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European Commission says securitisation market review will ensure growth not restricted by regulation


The European Commission is reviewing the regulation of the securitisation market in a bid to boost its growth in line with that experienced in the US securitisation market.

The Commission is consulting on the way that the securitisation market is regulated to ensure that it is not hindering growth. EU rules on securitisation were tightened after the 2008 global financial crisis.

"The Commission will put forward a proposal on how to build a sustainable securitisation market," its consultation (18-page / 111.23 KB PDF) said. "The goal is for Europe to benefit from a safe, deep, liquid and robust market for securitisation, which is able to attract a broader and more stable investor base to help allocate finance to where it is most needed in the economy."

Securitisation typically involves the pooling and repackaging of loans or other assets, such as mortgages, leases or credit card receivables, and the conversion of them into debt securities. The repackaged assets are put together into portfolios and sold to special purpose companies, which fund the acquisition by issuing debt securities to investors.  The investors then receive a regular cash flow from the underlying assets

In order to regulate different securities in a different way, in 2014 the Commission introduced a differentiated approach to allow for a more risk-sensitive treatment of securitisations. This is based on three criteria: the simplicity, transparency and comparability, or standardisation, of the securities. These can be supplemented by additional criteria based on specific risks including credit quality.

This 'modular' approach allows consistency across the system and can help to address sector-specific risks, the Commission said.

A high-quality securitisation market would be a "building block of the capital markets Union" and contribute to a return to growth and job creation, the Commission said in the paper.

An EU securitisation framework will promote further integration of EU financial markets, help to diversify funding sources and unlock capital, making it easier for banks to lend to both individuals and businesses, the Commission said.

In the consultation paper, the Commission stressed that there is "no intention ... to undo what has been put in place in the EU to address the risks inherent in highly complex, opaque and risky securitisation". Improvements to differentiation and the development of transparent, simple and standardised securitisation are "a natural next step to build a sustainable EU market".

The aim of the consultation, it said, is to gather views from stakeholders on how well current European securitisation markets work, and how the legal framework can be improved to create a sustainable market for high quality securitisation.

"On the basis of the feedback received, the Commission will reflect further on how to reach that objective," it said.

Securitisation expert Edward Sunderland of Pinsent Masons, the law firm behind Out-Law.com, said: "Any proposals to loosen the regulatory restrictions suffocating the securitisation market are to be welcomed. Getting the market running closer to its 2007 levels would have a significant and positive impact, though of course it all depends how quickly any such changes would take to come into effect."

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