COMMISSION STAFF WORKING DOCUMENT Accompanying the documents Proposal for a directive of the European Parliament and of the Council amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic Proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 2017/1129 as regards the EU Recovery prospectus and targeted adjustments for financial intermediaries to help the recovery from the COVID-19 pandemic Report from the Commission to the European Parliament and the Council on the creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation Proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation to help the recovery from the COVID-19 pandemic Proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards adjustments to the securitisation framework to support the economic recovery in response to the COVID-19 pandemic
Date: 2020-07-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: banking, capital market, credit, economic recovery, epidemic, financial institution, financial legislation, financial market, infectious disease, investment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.7.2020  SWD(2020) 120 final  EU Capital Markets Recovery Package COMMISSION STAFF WORKING DOCUMENT   Accompanying the documents Proposal for a directive of the European Parliament and of the Council amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic Proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 2017/1129 as regards the EU Recovery prospectus and targeted adjustments for financial intermediaries to help the recovery from the COVID-19 pandemic          Report from the Commission to the European Parliament and the Council on the creation of a specific framework for simple, transparent and standardised synthetic securitisation, limited to balance-sheet synthetic securitisation          Proposal for a regulation of the European Parliament and of the Council  amending Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation to help the recovery from the COVID-19 pandemic           Proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards adjustments to the securitisation framework to support the economic recovery in response to the COVID-19 pandemic {COM(2020) 280 final} - {COM(2020) 281 final} - {COM(2020) 282 final} - {COM(2020) 283 final} - {COM(2020) 284 final}  
 
 
TABLE OF CONTENTS 

1 

Problems that the Prospectus proposal aims to address ................................................................ 5 

Need for liquidity - Restoration of equity levels ................................................................................. 5 

2 

Content of the Prospectus proposal and cost-benefit analysis....................................................... 5 

2.1 

2.2 

Creation of a new short-form prospectus for secondary issuances ........................................ 5 

Targeted amendments for financial intermediaries ............................................................... 8 

2.2.1 

Supplements .................................................................................................................... 8 

2.2.2 

Non-equity securities issued by credit institutions ......................................................... 9 

3 

Problems that the MiFID proposal aims to address ...................................................................... 10 

3.1 

3.2 

Operational constraints and allocation of resources ............................................................ 10 

Risk to competitiveness at global level ................................................................................. 11 

4 

Content of the MiFID proposal and cost-benefit analysis ............................................................. 12 

4.1 

Amendments in the field of investor protection ................................................................... 12 

4.1.1 

Paper-based investor communications ......................................................................... 12 

4.1.2 

Cost and charges disclosures ......................................................................................... 14 

4.1.3 

Delayed transmission of cost and charges disclosures ................................................. 17 

4.1.4 

Periodic statements and loss reports ............................................................................ 18 

4.1.5 

Best execution reports .................................................................................................. 19 

4.1.6 

Cost-benefit analysis in case of switching ..................................................................... 21 

4.1.7 

Changes to the product governance rules .................................................................... 22 

4.1.8 

Research on small and mid-cap issuers and fixed income instruments ........................ 25 

4.2  Measures for reviving nascent energy derivative markets ................................................... 28 

4.2.1 

Position limits and hedging exemption ......................................................................... 28 

4.2.2 

Ancillary activity test ..................................................................................................... 33 

5 

Problems that the Securitisation proposal aims to address ......................................................... 35 

5.1 

5.2 

On-balance-sheet synthetic securitisation ............................................................................ 35 

Securitisation of non-performing exposures ......................................................................... 36 

6 

Content of the Securitisation proposal and cost-benefit analysis ................................................ 39 

Extension of the STS regime in the Securitisation Regulation to on-balance-sheet synthetic 

6.1 
securitisation ..................................................................................................................................... 39 

6.1.1 

Cost-benefit analysis ..................................................................................................... 39 

6.1.2 

Description of the proposal ........................................................................................... 43 

Targeted amendments of the Securitisation Regulation and CRR in order to remove the 

6.2 
constraints to securitising NPEs ........................................................................................................ 43 

1 

 
6.2.1 

Cost-benefit analysis ..................................................................................................... 44 

6.2.2 

Content of the proposal ................................................................................................ 45 

7 

Consultation and stakeholders ...................................................................................................... 49 

7.1  MiFID II/MiFIR consultation and stakeholders ...................................................................... 49 

7.1.1 

Public Consultation by the Commission ........................................................................ 49 

7.1.2 

ESMA’s work .................................................................................................................. 50 

7.1.3 

Member States Consultations (EGESC/FSC) .................................................................. 51 

7.2 

Prospectus consultation of stakeholders .............................................................................. 52 

7.2.1 

Member States Consultations (EGESC/FSC) .................................................................. 52 

7.3 

Securitisation consultation of stakeholders .......................................................................... 52 

7.3.1 

EBA’s work and the Basel Committee ........................................................................... 52 

7.3.2 

Member States Consultations (EGBPI/FSC) ................................................................... 52 

2 

 
 
 
 
Introduction  

The  Capital  Markets  Recovery  Package  forms  an  integral  part  of  the  Commission  post-
COVID-19  strategy.  EU  securities  market  regulation  provides  for  a  flexible  environment  in 
which the market can operate, even in stress conditions. There is room, however, for further 
enhancing  the  role  securities  markets  can  play  in  the  recovery.  A  timely  recovery  from  the 
COVID-19 pandemic relies on achieving three key objectives:  

  Facilitating investments in the real economy;  
  Allowing for a rapid recapitalisation of companies listed in the EU;  
  Maintaining and enhancing the capacity of banks to lend to the economy, in particular 

to households and SMEs. 

