Capital Markets - Capital Markets Blog

11. September 2020

ESMA Templates and Securitization Repository RTS Enter into Force

On September 3, 2020, the remaining regulatory technical standards (RTS) of the Securitization Regulation completed their scrutiny period and were confirmed and published by the European Parliament in the Official Journal[1]. This legislative act comes one year and nine months after the Securitization Regulation formally entered into force and thus formalistically completes the transition from the current regulatory regime into the new one. The approved RTS will enter into force on September 23, 2020 and will bring substantial changes to the market mechanics. The following text was compiled in order to help the reader to better understand the market impact.

Establishment of Securitization Repository (SR)

The new legislation defines the final standards of application for registration of SRs as well as it sets forth technical standards relating to its operations, data collection, aggregation, comparison, access and verification of completeness and consistency. Having this RTS entered into force allowed ESMA to open application period, starting on September 23, 2020[2], where entities wishing to be registered as SR can submit their application. It is worth pointing out that based on Securitization Regulation it is expected, though likely in the long run, to see several SRs on the market. There is, however, no indication provided by ESMA on the limit of licenses granted or cooperation between established SRs.

In order to facilitate the application process, ESMA released in December 2019 an early guidance[3] on the application mechanics. The document outlines all relevant information that shall be followed by entities willing to initiate their compliance check with ESMA, leading to registration as SR. Upon receipt of given application, ESMA has 20 working days to assess its completeness. After this time, the applicant will be notified of ESMA’s findings. Once the application is complete, ESMA will require additional 40 business days to examine the application’s compliance with the requirements of the Securitization Regulation. This can also include on-site visits at applicant’s premises. According to Article 12, ESMA must adopt decision no later than 40 working days after confirming the application’s completeness and this decision will come into effect on the 5th working day following its adoption – after which the SR will start to receive, store and make available securitization data. The licensing decision shall also be communicated to the National Competent Authority and the European Commission.

At PwC, we assume that this application process for the first successful SRs will take approximately six months in total. Should this assumption be correct, we expect to see the first SRs starting operations in late March 2021. The time of establishment of the first SRs will be an important milestone as it will trigger convergence of ESMA and ECB templates for ECB’s collateral eligibility, further discussed in chapter Dual Reporting of Underlying Exposures.

New Reporting Requirements

Second important piece of the published RTS deals with the new reporting regime. Starting on September 23, 2020, all European (public and private) securitization will be required to disclose detailed information about their underlying portfolios using ESMA Templates. These loan-by-loan templates use a similar logic and layout known to the market from the past years as ECB Templates. These templates were introduced by the ECB in 2014 and remain in place for the purposes of validation of the Eurosytem’s eligible collateral and as one of the requirements to qualify for the ABS purchase program (ABSPP).

Compared to ECB’s templates, ESMA templates removed all optional fields, mainly increasing requirements for data completeness[4] and became mandatory for new asset classes such as ABCPs, NPLs and Esoteric Transactions. Also, the format in which these datasets will be made available has been narrowed down from previously used Excel sheets, CSV files and XML files to a single option – the XML format.

Detailed comparison of ECB and ESMA templates will be discussed elsewhere on our PwC Capital Markets Blog

Temporary Disclosure Requirements

Even though the first SR will be registered well after the beginning of the new reporting regime, the requirement to use the ESMA templates from September 23, 2020 onwards remains binding. Before ESMA registers the first repository, Article 7 (2) of the Securitization Regulation shall be followed, which provides further guidance on the transition period. It states, that in case of unavailability of an SR, the reporting entity shall fulfill reporting requirements stated in Article 7 (1) by using a website that:

Provides a well-functioning data quality control system
Has appropriate governance standards and organizational structure
Addresses operational risk in an appropriate manner
Ensures data protection and is capable to react promptly to data queries
Is capable of storage of submitted data for at least of 5 years after the maturity of the securitization

Once the SR is established, it shall be used as the only option in order to fulfill disclosure requirements defined in Article 7 of the Regulation.

Dual Reporting of Underlying Exposures

As soon as the first SR is registered, all securitizations subject to Article 7 will be required to make the data available through the means of a repository. Data disclosed prior the date of registration of the first SR do not have to be resubmitted to the SR^[5].

Notwithstanding this, use of ESMA’s templates for the underlying exposures shall begin as soon as these templates enter into force. From this day on, there will be, however, a number of originators suddenly facing a dual disclosure requirement. Besides reporting via ESMA templates, all originators seeking ECB eligibility^[6] will be required to continue reporting to ECB’s designated repository via the existing ECB templates. This practice of dual reporting is expected to be challenging for many originators because it raises reporting cost and adds complexity due to different sets of templates that must be reconcilable or at least consistent with each other. This will require the implementation of data quality and integrity rules to prevent concerns on the available data quality.

In March 2019, ECB announced an amendment of eligibility criteria^[7] which will newly accept underlying data being disclosed by ESMA templates. ECB will phase out its own templates for eligibility gradually over 3 months – 3.5 years, depending on the transaction’s vintage. ECB’s templates will no longer be applicable for securitizations originated after 2019 shortly after the first SR is registered and ESMA templates are in full use. For securitization originated prior 2019, an addition of 3 years of grandfathering period will be granted. While the fulfilment time of the first condition is still unknown, the commencement of the dual reporting will be triggered by the ESMA templates – on September 23. Should we use the assumption of six months long application period for the first SR, we can estimate following two convergence timelines:

For securitizations originated in 2019 or later, the convergence period from ECB templates to ESMA templates will be only three months long and will start once the both ECB’s conditions are met. In this scenario, we expect dual reporting to last from September 23, 2020 until March 23, 2021. This applies to institutions willing to migrate from ECB Templates to ESMA Templates on the earliest time possible. For other entities, there is still time window of three months to do so, eventually stretching the dual reporting period to a maximum of 9 months (September 23, 2020 – June 23, 2021).

For securitizations originated prior 2019, the convergence period will be extended additionally by a maximum of 36 months. In such a case, the transition period will look as follows:

This lengthy grandfathering period may not be as convenient as it appears. The inevitable dual reporting between September 23, 2020 and March 23, 2021 will be organizationally demanding for all issuers. It is therefore advisable for those issuers who can to fully switch to ESMA templates to do so as soon as possible (i.e. March 2021). Reporting entities with transactions issued prior 2019 are free to use up time until the final deadline, being June 2024^[8]. There are, however, many institutions originating new securitizations on a yearly basis which brings them into a situation where old outstanding transactions or master trusts will be given more time to converge than recent issuances. In such a case, the adoption of ESMA templates for all transactions at once would be the most sustainable solution, since partial use of ECB templates for selected transactions is cumbersome to maintain.

PwC’s Outlook

We support ECB’s decision to recognize the ESMA templates as a sufficient way of data disclosure for eligibility under efficiency, reporting integrity and complexity reduction reasons. Gradual replacement of ECB templates will clearly decrease organizational efforts for those issuers seeking both ECB eligibility and compliance with Securitization Regulation. This especially holds for originators of transactions that require data submission on monthly basis (e.g. AUTO asset class). There still are a lot of issues around the content of ESMA’s templates which we regularly discuss in this Blog but which are not within the scope of this article.

