May 24, 2018

EC proposed a regulation on sovereign bond-backed securities (SBBS) in the EU, the comment period for which ends on July 20, 2018. The proposal would eliminate existing regulatory obstacles by granting SBBS the same regulatory treatment as national euro-area sovereign bonds denominated in euro (for example, in terms of capital requirements).

The proposal lays down precise eligibility criteria for SBBS to benefit from the envisaged regulatory treatment. Such standardization will enhance the liquidity of SBBS and make them appealing to a larger number of investors. The proposal also amends a number of legislative acts setting out the regulatory treatment of SBBS held by banks and other financial operators. The proposed regulation lays down a general framework for SBBSs and applies to original purchasers, special purpose entities, investors, and any other entity involved in the issuance or holding of SBBSs. The underlying portfolio of an SBBS issue shall only consist of sovereign bonds of member states whose currency is the euro and the proceeds from the redemption of those sovereign bonds.

At a press conference where the several new proposals on European financial markets were presented, the EC Vice President Valdis Dombrovskis said: "This is a risk reduction measure. SBBS are a low-risk financial product that would be backed by a bundle of the 19 euro-area government bonds. If the market for SBBS takes off, it could help the private sector better diversify risks across borders. And therefore, SBBS would further weaken the bank-sovereign loop, which was at the heart of the crisis."

 

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Comment Due Date: July 20, 2018

Keywords: Europe, EU, Banking, Insurance, Securities, SBBS, Sovereign Bonds, EC

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