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Capital Markets Recovery Package: Council confirms targeted amendments to EU capital market rules

On behalf of the Council, EU ambassadors recently (16 December 2020) endorsed targeted amendments to the EU capital market rules provisionally agreed with the European Parliament last week to support economic recovery from the COVID-19 crisis.

Negotiations on the so-called Capital Markets Recovery Package took top priority in the Council and in talks between the EU co-legislators in order to provide immediate support for the economic recovery by facilitating access to finance for EU companies and, in particular, SMEs. The Council and the Parliament reached an agreement less than five months after the presentation of the legislative proposal by the European Commission in July.

The legislative changes include amendments to the markets in financial instruments directive (MiFID) II, the prospectus regulation and the EU securitisation framework.

Olaf Scholz, Germany's Federal Minister for Finance and Vice Chancellor recently said:

For a swift and sustainable economic recovery from the COVID-19 crisis we need to enhance public and private investments. The Capital Markets Recovery Package will make a major contribution to this end. The package makes it easier for capital markets to support the economic recovery. It will facilitate the recapitalisation of companies, support bank lending and boost investment in the economy while maintaining high levels of investor protection.

Changes to the MiFID II regime

As part of amendments to the MiFID II rules, the Council and the Parliament have agreed to simplify information requirements in a targeted way, for instance on costs and charges disclosures. These amendments will facilitate the provision of investment services and investment in the EU economy without compromising investor protection.

In addition, a targeted exemption has been agreed to allow banks and financial firms to bundle research and execution costs when it comes to research on small and mid-cap issuers. This will increase research coverage for such issuers, thereby improving their access to capital market finance.

The position limit regime for commodity derivatives will also be adapted to help European businesses to react to market volatility and to support the emergence and growth of euro-denominated commodity derivatives markets. The changes do not affect agricultural products, in particular products used for human consumption.

A new type of prospectus

The EU co-legislators have also agreed to establish a new ‘EU recovery prospectus’ – a shorter prospectus – to make it easier for companies to issue capital.

The EU recovery prospectus will be available for capital increases of up to 150% of outstanding capital within a period of 12 months. This will avoid highly dilutive issuances, while ensuring that the new prospectus may be used as a basis for a meaningful recapitalisation of companies. The new regime will apply until 31 December 2022 to allow issuers to raise the necessary additional equity to overcome the COVID-19 crisis.

During the negotiations, the Council and the Parliament have also fine-tuned the requirements regarding the minimum information to be included in the recovery prospectus, so as to provide adequate information to investors.

Targeted adjustments to facilitate securitisation

To facilitate securitisation, the existing EU framework for simple, transparent and standardised (STS) securitisations will be extended to cover 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.

The agreed changes will free up bank capital for further lending and allow a broader range of investors to fund the economic recovery from the COVID-19 crisis. In order to encourage the use of the STS label, preferential risk weights are introduced for senior tranches retained by the originator, while the European Banking Authority will closely monitor the market for such products to ensure that this does not lead to excessive leveraging of banks.

The new rules also remove regulatory obstacles to the securitisation of non-performing exposures (NPEs). This is done by broadly aligning NPE rules with international standards and ensuring their prudential soundness, while at the same time allowing originating banks to use risk-sensitive modelling practices.

This will help banks to better manage their balance sheets when dealing with the economic fallout from the COVID-19 pandemic, to secure their lending capacity in the medium term and to share risks more broadly with the non-bank financial sector.

Next steps

The Parliament and the Council will now be called on to formally adopt the amendments without further discussion, possibly in February 2021, after the usual legal-linguistic revision of the text.

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