To  this  end,  the  Commission  proposes  a  Capital  Markets  Recovery  Package,  encompassing 
light–touch  adjustments  of  MiFID  II  and  the  Prospectus  Regulation  as  well  as  targeted 
amendments  of  the  securitisation  framework  (Securitisation  Regulation  and  Capital 
Requirements  Regulation).  MiFID  II,  the  Prospectus  Regulation  and  the  securitisation 
framework are at the core of the Capital Markets Union aiming at better integrating national 
capital markets and ensuring equal access to investments and funding opportunities across the 
EU.  

The purpose of this staff working document is to present the rationale of the proposals in the 
Capital Markets Recovery Package, and to explain their benefits compared to the status quo, 
and where relevant, compared to alternative policy options that the Commission has decided 
not to pursue. 

The  current  crisis  makes  it  even  more  important  to  not  impose  burdens  where  they  are  not 
strictly  necessary.  Certain  requirements  could  be  significantly  alleviated,  leaving  more 
resources for dealing with the consequences of the crisis. The Commission therefore strives to 
recalibrate  those  areas  where  the  right  balance  between  a  sufficient  level  of  transparency 
towards the client, the highest standards of protection and acceptable compliance costs for the 
firms, is not met.  

The targeted amendments to the Prospectus Regulation relate to the creation of a new type 
of short-form prospectus (the “EU Recovery Prospectus”) as well as to releasing pressure on 
financial intermediaries. This proposal therefore aims at simplifying the procedure for issuers 
to quickly raise capital due to the economic urgency resulting from the COVID-19 pandemic.  

In the context of the recovery and to ensure that financial institutions can optimally fulfil their 
essential  function  in  financing  the  real  economy,  a  quick  adjustment  of  certain  MiFID  II 
requirements is indicated. The Commission started looking into measures that would facilitate 
the recovery of the financial markets at a very early stage. In the light of the MiFID II review, 
stakeholders had  already addressed the Commission  in  2019 a warning that several  conduct 
requirements were unnecessary and overly burdensome, leading to operational constraints and 

3 

 
a  less  optimal  allocation  of  resources  which  would  negatively  influence  European  entities’ 
global competitiveness.  

The  securitisation  framework  has  only  entered  into  force  very  recently.  Nevertheless,  the 
Commission has identified two very specific areas where it can be improved to play a more 
constructive role in the economic recovery. For a large part, securitisation is used as a funding 
tool, raising the liquidity banks need to  lend to  households  and businesses. However, banks 
also need capital to lend and securitisation can help them make the best use of their capital. In 
particular,  their  lending  capacity  can  be  enhanced  if  professional  investors  share  the  risk  of 
loans  with  banks,  thereby  freeing  up  banks’  capital  to  support  new  loans.  Securitisation 
techniques that use guarantees or similar instruments to share the risks of loans that remain on 
the balance sheet of the bank are particularly helpful in this context, and a sound framework 
that makes them simple, transparent and standardised can promote their use in a way that is 
beneficial for financial stability. Such a framework is part of the present proposals.  

Furthermore, non-performing exposures on banks’ balance sheet are a serious burden on the 
operational capacity and capital resources that banks need for fresh loans to households and 
businesses. Securitisation can play an important role in providing relief. As it currently stands, 
the prudential framework, set out in the CRR, limits the incentives of banks to make use of 
securitisation.  But  with  limited  improvements  to  that  framework,  this  problem  can  be 
addressed. These improvements are also part of the present proposals. 

As  the  amendment  aims  at  mitigating  the  effects  of  the  COVID-19  pandemic  that  are 
expected to fully surface in the coming months, an early application of the amendments would 
be  most  beneficial.  The  goal  should  therefore  be  that  the  proposed  amendments  should 
therefore become applicable at the earliest opportunity.  

It is important to prepare now the tools that will be needed to boost the equity of corporates 
and to maintain and possibly even enhance the lending capacity of banks.  These amendments 
should be considered urgently given their usefulness for economic recovery. Waiting for the 
upcoming  comprehensive  review  of  MiFID  II/MiFIR  due  in  2021  and  of  the  securitisation 
framework due by January 2022 with possible legislative initiatives if appropriate, would lead 
to desirable legal adjustments probably only in a few years’ time and thus frustrate the goal to 
promote the economic recovery in the coming months. 

4 

 
 
Chapter 1 – Changes to the Prospectus 
Regulation 

1  PROBLEMS THAT THE PROSPECTUS PROPOSAL AIMS TO ADDRESS 

Need for liquidity - Restoration of equity levels 

The COVID-19 pandemic has left a wide part of the real economy in dire need of liquidity to 
weather the economic consequences that stem from preventive measures that were necessary 
to  curb  the  spread  of  the  virus.  Governments  and  central  banks  have  organised  multiple 
channels  to  ensure  that  short-term  funding  remains  accessible  to  companies  to  pursue  (and 
restart) their operations.  The immediate focus is on ensuring business continuity.  

