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The severe economic repercussions of the COVID-19 pandemic call for rapid measures to facilitate investments in the real economy, to allow for a swift recapitalisation of EU companies, and to enable issuers to tap into public markets at an early stage in the recovery process and increase banks' capacity to finance the recovery.
Because public financing alone will not be enough to boost economies and businesses will need more equity after financial aid, capital markets are vital to recovery across the EU. Accordingly, as part of the Commission's overall coronavirus recovery strategy1, the EU's capital markets recovery package will introduce amendments to the EU Prospectus Regulation2, MiFID II, the CRR3 and the securitisation rules4. All of these measures aim to help financial markets support Europe's recovery and to complement the EU's Capital Markets Union aimed at integrating national capital markets and ensuring equal access to funding.
The EU's capital markets recovery package includes:
1. A new "EU Recovery Prospectus", which is a short-form prospectus to facilitate new funding in a short time period.
2. Alleviations to the MiFID II framework to encourage investment in the real economy and free up resources for investors and firms.
3. Improvements to securitisation rules to support SME lending and management of non-performing loans.
- A new short form prospectus format for well-known issuers, focusing on essential information that investors need to make an informed decision, displaying information on the issuer's prospects and significant changes in its financial position since the end of the last financial year, essential information on shares, the reasons for the issue, the impact on the capital structure and the use of proceeds.
- A maximum 30-page document that will be easy to produce for issuers, easy to read for investors and easy to scrutinise for regulators.
- A fast-track issuance/approval procedure for secondary issuances of listed issuers.
- A temporary disclosure document that will only be available until 18 months after the date of application of the revised Prospectus Regulation.
- Enable listed companies to issue capital more easily, swiftly and cheaply, as it scaled down significantly from the usual couple of hundreds of pages to just 30 pages, reducing issuance costs and time to market.
- Incentivise issuers to raise equity instead of incurring further indebtedness, thereby improving debt-to-equity ratios and making companies more resilient.
- Benefit from the EU passport mechanism, meaning that investors across the EU will be able to finance these companies if they wish to do so.
- The phase-out of the mandatory paper-based default method for client communication, thereby reducing costs and accelerating the investment process (unless retail clients opt-in to paper-based information).
- The introduction of exemptions from the costs and charges disclosure for eligible counterparties and for professional clients (for services other than investment advice and portfolio management) and from the ex-ante notification about costs for all client-types to reflect the increased usage of electronic investment services and the necessity for efficient trade execution online and by phone.
- A reduction/suspension of further overly burdensome reports/statements such as: (i) ex-post service reports for eligible counterparties and professional clients (with the possibility to opt-in for professional clients), (ii) cost-benefit analysis in case of product switching by professional clients, and (iii) public best execution reports (streamlining of the reports will be analysed).
- Reduction of product governance rules for simple corporate bonds with make-whole clauses, because applying the full set of product governance rules to all financial instruments and regardless of the client is considered to have little benefit in the context of certain plain vanilla products and has prevented an optimal allocation of capital.
- A set of amendments in the field of commodities markets, including changes in position limit regime, hedging exemption and the ancillary activity test.
- Better balance transparency towards the client, the highest standards of protection and acceptable compliance costs for firms.
- Leave more resources for dealing with the consequences of the COVID-19 pandemic by more finely calibrating the administrative burdens that result from documentation and disclosure rules imposed on financial institutions.
- And thus, ensure that financial institutions and intermediaries can fulfil their essential function in financing the real economy and providing investment services.
- The extension of the simple, transparent and standardised (STS) securitisation framework to securitisation techniques using financial guarantees or credit derivatives to transfer the risks of exposures that remain on the balance sheet of the originating institution (referred to as "balance-sheet synthetic securitisations").
- The harmonisation of the criteria for the newly introduced STS balance-sheet synthetic securitisations with the existing criteria for traditional true sale securitisations to the extent possible, but also adopting some new requirements to reflect the inherent differences between true sale and synthetic securitisation, e.g. in regards to the technique of risk transfer.
- The tweaking of the STS securitisation framework to facilitate the securitisation of non-performing exposures (NPEs), for example by alleviating the risk retention requirements for NPEs (e.g. calculation of retention based on net value of the securitised exposures instead of their nominal value).
- Provide for on-balance-sheet synthetic securitisations which are an important risk management tool for credit institutions lending to corporates, in particular SMEs. The proposed extension of the STS securitisation framework is therefore expected to improve capital treatment and release additional capital to lend to corporates and households.
- Remove regulatory obstacles to the securitisation of NPEs to enable broader use of securitisation by credit institutions to free their balance sheets from NPEs.
It is now up to the European Parliament and the Council to agree on the legislative texts. After the package is adopted and has entered into force5, the changes to the Prospectus Regulation and the Securitisation Framework will apply directly in the Member States. The MiFID amendments will need to be transposed into national laws before they are applicable. It is hoped that these draft regulations will be implemented fairly quickly to ensure that their desired impact as a response to COVID-19 is in the market as soon as possible.
"It is now up to the European Parliament and the Council to agree on the legislative texts. After the package is adopted and has entered into force."
authors: Ursula Rath, Matthias Pressler, Martin Ebner, Michael Schmiedinger
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