On 24 May 2018, the European Commission (EC) published a series of draft regulations the intent of which is to give small and medium sized enterprises (SMEs) better access to financing through a trifold approach involving public markets under the Capital Markets Union, the introduction of the new sovereign bond-backed securities, as well as a series of measures for sustainable growth.
Public markets under the Capital Markets Union (CMU)
The EC proposal allows for a SME financing access through public markets under the CMU. The proposed regulation would introduce proportionate requirements for SMEs listing and issuing securities on so-called SME growth markets, a new market of trading venues specifically dedicated to small issuers. The legislative proposal includes technical amendments to the Market Abuse Regulation (MAR) and the Prospectus Regulation in order to:
- adapt current obligations on keeping registers of persons with access to price-sensitive information to ease the administrative burden on SMEs, while ensuring that competent authorities can investigate cases of insider trading,
- allow issuers with at least three years listing on SME Growth Markets to produce a simpler prospectus when transferring to a regulated market beyond existing requirements for a simplified prospectus,
- make it easier for trading venues specialised in bond issuance to register as SME Growth Markets by setting a new definition of debt-only issuers, which could apply to companies issuing less than EUR 50m of bonds over a 12-month period, and
- creating common rules for SME Growth Markets relating to agreements between issuers and financial intermediaries.
The EC is, in this context, also consulting on further technical amendments to delegated acts under MiFID II on certain registration conditions to promote the further use of SME Growth Markets for the purpose of MiFID II.
Sovereign bond-backed securities (SBBSs)
The second EC proposal deals with a new financial markets instruments, the sovereign bond-backed securities (SBBSs). Aimed at enabling demand-led market development of SBBSs and the emergence of an efficient market over time, the proposed regulation sets out a general framework for a new financial instrument where credit risk is associated with exposures to a portfolio of euro-area sovereign bonds.
Among other things, the regulation sets out a harmonised definition, qualifying criteria and specific regulatory treatment. According to these criteria, SBBSs would take the form of low-risk liquid assets backed by a pre-defined pool of euro-area central government bonds.
SBBSs are a market-led solution to promote financial integration, reduce the ‘home bias’ in investor portfolios and facilitate the diversification of their sovereign exposures. For banks, SBBSs would contribute to further weakening the link between banks and their governments. Moreover, and most importantly, SBBSs will add another type of low-risk liquid asset in the financial system. Through risk-reduction with an enhanced risk diversification by spreading risks more widely across investors and across borders, SBBSs will contribute to expanding the supply of low-risk and liquid assets and create more integrated and diversified financial markets in sovereign debt.
It is worth to note that SBBSs would, by design, not involve mutualisation of risks and losses among euro area Member States. Only private investors would share risk and possible losses.
The EC finally also presented a package of measures as a follow-up to its action plan on financing sustainable growth. The package includes three proposals aimed at:
- establishing a unified EU classification system of sustainable economic activities (taxonomy),
- improving disclosure requirements on how institutional investors integrate environmental, social and governance (ESG) factors in their risk processes,
- creating a new category of benchmarks which will help investors compare the carbon footprint of their investments.
In addition, the EC seeks feedback on amendments to delegated acts under MiFID II and the Insurance Distribution Directive to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients.
This initiative aims mainly, from a CMU perspective, to diversify capital flows by channelling market-based finance to all businesses in the EU, particularly innovative companies. These proposals will better connect markets with the real needs of the European economy, in particular the necessity of reorienting flows of capital towards sustainable investment. They also create a solid basis for an EU-wide market for sustainable investments, supporting the integration of risks stemming from environmental and social sustainability into long-term investment decisions.
By Gilles Walers, ABBL, Legal Adviser