EU Supervisory Authorities Lay Out Recommendations to Strengthen Securitisation Regulation

Key Takeaways

• Clarifying SECR Scope: The ESAs recommend applying the Securitization Regulation when at least one party involved in the securitization is based in the EU, ensuring consistent supervision.
• Expanding Public Securitization Definition: The report suggests broadening the definition of public securitization to include securities issued with an EU-approved prospectus or traded on EU-regulated markets.
• Proportional Due Diligence Requirements: The ESAs call for more practical due diligence processes, making it easier for investors to assess risks with meaningful data provided throughout a transaction’s life.
• Simplifying Reporting and Transparency: Recommendations include streamlining reporting templates and allowing greater flexibility in data presentation, particularly for smaller entities.
• Enhancing Supervisory Consistency: The ESAs propose stronger coordination across Member States to ensure uniform application of regulations, with a potential shift toward consolidated European supervisory arrangements.

Deep Dive

In an effort to further refine and enhance Europe’s financial infrastructure, the Joint Committee (JC) of the European Supervisory Authorities (ESAs) has just published its evaluation report on the EU’s Securitization Regulation (SECR). The report, which arrives at a crucial moment for the European financial markets, offers a comprehensive review of how the regulation has been performing and lays out several key recommendations for making Europe’s securitization framework more effective, transparent, and investor-friendly.

At its heart, the report reflects the ESAs’ ongoing commitment to fostering a secure and stable securitization market that supports growth while maintaining high levels of investor protection. But it’s not just about keeping the market safe, it’s also about simplifying processes, enhancing clarity, and streamlining requirements to ensure that Europe’s securitization market stays competitive in the global financial landscape.

So, what’s in the report? Here are some of the most important takeaways:

1. A Clearer Scope for the Securitization Regulation: One of the key recommendations is a push for greater clarity on when the Securitization Regulation applies. The ESAs suggest that SECR should be triggered whenever at least one party involved in a securitization, whether on the sell-side or buy-side, is based in the European Union. This isn’t just for legal certainty; it’s about ensuring that supervision is consistent across the board. In an increasingly globalized world, making sure that every market participant knows where they stand under the regulation is crucial.

2. A Bigger Picture for Public Securitization: Public securitization, as defined under the current regulation, may be due for a bit of a makeover. The report suggests broadening the definition to cover transactions that are either issued with a prospectus approved under the EU Prospectus Regulation or are admitted to trading on EU-regulated markets or Multilateral Trading Facilities (MTFs). This change would help make the scope of public securitization much clearer, increasing market transparency and encouraging greater investor confidence.

3. Due Diligence That Makes Sense: For institutional investors, the due diligence process can often feel like navigating a maze. That’s why the ESAs are calling for more proportional, practical due diligence requirements, ones that enable investors to receive data in formats that truly support meaningful risk assessments. This is about making sure that the information provided throughout a transaction’s life cycle is not only available but also useful.

4. Simplifying Reporting: Less Red Tape, More Action: The report acknowledges that the current reporting requirements for public securitizations can be a bit overwhelming, especially for smaller players. To combat this, the ESAs are recommending streamlined reporting templates, better data standardization, and the introduction of some flexibility in how data is presented, whether through aggregated or stratified formats. This would ease the burden on smaller reporting entities and create a more efficient process across the board.

5. A Smarter STS Framework: When it comes to the Simple, Transparent, and Standardized (STS) framework, the ESAs are looking to make some focused adjustments. These tweaks are particularly aimed at improving the efficiency of on-balance-sheet (OBS) securitizations, a concept introduced under the Capital Markets Recovery Package (CMRP). The goal? Make sure that the framework works better and is more efficient without complicating things further.

6. Clarity on Risk Retention: Risk retention rules, especially when it comes to complex products like Collateralized Loan Obligations (CLOs), have long been a source of confusion. The ESAs suggest that clearer guidance on these rules could help reduce the uncertainty around how risk retention is applied. By introducing more precise terminology, such as defining the “predominant source of revenues,” they aim to make it easier for market participants to understand and follow the rules.

7. Ensuring Consistency Across Borders: Lastly, the report touches on the need for stronger supervisory consistency across Europe. The ESAs recommend enhanced coordination within the Joint Committee Securitization Committee in the short term. Over the longer term, they suggest the possibility of more consolidated European supervisory arrangements, especially when dealing with cross-border transactions. This would help prevent fragmentation and ensure that all EU Member States are on the same page when it comes to applying the regulation.

The ESAs’ recommendations will now feed into the European Commission’s legislative review of the securitization framework, providing valuable input as Europe looks to make its securitization market more resilient, transparent, and adaptable to future challenges.

While these changes may not happen overnight, they signal a strong push toward a more streamlined, efficient, and robust European securitization market. For market participants, creating a regulatory framework that supports growth without compromising on investor protection or financial stability is critical. By focusing on simplification, proportionality, and enhanced clarity, the ESAs are setting the stage for a future where Europe’s securitization market can continue to thrive, even as global financial landscapes evolve.

With these recommendations in place, Europe is not just safeguarding its financial future, it’s also positioning itself as a leader in the securitization space, ensuring that the market is well-equipped to meet the demands of a rapidly changing world.

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