Concerning the number of registered Securitization Repositories in Europe, we predict the European Authorities will conduct a balanced approach between the European core principle of competition and the ability of the individual repositories to conduct business on competitive markets. This would achieve both the goal of raising transparency and improved efficiency and resiliency of the market.

For any question related to this topic, ESMA Templates or to Securitization Regulation in general, please contact your PwC experts.

Stephan Lutz – Mail: stephan.x.lutz@pwc.com

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] See (EU) 2020/1225

[2] See ESMA’s press release from September 4, 2020

[3] See Guidance on registering securitization repositories

[4] The number of fields allowing ND values has decreased

[5] See ESMA’s Q&A, version 5 from May, 2020, Q5.1.1 (d)

[6] Transaction wishing to be accepted as collateral for Eurosystem’s refinancing operations

[7] See ECB’s press release

[8] Expected based on our scenario

6. May 2020

Capital Markets Blog Series – Investment Funds in Scope of Liquidity Stress Testing (LST)

This contribution is focused on the main challenges regarding both governance and methodology of liquidity stress testing due to emerging regulatory attention and the increasing importance of liquidity stress testing in the light of current developments in the financial markets.

20. March 2020

Financial Services Post-Brexit: The Age of Equivalence

With Brexit carried out on 31^st January, 2020, the clock for the negotiations on the future of the economic relationship between the UK and the EU started ticking aloud. Before bilateral, structured meetings formally kicked off on 2^nd March 2020, both sides had already started indirect communication by formulating a Blueprint (PM Johnson) and a negotiation mandate (of the European council for Commissioner Barnier) aiming at setting the scene for later direct talks. Both sides have stated that Financial Services will be on the table, which is not a surprise. If we think of the negotiations as a dinner table, Financial Services would be the Lobster: After use of some tools and techniques (both themselves taking some time to get learned), you get a non-everyday culinary experience (at least for most of us). You will possibly remember a meal for the Lobster served. But If you are hungry and in a hurry, you will probably not choose the lobster, deprioritizing it to the most important target at hand: Not leaving the table hungry.

As of now, Financial Services could well become the Lobster in the Brexit negotiation: The masterpiece of negotiations, but unavailable for time constraints. Instead, it is more likely than not that EU-UK-cross-border financial services from 2021 on will be governed by a concept which is already established in both EU and UK law and will thus not require negotiations: Equivalence.

In this article, we will explain the concept of equivalence, why we consider it the most probable outcome and what this means for the provision of cross-EU-UK-border (cross-border) financial services after the end of the transition period, in the short and medium term.

18. March 2020

PwC Live-Webcast: Responding to the impacts of COVID-19

The current CoViD-19 situation is evolving dynamically. While the immediate focus is on making sure that as many people can be treated medically in appropriate and life saving ways, business matters come to the fore due to more and more constraints and interrupted supply chains and subsequent impact on financial institutions’ business models.

How are businesses coping with the situation globally? Which conclusions can be drawn so far? What should businesses look at to react effectively, protect employees and maintain their brand value?

Those and further issues will be discussed in our live webcast “Responding to the impacts of CoViD-19” on March 19, 2020 at 2pm CET to which we would like to invite you.

Please register here.

Details

When: Thursday March 19, 2020 | 2.00 – 2.45pm CET (webcast opens 1:55pm CET)

Please feel free to share and forward the invite with colleagues and employees who are involved in your task forces.

Your questions

You are invited to ask our experts live during the webcast. Alternatively, you can submit questions upfront to tobias.bremser@pwc.com

We are looking forward to welcome you and your colleagues to the webcast.

5. March 2020

Integration von FinTechs in das Risikomanagement von Banken

Der digitale Wandel trifft den Finanzsektor derzeit stark. Bankkunden verlangen mehr und mehr digitale Dienstleistungen von „ihrer“ Hausbank. Banken müssen somit neue digitale Dienstleistungen für ihre Kunden entwickeln und gleichzeitig ihre veraltete IT und Prozesse modernisieren. In diese „Lücke“ sind nun die FinTechs getreten und rauben den etablierten Banken nach und nach Marktanteile.

Banken sind somit gezwungen, schnellstmöglich digital „nachzurüsten“ – sowohl bei ihrem digitalen Kundenangebot als auch bei den eigenen Prozessen. Zusätzlich bieten sich dadurch im derzeitigen Niedrig-Zinsumfeld wiederum neue Ertragsquellen und Wachstumschancen. Aktuell besteht eine hohe Investitionsbereitschaft im Bereich Digitalisierung, insbesondere im Private Banking, Wealth Management und Transaction Banking.

Banken stehen nun vor der Entscheidung, entweder eigene digitale Lösungen zu entwickeln oder auf bereits bestehendes Know-how diverser FinTechs zu setzen – durch Akquisitionen oder strategische Kooperationen. Dabei stehen sie vor großen Herausforderungen. Sie können die genauen Auswirkungen eines Kaufs bzw. einer Kooperation auf ihr Geschäftsmodell, ihre bestehenden Prozesse, ihr Risikomanagement und die Erfüllung regulatorischer Vorgaben oftmals nicht vollumfänglich abschätzen. Neben dem strategischen Fit ist dabei die konkrete Ausgestaltung der Integration des FinTechs in die bestehenden Bankprozesse, insbesondere im Bereich Risikomanagement, von entscheidender Bedeutung für den Erfolg.

In jedem Fall sind dabei vor der Geschäftsaufnahme die Anforderungen nach AT 8 MaRisk einzuhalten. Größte Herausforderung für Banken stellt dabei die Durchführung einer detaillierten Risikoanalyse vor der Aufnahme der Kooperation bzw. vor dem Kauf dar:

Diese Analysen und Konzepte sind noch vor der Geschäftsaufnahme durchzuführen:

Nach dem Zusammenschluss ist eine stringente Einbindung des FinTechs in die innerhalb der Bank bestehenden Prozesse im Risikomanagement von hoher Bedeutung (Post Merger Integration). Die jeweilige Form der Kooperation bzw. Beteiligung determiniert dabei die konkrete Behandlung im Risikomanagement. Dabei sind sowohl die bankinternen Prozesse als auch die bestehenden Methoden und Modelle betroffen:

Um mit diesen Herausforderungen gerecht zu werden, unterstützt Sie PwC gerne mit folgenden Services:

Identifikation der bestehenden Prozesse auf Betroffenheit durch Integration des FinTech
Impact-Analyse des FinTechs auf die bestehenden Prozesse und Erstellung des operatives Zielmodells
Analyse auf Synergiepotentiale
Darstellung von Optimierungspotentialen an den bestehenden Prozessen im Zuge der Integration (Identifikation von „Quick Wins“)
Erstellung von Fachkonzepten bei Prozessanpassungen
Unterstützung beim Rollout der neuen Arbeitsabläufe
Unterstützung beim Auslagerungsmanagement
Impact-Analyse hinsichtlich SREP: Analyse der Auswirkungen auf geändertes Geschäftsmodell
Erstellung eines Projektkonzeptes und PMO
Ex-Post-Validierung des erwarteten Nutzens
Risk Assessment – Analyse des FinTechs auf neue Risiken für die Bank: Reputation, operationelle Risiken, etc.
Impact-Analyse neuer Risiken durch FinTech auf bestehendes Risikomanagement: Governance, Prozesse, Methoden, etc.
Erarbeitung eines Integrationskonzeptes für das Risikomanagement der Bank: Risikoinventur, Risikostrategie, Risikotragfähigkeitskonzepte auf Gruppenebene (AT 4.5 MaRisk), Waiver, etc.
Unterstützung bei der revisionssicheren Durchführung eines Fusions- bzw. Anpassungsprozesses (AT 8 MaRisk) sowie Outsourcings (AT 9 MaRisk)