The initial response to the crisis, in the form of guaranteed loans to safeguard liquidity (phase 
1  liquidity),  has  further  contributed  to  increase  the  already  very  high  amount  of  corporate 
debt, to a level that risks becoming unsustainable for the solvency of many corporates. Whilst 
the first wave of guaranteed loans have proven effective in maintaining corporate liquidity, it 
will shortly become necessary to restore the debt-to-equity ratio (solvency restoration). This 
requires a better market ecosystem for the issuance of new equity. 

Restoring  the  debt-to-equity  ratio  to  levels  that  were  prevalent  before  the  crisis  is 
indispensable in the near term, but it will not be enough to fuel a sustained investment-based 
recovery.  For  an  effective  restoration  of  the  ecosystems/value  chains  in  the  EU  and  a  rapid 
and sustainable recovery based on investment it is necessary to further strengthen the equity 
base of companies, especially in the small and midcap market segments, over and beyond the 
pre-crisis level. 

To  prepare  this  second  wave  and  facilitate  issuing  of  capital,  issuers  and  investors  must  be 
equipped with the right tools to easily issue new capital on the one hand (an objective to be 
achieved  through  the  implementation  of  the  a  new  short-form  Prospectus)  and  easily  get 
access  to  an increased investor base on the other hand (an objective to  be achieved through 
targeted  changes  to  MiFID  II  under  Chapter  2).  The  earlier  these  tools  are  operational,  the 
better for companies and investors alike.  

2  CONTENT OF THE PROSPECTUS PROPOSAL AND COST-BENEFIT ANALYSIS 

2.1  Creation of a new short-form prospectus for secondary issuances  

Problem to be addressed 

A prospectus is a legally required document presenting information about a company and the 
securities that such companies offer to  the public or seek to  admit  to trading on a regulated 
market. This information should be the basis on which investors can decide whether to invest 
in  securities  issued  by  that  company.  The  cost  of  drawing  up  a  prospectus  might  act  as  a 

5 

 
deterrent for issuers in financial distress seeking to raise new funds, in particular equity. Due 
to  the  situation  resulting  from  the  COVID-19  pandemic,  it  is  crucial  to  ensure  that  the 
prospectus regime does  not act as a barrier to raise capital on public markets. This proposal 
therefore  aims  at  simplifying  the  procedure  for  issuers  to  quickly  raise  capital  due  to  the 
economic urgency resulting from the COVID-19 pandemic. 

Options 

As part of the measures to soften the impact of the COVID-19 pandemic on the real economy 
and financial markets, the Commission would consider introducing a new type of short-form 
prospectus  called  the  “EU  Recovery  prospectus”.  Option  1  creates  a  new  prospectus  that 
could  be  used  for  initial  public  offerings  and  secondary  issuances  of  all  types  of  securities, 
including complex securities.  

Under  Option  2,  the  short-form  prospectus  could  only  be  used  for  secondary  issuances  of 
shares by issuers already listed for at least 18 months.  

Policy choice 

The preferred option is Option 2 and thus to create a short version of the current prospectus 
for secondary issuances of shares.  Its specific features are detailed below. 

Scope.  The  EU  Recovery  prospectus  would  be  available  only  to  issuers  that  have  shares 
already admitted on a regulated market or an SME Growth Market for at least 18 months. It 
would  take  advantage  of  the  fact  that,  being  listed,  issuers  have  already  experience  with 
capital markets and are subject to comprehensive disclosure requirements, such as under the 
Transparency  Directive  or  the  Market  Abuse  Regulation.  In  particular,  subject  to  certain 
exemptions,  the  Transparency  Directive  requires  issuers  whose  securities  are  admitted  to 
trading  on  a  regulated  market  to  publish  the  annual  and  half-yearly  financial  reports.  The 
same requirement, subject to certain exemptions, applies to issuers whose securities are traded 
on  an  SME  Growth  market,  in  accordance  with  Commission  Delegated  Regulation  (EU) 
2017/565. The Market Abuse Regulation sets out several disclosure requirements applicable 
for  regulated  issuers,  Multilateral  Trading  Facility  issuers  (including  SME  Growth  market 
issuers) and Organised Trading Facility issuers. Such disclosures include the requirement for 
the  issuer  to  inform  the  public  as  soon  as  possible  of  inside  information  which  directly 
concerns that issuer.   

For  the  reasons  mentioned  above,  the  EU  Recovery  prospectus  would  not  be  suitable  for 
initial public offerings where potential issuers would have no long track record on financial 
markets. In addition, to reduce the debt-to-equity ratio for companies highly indebted due to 
the COVID-19 pandemic, the short form prospectus could only be used for share issuances.  

Content  and  approval  of  the  EU  Recovery  prospectus.  The  EU  Recovery  prospectus  would 
focus on essential information. As an exception to Article 6 of the Prospectus Regulation, key 
items  have  been  identified  as  elements  to  be  disclosed  by  issuers  and  are  listed  in  the  new 

6 

 
Annex Va to the Prospectus Regulation. The EU Recovery prospectus would be shortened to 
a  maximum  of  30  pages.  However,  as  a  balancing  measure,  incorporation  by  reference  of 
information  already  available  in  the  market  as  defined  in  Article  19  of  the  Prospectus 
Regulation  would  be  allowed  and  that  information  would  not  be  taken  into  account  in  the 
above mentioned maximum size of 30 pages. It would also include a short-form summary.  

