EU securitisation reform: preparing for the end game
We are entering the final stages of the legislative process for reforms designed to revitalise European securitisation markets – but key issues remain unresolved.
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For those watching the progress of proposed – and much-needed – reforms to European securitisation regulation, last week saw an important milestone passed. Player Three has entered the game.
Last week the European Parliament’s Committee on Economic and Monetary Affairs presented its draft reports, originally published in December, on the European Commission’s proposals. These will be debated into next week, following which a final parliamentary position will be adopted. The Council, the co-legislator representing member states, already published its position (“general approach”) last month.
So, we will shortly have the Commission’s proposals, along with the compromise positions from the Council and Parliament, on the table. This will set the scene for the “trilogues” – regulatory-speak for compromise negotiations between the co-legislators – in the summer, and subsequently the final framework to be adopted.
But while we are edging closer to the end game in the legislative process, we believe we are still some way from a set of reforms that will truly revitalise the securitisation market – and so the objective to boost European competitiveness and support the creation of a true Savings and Investment Union (SIU).
Why securitisation matters
Europe’s securitisation market today is a shadow of its pre‑crisis self. This is not because of a lack of economic need, but rather regulatory rigidities that have narrowed participation and dampened issuance.
Securitisation, when effective, is a conduit to channel capital into the real economy, enabling banks and others to convert pools of loans and financial assets into investment instruments that can be bought and sold. This enhances liquidity and so the flow of credit available to businesses and households, and to finance critical infrastructure projects.
On the other hand, a functioning and active securitised credit market offers institutional investors, such as pension funds across the continent, diversified exposure to collateralised investments providing potentially premium income returns.
Signs of progress, but not enough
There are encouraging signs that policymakers are listening on the key issues within the rules that are holding the market back.
Recognition that disclosure and due diligence rules need to be more proportionate is a key thrust of the original proposals that is supported in the Council and Parliament reports, with a shift away from inflexible templates toward a principles‑based approach.
Elsewhere, there has been constructive engagement on investor sanctions, highlighting how duplication across securitisation and other regulations risks deterring participation.
The debate around Solvency II capital charges is moving in the right direction, with increasing acknowledgement that the current disparity between European and US insurers’ allocations to securitisation is hampering competitiveness.
Finally, there is also growing clarity around the distinction between public and private securitisations. This is a nuanced point but one that matters in practice. The current regime means any admission to trading on a major EU exchange – even for transactions that are otherwise private and bilaterally negotiated – triggers burdensome reporting requirements.
It is critical that the legislative interventions do not inadvertently create a cliff edge, but rather ensure that negotiated transactions are, irrespective of listing, private and can remain so. The proposals must avoid creating uncertainty for issuers and investors alike – which could in turn discourage use of securitisation for transactions that garner funding for more innovative or first-time asset classes – such as greening and digitisation – of precisely the type needed for future financing of the EU economy.
Overall, then, the proposals are constructive and there have been welcome developments on some points, but as a package the reforms point to incremental rather than transformative change that may fail to meaningfully move the needle on reviving the market.
Third country disclosure – the key policy risk
We believe the most pressing unresolved challenge lies in the treatment of third‑country securitisations. Under current proposals, non‑EU issuers would still be required to comply with EU‑designed templates intended for European market players.
Global securitisation markets have distinct buyer bases and limited crossover. Imposing EU‑centric disclosure requirements on non‑EU issuers creates friction and serves as a barrier rather than a bridge. Only a narrow set of transactions, where issuers perceive sufficient European demand to go the extra mile of meeting rigid EU requirements, will flow into the European market, significantly limiting EU investor choice.
If the aim of the SIU is to integrate capital markets and broaden opportunities for European savers, this approach undermines both. Our view is that regulatory coherence with global practice, not isolation, should be the guiding principle.
Investors already conduct robust due diligence, as required (among other things) under UCITS and AIFMD frameworks. Adding duplicative requirements in the securitisation regime risks discouraging participation without improving transparency, particularly among smaller investors who are essential to broad and liquid markets.
There are further issues that should not be overlooked. As intimated above, treating any publicly traded issue as a “public securitisation” pushes issuers toward non‑EU venues where confidentiality can be preserved, ultimately weakening Europe’s capital markets.
Also as above, if we do not have Solvency II capital charges that reflect risk rather than historical bias, insurers will remain underallocated to securitisation.
The stakes are high
The securitisation framework is in many ways a litmus test for efforts to boost EU growth and competitiveness more broadly. It is the first legislative proposal under the SIU for a reason – and its outcome will matter to the future of that key initiative.
Success here would suggest that Europe can forge rules that are proportionate, internationally coherent and supportive of both investors and the real economy. A revised securitisation framework has the potential to drive credit flows and a more dynamic economy - but failure to address key sticking points would leave a narrower, less dynamic market.
Opportunities remain for the legislative bodies to make the necessary changes that would realise these lofty ambitions, with the final parliamentary position not due until May and final rules not likely until closer to the end of the year.
Getting this right now, when there is focus, energy and attention on this market and these rules, is important. Game on.
Further reading · Schroders Capital position paper: EU securitisation reform: Unlocking the market and driving growth – our view
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