The severe economic repercussions of the COVID-19 pandemic call for rapid measures to facilitate investments in the real economy, to allow for a swift recapitalisation of EU companies, and to enable issuers to tap into public markets at an early stage in the recovery process and increase banks' capacity to finance the recovery.
Because public financing alone will not be enough to boost economies and businesses will need more equity after financial aid, capital markets are vital to recovery across the EU. Accordingly, as part of the Commission's overall coronavirus recovery strategy1, the EU's capital markets recovery package will introduce amendments to the EU Prospectus Regulation2, MiFID II, the CRR3 and the securitisation rules4. All of these measures aim to help financial markets support Europe's recovery and to complement the EU's Capital Markets Union aimed at integrating national capital markets and ensuring equal access to funding.
The EU's capital markets recovery package includes:
1. A new "EU Recovery Prospectus", which is a short-form
prospectus to facilitate new funding in a short time period.
2. Alleviations to the MiFID II framework to encourage investment
in the real economy and free up resources for investors and
firms.
3. Improvements to securitisation rules to support SME lending and
management of non-performing loans.
The new EU Recovery Prospectus
. is
- A new short form prospectus format for well-known issuers,
focusing on essential information that investors need to make an
informed decision, displaying information on the issuer's
prospects and significant changes in its financial position since
the end of the last financial year, essential information on
shares, the reasons for the issue, the impact on the capital
structure and the use of proceeds.
- A maximum 30-page document that will be easy to produce for
issuers, easy to read for investors and easy to scrutinise for
regulators.
- A fast-track issuance/approval procedure for secondary issuances
of listed issuers.
- A temporary disclosure document that will only be available until
18 months after the date of application of the revised Prospectus
Regulation.
. is relevant because it will
- Enable listed companies to issue capital more easily, swiftly
and cheaply, as it scaled down significantly from the usual couple
of hundreds of pages to just 30 pages, reducing issuance costs and
time to market.
- Incentivise issuers to raise equity instead of incurring further
indebtedness, thereby improving debt-to-equity ratios and making
companies more resilient.
- Benefit from the EU passport mechanism, meaning that investors
across the EU will be able to finance these companies if they wish
to do so.
The alleviation of MiFID II
. is
- The phase-out of the mandatory paper-based default method for
client communication, thereby reducing costs and accelerating the
investment process (unless retail clients opt-in to paper-based
information).
- The introduction of exemptions from the costs and charges
disclosure for eligible counterparties and for professional clients
(for services other than investment advice and portfolio
management) and from the ex-ante notification about costs for all
client-types to reflect the increased usage of electronic
investment services and the necessity for efficient trade execution
online and by phone.
- A reduction/suspension of further overly burdensome
reports/statements such as: (i) ex-post service reports for
eligible counterparties and professional clients (with the
possibility to opt-in for professional clients), (ii) cost-benefit
analysis in case of product switching by professional clients, and
(iii) public best execution reports (streamlining of the reports
will be analysed).
- Reduction of product governance rules for simple corporate bonds
with make-whole clauses, because applying the full set of product
governance rules to all financial instruments and regardless of the
client is considered to have little benefit in the context of
certain plain vanilla products and has prevented an optimal
allocation of capital.
- A set of amendments in the field of commodities markets,
including changes in position limit regime, hedging exemption and
the ancillary activity test.
. is relevant because it will
- Better balance transparency towards the client, the highest
standards of protection and acceptable compliance costs for
firms.
- Leave more resources for dealing with the consequences of the
COVID-19 pandemic by more finely calibrating the administrative
burdens that result from documentation and disclosure rules imposed
on financial institutions.
- And thus, ensure that financial institutions and intermediaries
can fulfil their essential function in financing the real economy
and providing investment services.
The revision of the STS Securitisation Framework
.is
- The extension of the simple, transparent and standardised
(STS) securitisation framework to securitisation techniques using
financial guarantees or credit derivatives to transfer the risks of
exposures that remain on the balance sheet of the originating
institution (referred to as "balance-sheet synthetic
securitisations").
- The harmonisation of the criteria for the newly introduced STS
balance-sheet synthetic securitisations with the existing criteria
for traditional true sale securitisations to the extent possible,
but also adopting some new requirements to reflect the inherent
differences between true sale and synthetic securitisation, e.g. in
regards to the technique of risk transfer.
- The tweaking of the STS securitisation framework to facilitate
the securitisation of non-performing exposures (NPEs), for example
by alleviating the risk retention requirements for NPEs (e.g.
calculation of retention based on net value of the securitised
exposures instead of their nominal value).
. is relevant because it will
- Provide for on-balance-sheet synthetic securitisations which
are an important risk management tool for credit institutions
lending to corporates, in particular SMEs. The proposed extension
of the STS securitisation framework is therefore expected to
improve capital treatment and release additional capital to lend to
corporates and households.
- Remove regulatory obstacles to the securitisation of NPEs to
enable broader use of securitisation by credit institutions to free
their balance sheets from NPEs.
What are the next steps?
It is now up to the European Parliament and the Council to agree on the legislative texts. After the package is adopted and has entered into force5, the changes to the Prospectus Regulation and the Securitisation Framework will apply directly in the Member States. The MiFID amendments will need to be transposed into national laws before they are applicable. It is hoped that these draft regulations will be implemented fairly quickly to ensure that their desired impact as a response to COVID-19 is in the market as soon as possible.
"It is now up to the European Parliament and the Council to agree on the legislative texts. After the package is adopted and has entered into force."
Footnotes
1 On 28 April, the Commission had already
proposed a so-called "banking package" to facilitate bank
lending to households and businesses throughout the EU.
2 Regulation (EU) No 2017/1129.
3 Regulation (EU) No 575/2013.
4 Regulation (EU) No 2017/2402.
5
https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2020/0155(COD)&l=en;
https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2020/0152(COD)&l=en;
https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2020/0151(COD)&l=en;
https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2020/0156(COD)&l=en
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