Considerations on COM(2018)339 - Sovereign bond-backed securities

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dossier COM(2018)339 - Sovereign bond-backed securities.
document COM(2018)339 EN
date May 24, 2018
 
(1) Sovereign Bond-Backed Securities (‘SBBSs’) can address some vulnerabilities that have been exposed by or have resulted from the 2007-2008 financial crisis. More specifically, SBBSs can help banks and other financial institutions better diversify their sovereign exposures, further weaken the bank-sovereign nexus and enhance the supply of low-risk euro denominated assets. SBBSs could in addition render bonds issued in small and less liquid national markets more attractive for international investors, which can foster private sector risk sharing and risk reduction and promote a more efficient allocation of risks among financial operators.

(2) Under the existing legal framework, SBBSs would be treated as securitisations and thus be subject to additional charges and discounts relative to the charges and discounts faced by the euro area sovereign bonds in the underlying portfolio. Those additional charges and discounts would hinder the production and use of SBBSs by the private sector, despite the fact that SBBSs do not carry the risks associated with securitisations that justify such charges and discounts. SBBS should therefore be subject to a regulatory framework that better takes into account the unique features and properties of SBBSs to enable that product to emerge on the market. To that end, the removal of regulatory obstacles is neecessary.

(3) Enabling a market-led development of SBBSs is part of the Commission's efforts to reduce risks to financial stability and advance towards completion of the Banking Union. SBBSs could support further portfolio diversification in the banking sector, while creating a new source of high-quality collateral, which is particularly suited for use in cross-border financial transactions. Furthermore, enabling SBBSs could also

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increase the number of instruments available for cross-border investment and risk sharing, which feeds into the Commission's efforts to deepen and integrate further Europe's capital markets in the context of the Capital Markets Union.

(4) SBBSs do not involve any mutualisation of risks and losses among Member States because Member States will not mutually guarantee their respective liabilities within the portfolio of sovereign bonds underlying the SBBSs. Enabling the emergence of SBBSs neither involves any changes to the current regulatory treatment of sovereign exposures.

(5) To achieve the objectives of geographic risk diversification within the Banking Union and the internal market, the underlying portfolio of SBBSs should be composed of sovereign bonds of Member States whose currency is the euro. To avoid currency risks only euro-denominated sovereign bonds issued by Member States whose currency is the euro should be allowed for inclusion in the SBBSs underlying portfolio. To ensure that sovereign bonds of each euro-area Member State contribute to the production of SBBSs in line with each Member State's stake in the stability of the overall euro area, the relative weight of the national sovereign bonds in the SBBSs’ underlying portfolio should be very close to the relative weight of the respective Member States in the key for subscription by the national central banks of Member States of the European Central Bank's capital.

(6) To provide for a high quality low-risk asset and at the same time cater for investors' different levels of risk appetite, an SBBS issue should be composed of both a senior tranche and one or more subordinated tranches. The senior tranche, corresponding to seventy percent of the nominal value of an SBBS issue, should keep the SBBS issue expected loss rate in line with that of the safest euro area sovereign bonds, taking into account the risk and correlation of the sovereign bonds in the SBBSs underlying portfolio of sovereign bonds. The subordinated tranches should provide for protection to the senior tranche. The seniority of the tranches should determine the order in which losses on the underlying portfolio of sovereign bonds should be borne by investors. To limit the risk of the junior tranche (the tranche bearing losses before any other tranche), the nominal value of the junior tranche should however be at least 2 percent of the outstanding nominal value of the entire SBBSs issue.

(7) To ensure the integrity of an SBBS issue and limit as much as possible the risks related to the holding and management of the underlying portfolio of sovereign bonds, maturities of underlying sovereign bonds should be closely aligned with the maturity of the SBBSs and the composition of the underlying portfolio of sovereign bonds should be fixed for the entire lifecycle of the SBBSs.

(8) The standardised composition of the underlying portfolio of an SBBSs may render difficult or impede the issuance of an SBBS issue when sovereign bonds of one or more Member States are not available on the market. For that reason, it should be possible to exclude sovereign bonds of a particular Member State from future issuances of SBBSs where and as long as the issuance of sovereign bonds by that Member State is significantly limited due to a reduced need for public debt or impaired market access.

(9) To ensure that SBBSs are sufficiently homogeneous, the exclusion and re-integration of sovereign bonds of a particular Member State from the underlying portfolio of sovereign bonds should be allowed only following a decision of the Commission, ensuring that all SBBSs issued at the same time have the same underlying portfolio of sovereign bonds.

(10) The fixed size of the senior tranche of each SBBS issue may be reduced for future SBBSs issuances where, due to adverse market developments that severely disrupt the functioning of sovereign debt markets in a Member State or in the Union, a smaller size is required to ensure continued high credit quality and low risk for the senior tranche. When such adverse market developments end, the size of the senior tranche for future SBBSs issuances should be brought back to its initial value of seventy percent. To ensure that SBBSs are standardised, the variation of the senior tranche should be allowed only following a decision of the Commission, ensuring that all senior tranches of SBBSs issues issued at the same time have the same size.

(11) Investors should be protected from the risk of insolvency of the institution that acquires the sovereign bonds ('original purchaser') for the purposes of assembling the SBBSs underlying portfolio. For that reason, only special purpose entities (‘SPEs’) that are exclusively devoted to the issuance and management of SBBSs and that do not undertake any other activities, such as providing credit, should be allowed to issue SBBSs. For the same reason, SPEs should be subject to strict asset segregation requirements.

