COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on sovereign bond-backed securities
Date: 2018-05-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: European Securities and Markets Authority, bond, euro area, financial legislation, financial risk, financial stability, financial supervision, public borrowing

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   EUROPEAN COMMISSION  Brussels, 24.5.2018 SWD(2018) 253 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on sovereign bond-backed securities {COM(2018) 339 final} - {SEC(2018) 251 final} - {SWD(2018) 252 final}  
 
 
Executive Summary Sheet 

Impact assessment on a proposal for an enabling regulatory framework for the development of sovereign bond-
backed securities (SBBS). 

Why? What is the problem being addressed? Maximum 11 lines 

A. Need for action 

Sovereign Bond-Backed Securities (SBBS) are a novel financial instrument that could encourage banks to better 
geographically diversify their sovereign bond holdings. This would further weaken the bank-sovereign nexus and 
enhance  private  sector  cross-border  risk  sharing.  At  the  same  time,  it  would  help  expand  the  supply  of  euro-
denominated  low-risk  assets.  In  a  nutshell,  they  could  enhance  the  resilience  and  efficiency  of  the  euro-area 
financial sector. 

Yet their development is hindered by the fact that, currently, prudential regulation does not fully take into account 
the special nature of SBBS, by treating them as other regular securitisations. In particular, SBBS securitisations 
would  not  suffer  any  of  opaqueness  and  adverse  selection  risks  typical  of  more  traditional  securitisations,  as 
they  would  be  issued  against  a  predetermined  portfolio  (with  weights  in  line  with  ECB  capital  key)  of  such 
workhorse transparent, liquid and traded financial instruments as euro-area sovereign bonds.  

Hence, the capital charges, liquidity discounts  and investment limitations imposed on traditional securitisations 
are not warranted in the case of SBBS. Unless these are removed, SBBS remain too "costly" to hold (and thus 
uneconomical to produce), especially when compared with direct holdings of euro-area sovereign bonds.  

What is this initiative expected to achieve? Maximum 8 lines 

The initiative aims at removing extra costs (in terms of higher capital and liquidity requirements) associated with 
investing  in  SBBS  compared  with  investing  in  euro-area  sovereign  bonds.  It  is  thus  expected  to  enable  the 
demand-led development of an SBBS market. 

What is the value added of action at the EU level? Maximum 7 lines  

The  regulatory  hindrances  currently  faced  by  SBBS  are  the  result  of  EU  Regulations.  Thus  EU-level  action  is 
necessary  to  remove  them.  Member  States'  action  is  not  only  legally  inadequate  to  remedy  this  situation 
because prudential regulation is an EU competence.  It would also be suboptimal, as it could lead to a regulatory 
race to the bottom, it may fail to establish a unique standard (which is deemed necessary for the novel product 
to be liquid and thus appeal to potential investors), and could de facto result in obstacles to the Single Market 
(e.g., high compliance costs for an arranger that would want to operate in multiple jurisdictions). 

B. Solutions 

What  legislative  and  non-legislative  policy  options  have  been  considered?  Is  there  a  preferred 
choice or not? Why? Maximum 14 lines  
The  IA  proposes  an  enabling  legislation  that  equates,  in  terms  of  regulatory  treatment,  (the  senior  tranche  of) 
SBBS  to  euro-area  sovereign  bonds.  It  identifies  three  key  policy  choices:  (1)  the  scope  of  applicability  of  the 
enabling  framework  (only  to  SBBS,  or  to  any  securitisation  of  euro-area  sovereign  bonds,  regardless  of  the 
portfolio  weights);  (2)  whether  to  "enable"  all  tranches  or  only  the  senior  tranche;  and  (3)  how  to  ensure 
compliance  with  the  defined  eligibility  requirements.  In  addition,  the  IA  consider  the  conceptually  distinct  but 
related option to provide the same treatment of sovereign bonds to a specific basket without tranching of euro-
area central government bonds (i.e., one with weights in line with the ECB key), owing to it being a much simpler 
structure.  Combining  these  options,  the  IA  considers  five  possible  models  for  the  legislative  proposal,  and 
assesses them against the baseline scenario which is the status quo (i.e. no legislative intervention). 

While solutions ("models") that are unlikely to result in a standardised product are assessed as inferior, the IA 
retains  the  other  three  models,  i.e.  granting  the  regulatory  treatment  of  euro-area  sovereign  bonds  to  (1)  all 
SBBS  tranches,  (2)  only  SBBS  senior  tranche,  and  (3)  the  basket.  The  IA  does  not  rank  these  possible 
solutions,  but  highlights  the  main  trade-offs  involved.  In  particular,  Models  1  and  2,  by  virtue  of  tranching,  are 
better at expanding the supply of euro-denominated low-risk assets. Model 3 is, on the other hand, simpler.  