Ihre Ansprechpartner:

Stephan Lutz
Partner

Tel: +49 69 9585-2697

Mobile: +49 151 14623538

stephan.x.lutz@pwc.com

Steffen Bätz
Manager

Tel: +49 69 9585-5359

Mobile: +49 160 90137103

steffen.baetz@pwc.com

23. January 2020

ESMA Opens Consultation Period on Data Completeness Thresholds and their Calibration

On Friday January 17, ESMA opened a period on assessment of data completeness of Securitization Disclosure. The consultation paper can also be accessed on ESMA’s web site.

Each party reporting data under Article 7 of the Securitization Regulation may use different No Data option for fields it cannot populate (each option disclosing the reason for its use, e.g. ND1 meaning that required information has not been collected because it was not required by the lending or underwriting criteria at the time of origination). In order to keep up the information value of the disclosures, ESMA limits the use of the different No Data options. The core of the new consultation deals with a calibration of acceptance thresholds for the use of No Data[1] options in the disclosure templates. ESMA defines two root causes of No Data usage – Legacy Assets and Legacy IT Systems. The first one represents a situation where the reporting entity lacks most of the data for a limited number of loans granted whereas the later one would be referred to if a limited number of fields is unavailable across many exposures. These thresholds will be applied to all asset classes from templates for underlying exposures, not including Investor reports (Annexes 12 and 13) and Inside Information and Significant Events (Annexes 14 and 15) and are expected to change over time with a trajectory towards increased data completeness.

The consultations paper deals in greater detail with data analysis and requests for a feedback on proposed calibration of initial thresholds for data from both Legacy Assets and Legacy IT Systems. Further to his, ESMA opens a discussion around threshold revision process without making any specific suggestion about the timing.

It also worth noting that ESMA does not expect the Securitization Repositories to check for data completeness for non-STS transactions issued prior to 2019. Only public securitizations issued after Jan 1, 2019 or deals seeking the STS label will be subject to the aforementioned data completeness requirements.

ESMA has announced to close the consultation period on March 16 and evaluate all feedback collected. At PwC, we expect to see ESMA’s follow up on this topic later in Q2, 2020, for which we will publish our detailed opinion via a separate blog entry.

For more information on securitization markets, please feel free to get in touch with your PwC’s subject matter experts.

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] ND1-4

22. January 2020

The Securitization Market: 2019 recap and 2020 expectations

Dear readers,

The first year of our blogging activities concerning Securitization and Structured Finance Issues is over. We have received quite some feedback from you and would like to thank you accordingly. Knowing that our topics are of interest to the Securitization community is key for us and guides us to compile not only informative but also relevant posts.

Therefore, our first post of 2020 will provide you with a short recap of what happened in 2019 and our expectations of the key market developments for 2020. We welcome your input on this and will provide you with an update on our expectations at the end of this year. As always, we take a regulation-driven look and analyze its effects on market developments.

Stephan, Philipp & Petr

2019 short recap

2019 was one of the most important years for the Securitization markets since 2009. New regulatory provisions for Securitizations came into effect and – unlike to what had happened in recent years when new regulation was introduced – markets saw an increase in activity.

Their first reaction to the new regulation was surprisingly positive. Even an increase of risk weights for the better-rated senior tranches (moving from a floor of 7% to 10% means an increase by over 40% after all) while more subordinated tranches profit from lower risk weights in many cases, depending on the approach used (interestingly, under SEC-ERBA it is not possible to calculate a risk weight of exactly 1250% for a first loss piece due to the formula’s math but the resulting risk weight will remain some percent below 1250%). The reaction of the markets was positive however. This was probably due to investors valuing the decisive step to higher transparency which the disclosure requirements introduce, independently of whether the transaction is STS or not (although STS transactions fulfill even higher transparency requirements than other transactions). While there was little activity in the first quarter, STS transactions started to appear with a clear trend visible in the second half of the year.

Despite total volume issued in 2019 was lower than in the previous years, we could observe a growing ratio of publicly placed to total issuances which continues to follow the trend from previous years. This is clearly a positive signal demonstrating a healthy securitization environment.

Even though we do not expect final 2019 issuance (as soon as Q4 numbers are available), to reach the heights of the previous years, we still see the market positively. Lower issuance in 2019 was caused by almost ceasing market activity in Q1 as a cautious as well as preparatory reaction to new regulatory rules. During that period during the impression was that markets were literally gaining momentum for the issuance of transactions which had been under preparation for months. Market pick-up can be seen form March on where both “classic” transactions as well as STS deals started being issued. The STS label became quickly recognized and used by many originators. The following figure illustrates its growing popularity throughout 2019.

2020 Expectations

Peak regulation most likely reached Regulation activity has been going on since Securitization Regulation and the CRR Amendment came into effect in January 2019. EBA issued, among others, draft technical standards on Weighted Average Maturity and STS for Synthetics or its Opinion on NPE securitizations while ESMA published their Draft Technical Standards on the templates for disclosure under article 7 of the Securitization Regulation. Although it seems like a lot of additional regulation and thus business as usual, the list for 2020 has become shorter. We expect to see work on the application of Article 7 for third country issuances, a finalization of the STS for Synthetics and – towards the end of the year – a new draft of the DP on Significant Risk Transfer (see (4)). ESMA will start the process of licensing Securitization Repositories (see [Link]). Although this sounds like a lot, we clearly expect the regulation activity to slow down in 2020 compared to the past years. This will give market players the possibility to further develop their business under existing rules and develop market standards for STS and other open issues (e.g. Data Quality under Article 7 or expectations on Cash Flow Models).

1. Loan-level data becomes the topic of the day

Loan-level data or underlying exposures, as commonly being referred to by ESMA, will in 2020 find its way to regulators and investors in two formats – by ECB templates and newly by ESMA templates. Even though the reporting logic is similar, the data reported differ to some extent (depending on asset class). In general, the new ESMA templates cover a wide range of new data fields which we expect to be quickly leveraged by investors and regulators to better understand embedded risks. Further, we expect ECB to incorporate ESMA templates to its eligibility requirements[1] defining what is an acceptable collateral for ECB liquidity. Is effectively means that ECB will gradually move away from its own loan-level data templates over the next years, likely starting in the second half of 2020.

2. STS takes over public transactions

The 2019 trend towards the issuance of STS transactions will gain additional momentum. Big market players have already done their first issuances in 2019, as illustrated by Figure 3. Smaller players will now learn to achieve STS compliance. 2020 will also see a further increase of the use of third-party verification agents who, after their first verification, will help smaller players by spreading Know-how gained in 2019. A specificity of the German market, smaller Cooperative and Savings Banks without an individual capital market access will enter the market via private transactions hosted by their respective core institutions (DZ BANK and the Landesbanken). Relevant asset classes will be car loans and leases at first with MBS assets classes next in line.