A fast track approval procedure already exists in the Prospectus Regulation. Based on this, the 
EU Recovery prospectus would also benefit from such fast track approval of no more than 5 
working days.  

Temporary  regime  and  assessment  of  the  regime.  Such  a  short-form  Prospectus  aims  at 
helping  recapitalisation  during  the  recovery  phase.  It  is  therefore  conceived  as  a  temporary 
regime that expires 18  months after the date of application of the  regulation. As part of the 
Prospectus  Regulation  review,  it  should  be  assessed  whether  this  initiative  meets  its 
objectives.  In  particular,  key  parameters  to  measure  achievement  of  the  stated  objectives  of 
the EU Recovery prospectus would be (a) the number of EU Recovery prospectuses approved 
and  an  analysis  of  the  evolution  of  such  number  as  well  as  (b)  the  cost  of  preparing  and 
having an EU Recovery  prospectus  approved compared to  the current  costs for a secondary 
issuance prospectus together with an indication of the overall financial savings achieved. To 
make  this  assessment  useful,  the  proposal  would  require  that  the  ESMA  centralised  storage 
mechanism collecting prospectus data from national competent authorities would also collect 
data on EU Recovery Prospectuses. This should not incur significant additional costs.  

Cost-benefit analysis. The simplified disclosure regime of the EU Recovery prospectus aims 
to significantly reduce compliance costs for issuers. Based on the fact that, compared to a full 
secondary issuance prospectus, approximately half of the disclosure elements are not required 
to be disclosed in an EU Recovery prospectus, the cost of an EU Recovery prospectus could 
be estimated to be by about 50% lower than the cost of a prospectus for secondary issuances. 

The  costs  of  a  prospectus  generally  depends  on  the  market  capitalization  of  the  company, 
legal  and  auditor  costs,  the  type  of  security  issued  as  well  as  the  amount  of  the  issuance. 
Based on the  analysis performed in  the impact  assessment  for the Commission  proposal  for 
the Prospectus Regulation1, the average cost of an equity prospectus is EUR 1 million and the 
average  cost  of  a  secondary  issuance  prospectus  is  expected  to  be  EUR  800  000  (20% 
estimated savings compared to a full equity prospectus). Based on the assumption that the cost 
of  an  EU  Recovery  prospectus  is  half  the  cost  of  a  secondary  issuance  prospectus,  issuers 
would save approximately EUR 400 000 per prospectus. Pursuant to the latest report on EEA 
prospectus  activity2 published by ESMA on 31 October 2019, a total  of 3 390 prospectuses 

1 
2 

SWD(2015) 255 final. 

https://www.esma.europa.eu/sites/default/files/library/esma31-62-
1360_eea_prospectus_activity_in_2018.pdf 

7 

 
                                                           
have  been  approved  in  the  EEA  in  2018,  including  21%  of  share  prospectuses  (i.e.  712 
prospectuses).  

Based on the  analysis performed in  the impact  assessment  for the Commission  proposal  for 
the  Prospectus  Regulation,  an  average  of  70%  of  all  equity  prospectuses  were  relating 
secondary issuances. Taking as an assumption that 70% of share prospectuses approved in the 
EEA in 2018 (i.e. 498 prospectuses) are secondary issuance prospectuses, the estimated total 
amount  of  yearly  savings  in  the  EEA  stemming  from  the  EU  Recovery  prospectus  regime 
would account for about EUR 200 million per year. The EU Recovery prospectus should also 
reduce the workload of  national  competent  authorities as less information  would have to  be 
scrutinized. At the same time, the approval process would be faster.  

2.2  Targeted amendments for financial intermediaries 

2.2.1  Supplements 

Problem to be addressed 

An  issuer  is  required  to  publish  a  supplement  to  the  prospectus  for  any  significant  new 
factors,  material  mistakes  or  material  inaccuracies  relating  to  the  information  included  in  a 
prospectus  which  may  affect  the  assessment  of  the  securities  and  which  arises  or  is  noted 
between the time when the prospectus is approved and the closing of the offer period or the 
time when trading on a regulated market begins, whichever occurs later. The publication of a 
supplement triggers a withdrawal right for the investors to be exercised within two working 
days  from  the  publication  of  the  supplement.  As  part  of  their  duty  to  protect  investors, 
financial  intermediaries  must  contact  investors  to  inform  them  that  a  supplement  was 
published    on  the  day  where  the  supplement  is  published.  Such  a  deadline,  as  well  as  the 
broad qualification of “investors”, have created difficulties for financial intermediaries.  

Options 

To deal with these difficulties and free up resources for financial intermediaries, both Option 
1 and Option 2 would propose to extend to 1 working day (rather than the same day) the time 
period  during  which  financial  intermediaries  should  contact  investors.  To  maintain  a  high 
level of investor protection, the period during which the withdrawal right could be exercised 
by  investors  would  be  extended  from  two  working  days  to  three  working  days  from  the 
publication of the supplement. Both Options would also require the financial intermediaries to 
only contact investors that benefit from a withdrawal right.  