(12) To manage limited maturity mismatches in the time period between receipt of proceeds of debt service on the underlying portfolio and pay out dates to SBBSs investors, SPEs should be allowed to invest the proceeds from the debt service on the underlying portfolio of sovereign bonds of the SBBSs only in cash and highly liquid financial instruments with low market and credit risk.

(13) Only products that fulfil the requirements regarding the composition and maturity of the underlying portfolio as well as the size of the senior and the subordinated tranches as provided for in this Regulation should enjoy the same regulatory treatment as the regulatory treatment granted to sovereign exposures in terms of capital requirements, concentration limits, and liquidity.

(14) A system of self-attestation by SPEs should ensure that an SBBS issue complies with the requirements of this Regulation. ESMA should therefore keep a list of SBBSs issued, enabling investors to verify whether a product that is offered for sale as an SBBS is indeed an SBBS. For the same reason, ESMA should indicate in that list whether any sanction in relation to a SBBS has been imposed and remove from that list those products that are found to be in violation of this Regulation.

(15) Investors should be able to rely on the notification of SBBSs by SPEs to ESMA and on the information provided by SPEs. Information on SBBSs and the sovereign bonds in the SBBSs underlying portfolio should empower investors to understand, assess and compare SBBSs transactions and not to rely solely on third parties, including credit rating agencies. That possibility should enable investors to act prudently and to carry out their due diligence efficiently. Information on SBBSs should therefore be freely available to investors, via standardised templates, on a website that ensures continuous accessibility.

(16) To prevent abusive behaviour and to ensure that trust in SBBSs is maintained, appropriate administrative sanctions and remedial measures should be provided for by Member States for cases of negligent or intentional infringements of notification or product requirements for SBBSs.

(17) Investors in different financial sectors should be able to invest in SBBSs under the same conditions as they invest in the underlying euro area sovereign bonds. Directive

2009/65/EC of the European Parliament and of the Council15, Regulation (EU) No 575/2013 of the European Parliament and of the Council16, Directive 2009/138/EC of the European Parliament and of the Council17 and Directive (EU) 2016/2341 of the European Parliament and of the Council18 should therefore be amended to ensure that SBBS are granted the same regulatory treatment as their underlying assets across the various regulated financial sectors.

(18) To safeguard financial stability, ensure investors' confidence and promote liquidity, a proper and effective supervision of SBBSs markets is important. To that end, competent authorities should be informed about the issuance of SBBSs and should receive from SPEs all the relevant information needed to perform their supervisory tasks. Supervision of compliance with this Regulation should primarily be performed to ensure investors’ protection and, where applicable, on aspects that may be linked to the issuance and holding of SBBSs by regulated financial entities.

(19) Competent authorities should closely coordinate their supervision and ensure that their decisions are consistent. Where an infringement of this Regulation concerns the fulfilment of the obligations required for a product to be qualified as an SBBS, the competent authority identifying that infringement should inform ESMA, as well as the competent authorities of the other Member States concerned. In the event of disagreement between the competent authorities, ESMA should exercise its binding mediation powers in accordance with Article 19 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council19.

(20) Given that SBBSs are new products, it is appropriate that the European Systemic Risk Board (ESRB) and the national competent and designated authorities for macroprudential instruments oversee the SBBSs market.

(21) As a body with highly specialised expertise regarding securities markets, it is appropriate to entrust ESMA with the development of draft regulatory technical standards concerning the types of investment that the SPE may conduct with the proceeds from the payments of principal or interest of the SBBSs’ underlying portfolio, the information to be provided by the SPE for the notification to ESMA of an issuance of SBBSs issues, the information to be provided before transfering a an SBBS and the cooperation and information exchange obligations among competent authorities. The Commission should be empowered to adopt those standards in accordance with Article 290 of the Treaty on the Functioning of the European Union (‘TFEU’) and with Articles 10 to 14 of Regulation (EU) No 1095/2010.

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Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the

coordination of laws, regulations and administrative provisions relating to undertakings for collective

investments in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32).

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on

prudential requirements for credit institutions and investment firms and amending Regulation (EU) No

648/2012 (CRR) (OJ L 176, 27.6.2013, p.1).

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the

taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (OJ L 335 17.12.2009,

p. 1).

Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the

activities and supervision of institutions for occupational retirement provision (IORPs) (OJ L 354,

23.12.2016, p.37).

Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010

establishing a European Supervisory Authority (European Securities and Markets Authority), amending

Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L331, 15.12.2010,

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(22) The Commission should also be empowered to adopt implementing technical standards by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1095/2010 with regard to notification requirements of SPEs prior to the issuance of an SBBS issue.

(23) In order to ensure uniform conditions for the implementation of this Regulation,

implementing powers should be conferred on the Commission to decide whether

sovereign bonds of a Member State should be removed from or included in the

SBBSs’ underlying portfolio and whether the size of the senior tranche of the future

SBBSs issues to be issued should be changed. Those powers should be exercised in

accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council20.

(24) Since the objective of this Regulation, namely laying down a framework for SBBSs, cannot be sufficiently achieved by the Member States, given that the emergence of a SBBSs market depends on the removal of obstacles resulting from the application of Union legislation and that a level playing field in the internal market for all institutional investors and entities involved in the operation of SBBSs, can only be achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve that objective.