EU Reaches Agreement on New Securitization Framework

On Tuesday, May 30th, European Union (EU) lawmakers announced that they have reached a preliminary agreement on the creation of an EU framework to reboot securitization across Europe.

According to a Bloomberg BNA article, the agreement marks the end of "months of heated debate (between) negotiators representing the EU's 28 member states and the European Parliament." The draft text outlines common EU rules for the market, creating a "simple, transparent and standardized" (STS) label that will apply to securities that meet certain specified criteria. The agreement also resolved disagreements around the appropriate level of risk retention for securitizations by accepting the "European Commission's original proposal of at least 5 percent."

According to the EU press release, a framework for securitization is one of the main elements of the EU's 2015 plan to develop a fully functioning capital markets union by the end of 2019.

As part of the capital markets union action plan, the Commission proposed two legislative measures to promote a safe and liquid market for securitization:

  • a regulation on securitization that will apply to all securitization products and include due diligence, risk retention and transparency rules together with a clear set of criteria to identify STS securitizations; and
  • an amendment to the regulation on capital requirements to make the capital treatment of securitizations for banks and investment firms more risk-sensitive and able to properly reflect the specific features of STS securitizations.

The agreement will be submitted to EU ambassadors for endorsement on behalf of the Council, following technical finalization of the text. Parliament and Council will then be called on to adopt the proposed regulation at first reading.

In April of this year, SFIG released a white paper recommending specific securitization-related regulatory reforms to be adopted in the United States. Much like the current EU proposal, SFIG advocates for a more tailored approach to capital and liquidity requirements related to securitizations among other much needed reforms.

SFIG's High Quality Securitization Task Force has also commented substantially on STS securitization, including a response to Basel's Consultative Document regarding Capital Treatment for STC Securitisations and comments to the European Commission's consultation on an EU framework for STS securitization.

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