The European Banking Authority (EBA) las launched a public consultation on proposals for a simple, transparent and standardised (STS) framework for so-called ‘synthetic securitisation’.

 

Securitisation – the transformation of income-yielding assets, typically loans, into tradable securities – has been in regulators’ spotlight since the 2008-09 financial crisis, in which the signing and trading of high-risk loans was a major contributing factor.

However, some have argued that regulators failed to distinguish clearly enough between complex, opaque, or sub-prime loans and simple, high-quality, low-risk lending in their efforts to reduce risk in the global economy. As a result, the securitisation market has been flat in Europe. Banks have argued that this has reduced their capacity – or willingness – to lend money to business, especially to SMEs.

Kickstarting the market for high-quality loan trading is one goal of the EU’s Capital Markets Union Project. Synthetic securitisation – effectively, the transfer of credit risk to the capital markets as a hedge against default, leaving the loan on the issuing bank’s balance sheet – has been proposed as one means of doing so.

 

Arguably, this makes loans increasingly opaque to regulators while spreading, or sharing, risk. Synthetic transactions of this nature are currently outside of the current STS Framework, something that the EU is now considering changing. The deadline for feedback to the consultation project is 25 November 2019.

  • In other regulatory news, the European Securities and Markets Authority (ESMA) is updating its financial instrument reference database, and has issued a statement on position limits under MiFID II / MIFIR.

The EU is also in the process of agreeing a sustainability taxonomy – a common language for economic activities that are environmentally sustainable, with a timescale on agreeing the taxonomy by 2022.

 

Meanwhile, the UK is grappling with the regulatory impacts of Brexit on the financial services industry. The Financial Conduct Authority (FCA) has updated its directions under the Temporary Transitional Power (TTP) for Brexit to provide greater flexibility, extending the proposed duration of directions to 31 December 2020.

In the US, the Securities and Exchange Commission (SEC) is consulting on a proposal to enhance retail investor protection by requiring that current and publicly available issuer information is accessible to investors.

 

Meanwhile, the Office of the Comptroller of the Currency (OCC) has warned that Q2 banking trading revenues were 19.8 percent lower than in the previous quarter.

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