It is a truth held to be self-evident that the European Union needs more developed and deeper debt capital markets in order to achieve higher levels of economic growth.
The capital markets union (CMU), of which the securitisation regulation forms a high profile part, is intended to assist in achieving this aim.
Securitisation, in this context, means the repackaging of an exposure or pool of exposures into debt obligations that are repaid from the proceeds of back exposures and are tranched into different layers of credit risk.
The draft securitisation regulation, in pursuit of this aim, seeks to do three things.
First, to draw together in one place all the different aspects of securitisation regulation enacted by the EU since the financial crisis.
Secondly, to consistently regulate all securitisations where the originator, sponsor, original lender, issuer or investor is in Europe.
Thirdly, to create a new category of simple, transparent and standardised (STS) securitisation which it is intended should be preferred by investors (due to lower capital charges) relative to non-STS securitisations.
The first aim of the securitisation regulation appears to be partially satisfied, in that most of the non-regulatory capital aspects of post GFC securitisation regulation now appear in the securitisation regulation.
However, each EU jurisdiction will appoint its own sectoral regulators as competent authorities to implement and enforce the securitisation regulation.
What does this mean for securitisation?
The regulation of securitisation threatens to become a patchwork of competing and possibly overlapping regulatory bodies.
Investors will be subject to regulation by their sectoral regulators.
Who will regulate the issuers is as yet less clear.
For issuers who are not currently regulated as a bank, insurer, Ucits, IORP or alternative investment fund (for example, a manufacturing concern that wishes to securitise its receivables or a property company that wishes to securitise its rental income), it is left to member states to designate one or more competent authorities to regulate them.
The exact basis on which such designation is to take place is left to the relevant member states – it would be unfortunate if one of the results was multiple regulators seeking to claim jurisdiction in relation to the same issuers.
Financial advisers may need to familiarise themselves with the requirements of a range of different regulators of securitisation issuers, bearing in mind that some may apply the rules differently to others.
They may also need to be alert to situations where the investor’s regulator takes a different view to the regulator of an issuer.
Unless the relevant competent authorities adopt a safe harbour regime in relation to differing opinions between regulators, certain occupational pension fund investors may need to follow the approach approved by more conservative of the regulators.
One potential concern to investors will be whether the determination by a competent authority in a different jurisdiction to the fund’s that there has been a breach of the regulation will also cause the relevant securitisation to be deemed to be in breach in the occupational fund’s jurisdiction as well, with potential implications for the ability of the fund to continue to hold that securitisation or for the solvency capital treatment of that securitisation.