European Commission Publishes Proposal for a Regulation on Sovereign Bond-Backed Securities

The European Commission has published a proposal for a Regulation to provide an enabling framework for a market-led development of Sovereign Bond-Backed Securities, following the publication of an inception impact statement in January 2018. The proposal forms part of the Commission's efforts to enhance the Banking Union and Capital Markets Union.

SBBSs are to be defined as instruments created by the private sector, whereby a private sector entity would assemble an underlying portfolio of sovereign bonds from the market and would subsequently transfer them to a legally separate, self-standing entity, specifically established for the sole purpose of issuing to investors a series of securities representing claims on the proceeds from this underlying portfolio. Losses from the portfolio would be borne in a certain sequence by tranches of issued securities.

Under the existing regulatory framework, SBBSs would be defined as securitization products and they would be treated significantly less favourably for capital requirements purposes than their underlying portfolio of euro area sovereign bonds. However, a task force of the European Systemic Risk Board that was set up in 2016 to assess the feasibility and merits of SBBSs concluded that SBBSs carry risks that are comparable to the underlying sovereign bonds rather than regular securitizations. Accordingly, the existing regulatory framework is an impediment to the development of SBBSs. SBBSs are not expected to replace, or have any material negative impact on, existing national bond markets.

The proposal for a Regulation sets out rules defining the elements of SBBSs to ensure that as standardized a product as possible is produced by the markets, which should ensure that the product is liquid and that it appeals to investors. The proposed Regulation also sets out notification and transparency requirements for the issuing entity and contains rules regarding the supervision of SBBSs and possible sanctions in case of non-compliance and/or fraudulent behaviour of the issuing entity. The proposed Regulation also sets out amendments to the existing legal framework.

The Commission is seeking feedback on the proposal by July 24, 2018.

View the Inception Impact Assessment.

View the Proposal for a Regulation.