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Action Stations as EU Publishes CMU Action Plan and STS Framework

30 September 2015

30 September 2015 - The European Commission (EC) today published its much anticipated Action Plan (Action Plan) on Building a Capital Markets Union (CMU).  The publication of the Action Plan follows the launch of a Green Paper: Building a Capital Markets Union, together with a consultation paper on the creation of a high-quality securitisation market and a further paper proposing a review of the Prospectus Directive on 18 February 2015. Responses were requested by 13 May 2015, following which a conference took place over the summer prior to today's publication of the agreed Action Plan.

The CMU forms part of President Juncker's EUR315bn investment plan to strengthen Europe's economy and stimulate investment to create jobs.   In addition to the Action Plan, the EC has published proposals relating to securitisations and the Prospectus Directive, which are discussed below.   The EC intends for a "well-functioning and integrated" CMU to be established by 2019 and will assess its progress on an annual basis as well as conducting a full review in 2017.

Based upon an earlier draft, the key priorities under the Action Plan include:

  • Encouraging long term financing in infrastructure: The EC highlights the role that it hopes that European Long Term Investment Funds (ELTIFs) will have in long term cross border projects once the ELTIF Regulation comes into force in December 2015.  The EC has announced that it will amend the Solvency II Directive and the Capital Requirements Regulation to re-calibrate the regulatory capital treatment of investment in infrastructure projects and in ELTIFs in order to ensure that they are more risk sensitive and encourage investment by institutional investors.  By the end of 2017, the EC will also assess whether the capital treatment of private equity and privately placed debt in Solvency II is an impediment to insurers investing in such assets.
  • Promoting a better functioning securitisation market:  Through a number of proposed amendments and the introduction of simple transparent and standard (STS) designation for securitisations the EC intends to revitalise the European securitisation. Of particular importance to the market will be the proposed re-calibration of capital requirements for institutional investors who invest in STS securitisations.  
  • EU-wide covered bond framework: Before the end of 2015, the EC will also examine the viability of building a pan-European covered bond framework and will continue to explore the possibility of allowing local credit unions to operate outside of the capital requirements framework for banks.  
  • Reducing investment barriers between EU member states: The EC will consult on certain key insolvency and early restructuring barriers and legislation on business insolvency, address ambiguities relating to securities ownership, improve existing clearing and settlement procedures for cross border securities transactions and strengthen supervisory convergence.
  • Amending disclosure requirements: The EC has identified the need to review how corporate disclosure about an entity seeking access to the capital markets is produced. This is currently governed by the Prospectus Directive which will be updated to clarify when a prospectus is needed, streamline the information required and the approval process, and create a proportionate regime for SMEs to draw up corporate disclosure and access capital markets. Proposals to amend the Prospectus Directive can be expected in November 2015. A review of the Prospectus Directive may have knock-on effects for other participants in the capital markets, particularly if there is also a focus on streamlining information made available to retail investors, as this may force a fundamental shake-up in how disclosure surrounding retail products is presented by financial counterparties,  
  • Providing more funding choices for European businesses and SMEs: The EC has also stated it intends to introduce measures to better connect SMEs with potential funding sources, and will promote forms of non-bank financing such as crowd-funding, as well as private placement and loan-originating funds. In relation to private placement, the EC acknowledges its support for the steps taken by the ICMA and the German Schuldscheine regime to standardise the process and documentation for the private placement market.
  • Greater choices for retail investors: The EC recognises the importance of retail savings held through asset managers, life assurance companies and pension funds and intends to publish a Green Paper before the end of 2015 on retail financial services and insurance to assess ways to boost competition and choice, and examine the regulatory framework for retail investment.

Commenting on the Action Plan, Andrew Carey, partner in Hogan Lovells' International Debt Capital Markets (IDCM) team, said:
"The CMU Action Plan represents a significant development for European capital markets.  It is hoped that the plans for improving access to non-bank financing for SMEs, including the  European Commission's support for crowd funding and private placements have a positive impact upon the ability of companies to access a wider range of funding in the EU".

Commenting on the changes proposed to the securitisation regulations in the Action Plan, Julian Craughan, partner in Hogan Lovells' Structured Finance team, said:
"The proposed revisions to regulatory capital charges for securitisations designated as simple transparent and standard (STS) are a welcome development for the European securitisation markets.  There are a number of less helpful proposals though that could actually introduce uncertainty into the market."

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