Capital Markets Recovery Package: Council agrees its position

The EU is taking measures to make it easier for capital markets to support economic recovery from the COVID-19 crisis.

Member states’ ambassadors to the EU today agreed the Council’s position on the Capital Markets Recovery Package, which contains targeted amendments to the EU capital market rules to help EU companies raise capital on public markets, support the lending capacity of banks and boost investment in the real economy. The Commission presented the package at the end of July; it was subsequently taken forward by the presidency as a key priority dossier in the Council.

The amendments focus on the Markets in financial instruments directive (MiFID) II, the Prospectus Regulation and the securitisation framework laid down in the Securitisation Regulation and the Capital Requirements Regulation. The Council lends its full political support to the Commission’s package, while suggesting changes to some of its detailed provisions.

Capital markets have a key role to play in supporting Europe’s recovery from the COVID-19 crisis. We need to facilitate the recapitalisation of companies, investment in the economy and bank lending to small and medium-sized enterprises. The targeted amendments to the capital markets rules will do this while maintaining high levels of investor protection. I am looking forward to a swift completion of work on this legislative package with the European Parliament. We need to provide this additional support for businesses and the economy as soon as possible.

Olaf Scholz, Germany’s Federal Minister of Finance and Vice-Chancellor

Adjustments to the MiFID II requirements

In light of the COVID-19 crisis, the Commission has proposed a number of amendments to the MiFID II rules to simplify information requirements and address the needs of the commodity derivatives market. 

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 certain 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, the Council is fine-tuning changes to the MiFID rules aimed at supporting the growth of euro-denominated derivatives markets. 

A new EU Recovery Prospectus

One of the key changes is the introduction of an ‘EU Recovery Prospectus’ – a shorter prospectus which companies with a track record in the public market could use for disclosing 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.

In its position, the Council has 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. This may free up companies’ resources for more urgent needs.

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. Securitisation is the practice of bundling assets such as bank loans into securities traded on capital markets. This helps banks to free up capital and therefore increases their capacity to lend to the real economy.

The proposed amendments extend the existing EU framework for simple, transparent and standardised (STS) securitisations to synthetic securitisations. Synthetic securitisations are an important credit risk management tool for banks as they enable them to transfer the credit risk of a set of loans, typically large corporate loans or SME 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 a potential misuse of SES for arbitrage purposes for all synthetic securitisation transactions, irrespectively of whether they meet the STS criteria or not.

Next steps

On the basis of this negotiating mandate, the presidency will start negotiations with the European Parliament as soon as the Parliament has adopted its position.