Under  Option  1,  there  would  be  a  distinction  between  situations  where  the  financial 
intermediaries provided advice to investors and situations when it did not. In situations where 
investors received an advice from the financial intermediary and the investors benefit from a 
withdrawal  right,  the  financial  intermediary  shall  contact  the  investors  to  inform  him  that  a 
supplement  has  been  published.  In  other  situations,  the  financial  intermediary  would  only 
have to publish a notice on its website informing that a supplement has been published. Under 

8 

 
Option  2,    such  distinction  would  not  be  made.  All  investors  benefiting  from  a  withdrawal 
right would be contacted by the financial intermediary.  

Policy Choice   

The  preferred  option  is  Option  2.  Financial  intermediaries  would  benefit  from  targeted 
amendments  that  will  help  them  to  overcome  the  difficulties  they  met  to  effectively  reach 
investors  when  a  supplement  is  published  while  maintaining  a  high  level  of  investor 
protection.  As  the  targeted  amendment  on  supplements  would  fix  difficulties,  such 
amendment would not be limited in time.  

2.2.2  Non-equity securities issued by credit institutions   

Problem to be addressed  

An  offer  of  non-equity  securities  issued  in  a  continuous  or  repeated  manner  by  a  credit 
institution is, under certain conditions, not subject to the obligation of publishing a prospectus 
if the total consideration is less than EUR 75  million per credit institution calculated over a 
period  of  12  months  (Article  1(4)(j)  of  the  Prospectus  Regulation).  These  non-equity 
securities should not to be subordinated, convertible or exchange and should not give the right 
to  subscribe  for  or  acquire  other  types  of  securities  and  are  not  linked  to  derivative 
instruments.  Credit  institutions  have  been  active  in  the  recovery  to  support  companies  that 
needed financing and are expected to be a fundamental pillar of the recovery.   

Options 

Option  1 would  consist of the status  quo for credit institutions. Under Option  2, in  order to 
help credit institutions by making it easier for them to have more financing and bring them a 
breathing space to support their clients in the real economy, it would be proposed  a targeted 
temporary increase of the threshold from EUR 75 million to EUR 150 million.  

Policy choice 

The preferred option is Option 2. This targeted amendment aims at supporting the financing 
of credit institutions in the recovery phase by increasing the prospectus exemption threshold 
for certain type of offers of securities. As this measure is directly linked to the recovery phase, 
it should be available for a limited period of time of 18 months. 

9 

 
 
 
 
Chapter 2 – Changes to the MiFID 
framework 

3  PROBLEMS THAT THE MIFID PROPOSAL AIMS TO ADDRESS 

3.1  Operational constraints and allocation of resources 

With the anticipation that revenues might decrease in a number of sectors, companies focus 
on  reorganising  their  operations  and  allocating  their  internal  resources  where  most  value  is 
created.  The  compliance/reporting  functions  of  investment  firms  could  focus  on  what 
contributes  to  the  orderly  functioning  of  the  markets  and  the  safeguarding  of  high  investor 
protection standards.  

A recent study by the sector shows that MiFID II provisions have resulted in an increase in 
resources spent on interactions with clients and, on average, in more than EUR 4 million of 
recurrent  costs.3  A significant  part of the compliance costs4, as indicated by  another source, 
relates to the drafting, producing and emailing of reports. In the current circumstances, these 
budgets  could  be  partially  reallocated  to  support  the  business  lines.  Other  key  business 
projects  have  been  delayed  to  allow  IT  and  compliance  departments  to  implement  the  new 
MiFID II requirements. 

Furthermore,  it  often  proves  more  costly  and  time-consuming  to  produce  information 
remotely than to produce the same information from the centralised offices where access to IT 
systems  and  servers  works  more  efficiently.  This  is  for  example  evidenced  by  ESMA’s 

3  

4  

For  the  German  market  see  Paul,  S.,  Schröder,  N.  and  Schumacher,  S.  (2019),  “Impact  study  of 
MiFID/MiFIR and PRIIPs Regulation: effectiveness and efficiency of the new rules against the backdrop of 
investor and consumer protection – a qualitative empirical analysis”, Ruhr University Bochum on behalf of 
the German Banking Industry Committee. For Luxembourg, LU ABBL indicated a yearly compliance cost 
of EUR 1,8 million on average per member. The European Federation of Financial Advisers and Financial 
Intermediaries (FECIF) highlights the significant costs also for smaller firms: Professional insurance for a 
very  small  company  (0  to  110  000€  turnover):  1500€/year;  Basic  software:  7000€;  Association  and 
Authorities:  1500€/year;  Training:  500  to  2000€/year/person;  Compliance  company:  1500  to  7000€/year; 
Documentation  :  1000  to  2000€;  Compliant  website:  2500€  +  cost  of  staff  time  if  50  customers  (level 
which  seems  low  for  any  standard,  viable  companies):  30000€  +  management  and  updating  of  internal 
procedures  compliance  (1  week  full  time/year):  5  to  10  000€.  In  total:  between  50000€  and  63500€,  i.e. 
more than 50% of turnover.  

the  Johannes  Kepler  University  Linz  “Studie  Buerokratiebelastung  der  Banken 

Study  by 
in 
Niederoesterreich  2017”  (May  2018)    came  to  the  conclusion  that  the  implementation  costs  of  MiFID  II 
have been  very  high and  for  some banks even  higher than the burden  of other regulatory acts. Table 5.1 
(page  49)  shows  that  in  some  areas  MiFID  II  produces  more  costs  for  Austrian  banks  than  the  Capital 
Requirements Regulation (CRR). The running costs including overhead and pro rata non-recurring costs (as 
can  be  seen  in  the  table)  which  were  caused  by  MiFID  II  exceed  the  corresponding  costs  caused  by  the 
CRR in two of the three reference banks (No. 2 and No. 3). For reference bank No. 3, the costs which were 
caused by MiFID II were more than twice as high as the costs caused by CRR. 

