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LMA responds to the European Commission's Consultation on the Capital Markets Union Mid-Term Review 2017

22 March 2017

The Loan Market Association ("LMA") has responded to the European Commission's consultation on the Capital Markets Union ("CMU") mid-term review. The consultation sets out the Commission's efforts to facilitate simple, transparent and standardised ("STS") securitisation through its proposed Securitisation Regulation (the "Regulation").

The European Council, European Parliament and European Central Bank have issued support for the overriding objective of the proposed Regulation as a means of achieving the aims of the CMU. Despite this, the LMA has identified a number of areas which require further clarification or amendment.

In its response, the LMA addresses concerns relating to risk retention and transparency requirements, particularly as they affect CLOs. The Regulation proposes an increase in risk retention levels from 5% to 10%, with an option for a further increase to 20% pursuant to market circumstances. However, the LMA notes that global retention requirements have congregated at 5%, which already represents a significant risk being held by a retention holder. There is also a lack of clarity as to when the 20% rate would apply, creating uncertainty within the market. In light of this, the LMA does not consider there to be an economic case for increasing risk retention levels from 5%, and these proposals may deter participants within the market, proving inconsistent with the aim of the Regulation in reviving the EU securitisation markets.

The proposed Regulation also introduces additional disclosure requirements, requiring a secondary market investor in a securitisation to make information available to its competent authority regarding the size of its investment and to which tranche of the securitisation it relates. The purpose of these proposals is to increase transparency in the market for the benefit of the regulators. However, it is difficult to see that any benefit that would accrue to the market would justify the cost and time that these proposals would impose on market participants.

Commenting on the Consultation on the Capital Markets Mid-Term Review, Nicholas Voisey, LMA Managing Director, said:

"Taken together, these proposals, as they are currently drafted, are more likely to damage the EU securitisation market than to foster its revival, particularly due to the lack of clarity in the proposals and the potential to deter participants within the market. The proposed Regulation may therefore significantly undermine the aim of the Regulation in assisting the revival of the EU securitisation market, and consequently contradict a significant element of the CMU initiative."