On June 10, 2020, the European Commission’s High-Level Forum (HLF) issued its final report on the Capital Markets Union (CMU), which proposes detailed recommendations for improving and enhancing the capital markets of the European Union (EU). The report’s 17 recommendations are grouped under four larger themes: (i) creating a vibrant and competitive business environment; (ii) building stronger and more efficient market infrastructure; (iii) fostering retail investments in capital markets; and (iv) going beyond boundaries across the internal market.
The European Commission established the HLF in November 2019, with three sub-groups focusing on (i) creating a system that enables greater capital raising, (ii) developing the European capital market architecture, and (iii) enhancing investment choice and accessibility to capital markets services to promote greater retail investors’ participation.
An interim report was released in February 2020, aimed at identifying the key objectives of the CMU. The interim report discussed the four goals of the CMU: (i) embracing new opportunities in the rapidly changing financial system; (ii) giving European citizens a better financial future by offering better opportunities to cater for long-term financial needs, better access to investment products and promoting entrepreneurship; (iii) leading capital markets globally, by making the EU a more attractive marketplace for businesses and investors; and (iv) building on the existing strengths of the EU, which include the ability of EU firms to sell products across EU borders using financial services passports and the role of the European Supervisory Authorities in integrating and developing EU capital markets.
The final report expands on the interim report, offering specific recommendations in line with these goals. One of the recommendations addresses differentiating between disclosure and due diligence requirements for public and private securitizations, with a specific need to focus on third-country securitizations.
The report proposes a clarification that Article 5.1(e) of Regulation (EU) 2017/2402 does not apply to a third country originator, sponsor or securitization special purpose entity (SSPE). This clarification would ensure that a third country originator, sponsor or SSPE does not have a requirement to make available in a securitization the required information in the manner set forth in the regulation. Rather, such third country originator, sponsor and SSPE must ensure that the EU-regulated investor has received sufficient information to meet the requirements for due diligence proportionate to the risk profile of the securitization exposure. While the report only identifies recommendations, and has no authority to create change, it is expected to influence lawmakers and regulatory groups to adopt at least some of the recommendations regarding securitizations.
In July 2019, prior to the issuance of the final report, the Structured Finance Association (SFA) submitted a comment letter seeking clarification on three issues:
- Whether asset-level disclosures in a Section 144A securitization offering by a US issuer sold to EU investors should be required in the European Union if none are required in the United States for that type of offering;
- hether asset level disclosures in US-registered deals (such as credit card securitizations that rely on pool level disclosures rather than loan level disclosures) sold to EU investors should be required in the European Union if none are required in the United States; and
- When a US deal does require some asset-level disclosure, whether the US issuer should be able to provide the type of loan level disclosure that would typically be provided in the US securitization instead of the EU disclosure templates if the deals are sold in the European Union.The current industry consensus appears to be to accept the proportionate language in the report and view it as a win for the industry.
In response to these comments, the final report recommends that third country originators, sponsors, and SSPEs should only have to ensure that the EU investor has received “sufficient information to meet the requirements for due diligence proportionate to the risk profile of the securitization exposure” (emphasis added). Some in the industry believe the use of the word “proportionate” in the final report only addressed the comment in issue (3), and suggested sending another comment letter to the HLF asking it to include an additional sentence addressing the other two issues, such as “EU investors can invest in a US 144A offering that does not have asset level disclosure if asset level disclosure is not required in connection with such offering in the US.” However, others in the industry fear that the EU might react negatively if another SFA comment letter is submitted which asks for such a specific response, and are of the view that the more general language provides more leeway for US issuers.
The current industry consensus appears to be to accept the proportionate language in the report and view it as a win for the industry.
* Special thanks to Chana Ben-Zacharia for her assistance in preparing this post