10 

 
                                                           
statement5  that  firms  may  need  to  deprioritise  efforts  for  the  publication  of  best  execution 
reports due to the exceptional circumstances created by the COVID-19 pandemic. Once again, 
alleviating the reporting burden would help companies to remain efficient and competitive in 
the recovery phase. 

In parallel, ESMA will continue to collect the necessary data for monitoring the effects of the 
COVID-crisis  on  investment  firms  and  investment  activities  in  Europe  and  how  the  crisis 
affects markets and supervisory practices. This will allow for the future evaluation of the new 
policy  tools.  Additionally,  the  Commission  services  will  continue  to  carefully  monitor  the 
latest  developments  and  to  engage  in  the  relevant  fora,  such  as  the  European  Securities 
Committee (ESC).  

Compliance and enforcement will be ensured on an ongoing basis where needed through the 
Commission  launching  infringement  proceedings  for  lack  of  transposition  or  for  incorrect 
transposition or application of the legislative measures. Reporting of breaches of EU law can 
be channelled through the European System of Financial Supervision  (ESFS), including the 
national competent authorities and ESMA. 

3.2  Risk to competitiveness at global level 

In the aftermaths of the COVID-19 pandemic, companies around the globe will face similar 
economic and organisational challenges. Those able to recover promptly are likely to be those 
companies that can adjust quickly and allocate their financial and human resources to prepare 
the exit from the crisis. EU companies must therefore be given the flexibility to adjust quickly 
and restore profitability.  

Absent such flexibility, the risk is that EU companies would be slower in exiting the crisis and 
less competitive at  international  level  compared to  their competitors. This  reasoning applies 
particularly in the field of energy trading.  

Energy exchanges play an important role for the real economy as they provide accurate and 
trusted  price  signals  for  market  participants  to  hedge  their  risks.  The  COVID-19  pandemic 
caused  an  energy  demand-shock  followed  by  unusual  changes  in  prices  and  volumes. 
Changing  market  fundamentals  have  required  market  participants  to  adjust  their  risk 
exposure.  

The  real  economy  needs  to  be  able  to  react  to  the  risk  of  price  fluctuations.  This  allows  to 
produce as efficiently as possible and to avoid costs that would otherwise have to be passed 
through to the end consumers. Certain provisions in the MiFID framework for energy trading 
could prevent a quick recovery and therefore changes are proposed to simplify requirements, 

5  

https://www.esma.europa.eu/press-news/esma-news/esma-provides-clarifications-best-execution-reports-
under-mifid-ii. 

11 

 
                                                           
provide  for  cost  savings  and  ensure  a  level  playing  field  with  the  global  energy  trading 
markets. 

4  CONTENT OF THE MIFID PROPOSAL AND COST-BENEFIT ANALYSIS 

4.1  Amendments in the field of investor protection 

In order to situate the stakeholder impacts of the proposed amendments in the area of investor 
protection, it is useful to establish an overview of the different types of MiFID II stakeholders 
that will be affected by the proposed changes to the MiFID II rulebook. The MiFID II rules 
apply to two basic client categories: qualifying clients and retail clients.  Within the category 
of qualifying clients, the following distinctions apply:  

BOX 1: EU QUALIFYING CLIENTS 

Eligible counterparties  Professional clients 

Authorised financial institutions 
National governments and public debt management 
bodies 
Central banks and supranational organisations 
Large undertakings  
Regional governments and public debt management 
bodies 
Other institutional investors, including securitisation 
and financing SPVs 

+ 
+ 

+ 
* 
* 

* 

+ 
+ 

+ 
+ 
+ 

+ 

Notes: Classification of an entity as an eligible counterparty is subject to the entity’s right to request 
treatment  as  a  professional  client  or  express  consent  to  treatment  as  such.  Authorised  financial 
institutions  includes  investment  firms,  banks,  insurance  companies,  UCITS,  alternative  investment 
fund managers and pension funds. Large undertakings must meet two of the following on a company 
basis: total assets of EUR 20 million; net turnover  of EUR 40 million; own funds of EUR 2 million. 
There is overlap between the eligible counterparty class and the professional client class. It depends 
on  the  investment  service  or  activity  that  is  being  provided  or  performed  if  a  client  is  either  a 
professional  client  or  an  eligible  counterparty.  A  client,  such  as  a  financial  institution,  will  be  an 
eligible  counterparty  in  the  course  of  dealing  on  own  account,  execution  of  orders  or  receiving  or 
transmitting of orders, while he will be a professional client in the course of portfolio management or 
investment advice.  

* At Member State discretion. 

