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September 14, 2018

The European Parliament (EP) published a briefing that outlines the main purposes of the “enabling regulatory framework” for the development of sovereign bond-backed securities (SBBS). The briefing also focuses on significant differences between the original ESRB proposal and the concept of SBBS, which no longer suggests institutional changes nor amendments to the existing regulatory treatment for sovereign debts. Absent such "flanking" measures to SBBS, the question is raised as to whether SBBS, as proposed by EC, would be met by sufficient demand.

SBBS has been presented by EC as a market-driven initiative. By removing the regulatory obstacles that have hindered its development, this enabling framework would put SSBS to a market test. In that context, SBBS has been portrayed by the EC Vice President Dombrovskis at the May 2018 structural dialog as “a proposal on its own.” EC had proposed the regulation on sovereign bond-backed securities (SBBS) in the EU on May 24, 2018 and the comment period for the proposed regulation ended on July 20, 2018.

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.

 

Related Link: EP Briefing (PDF)

Keywords: Europe, EU, Banking, Securities, SBBS, Sovereign Bonds, Briefing, European Parliament

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