Besides cashflow securitizations, the success of STS and thus the principles governing it (a better understanding of each transaction leading to enhanced market resilience from policymaker’s perspective) will also depend on the further development of STS for Synthetics. Although in the end a decision taken by COM (not in 2020), in the course of this year market players will gain insight into the political sphere´s appetite to extend STS to other transaction types. This will have impact on the further development of the market for Synthetics and thus the availability of efficient solutions for SRT (see (4)). We do not expect a final decision on the matter in the course of 2020.

3. SRT is back on the agenda

Basel IV, supervisory capital add-ons as result of the SREP process (in many cases due to IT / Data deficiencies, see (2)) and the macroeconomic environment will see a rise in securitization transactions targeting risk transfer. This will lead to each risk transferring bank developing its own understanding of compliance with the 2017 EBA DP on risk transfer. Under market conditions of increasing demand for SRT, ECB will communicate its own view of the 2017 DP bilaterally. Lawyers and professional services firms will spread the word, moving the system to a more homogeneous implementation of the 2017 DP. EBA is expected to take market developments into account and will likely issue an updated version of the DP towards year end. EBA will most likely position itself concerning tranche thickness, commensurate risk transfer and structural features. Whether EBA offers one or more approaches such as it did in the 2017 DP, towards the end of 2020 market players can be expected to have gained a substantially better understanding of the way SRT takes that at the beginning of the year.

4. Registration of multiple Securitization Repositories

The first and currently only Securitization repository was established as a part of the ECB’s loan-level data initiative[1] in June 2012 and became fully operational in January 2013. Since then, it has been the only place to store and access underlying information on collateral backing publicly issued ABS bonds. The Securitization Regulation, however, brings forth a provision which allows ESMA to register more Securitization repositories, eventually leading to decentralization of the information curtail for all data users. We are likely to see more than one Securitization Repository registered by the end of 2020. It is yet to be seen whether de-monopolization of this business justifies the costs and efforts made by investors, supervisors, rating agencies and researchers to acquire relevant information and data from multiple sources and will as such enhance transparency and resilience of Securitization markets. It is unlikely that ESMA will reveal its interpretation of the related regulation in 2020, so cost structures originating from Repository-stored data use will remain an open issue during 2020. Further, we expect ESMA to finalize its consultation period for data completeness scoring which will consequently be implemented by the Securitization Repositories. Given ESMA’s intention to gradually increase the scoring requirements we expect this to create dynamics for the originators, leading eventually to enhanced data availability for investors. We expect ESMA to release its first data completeness thresholds in second half of 2020 with further revisions to them in the coming years.

Stephan Lutz – Mail: stephan.x.lutz@pwc.com

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] See press release

20. December 2019

Valuation in Resolution

The global financial crisis 2007-09 revealed the need for developing adequate, effective tools and methods to deal with severe crises in the banking sector and for increasing financial and operational resilience of financial institutions to avoid future reliance on bank bail-outs by taxpayers’ money and to prevent contagion in the case of bank failure.

Answering this need, recovery and resolution planning (RRP) has been introduced into regulation, starting in 2011 with the Financial Stability Board’s (FSB) Key Attributes which set out essential features of RRP and which have been endorsed as international standards by the G-20. Since then, RRP has been incorporated into legislation in various countries globally. In Europe, after multiple cycles of drafting recovery and resolution plans, RRP is reaching a steady state with the focus shifting towards operationalization and finetuning of requirements.

One recent policy initiative focuses on operationalizing valuation in resolution: to inform resolution decisions and ensure the effectiveness of resolution actions, different valuations are to be performed within a short timeframe during a crisis and prepared in resolution planning.

Why is valuation in resolution important?

Valuation is the basis for determining whether an institution is failing or likely to fail. If this is the case[1], a more comprehensive valuation informs the choice of resolution tools and the amount of losses to be absorbed. After resolution, another valuation is required to ensure that shareholders and creditors did not receive worse treatment under resolution than under normal insolvency proceedings.

Regulators expect well-documented valuations by independent valuers to ensure informed decision making, accountability, and transparency.

What are the requirements and implications for banks?

To be robust, a valuation must rely on the timely provision of high-quality data. Banks are expected to have adequate management information systems (MIS), valuation, and data provision capabilities in place to support valuation in resolution and test abovementioned capabilities by means of self-assessments.

What are the key challenges banks need to overcome?

In the following, the above-mentioned requirements and implications of valuation in resolution are examined in more detail.

Valuation is an essential aspect in resolution (planning); operationalizing valuation in resolution has become a recent focus of authorities

The general criteria and requirements that valuations for purposes of resolution must comply with are set forth in the Single Resolution Mechanism Regulation (SRMR)[2] Article 20 as well as in the Banking Recovery and Resolution Directive (BRRD)[3] and its national transpositions:

Article 36 BRRD – Valuation for the purposes of resolution,
Article 74 BRRD – Valuation of difference in treatment, and
Article 49 BRRD – Derivative close-out and valuation.

The BRRD delegates responsibility to supplement and specify the general law to the European Banking Authority (EBA) to ensure effective and consistent implementation of BRRD across the EU.

With respect to valuation in resolution, EBA has developed several technical standards enacted in the form of Commission delegated regulations (CDR)[4]:

CDR 2018/345 – Regulatory technical standards (RTS) specifying the criteria relating to the methodology for assessing the value of assets and liabilities
CDR 2018/344 – RTS specifying the criteria relating to the methodologies for valuation of difference in treatment in resolution
CDR 2016/1401 – RTS for methodologies and principles on the valuation of liabilities arising from derivatives
CDR 2016/1075, Articles 37-41 – RTS specifying the requirements for independent valuers.

Furthermore, in order to operationalize the valuation process, both the EBA and the Single Resolution Board (SRB) have published guidance on valuation in resolution:

EBA Handbook on valuation for purposes of resolution (incl. data dictionary), and
SRB Framework for valuation.

This guidance represents the best practice approach and industry standards which should be adhered to.[5]

In 2019, SRB and EBA have further specified their expectations regarding valuation in resolution

The EBA Handbook on valuation is intended to support (national) resolution authorities (NRAs) in the context of valuation and facilitate the valuation process in times of crisis. It provides details on considerations and methodological issues, such as:

Measurement bases: hold value vs. disposal value,
Best point estimate vs. value ranges,
Preliminary vs. final valuation, and
Resolution tool-specific considerations.

The SRB Framework for valuation is addressed to the general public and future potential valuers. It specifies the expectations of the SRB regarding the principles and methodologies for valuations in resolution and details the main elements to be included in a valuation report. Though still being relatively principle-based in nature, it provides some specific expectations and guidance, e.g. regarding:

The length of projection periods to be used in DCF valuations depending on the resolution tool(s), and
The appropriate valuation range around the best estimate (± 5-10 %).

Banks are expected to have adequate MIS, valuation, and data provision capabilities in place to support valuation in resolution; resolution authorities will monitor progress and may impose measures if progress is deemed insufficient

In its “Expectations for banks 2019” document[6], the SRB emphasizes the need for banks’ MIS to provide accurate and timely information in the context of resolution preparedness for the reliability and robustness of valuations.

