European Commission Publishes Capital Markets Recovery Package in Response to COVID-19 Pandemic

The European Commission has published a series of proposed legislative amendments to reduce the burden on financial institutions during the coronavirus pandemic in relation to their obligations under the EU Securitization Regulation, the Markets in Financial Instruments Directive and the Prospectus Regulation. The package is referred to as the Capital Markets Recovery Package and is designed to make it easier for companies to raise capital and increase banks' capacity to finance the recovery.

The proposals include:
 
The Commission is proposing to introduce a new type of short-form prospectus, known as the EU Recovery Prospectus for listed issuers undertaking secondary share issuances. The reduced disclosure obligations of the EU Recovery Prospectus would be available to issuers with shares already admitted to trading on an exchange or SME Growth market (a type of multilateral trading facility) continuously for at least the last 18 months. The Commission expects that a prospectus that would normally have reached hundreds of pages would be reduced to 30 pages under these changes. In addition, regulators would have a shorter time to approve Recovery Prospectuses than usual.

The Commission is also proposing measures to alleviate the burden on financial intermediaries, including reducing the obligations to inform investors when a supplement is published. These changes would not be time-limited.  In addition, it is proposed that the exemption available to banks that make an offer of non-equity securities in a continuous or repeated manner under certain conditions should be extended to offers where the total consideration is less than EUR 150 million, instead of EUR 75 million,  over a period of 12 months. This change would be available for 18 months.

It is proposed that the revisions to the Prospectus Regulation would enter into force 20 days after publication in the Official Journal of the European Union.
 
The proposed measures include introducing criteria for a Simple, Transparent and Standardised balance-sheet synthetic securitization and introducing preferential capital treatment for certain STS on-balance sheet securitisation exposures. In addition, it is proposed that the capital requirements for non-performing loan securitizations would be reduced. The EU's securitization framework is due to be reviewed, with the potential for proposed legislative amendments by January 2022. The review would incorporate the changes made by these amendments. It is proposed that the revisions to the Securitization Regulation and CRR would enter into force 20 days after publication in the Official Journal of the European Union.
 
The proposals to amend MiFID II mostly aim to introduce a more proportionate approach to investor protection, which financial markets participants have requested since MiFID II first came in. The Commission's proposals include:
 

• Exempting corporate bonds with “make-whole clauses" from the product governance requirements. The Commission states that a related amendment to the Packaged Retail and Insurance-based Investment Product Regulation will need to be made to clarify that a "make-whole clause" does not of itself make these instruments a PRIIP. Such change is likely to be rolled into the PRIIPs Review;
• Exempting investment firms from the obligation to disclose costs and charges to eligible counterparties and professional clients, except where investment advice and portfolio management services are provided. This change will likely be welcomed by many financial institutions. You may like to see a further discussion of the issues in our client note, "Underwriting or Placing Fees, Corporate Finance Contacts and MiFID II";
• Removing, with respect to professional clients, the obligation for investment firms to carry out a costs-benefit analysis of certain portfolio activities where they have ongoing client relationships and financial instruments are switched; professional clients will be able to opt-in if they wish to;
• Removing the obligation for investment firms to provide service reports to eligible counterparties and professional clients with which the investment firm has ongoing relationships; professional clients will be able to opt-in if they want to receive such reports;
• Temporarily suspending the publication of best execution reports;
• Changing the format for the provision of investment information by an investment firm to its clients from written to electronic format, although retail clients may still request written format;
• Making it easier for firms and regulators to determine that a firm has satisfied the ancillary activities exemption criteria by removing all of the quantitative requirements, such as those relating to the size of the of firm's trading activity; and
• Introducing a hedging exemption for an investment firm that is part of a predominantly commercial group and that trades on behalf of the group; the exemption will only apply to those positions held by the financial institution that are objectively measurable as reducing risks directly related to the commercial activities of the non-financial entities of the group.

Several changes are proposed for the position limit regime, including:
 

• Narrowing the position limit regime for commodity derivatives to commodity derivatives that are deemed significant or critical commodity derivatives and their economically equivalent OTC contracts;
• An exemption from the position limit regime for financial and non-financial counterparties for positions resulting from transactions undertaken to fulfil mandatory liquidity provisions; and
• Excluding securitized derivatives.

In addition, the Commission has tabled a legislative proposal to ease the burden of the research requirements that are set out in legislation supplementing MiFID II. The proposed changes to Delegated Directive(EU) 2017/593 are designed to encourage research coverage of SME issuers and fixed-income instruments by the introduction of an optional derogation for investment firms from complying with the full research requirements when the research is exclusively provided on issuers which did not exceed a market capitalisation of EUR 1 billion during a period of 12 months preceding the provision of the research or where the research is exclusively provided on fixed income instruments. Under this lighter regime, an investment firm would be able to pay jointly for the provision of research and for the provision of execution services. Feedback on the proposed changes to the MiFID II Delegated Directive may be submitted until September 11, 2020. The changes to MiFID II and the related Delegated Directive would apply nine months after entry into force of the amending legislation.

All the proposals will now be put through the EU's legislative process.

View the proposed Regulation amending the Prospectus Regulation.

View the proposed Regulation amending the Securitization Regulation.

View details of the EBA's recommendations for STS Synthetic Securitizations.

View the proposed Regulation amending the CRR.

View the proposed Directive amending MiFID II.

View the proposed changes to the MiFID II Delegated Directive.

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