CrossLend GmbH
Creation of a European technology-driven debt marketplace platform connecting loan originators and institutional investors across borders and asset classes.
ID: 788166136407-18
Lobbying Activity
Response to Action Plan on the Capital Markets Union
4 Aug 2020
CrossLend is pleased to provide comments to the European Commission’s roadmap for the Capital Markets Union Action Plan.
Reconsidering the securitisation framework to further strengthen the CMU.
Establishing a fully connected, autonomous, and well-integrated capital market across the EEA is critical to ensuring a thriving European economy. In our view, one of the key elements to building a strong and resilient European capital market is a flexible and comprehensive securitisation market. We strongly support the view of the High Level Forum (HLF) regarding the importance of securitisation for the CMU and agree to its highlighted key issues. However, we see that particularly in the development of debt markets, traditional securitisations tend not to meet the expectations of its participants.
To be able to meet borrowers’ and investors’ increasingly complex demands alike, the securitisation framework needs to be reconsidered, especially in the regulatory context of traditional securitisation (with tranching as its main characteristic). By tranching credit risks and cash flows, traditional securitisations are highly complex financial transactions that target a very specialised (and hence small) investor base. Participants within the debt markets expect fast and broad market access with a high level of transparency through clear reporting, which traditional securitisations often cannot provide. The full potential of SPV issuances, as a means of a broad transfer of debt between players in the European market, is not used.
Securitisation as a technique can only efficiently contribute to the CMU if it results in a pure risk transfer without pooling and tranching.
Therefore, we want to highlight that the market consists of different formats of SPV issuances, each with different characteristics. While current regulation focuses on tranched issuances only, a broad range of such products are issued in an untranched way, passing credit risk and cash flow to the investor without structuring different levels of credit risk via subordination.
In its pure form, the CMU needs a simple risk settlement system as a backbone based on which different products and services can be provided. Therefore, we believe that the treatment of pass-through, highly granular and untranched securitisations require a special emphasis as a “carrier of credit risk”. The CMU in the first place requires an infrastructure that leaves the credit risk unchanged and does not add unnecessary risks and complexity.
This way, granular credit risk can be transferred on a very broad scale to investors without changing the economic character of the portfolio. Such issuances especially allow for small (usually local) investors to have broader market access, allowing them to allocate their funds more efficiently (and potentially across the borders of member states, according to the spirit of the CMU). Furthermore, non-marketable assets (loans, etc.) are transformed into a marketable and transferable format, increasing the liquidity of such instruments.
While such pass-through issuances allow a look-through approach for regulatory capital purposes on the investor level (especially for CRR and Solvency II investors), we believe that the key relevant issues and regulatory enhancements highlighted by the HLF should not be limited to tranched securitisations as defined by 2017/2402 only, but also extended to untranched issuances.
We therefore hold the view that key issues No. 1 (Unlocking the Significant Risk Transfer Assessment process), No. 4 (Reducing the costs of SME financing), No. 5 (Applying equivalent treatment to cash and synthetic securitisations), and No. 6 (Upgrade Eligibility in the LCR ratio) shall also be applicable to pass-through structures.
Only in this way can a level playing field among different securitisation formats be ensured, allowing debt market participants to benefit from the full range of such structures, thus strengthening the EU Capital Markets Union.
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