The availability of reliable data in an accessible format is a fundamental prerequisite for the performance of valuation work. Banks are expected to demonstrate their capabilities in resolution planning and increase their preparedness with respect to the SRB framework for valuation. As a first step, banks are expected to perform self-assessments regarding their in-house valuation and data provision capabilities, identifying any gaps and including those in their comprehensive resolvability work program.

In this resolvability work program, banks shall propose how to address potential impediments to resolution, outlining concrete deliverables, timelines, and milestones, which they will be held accountable against by SRB and NRAs. Progress will be monitored via a resolvability progress report which banks will have to submit at least semi-annually.

If banks’ valuation and data provision capabilities do not meet the resolution authorities’ expectations, do not represent best practice and progress is insufficient, this may be deemed as a ‘substantive impediment to resolution’.

SRB and NRAs have formal legal power to impose measures to reduce or remove impediments to resolution onto institutions (Art. 17 BRRD). Additionally, identification of shortcomings may be reflected in higher MREL requirements.

Generally, three distinct valuations are required in the resolution process

Valuation 1 is an accounting valuation aimed at determining whether an institution is failing or likely to fail. It informs the determination of whether the conditions for resolution and for write-down or for conversion of capital instruments are met. Valuation 1 is performed irrespective of the resolution strategy.

Valuation 2 is a much more detailed valuation to determine the economic value of the institution in resolution’s assets, liabilities and equity, ensuring that all losses are fully recognized and aimed at informing the choice and design of resolution tool(s). Hence, valuation methodology depends on the respective resolution tool(s) chosen as part of the (preferred) resolution strategy.

Valuation 3 is an ex-post counter-factual valuation, comparing actual resolution actions taken to a liquidation scenario. It aims at ensuring that shareholders and creditors do not receive worse treatment under resolution than what would have been expected in regular national insolvency proceedings (“No creditor worse off” principle) and hence safeguards the rights of shareholders and creditors against decisions adopted on the basis of valuation 2.

Figure 1 provides additional details regarding the three types of valuation required in resolution:

While valuation 1 largely follows the institution’s existing valuation methodologies for accounting purposes amended by applying assumptions made by the independent valuer, valuation approaches applied for valuations 2 and 3 may differ depending on the specific circumstances and due to different emphasis of the inherent time-accuracy trade-off. Broadly speaking, valuation 2 focuses more on informing timely decision-making while valuation 3, conducted post-resolution, requires best possible accuracy.

EBA and SRB emphasize their preference for the discounted cash-flow (DCF) valuation approach, which relies most heavily on the timely provision of a large set of accurate data.

From both a theoretical perspective and a practical standpoint, the method that best incorporates all factors affecting the value of an institution is the DCF valuation method.

A DCF valuation in the context of resolution requires the determination of three main parameters:

Projection period (depending on the resolution strategy / resolution tools applied, contractual / behavioral lifetimes of assets, time to normalization, cyclicality),
Cash flows over the projection period plus any terminal value (considering the restructuring / reorganization plan, macroeconomic / financial scenarios), and
Discount rate(s).

In practice, however, the adjusted book value method is a pragmatic alternative in case of significant time pressure. Adjustments and haircuts are applied to the balance sheet in order to consider the effects of resolution (e.g. fire sales leading to depressed prices).

A third valuation approach is the comparative market valuation, i.e. the use of multiples derived from market capitalization of similar entities or from comparable transactions. Typically, a DCF should be validated by a second valuation as a sanity check, giving a valuation range of ± 5-10 % around the best point estimate.

In valuation 2, one main determinant of the valuation parameters is the resolution strategy, impacting for example the following:

Use of hold vs. disposal values,
entity level vs. portfolio / asset view (The entity level view is suitable in case of a share deal or if all or the majority of assets are to be transferred. The portfolio / asset view is suitable in case of an asset deal or when assets can be grouped into relatively homogeneous portfolios in terms of risk profile, business line, or similar characteristics (stratification)), and
whether to include franchise value or resolution costs (e.g. set-up and running costs of a bridge bank, workout costs and benefits of an asset management vehicle (AMV)).

Furthermore, institutions are expected to leverage their internal capabilities such as systems in place to meet IFRS 9 requirements, stress tests, AQR exercises or portfolio reviews and consider data from historical bank failures.

Figure 2 details the impact of resolution strategies on valuation 2:

Institutions are expected to perform self-assessments as to their preparedness for supporting valuation in resolution and propose how to close any identified gaps

One of the main challenges for institutions is the need for providing a large set of accurate data within a very short timeframe (e.g. 12-24 hours)[7] during or leading up to resolution.

A robust valuation is essential to the effectiveness of resolution actions, including the legitimacy and soundness of the decision, and the achievement of the resolution objectives. To be robust, a valuation must rely on the timely provision of high-quality data and information to the independent valuer:

Data must be provided within a very short period of time (target: 12-24h),
Data provided need to be complete, correct, and consistent, and
Data must be up-to-date as per the chosen reference date.

To ensure smooth resolution in actual crises, there is the need to enhance institutions’ preparedness in the course of the resolution planning phase.

As a starting point, EBA has developed its so-called data dictionary as best practice to structure, store and link data for purposes of valuation in resolution, detailing a large number of required data points with a “one-fits-all” approach. As indicated in its “Expectations for banks 2019” paper, SRB is currently working on its own best practice dataset for valuation in close collaboration with EBA.

Institutions are asked to do a self-assessment of how they would approach the valuations and to map their current data infrastructure to the data dictionary, thereby identifying any gaps and providing insights for future resolvability work programs (mentioned above). With regard to their existing internal valuation models which may be used as a starting point for valuation in resolution, banks are asked to document underlying assumptions, methodologies, and parameters.

Figure 3 summarizes information required for valuation in resolution according to the EBA data dictionary:

PwC suggested approach

PwC is at your disposal to further discuss implications of mentioned requirements and possible ways to approach the self-assessments.

Based on our extensive experience in bank valuation, resolution planning, and actual bank resolution we have developed an approach for completing the self-assessments in a strategic and goal-oriented manner.

If you are interested in discussing any implications of the abovementioned requirements and expectations, our project approach and how it may be adjusted to your institution’s individual needs, or would like to address any questions, please do not hesitate to contact us using contact details as provided below.

Marc-Alexander Schwamborn

Telephone +49 69 9585 5824

Mobile +49 175 432 3885

marc-alexander.schwamborn@pwc.com

Stephan Lutz

Telephone +49 69 9585 2697

Mobile +49 151 146 23538

stephan.x.lutz@pwc.com

Stefan Linder

Telephone +49 69 9585 2915

Mobile +49 160 539 5454

stefan.linder@pwc.com

Dr. Philipp Völk

Telephone +49 69 9585 3991

Mobile +49 160 743 5320

philipp.voelk@pwc.com

Sarah Kirmse

Telephone +49 40 6378 2762

Mobile +49 170 569 1678

sarah.kirmse@pwc.com

Subscribe or Unsubscribe

If you would like to subscribe or unsubscribe from the PDF Newsletter Newsflash Bank Valuation, please send an informal e-mail to the following addresses: subscribe_bankenbewertung@de.pwc.com or unsubscribe_bankenbewertung@de.pwc.com

[1] And if there is no private sector alternative and a resolution is in public interest (see conditions to resolution, Art. 32 BRRD).

