignments in the event of a cross-border transaction.
The assignment is a legal mechanism whereby a creditor (assignor) transfers its rights to enforce a receivable to another person (assignee). This mechanism is used by certain businesses to obtain liquidity and access credit.
The solution proposed by the Commission is to adopt a general rule whereby, in conflict situations, the applicable law is that of the country in which the assignor has its usual residence.
However, the Commission has provided for two exceptions to this general rule: money deposited into the account of a bank and receivables from financial instruments, such as derivatives, when the law of the country of the receivable being assigned applies. Additionally, concerning the securitisation operations, the Commission is proposing a choice between the law of the country of the assignor and the law of the country of the assigned receivable.
See proposals at: http://bit.ly/2FCk1qd (regulation on receivables) and http://bit.ly/2p3MDlE (communication on securities).
At the European Council of 22 and 23 March, the heads of state or government will take stock of progress towards completing the Capital Markets Union. (Original version in French by Marion Fontana)