Status update – Draft EU Securitisation Regulation

Our October 2015 briefing "Draft EU Securitisation Regulation – impact for CLOs" described two draft regulations published by the EU Commission at the end of September 2015. The first included new proposals for simple, transparent and standardised (STS) securitisation (the Securitisation Regulation) and the second set out related amendments to the Capital Requirements Regulation (CRR) (the CRR Amending Regulation). As these proposals include a number of important changes relevant to CLOs, market participants have been keenly watching the regulatory developments since the initial leak in August 2015.

The proposals include giving STS-compliant transactions a more favourable capital treatment than those which do not meet the STS criteria. As expected, most managed CLOs will not be eligible to comply with STS requirements.

Of more interest to the CLO market is that the Securitisation Regulation also includes consolidated and recast risk retention, due diligence and disclosure rules applicable to all types of securitisations (including CLOs).

At the time of the Commission proposals, many market participants expected the new rules to come into force as early as mid-2016. Others predicted late 2016 or early 2017. Now it seems that even the latter prediction may be short of the mark.

After our October briefing, the Council of the EU proposed a "compromise" set of amendments to the draft Securitisation Regulation published by the EU Commission, and the Permanent Representatives Committee of the Council (COREPER) adopted the compromise in early December. The adopted compromise version is intended to form the basis of the Council's negotiating position with the EU Parliament. Several important changes and clarifications crept into the document, including some which are relevant to CLOs. Issues such as extra-territoriality and grandfathering were improved, but changes to the transparency requirements have raised further questions.

When adopting the Council position, COREPER acknowledged that the EU Parliament was some way behind the Council in its consideration of the proposals, but invited "the incoming Dutch Presidency to pursue, as soon as the European Parliament has reached its position, negotiations with the European Parliament on the basis of that approach with a view to reaching an agreement at the first reading".

It is now up to the European Parliament to review the version proposed by the EU Commission, alongside the Council's adopted position. Initially, this task falls to a sub-committee of the Economic and Monetary Affairs Committee (ECON), led by the MEP appointed as "Rapporteur" – Paul Tang of the Netherlands' Socialist Democrat party, who will be required to produce his report on the proposal to Parliament before any vote in full parliamentary session can take place.

As part of the preparation of the report of the Rapporteur, ECON has recently submitted a list of 109 questions on the Securitisation Regulation to the Commission. Many of the questions relate to the new STS proposals rather than the risk retention regime.

However, it is evident that ECON members do not consider the risk retention rules to be a finished product. The questions range from requests for further high-level background or evidence, to specific and detailed queries on the drafting of the Commission proposals.

Questions of particular interest to the CLO market include:

• What are the potential benefits and risks of CLOs?
• Why does the originator definition not prescribe a list of entities which can be an originator?
• Could the Commission clarify why it has not included non-MiFID asset-managers within the Sponsor definition? Could UCITS and AIFM asset managers be considered sponsors for the purpose of retention?

There are also several more general questions on the retention requirement, including even the impact of raising the level of retention to 10 or 15 per cent of the economic risk of the transaction (although this was also a call from individual MEPs during negotiations preceding the introduction of the original retention requirements and never gained much traction).

The Rules of Procedure of the European Parliament provide that if an MEP submits written questions to the Commission for a written answer, the Commission has six weeks in which to respond. However, MEPs would usually be limited to five such questions each parliamentary session, and the questions raised here (although raised by several members of ECON) far exceed that number. It appears that these questions are raised as part of more informal bilateral discussions which would commonly take place between the two bodies, rather than under the strict rules of Parliamentary procedure. Although the Commission was asked to respond within six weeks (by 26 April), to enable the ECON report to be published in mid-May, that time limit seems very tight in the context of the questions asked. It appears likely that this timetable will slip.

Once Parliament has determined its position, the three institutions (the Council, the Commission and the European Parliament) will enter into "trialogue" negotiations to reach agreement on the final text. This will involve consideration of the initial Commission proposal from September 2015, the compromise produced by the Council in November 2015, and the draft produced by the European Parliament during 2016.

Given the nature of and extent of the ECON questions, it is unlikely that the European Parliament will reach its own agreed position before late 2016. At that time, the six-month Croatian Presidency of the Council will be coming to an end. It may be that the trialogue will start instead at the beginning of the Maltese Presidency of the Council in January 2017. On the other hand, informal trialogues can take place at any time, so it may be that some discussions are held before Parliament arrives at its final position, and a political agreement of the three bodies may therefore be simultaneous with publication of Parliament's final text. This would speed up the process of adoption.

However, on balance, it seems increasingly likely that the final version of the Securitisation Regulation will be adopted by the Commission rather later than first estimates suggested, and we may be some way into 2017 before the proposals become law.