The new EU Benchmark Regulation will take effect from January 1 2018 and will be directly applicable to EU firms that are benchmark users, administrators or contributors, without the need for national implementing legislation. As the scope of the regulation is much broader than any existing EU framework, securitisation and structured finance market participants should start to consider the increased controls that this will introduce.
The European Banking Authority recently published a report proposing a three-step approach to the harmonisation of covered bond frameworks in the European Union. The report summarises the functioning of – and developments in – national covered bond frameworks and provides recommendations which the European Commission will consider in the process of furthering the Capital Markets Union project.
As part of the EU shadow banking initiatives, the EU Securities Financing Transactions Regulation recently entered into force. It purports to rectify a lack of transparency in both the securities financing markets and the financial markets by enhancing transparency. It has added to the regulatory burden imposed on orphan special purpose vehicles and the costs of setting up and maintaining a securitisation transaction.
The rules on risk retention in the United States and the European Union do not completely align; therefore, securitisations distributed into both the US and EU markets must be careful to comply with both sets of rules. To the extent that transactions already complying with the EU risk retention rules may need to be modified to address the US rules, the European Union has adopted regulatory technical standards which permit the form of retention to be modified in exceptional circumstances.
Although the recently enacted EU Market Abuse Regulation has not radically overhauled the EU Market Abuse Directive regime that it replaced, many of the procedural requirements under the directive have been clarified or supplemented. Even where the changes are minimal, the regulation serves as a reminder to securities issuers and other market participants of some practical questions.
New business opportunities have emerged following recent changes to the Securitisation Law. Until recently, securitisation special purpose vehicles (SPVs) were prohibited from playing an active role in the management of distressed debts which they purchased in the context of a securitisation transaction. The new rules offer securitisation SPVs a wider set of tools and foster the growth of the market for non-performing loans across various asset classes.
Trusts are the most commonly used special purpose vehicle (SPV) in Mexico. Most securitisations involve the use of a trust as the SPV. Trusts are also used for secured loans, and collateral or payment source trusts are often used in Mexican financings to segregate collateral from the debtor. In addition, almost all project finance involves transferring assets to a trust in order for such trust to be the payment vehicle of the transaction. However, a recent court decision may have put these structures at risk.
The ongoing disruption of credit and capital markets is urging banks to pursue refinancing solutions that have rarely been used in the past or that have previously been used in a different context. A recent transaction shows that the mortgage bond system might become an efficient refinancing tool in situations where a secured refinancing transaction is difficult to structure or an off-balance sheet securitization is not possible.
The use of operating company ('opco') and property company ('propco') structures has recently become increasingly common in the Swiss lending and securitization market. Using these structures often leads to more efficient and less expensive financing. This update outlines some of the most significant features and issues related to setting up an opco/propco structure.
A provision of the Swiss Merger Act facilitates a transfer of assets from the originator to the securitization vehicle in a securitization transaction. Although some issues require clarification, the new transaction method will in most cases facilitate the transfer of a portfolio consisting of a large number of agreements, particularly with regard to the third-party consent required for such a transfer.
Switzerland has recently seen a major increase in both origination and securitization activity in the commercial real estate market. It is expected that this year will see another increase in commercial mortgage-backed securitization (CMBS) transactions, and that future multi-jurisdictional and pan-European deals including Swiss assets will be conducted.
The Swiss Federal Banking Commission is consulting on its Position Paper on the Applicability of the Investment Fund Law to Structured Products and Other Finance Vehicles. The paper asserts that structured finance products have evolved to the point that they have become publicly offered substitutes for regulated investment funds; therefore, they should be regulated as investment funds.
The final US risk retention rules will soon apply to asset-backed securities with respect to all asset classes other than residential mortgage-backed securitisations (to which they already apply). In light of this, it is timely to examine the exclusion which applies to certain non-US securitisation transactions and the basic US risk retention requirements. Further, some key issues should be considered when determining whether a proposed transaction falls within the 'foreign-related transaction' safe harbour.