On 25 May 2018, the European Commission published a draft Regulation on sovereign bond-backed securities. The legislative proposal is part of the Commission’s efforts to enhance Banking Union and Capital Markets Union. It aims to enable the emergence of an efficient market for sovereign bond-backed securities (SBBSs) over time. In turn, the Commission believes that SBBSs could support further portfolio diversification in the financial sector, while creating a new source of high-quality collateral particularly suited for use in cross-border financial transactions.

The draft legislation applies to original purchasers, special purpose entities, investors and any other entity involved in the issuance or holding of SBBSs. The draft legislation has four parts:

  1. The first part provides a set of rules that define the constitutive elements of SBBSs. These rules are necessary to ensure that as standardised a product as possible is produced by the markets. This in turn favours its liquidity and appeal to investors;
  2. The second part provides rules that define notification and transparency requirements for the issuing entity to ensure that self-attestation is performed in a harmonised and credible way;
  3. The third part contains rules regarding the supervision of SBBSs and possible sanctions in case of non-compliance and/or fraudulent behaviour of the issuing entity; and
  4. The fourth part contains a set of amendments to the existing legal framework required to grant SBBSs a regulatory treatment in line with their unique design and properties.

The Commission has invited feedback on the draft Regulation. The deadline for comments is 25 July 2018.