On 3 September 2020, representatives of Member States met to discuss the Capital Markets Recovery Package. The package consists of amendments to the Markets in Financial Instruments Directive (MiFID II), the so called MiFID “quick fix”, amendments to the Prospectus Regulation,  amendments to the Securitisation Regulation and the corresponding changes to the Capital Requirements Regulation (CRR).  The main aim of the proposed amendments is to help capital markets and their participants to swiftly recover from the economic impact of the COVID-19 pandemic by facilitating investments and recapitalisation of European companies.

In advance of the meeting, the German Presidency of the Council circulated a note to the delegations, setting out the proposed discussion points. While the content of the legislative proposals was largely agreed between the Commission and the Member States in consultations preceding the publication of the proposals on 24 July, some open issues remain. The Presidency aims for a swift adoption of the compromise position between Member States in order to proceed to negotiations with the European Parliament over the coming month or so, and to formally finalise the legislative review by the end of the year.

Key points discussed included:

  1. MiFID II / MiFIR
  • Product governance: Member States discussed whether the exemption for simple corporate bonds with make-whole clauses from the MiFID II product governance introduced in the Commission proposal should remain as it is, be extended to shares traded on regulated markets and SME growth markets, plain vanilla bonds and UCITS, or deleted from the text.
  • Loss reporting: Member States considered expanding the proposed exemption for eligible counterparties and professional clients from receiving loss reports under Article 25(6) of MiFID II by changing the reporting frequency to quarterly reporting only, and the prospective increase of threshold triggering loss reporting reports sent to retail clients.
  • Best execution reports: Whereas the Commission proposal temporarily suspends best execution reports by trading venues, systematic internalisers and execution venues under Article 27(3) MiFID II, there appears to be a divergence of views between Member States that would wish to extend this suspension to include best execution reports by investment firms and those that are critical about temporarily suspending best execution reports in general.
  1. Prospectus Regulation
  • EU Recovery Prospectus cap: The Commission proposed to introduce an EU Recovery Prospectus, which would allow issues that have had shares admitted to a regulated market or SME Growth Market continuously for the last 18 months before the offer or admission to trading of shares, to issue equity on the basis of requirements deviating from the simplified disclosure regime for secondary issuances. As these new issuances could have an effect on previously issued equity, a number of Member States are understood to have proposed introducing a cap for using the EU Recovery Prospectus of up to 20 percent of outstanding capital.
  • Format, contents and approval timeframes: On the format and content of the EU Recovery Prospectus Member States are debating on a few issues, such as whether a two-page summary of the prospectus is required and the role of national competent authorities (NCAs) in taking into account whether the issuer has disclosed the regulated information in accordance with EU law. Also, differences remain on the timeframe for NCAs for the scrutiny and approval of EU Recovery Prospectuses. A number of Member States are understood to disagree with the Commission that a five working day scrutiny and approval timeframe is appropriate and propose ten working days instead.
  • Prospectus-free issuances for credit institutions: There appear to be divergent views in respect of the Commission’s proposal to increase the threshold for prospectus-free public offerings by credit institutions from EUR 75 million to EUR 150 million.
  1. Securitisation Regulation
  • Synthetic Excess Spread (SES): Member States’ representatives considered whether the permission of the use of SES as a credit enhancement for investors by originators should stay in line with the Commission proposal, or whether further requirements are needed.
  • Collateral: Disagreement exists on the permission of the use of cash collateral on deposit – whereas the Commission proposal only permits the use of cash collateral on deposit with an originator of a minimum of credit quality step (CQS) 2, some Member States suggest that all originators with an investment grade rating shall be allowed to make use of the proposed provision, thereby proposing to set the minimum credit quality requirement at a CQS of 3.
  1. Capital Requirements Regulation
  • Recognition of credit risk mitigation for securitisation positions: The Commission proposal envisages amending Article 249(3) of the CRR by adding that institutions applying the standardised approach can recognise an unfunded credit protection with respect to a securitisation position in the same way and under the same conditions as provision in the general risk mitigation applicable to non-securitised exposures only when credit protection providers fulfil a minimum credit rating requirement at a CQS of 3. However, since the Commission proposes this amendment to be more in line with the Basel III framework, some Member States would like to make it fully in line with the Basel recommendations by asking for a CQS of 2 at the time the credit protection was first recognised and a CQS of 3 thereafter.
  • Treatment of NPE securitisations: The Presidency would like to know from Member States whether the proposed new Article 264(a) CRR that increases the risk sensitivity of non-performing exposure securitisations should be fully in line with the Basel III framework and in particular, whether the expected loss against the non-refundable purchase price discount for the calculation of maximum capital requirements or whether the present cap should be applied.
  • Preferential regulatory treatment for senior positions in STS synthetic on-balance sheet securitisation: The Commission proposes to extend the preferential regulatory treatment of the senior position of a synthetic on-balance sheet securitisation to all of such positions regardless of underlying asset class. A number of Member States remains sceptical about the proposal. The Presidency asks Member States on the merits of applying a grandfathering rule for outstanding synthetic on-balance sheet securitisations and whether the EBA should get a mandate to monitor the STS synthetic on-balance sheet securitisation market.