[2] Regulation (EU) No. 806/2014, article 20

[3] The BRRD has incorporated RRP into EU law, transposed into national law by each country (in Germany via the Sanierungs- und Abwicklungsgesetz, SAG) – so-called “level 1 regulation”. Additionally, various specifications of the general law, so-called “level 2 regulation”, as developed by the EBA, apply.

[4] Regulatory and implementing technical standards drafted by EBA become directly applicable law in all EU member states by publication as CDR in the official journal of the EU Commission.

[5] Though legally subordinate to the Level 1 and Level 2 regulation

[6] Consultation paper specifying the capabilities the SRB expects banks to demonstrate, reflecting best practice and setting benchmarks for assessing resolvability.

[7] See e.g. Ma Bail-in (BaFin Circular 05/2019).

18. November 2019

PwC’s Guidance for Disclosure Requirements of Private STS Securitizations

The objective of this article is to explain how private[1] securitization can obtain the STS label by complying with the legal disclosure requirements. Following paragraphs aim to outline areas of concern to any reporting or in other way designated entity that wishes to issue and maintain STS label for its securitization. According to Article 7 (2), it is the originator, sponsor or special purpose entity that shall make the data available to third parties. As the interpretation logic between ABCPs and non-ABCPs does not differ significantly, for the purposes of this paper, we further continue with analysis of STS criteria for short-term[2] securitizations only.

In order to fully understand these requirements, this document refers to Regulation (EU) 2017/2402 (Securitization Regulation) and Regulatory Technical Standards (RTS), published by ESMA. The RTS concerning the use of Securitization Repositories (SR) is not legally binding yet[3], therefore some changes altering its interpretation may take place upon finalization.

Any ABCP securitization, irrelevant of its private of public nature, can obtain STS label if Articles 23-26 are met. Further, compliance with Article 7 (Disclosure) is required as this Article is being referred to within the STS criteria. Nevertheless, compliance with Article 7 and Articles 23-26 only will not automatically grant the STS label to a given securitization unless the full regulatory text is considered. An analysis of full Securitization Regulation is beyond the scope of this paper, therefore only dependencies between Article 7 and the STS Criteria will be further discussed.

STS Criteria

STS can be considered an additional layer on top of regulatory requirements for non-STS securitizations. It shall signal fulfillment of more strict rules, demonstrating higher quality of the underlying collateral and sponsor’s commitment to given issuance. STS criteria outline requirements for any European securitization that seeks the STS label. These requirements are defined directly in the Securitization Regulation in chapter 4, section 1 for non-ABCP securitizations and section 2 for ABCP securitizations. Each of these sections breaks down into four articles listing conditions for simple, transparent and standardized issuances.

A short-term transaction that complies with Article 24 and a short-term programme that complies with Articles 25-26 shall be considered STS[4]. None of the aforementioned requirements forbid private securitization to obtain the STS label. It is therefore correct to state that compliance of securitization in question with Articles 24 – 26 shall grant the STS label to both public and private ABCP securitization.

It worth noticing that the STS criteria (Articles 24 – 26) contain a set of specific requirements (e.g. weighted average life) but also cross references to other Articles. Specifically, Article 25 (5), (6) require compliance with provisions stated in Article 6 and Article 7, respectively. Non-compliance with interlinked provisions elsewhere in the Regulation would mean automatic non-compliance with the STS criteria.

Disclosure Requirements – Article 7

Since STS criteria did not state any limitation for securitization being either private or public, we further examine disclosure requirements. Compliance with Article 7 is a prerequisite for the STS label but also a base requirement for any transaction falling under the Securitization Regulation. Unlike the STS criteria, the disclosure requirements do differentiate between private and public securitizations. All securitizations are required to disclose:

regularly information about underlying exposures [see (1)(a) of Article 7]
information through supportive documentation (e.g. OC) [see (1)(b) of Article 7]
STS notification referred to in Article 27 in case of STS securitization [see (1)(d) of Article 7]
regularly investor reports [see (1)(e) of Article 7]
significant events and inside information [see (1)(f-g) of Article 7]

It shall be noted, that 1) and 4) are an ongoing disclosure activity, performed on monthly basis for ABCPs. Points 3) and 4) are one-time notifications and 5) only when applicable. Listed reporting requirements shall be done through a Securitization Repository (SR) as stated in the second subparagraph of paragraph (2) under Article 7. Private securitizations, however, need to additionally provide a transaction summary as per (1)(c) and are exempt from data disclosure through a SR[5] This is stated in recital 13 of the Securitization Regulation where the bespoke nature of private transactions and its value for the transaction parties is explained.

Article 7 further delegates the development of relevant RTS to ESMA, EBA and EIOPA in paragraphs (3) and (4). Since the disclosure requirements do not further discuss how the data disclosure will physically be carried out, we need to refer to the relevant RTS in order to understand how the disclosure must be technically conducted.

Reporting of Private ABCPs

Given the fact that STS criteria do not distinguish between private and public securitizations, the reporting rule will be driven solely by the RTS related to Article 7. We therefore refer to ESMA’s Q&A document[6] that provides additional guidance and explanation to RTS. Under Q5.13.5 ESMA states that disclosure templates[7] for significant events and inside information (Annex 15 to the RTS) are not required for the private transactions[8]. ESMA further lists templates to be used for reporting of both private and public ABCPs where it states that both public and private ABCPs shall disclose data as per Annexes 11 and 13 (underlying exposures and investor report)[9].

This essentially means, that private ABCPs, compliant with RTS under Article 7, are required to disclose underlying exposures via the data templates in Annex 11 and 13 on monthly basis. The disclosure does not have to happen through a SR, yet the data templates shall be made available directly to holders of securitization positions, to competent authorities[10] referred to in Article 29 of the Securitization Regulation and, upon request, to potential investors.

Guidance for Reporting

Our analysis confirms that private securitizations are required to disclose information about underlying exposures. This shall be done on timely basis for both STS and non-STS issuances. Since private transactions were not provided with any type of disclosure template prior to the Securitization Regulation[11], the new standards will require a similar data-handling infrastructure as for public securitizations – IT setup for data aggregation, validation and dissemination.

In case instructions or guidance provided by national competent authorities on reporting of private securitization are not available, reporting entities are free to make use of any arrangements that meet the conditions of the Securitization. Therefore, we recommend using a private area of SR, if available, that offers appropriate infrastructure that satisfies ongoing requirements for data disclosure. We further propose to setup, maintain and regularly update data quality management system to reflect ESMA’s up-to-date minimum quality standards (discussed below). Also, such a system can later be easily used for a verification of underlying exposures as per Article 26(1) of the STS criteria.

Further, we notice that Article 7 (2)(a) requires specifically a disclosure of relevant data through a platform offering a data quality control system until the first SR is registered by ESMA. Specific requirements for functionalities of SR can be also found in relevant SR RTS[12]. Here we can see that ESMA plans to impose data quality rules comprising No Data values, interfiled inconsistencies but also STS-compliance checks for securitizations reported to SR. Even though this seemingly does not concern private transactions; as they do not have to channel their data through SR, it is likely to see similar efforts from Competent Authorities to ensure comparable quality between public and private STS transactions in the future.

