LMA responds to European Commission Green Paper: "Building a Capital Markets Union"13 May 2015
The LMA has responded to a Green Paper issued by the European Commission that seeks to build a single market for capital via a Capital Markets Union for all 28 Member States.
Given that many of the issues raised and recommendations suggested by the Green Paper are likely to impact the wider financial markets, we have provided the European Commission with our views from both a private placement and loan market perspective.
Key points arising as part of the LMA's response include:
Private placements, from a pure product perspective, do not require regulatory intervention, although challenges arising from a tax and Solvency II perspective warrant further investigation
Both issuers and investors have already demonstrated a clear desire to widen and diversify the private placement market and it is hoped that this will bring about a natural evolution for the product. In addition, documentation standardisation has already been achieved via the production of standard form LMA private placement templates, enabling participants to operate under a recognisable framework. It is hoped that increased use of this documentation will also lead to improved transparency and less fragmentation between domestic markets. That said, matters such as the imposition of withholding taxes on interest paid between EU member states and capital requirements under Solvency II that do not adequately reflect the underlying risk profile of the product are worthy of further investigation, so as to ensure that there is a level playing field between different types of investors across the EU.
The European Commission should revisit the current regulatory treatment of CLOs under recent proposals relating to STS Securitisations
The EBA and BCBS/IOSCO have included a number of detailed criteria for identifying STS Securitisations. In addition, a number of criteria have been put forward in the delegated acts of Directive 2009/138/EC (Solvency II). The current proposals, if implemented as drafted, would exclude managed CLOs from being able to qualify as STS Securitisations on the basis that the portfolio of assets is actively managed. We do not share the view that a securitisation should be excluded on the basis that it is actively managed. This seems to be predicated on the belief that active management of a portfolio adds a layer of complexity to a securitisation which would make it ineligible for inclusion as an STS Securitisation. CLOs should not be disadvantaged in comparison to other securitisations because they are actively managed. The expertise of a CLO manager can add a great deal of value to a transaction through managing recoveries on credit impaired and defaulted credits. In fact, CLO managers have consistently outperformed static loan indices. Even through the credit crisis, default rates on European CLOs remained very low at just 0.1%, better or comparable to other securitisation vehicles.
We remain very concerned that the labelling of certain securitisations as STS could materially and adversely affect the wider securitisation market creating implied 'quality stamps' for those that do meet the criteria and 'cliff effects' for those that don't.
In terms of additional actions in the field of financial services regulation, action should be taken to reduce barriers to corporate lending for non-bank investors
Both bilateral and syndicated lending are a vital source of capital for corporate borrowers. This basic form of finance, traditionally provided by banks, but increasingly offered by other types of non-bank lender (including funds, insurance companies and CLOs) enables corporates to grow their business, increase employment and thus contribute to economic growth.
One way in which greater access to non-bank liquidity could be achieved is via the removal of barriers to corporate lending by non-bank lenders. Banking monopoly or bank licensing requirements have proven to be a significant barrier to lending by non-bank investors, impacting the ability of a wide range of lenders to deploy capital in the EU to fund investment by corporates and, in particular, acting as a severe impediment to non-banks seeking to lend funds to borrowers in certain jurisdictions. Given that the vast majority of European investment (particularly in the SME space) is deployed via loans, finding a way to create a level playing field for different types of investors to lend to corporates across the EU would undoubtedly be very beneficial to the non-bank investor community.
The main barrier to investment from a taxation perspective is the imposition of withholding taxes on interest paid between EU member states
Withholding taxes on interest payments made between EU member states currently act as a bar to efficient cross-border financing of companies between certain jurisdictions. The removal of such taxes would remove a significant barrier to investment for two reasons. First, it would facilitate investment by finance providers who can already benefit from an exemption from withholding taxes (whether under domestic law or under a double tax treaty) in jurisdictions where the treaty formalities or formalities required to benefit from a domestic exemption are very onerous. Second, it would allow for finance to be provided between jurisdictions where under current law, withholding taxes apply (increasing, in least in cash flow terms) the cost of financing. We consider that the abolition of these withholding taxes would remove an important tax-related barrier to cross-border financing in the EU.
Nicholas Voisey, Director, LMA, commented:
"Whilst the LMA would support any European Commission initiative to boost investment and develop liquidity in the EU financial markets, our members continue to indicate that regulation remains one of the greatest barriers. Unless regulation is proper, proportionate and appropriately targeted to both the asset and the investor, there is a real risk of it becoming a drag on the provision of credit and an impediment to economic recovery and growth."
"Whilst it is encouraging to see the European Commission attempting to unlock investment for companies by encouraging greater participation by non-bank lenders, we believe much could still be done to broaden this valuable investor base and give it a meaningful diversity."