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Capital Markets play a pivotal role in supporting European companies’ recovery from COVID-19. It is for this reason that the EU has approved a Capital Markets Recovery package, which includes several measures.
Adjustments to the MiFID II requirements
The new rules will reduce the level of information that will have to be provided to professional investors such as institutional investors and banks, and, in some limited cases, to retail investors. This includes the phase-out of paper-based information, unless retail clients ask to receive it. The Council also exempts non-complex (‘plain vanilla’) bonds sold to both retail and professional investors from certain product governance-related information requirements under specific conditions. It supports the Commission’s proposal to suspend best-execution reports by trading venues (the so-called ‘RTS 27’) in order to free up resources.
In addition to this, the Council is fine-tuning changes to the MiFID rules aimed at supporting the growth of euro-denominated derivatives markets.
Shortening of the EU Recovery Prospectus
A shortened version of the ‘EU Recovery Prospectus’ has been introduced for companies with a track record in the public market, which need to disclose information to their investors when they issue shares and bonds. This new type of prospectus will make it easier for companies to issue capital and thus meet their funding needs.
The Council of the EU has also expanded the minimum information to be included in the EU Recovery Prospectus compared to the Commission proposal, to ensure better investor protection. It also introduces a cap on its use to avoid highly dilutive issuances, while ensuring that it may be used as a basis for meaningful capital increases: the EU Recovery Prospectus should thus be limited to offers equivalent to no more than 90% of outstanding capital, expressed as the ratio between the number of shares offered and the total number of shares before the issuance.
In the context of COVID-19, the Council has also proposed to amend the so-called Transparency Directive, to provide member states with the option to postpone, by one year, the requirement for listed companies to prepare all annual financial reports in a European Single Electronic reporting Format (‘ESEF’) for financial years beginning on or after 1 January 2020.
Easier use of securitisation
Other proposals included in the Capital Markets Recovery Package aim to facilitate the use of securitisation to support banks in maintaining their capacity to fund the recovery. The proposed amendments will allow for synthetic securitisations, which allow for the transfer of the credit risk of a set of loans to investors. This increases the overall private risk-sharing in the financial system and hence also contributes to the aims of the Capital Markets Union. In addition, regulatory obstacles to the securitisation of non-performing exposures (NPEs) are removed to support banks in offloading NPEs from their balance sheets in the context of the COVID-19 crisis, while maintaining high prudential standards.
The Council suggests complementing the Commission’s proposals with a dedicated prudential treatment for synthetic excess spread (SES) in the Capital Requirements Regulation. SES is a credit enhancement tool and a common feature in synthetic securitisation transactions, which, however, could be misused as a regulatory arbitrage tool. The introduction of dedicated and comprehensive regulatory capital requirements for SES addresses the risk of potential misuse of SES for arbitrage purposes for all synthetic securitisation transactions, irrespectively of whether they meet the STS criteria or not.