Conclusion

Private ABCP securitization may obtain the STS label upon fulfillment of all relevant disclosure requirements. In order to do so, private STS ABCP securitization must follow a data disclosure schedule for investor reports and underlying exposures by using specified templates. The use of a SR for this ongoing disclosures is not mandatory and can be expected to rather depend on guidance provided by National Competent Authorities which may eventually create a heterogeneous disclosure universe across the member states.

Please contact PwC where our subject matter experts are available in case of any questions.

Dr. Philipp Völk – Mail: philipp.voelk@pwc.com

Petr Surala, CFA – Mail: petr.surala@pwc.com

[1] defined as those where no prospectus has been drawn up in compliance with Directive 2003/71/EC

[2] short-term securitizations refer to ABCP securitizations (Asset-Backed Commercial Paper)

[3] Final Report, published by ESMA on December 12, 2018. Endorsement from European Commission is still pending

[4] see Article 23 of the Securitization Regulation

[5] see third subparagraph of paragraph (2)

[6] Questions and Answers on Securitization Regulation, version 3 from July 17, 2019

[7] Disclosure Templates developed by ESMA for data reporting

[8] Q&A document states under Q5.13.5 that Annex 15 shall not be used, however, the information itself must be disclosed in some way

[9] See Q5.1.2.1 in Questions and Answers on Securitization Regulation

[10] National Competent Authority in Germany is BaFin. Please refer to ESMA’s full list.

[11] Disclosure of data through ABS Repository was a condition for eligibility assessment determining whether collateral can serve in Eurosystem’s credit operations. For non-eligible transactions, there was no disclosure of loan-level data required.

[12] Final Draft on SR RTS

[13] Additional Credit Claims are non-marketable asset type, comprising exposure to residential real estates or small-medium enterprises. See ECB’s Occasional Paper

5. November 2019

Capital Markets Blog Series – Part II: The mechanisms and key objectives of the Capital Markets Union key building blocks

Banking Union and Capital Markets Union: Objectives and state of play

One of the conclusions of the financial crisis from a political and supervisory perspective was that the European banking system requires a uniform supervision across the EU. As part of the Banking Union roadmap, EU institutions agreed to establish a single supervisory mechanism (SSM), a single rulebook for banking regulation (CRD/CRR) and a single resolution mechanism (SRM) for banks. While the SSM and SRM have become an integral part of the prudential banking supervision and are fully operational, the implementation of a single European deposit insurance (EDIS) is still missing in order to complete the Banking Union roadmap. However, the implemented regulatory actions and the enforcement of supervisory expectations have subsequently led to a substantially more resilient banking system evidenced by an improvement of all material regulatory ratios for capital and liquidity as well as for resolvability.[1]

While the Banking Union mainly focuses on regulating banks’ activities (including those on capital markets by the FRTB-framework[2]) and strengthening the resilience of the financial sector by strengthening banks, the Capital Markets Union’s (CMU) overall aim is to complement bank financing by facilitating EU businesses’ direct access to harmonized EU Capital Markets, attracting more investors and fostering capital market growth and enhance its ability to provide capital and liquidity to the real economy. The biggest difference between these two initiatives is that – with regard to the Banking Union – a large part of the implementing regulation is directly applicable by banks based on European law – a prerequisite for the uniform supervision by the European Central Bank (ECB). By contrast, most of the implementing regulation of the CMU legislative framework will remain dependent on national transposition of European regulation, thus creating room for national discretion. The uniform implementation of the CMU will thus depend upon the participating European countries agreeing to implement it in a coordinated and rather similar way by the word. While uniform implementation is valuable in terms of creating a level playing field between the countries, the CMU is less regulatory and supervisory in nature and foresees no uniform supervision like the banking union.

Recognizing the growth potential of EU Capital Markets and the associated positive impact on the real economy, the European Commission adopted the Capital Markets Union action plan in 2015. As part of its mid-term review in 2017, further measures were identified and added to the CMU action plan. The legislative framework implementing the CMU currently comprises 13 key CMU building blocks and 3 sustainable finance initiatives. Furthermore, the Commission is planning to issue another action plan (‘CMU 2.0’), once political uncertainty on Brexit will be reduced. While the Banking Union was mainly geared towards increasing the regulation of bank´s activities and strengthening the resilience of the financial sector by strengthening banks, the Capital Markets Union’s overall aim is to foster growth of EU Capital Markets and provide a broader range of funding and investment alternatives to the real economy and consumers.

The following diagram shows a holistic overview of the key objectives of the key CMU building blocks mapped to the Capital Market participants (as defined in part I of this blog series):

The Capital Markets Union key building blocks: Overview and intended effects

Overall, the CMU was designed to mobilize and channel capital to EU companies and infrastructure projects, offer additional investment opportunities for savers and investors and make the financial system more resilient.[3] At present, the most important capital market in Europe is the UK capital market which currently offers financial intermediation to all European capital market players. After Brexit, the terms of access to this market will be uncertain. The remaining capital market landscape can be characterized as being fragmented nationally or regionally. Although cross-border investment and financing is legally possible and promoted as part of the Single European Market for goods and services, cross-border financial activity for many market players constitutes more an option than a widely used instrument. There are numerous reasons for this fragmentation, the most important ones being the remaining differences regarding legal frameworks governing national markets, national market supervision (as opposed to the SSM´s European supervisory scope), resulting in a wide range of regulatory/supervisory practices, product types and market specificities.

Under such market conditions transaction costs are high as is information asymmetry between market players. These market inefficiencies make markets thin (characterized by a small number of participants and transactions), slow and therefore inefficient. The individual CMU building blocks address these inefficiencies by (1) standardizing existing or creating new standardized products (such as STS securitizations) and thus reducing information asymmetries, (2) creating harmonized legal frameworks in fields that are not product-specific (such as insolvency procedures) and (3) stabilizing the financial system by ensuring consistent implementation of regulatory measures and achieving a level playing field. The last point also includes the regulation of banks as the predominant players on the European capital markets where this regulation is not yet integrated.

The following table provides an overview over the 13 key CMU measures structured by the underlying mechanism.

