The head of the EU financial markets supervisor threw her weight behind calls to cut requirements on the bloc’s securitisation market on Monday (23 September), signalling that policymakers will set out proposals to loosen current rules “in the coming weeks.”

“It’s clear the regulatory framework has not produced the expected results,” Verena Ross, Chair of the European Securities and Markets Authority (ESMA), said at an industry conference in London this morning – pointing to the hefty decline seen in Europe’s securitisation markets compared to the pre-2008 financial crisis era.

“Therefore, we need to look at this again [and] improve the regulatory incentives for markets participants to engage with the securitisation market” she said.

The market for asset-backed securities – financial products backed by pools of banks’ loans to homeowners, businesses and consumers – slid from €2 trillion at its pre-crisis peak to €1.2 trillion in 2023, Ross said, with yearly issuance shrinking from €600 billon in 2008 to “below €200 billion” in 2023.

The issue of securitisation has recently risen to the top of EU policymakers’ plans to boost private captial flows in the face of the bloc’s daunting funding needs, estimated to hover around €600 to €800 in additional investment per year. The issue took centre stage in the EU’s recent revamp of the decade-long Capital Markets Union (CMU) – due to be rebranded as the Savings and Investment Union in the incoming Commission.

In spring, EU leaders and financial ministers took up demands from the industry – as well as from the single market report by former Italian Prime Minister Enrico Letta – and committed to look at “regulatory and prudential changes” to “relaunch” the European securitisation market.

That would potentially involve re-opening the chapter on capital requirements – i.e. the amount of capital that banks and other institutional investors need to set aside to hedge for credit risk on their securitisation investments. “Prudential” capital requirements are widely seen as one of the main culprits behind the securitisation market’s slump in the post-crisis era.

In one of the clearest signals to date that EU legislators are indeed looking to amend core requirements for the sector, Ross said that “one of the key structural markets reforms [within CMU efforts]…is how to revive the securitisation market.”

“As we speak the Commission is working on a public consultation on the functioning of the securitisation framework – which we expect will be opened in the coming weeks or months,” she said.

ESMA will “contribute actively” to the Commission consultation “on the review of Level 1”, the core rules on which member states hold little disrection over implementation, Ross said.

Ross also pointed to a position paper ESMA itself published in May, where it recommended that the EU executive undertakes a “comprehensive review” of the sector that “should particularly look at prudential treatments.”

Meanwhile, Ross said the market watchdog will soon put forward proposals around “non-prudential” rules for the asset class – namely, due diligence and reporting requirements, which she said continue to put off both investors and issuers from engaging with the market.

“[We need to] provide greater clarity predictability on requirements… this means reviewing what might have restricted” investment and issuance, Ross said.

This would entail clarifying the jurisdictional scope of the rules and making both due diligence and reporting rules “more proportional”, especially “for smaller players.”

“We are currently preparing draft guidelines to introduce… more proportionality in the application of due diligence,” the EU official said, adding ESMA will open a consultation on these “in the upcoming weeks.”

On transparency rules, Ross said feedback from stakeholders was clear: “the current disclosure requirements are overly prescriptive and cumbersome… and not enough targeted.”

In the short term, ESMA will publish a “feedback statement… that will also propose possible amendments to our technical standards” on disclosure rules – on which the watchdog consulted last year – “with a clear focus on proportionality”, especially around private securitisations, she said.

“The simplification of the reporting regimes is front and centre of ESMA’s core data strategy” to cut compliance costs, Ross said. “We certainly aim to live up to this.”

[Edited by Owen Morgan]