4.1.1  Paper-based investor communications  

Problem to be addressed 

Currently,  MiFID  II  requires  all  investment  information  to  be  provided  in  a  “durable 
medium”,  which  includes  electronic  formats  (e.g.  E-mail,  a  determined  webpage  or  an 

12 

 
 
 
 
 
 
electronic mailbox) but paper remains the default method for communication (i.e. if the client 
does not actively request the use of electronic information paper will be the default option).  
Not only have some firms anticipated difficulties in relation to the provision of paper-based 
disclosures to clients during the COVID-19 crisis, but this default option for communication 
is  also  in  misalignment  with  the objectives of the Commission’s Green  Deal  and its Digital 
Finance  Agenda.  In  addition,  the  printing  and  mailing  of  the  numerous  information 
documents  required  by  MiFID  II  leads  to  significant  costs  for  investment  firms.  Almost  all 
respondents  of  the  MiFID  II  Public  Consultation  supported  a  phase-out  of  paper-based 
information.  The  economic  downturn  caused  by  the  COVID-19  pandemic  has  made  it  even 
more  urgent  to  facilitate  the  investment  process  to  increase  the  funding  alternatives  for 
European companies and to enable investment firms to use resources more efficiently.  

Relevant samples illustrate that only between January and May 2019 a Nordic medium sized 
banking  group  with  2.7  million  private  clients  (31%  of  which  had  invested  into  capital 
markets) had 405 000 pages of ex-ante information printed and sent in paper. End-of-the year 
reports and first quarterly reports amounted to 8.8 million pages in 2019, of which 3 million 
pages  were  sent  to  clients  in  printed-paper.  Another  banking  group  from  Southern  Europe 
estimates that (pre-contractual and contractual) disclosure rules require 48 sheets on average 
per client in the first year and 4 sheets on average per client in each following year.  

Based on the Nordic example, it can be estimated that around 1/3 of the clients still receive 
their  investment  information  by  post,  which  is  expensive  (paper,  printing,  postage  etc.). 
Already  in  2018  the  public  tariffs  for  20gr  letters  sent  within  one  country  were  on  average 
roughly one euro. Considering the various information requirements throughout the phase of 
an investment, the most optimistic estimation requires that the information is at least provided 
on  an  annual  basis  to  the  client.  Taking  into  account  that  in  the  first  quarter  of  2019, 
households’  total  holdings  of  securities  at  Euro  area  level  reached  EUR  3  707  billion6  and 
extrapolating that around one third of them receives information by postal services, only the 
cost for the letters could amount to around tens of millions annually.  

Options 

Given that paper-based information is a model of the past that is not only causing significant 
cost but that is also detrimental to the environment, doing nothing would be the least favourite 
option. It is essential that resources are used efficiently and effectively. This is especially true 
now when firms need additional resources to recover from the economic repercussions of the 
COVID-19 pandemic.  

As  professional  clients  are  permanently  able  to  view  their  investment  portfolios  online  (or 
contact their investment advisor where necessary), providing them with a plethora of paper-

6  

See  Household  wealth  and  consumption  in  the  Euro  area,  ECB  Economic  Bulletin,  01/2020: 
https://www.ecb.europa.eu/pub/economic-
bulletin/articles/2020/html/ecb.ebart202001_01~6ce994a1f7.en.html  

13 

 
                                                           
based  statements  has  already  become  superfluous.  A  complete  switch  to  electronic 
communication  would  have  the  strongest  impact  on  the  reduction  of  carbon  emissions7, 
accelerating  the  Digital  Agenda,  and  on  cutting  back  costs  for  the  printing  and  mailing  of 
these documents8.  

This  radical  option,  however,  was  dismissed  at  an  early  stage  as  it  did  not  sufficiently 
consider  the  needs  of  retail  clients.  According  to  Eurostat9,  the  share  of  EU-28  households 
with internet access has risen to 89% by 2018. More than four fifths (85%) of all individuals 
in the EU-28, aged between 16 and 74 years, used the internet (at least once within the three 
months  prior  to  the  survey  date).  The  proportion  of  the  EU-28’s  population  that  had  never 
used the internet was 11% in 2018. While it can be assumed that the number of those citizens 
using the internet on a regular basis has risen since 2018 there still seems to be a relevant part 
of  the  European  population  that  might  not  have  access  to  information  and  communication 
technologies (ICTs) or that simply does not want or is not capable of using it. 

The  second  option  would  therefore  require  firms  to  continue  providing  paper  based 
information to retail clients where the retail client explicitly requested it.  

Policy choice 

While the first option would meet the objective of freeing up resources and of contributing to 
foster investments in the real economy even more than the second option, the second option 
has the advantage of duly addressing the needs of the weakest client category: clients that are 
not able or willing to use digital means of communication and that might therefore already be 
disadvantaged as regards to the timeliness of the information.   

On  the  basis  of  the  above  assessment  the  preferred  option  would  consist  in  a  phase-out  of 
paper-based  communication  as  the  default  option  in  MiFID  II.  Retail  investors  may 
nevertheless be allowed to request paper based information. 