Mechanism	Policy Description	Objective (Factsheet)
(1) Reduce information asymmetry / standardise	Covered bonds	To provide a source of long-term financing for banks in support to the real economy
	Pan-European personal pension product (PEPP)	To give citizens more and better options for retirement savings.
	Prospectus Regulation	To facilitate access to financial markets for companies, particularly small and medium-sized enterprises.
	Simple, transparent and standardized securitization	To broaden investment opportunities and boost lending to Europe’s households and businesses.
	Sustainable finance: Taxonomy	To help to reorient private capital flows towards more sustainable investments, such as clean transport, and help finance the transition to a low-carbon, more resource-efficient and circular economy
	Sustainable finance: Disclosure
	Sustainable finance: Low carbon Benchmarks
(2) Reduce transaction cost / integrate	Cross-border distribution of collective investment funds	To remove burdensome requirements and harmonize diverging national rules
	Crowdfunding	To improve access to this innovative form of finance for start-ups, while maintaining investor protection.
	European Venture Capital Fund Regulation (EuVECA) and European Social Entrepreneurship Funds Regulation (EuSEF)	To stimulate venture capital and social investments in the EU.
	Preventive restructuring, second chance and efficiency of procedures	To provide honest entrepreneurs with a second chance and facilitate the efficient restructuring of viable companies in financial difficulties.
	Promotion of SME Growth Markets	To cut red-tape for small and medium-sized enterprises trying to access capital markets.
	Third-party effects on assignment of claims	To enhance legal certainty about the applicable national law to the effects on third parties where a claim is assigned cross-border.
(3) Stabilize financial system	European Supervisory Authorities review including anti-money laundering rules	To enhance supervisory convergence and strengthen enforcement, including against money laundering and terrorist financing.
	Investment firms review	To ensure a level playing field between the large and systemic financial institutions while introducing simpler rules for smaller firms.
	European market infrastructure regulation (Supervision)	To ensure that the EU supervisory framework effectively anticipates and mitigates risk from EU and non-EU central counterparties servicing EU clients.

(1) The following four building blocks are and will be implemented based on measures aiming at reducing information asymmetry and increasing standardization with regard to investments and funding opportunities:

Covered bonds: Acknowledging that covered bond markets are very fragmented across the EU, the new rules aim at enhancing market volumes in those Member States with less developed covered bond markets in order to raise overall market efficiency. By providing a common definition of covered bonds, defining the structural features of the instrument and identifying those high-quality assets that can be considered eligible in the pool backing the debt obligations, the EU Commissions aims at introducing standardization to the market and increasing the transparency for investors. The rules also establish a supervision mechanism for covered bonds and sets out rules allowing the use of the ‘European Covered Bonds’ label.
Pan-European personal pension product (PEPP)[4]: Based on the low interest rate environment, investment in shares and bonds increases slowly. However, EU households still hold their savings mainly in cash, bank deposits and insurance and pension products although higher returns could be generated by alternative investments. By introducing an EU wide cross-border standardized voluntary scheme for saving for retirements, PEPP aims at complementing existing public and national private pension schemes and therefore offer consumers more investment choices.
Prospectus Regulation: The CMU measures aim at increasing the transparency regarding the risks of the investments by introducing new rules that require firms to include multiple thresholds of risks in the prospectus and allowing cross-references to certain existing documents. Lighter disclosure rules which will be applicable by certain SMEs and mid-sized companies, aim at facilitating their access to Capital Markets to companies which currently mainly rely on bank financing.
Simple, transparent and standardized securitization (STS)[5]: Assuming the EU securitization market was built up again to the pre-crisis average, it would generate up to EUR 150bn in additional funding for the economy.[6] In order to achieve the aim of fostering the EU securitization market and restoring an important funding channel for the EU economy, the EU Commission has implemented new rules which differentiate between high-quality securitization products and other products which do not satisfy such criteria.
Sustainable finance initiatives: By introducing new sustainable finance initiatives the Commission aims at increasing transparency e.g. by creating a common classification system and taxonomy, establishing labels for green financial products and strengthening the transparency of companies on their environmental, social and governance policies (ESG) with the objective of supporting economic growth while reducing pressures on the environment and taking into account social and governance aspects.

(2) Furthermore, six of the CMU key building blocks are based on the idea to foster growth of EU Capital Markets by reducing transaction costs and with that allowing new participants into the market, which so far mainly rely on bank financing and fostering new cross-border investment opportunities:

Rules introduced in relation to Cross-border distribution of collective investment funds aim at aligning national marketing requirements and regulatory fees, harmonizing the process and requirements for the verification of marketing material by national competent authorities (NCAs) as well as enabling the European Securities and Markets Authority (ESMA) to better monitor investment funds.
Crowdfunding: Acknowledging that the EU market for crowdfunding is underdeveloped as compared to other major world economies[7], the new rules aim at improving access to crowdfunding for small investors and businesses in need of funding, particularly start-ups. Investors will potentially benefit from the new rules relating to a protection regime, information disclosures for project owners and crowdfunding platforms, governance and risk management and supervision.
European Venture Capital Fund Regulation (EuVECA) and European Social Entrepreneurship Funds Regulation (EuSEF): By introducing these two types of collective investment funds, the Commission is aiming at making it easier and more attractive for investors (e.g. insurance companies) to invest in unlisted SMEs.
Preventive restructuring, second chance and efficiency of procedures: By providing a second chance through debt discharge to businesses and entrepreneurs the Commission’s proposal aims to facilitate the restructuring of companies in financial difficulties with the aim to avoid insolvency and the destruction of going concern value.
Promotion of SME Growth Markets: By introducing a new category of trading venue dedicated to small issuers the Commission aims, among other things, at reducing the administrative burden and costs faced by SME growth market issuers while increasing market integrity and investor protection.
Third-party effects on assignment of claims: In order to foster cross-border growth of EU Capital Markets, the Commission acknowledges that a common legal framework across the EU is a key success factor. By determining which national law is applicable to the effects on third parties where a claim is assigned cross-border, transaction costs will potentially be reduced.

(3) One of the key CMU objectives is furthermore to stabilize the EU financial system, e.g. by enhancing the supervisory convergence, ensuring a level playing field and strengthening enforcement measures:

European Supervisory Authorities review including anti-money laundering rules: While the EU has strong AML rules in place, recent cases involving money laundering in some EU banks have raised concerns that those rules are not always supervised and enforced effectively across the EU. Planned changes regarding the AML directive therefore aims at further improving the level playing field among all firms operating across the Single Market (domestic, EU27-based or operating from third countries). A new specific provision requiring the European Supervisory Authorities (ESAs) to have in place dedicated reporting channels for receiving and handling information provided by a natural or legal person reporting on actual or potential breaches, abuses of or non-application of Union law are expected to increase transparency and contribute to improved rules and their consistent enforcement across the EU27.
Investment firms review: The investment firms review divides investment firms into three categories, with the aim to ensure a level playing field between the large and systemic financial institutions while introducing simpler prudential rules for non-systemic investment firms.
European market infrastructure regulation (Supervision): A proposal to strengthen the supervision of central counterparties: to ensure that the supervisory framework of the Union is sufficiently robust to anticipate and mitigate risk from Union central counterparties and from systemic third-country central counterparties servicing Union clients.

The CMU: First conclusion

In order to achieve the overall objective of fostering growth of EU capital markets, the Commission formulated the key objectives of the CMU action plan. In order to reach these CMU objectives in due course, it is essential that necessary measures are implemented homogeneously across the EU, considering that – in contrast to the Banking Union´s measures – most of the CMU building blocks will require national implementation of European directives. The uniform implementation of the CMU will thus depend on the agreement of participating Member States to implement it in a coordinated way in order to balance the administrative cost originating from it and the benefits of larger, efficient and resilient capital markets for the real economy. Furthermore, taking into account the latest political developments regarding Brexit, it is necessary that additional measures identified as part of the ‘CMU 2.0’ initiative focus more on the development of the EU27 capital markets and how to best minimize disruption regarding financial intermediation currently offered by the UK capital market participants post-Brexit.

Please contact our PwC experts in case of any questions.