Who supports which option? Maximum 7 lines  
Banks (and other investors) would likely prefer Model 1, since this minimises their regulatory costs. The ESRB 
High Level Task Force (HLTF) on SBBS, which studied the feasibility and merits of SBBS, concluded in favour of 
Model 2. Debt management officers have expressed general reservations on the SBBS concept, out of concerns 

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that it might displace/disrupt national debt markets. Among the three Models retained, they are likely to prefer 
Model 2 (which is less enabling) or Model 3 (which introduces the least changes relative to the status quo). 

C. Impacts of the preferred option 

What are the benefits of the preferred option (if any, otherwise main ones)? Maximum 12 lines                                       

Estimating the impact of the preferred solutions in terms of reduced regulatory hurdles is complicated by the fact 
that none of the relative instruments currently exists, and that the amount of regulatory hurdles in the status quo, 
i.e.  in  the  absence  of  any  intervention,  depends  on  how  much,  if  at  all,  these  would  be  held  but  for  these 
regulatory hurdles (the fact that these products are currently not held is consistent with these regulatory hurdles 
being prohibitive). Nevertheless some indicative figures are provided in the IA. For example, under the current 
regulatory framework, if banks included in the EBA 2015 Transparency Exercise switched their sovereign bond 
holdings into senior SBBS they would face additional capital requirements to the tune of EUR 70 billion. Models 
1 and 2 would bring this figure down to zero. 

The  benefits  of  enabling  these  new  products  would  be  significant.  In  particular,  SBBS  could  help  banks, 
insurance  companies,  pension  funds  and  other  investors  to  better  diversify  their  sovereign  exposures,  which 
could further weaken the bank-sovereign nexus. They could also help expand the supply of a euro-denominated 
low-risk  asset,  which  could  elicit  the  appetite  of  global  investors  (thus,  indirectly,  expanding  access  to  global 
savings  in  particular  for  small  Member  States)  and,  more  generally,  expand  the  toolkit  for  private  sector  risk 
sharing, including across borders.  

The IA has attempted to provide a quantification of some of these effects by considering two scenarios, one in 
which the new markets only reach a limited size (EUR 100 billion), and a steady state scenario where they reach 
a  macro-economically  relevant  size  (EUR 1500 billion).  The  analysis  shows  that  the  preferred  solutions,  in 
particular  those  involving  tranching,  can  contribute  to  a  greater  supply  of  low-risk  assets  and  greater  balance 
sheet diversification.  

None  of  the options  considered  has  any  direct  impact  on  the  environment,  the  social milieu,  or  SMEs,  though 
indirect positive impacts could result to the extent that the enabled new markets do enhance financial stability.  

What are the costs of the preferred option (if any, otherwise main ones)? Maximum 12 lines                                       

The costs of this legislative intervention are expected to be limited. For the public sector, aside for the one-off 
cost  of  drafting  new  legislation  and  putting  it  into  force,  limited  additional  costs—difficult  to  quantify  with 
confidence—would  arise  since  supervision  of  compliance  could  be  carried  out  in  the  course  of  normal 
supervisory activities.  

For  the  issuers,  costs  arising  from  arranging  the  product  (buying  sovereign  bonds,  warehousing  the  bonds, 
issuance  of  self-attestation,  etc.)  have  been  estimated  by  the  HLTF  at  EUR 3.26 million  per  year  for  a 
EUR 6 billion SBBS programme (with one-off upfront costs in the order of EUR 1.15 million).  

Debt Management Offices raised concerns that the introduction of SBBS could lead to higher financing costs for 
Member States, as liquidity in the underlying bond markets might decrease. A quantitative assessment carried 
out by the HLTF and summarised in Annex 4 of the IA suggests, also based on the experience with the ECB's 
Public Sector Purchase Programme, that such effects could be expected to be limited, if any, including because 
they would be offset by lower overall risk and greater bond demand, including from global investors. 

No costs are envisaged for the environment, the social milieu, or SMEs. 

How will businesses, SMEs and micro-enterprises be affected? Maximum 8 lines 
No direct effect 

Will there be significant impacts on national budgets and administrations? Maximum 4 lines 
Not in the preferred solutions. 

Will there be other significant impacts? Max 6 lines  
No 

D. Follow up 

When will the policy be reviewed? Maximum 4 lines  

Sufficient  data  has  to  become  available  before  the  initiative  can  be  reviewed.  It  is  proposed  to  monitor  the 
extent to which the new products are assembled and traded, and to assess the overall impact of the proposal 
after 5 years from the entry into force of the legislation. 

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