4.1.2  Cost and charges disclosures   

Problem to be addressed 

7  

8  

9  

The European pulp and paper industry, the 4th largest industrial energy user in EU, has the potential to 
contribute to the main objectives (stemming from the global commitments) to combat climate change, that 
are a 20%, 40% and 80% reduction in GHG emissions compared to 1990 by 2020, 2030 and 2050, 
respectively. See JRC study “Energy efficiency and GHG emissions: Prospective scenarios for the pulp and 
paper industry” from 2018: 
https://publications.jrc.ec.europa.eu/repository/bitstream/JRC111652/kjna29280enn_jrc111652_online_revi
sed_by_ipo.pdf  

Large  banks  claim  that  these  costs  could  amount  up  to  EUR  4  million  for  all  information  documents 
provided within a year. 

See  Eurostat  Article  “Digital  economy  and  society  statistics  -  households  and 
https://ec.europa.eu/eurostat/statistics-explained/index.php/Digital_economy_and_society_statistics_-
_households_and_individuals. 

individuals”: 

14 

 
                                                           
Article  24(4)  of  MiFID  II  requires  that  information  on  costs  and  charges  must  include 
information  relating  to  both  investment  and  ancillary  services,  including  the  cost  of  advice, 
the cost of the financial instrument and how the client may pay for it, also encompassing any 
third-party payments. Firms are also required to provide further cost and charges information 
ex-post  (e.g.  annual  post-sale  aggregated  information).10  Cost  information  is  supposed  to 
provide  investors  with  basic  levels  of  transparency  regarding  pricing  and  enables  them  to 
compare  different  investment  opportunities.  Eligible  counterparties  (ECPs)  and  professional 
clients,  however,  have  access  to  such  information  through  other  channels  (especially  their 
own parallel price enquiries). Such client groups also organise competitive tender procedures 
for investment services before choosing a provider. Professional clients and ECPs furthermore 
generally  place  a  large  number  of  high  value  orders  compared  to  those  placed  by  retail 
investors and attach great importance to swift order execution.  

Options 

One  option  to  address  this  issue  would  be  a  clear-cut  exemption  from  the  cost  and  charges 
disclosure  without  any  conditions.  To  ensure  an  adequate  level  of  protection,  however,  this 
exemption should not cover investment advice and portfolio management. The advantage of 
this  option  lies  in  its  simple  application.  This  option  would  also  allow  for  a  significant 
reduction of red tape that would free resources that could be used more efficiently.  

The second option encompasses a more tailored two-tier approach:  

i. 
ii. 

the introduction of a general exemption for eligible counterparties; and 
the introduction of an opt-out for professional clients, in relation to all services.  

With  an  amendment  to  Article  30(1)  of  MiFID  II,  ECPs  would  be  fully  exempted  from 
receiving costs and charges information as required by Article 24(4) of MiFID II. Further, the 
exemption  and  the  opt-out  for  professional  clients  should  cover  all  MiFID  II  services. 
Professional  clients  would  have  the  possibility  not  to  receive  information  (whether  ex-ante 
and  ex-post)  on  costs  and  charges.  Further,  firms  would  be  required  to  keep  records  of  the 
documented  requests  to  opt-out  and  they  should  contractually  agree  with  their  clients  what 
type of information the client will receive instead.  

The exemption of eligible counterparties from the cost and charges information requirements 
would  allow  firms  to  stop  producing  information  sheets11  that  are  not  read  by  their 
counterparties without establishing additional bureaucratic procedures for the opt-out process 
for  ECPs.  It  will  facilitate  the  provision  of  services  for  ECPs  as  the  application  of  the  cost 
disclosure requirements may lead to delays in the execution of transactions for participants for 

10  See also Article 50 of Delegated Regulation 2017/565. 
11   An Austrian Banking Group estimated that approximately 16 hours per day (summed up over all relevant 
front-offices of the group) would be spent on cost disclosure for eligible counterparties alone (not including 
systematic record keeping or additional costs and errors for systems, data storage etc.).  

15 

 
                                                           
whom time is of essence and may therefore have a negative impact on best execution. ECPs 
will,  on  their  own  volition,  put  brokerage  firms  in  competition  when  requesting  pricing  for 
their trades. This provides these investor groups with more influence and control of the prices 
than average retail clients. Both these type of investors and the involved firms should not have 
to invest resources in this part of the investment process. For these reasons, ESMA12 and the 
vast majority of professional clients and ECPs requested a full exemption from the cost and 
charges information.  

Option  2  would  further  include  an  opt-out  for  professional  clients  from  information 
requirements  across  services.  The  introduction  of  an  opt-out  option  for  professional  clients 
would allow for a tailor made regime that enables the client to take his/her individual situation 
into  account.  The  inclusion  of  advisory  services  and  portfolio  management  into  the  opt-out 
option  would  cover  many  more  services  than  Option  1.  There  are  currently  around  10  000 
(including third country) investment firms registered with ESMA.13 According to information 
compiled  by  the  EBA14,  around  85%  of  EEA  investment  firms  limit  their  activities  to 
investment  advice,  the  reception  and  transmission  of  orders,  portfolio  management  and  the 
execution  of  orders.  Nearly  40%  of  EEA  investment  firms  are  authorised  exclusively  to 
provide investment advice. Around 20% are authorised to carry out dealing on own account 
and underwriting.  

While  some  professional  clients  that  are  less  experienced  might  benefit  from  standardised 
information  documents,  those  that  prefer  more  individualised  information  would  have  the 
chance to negotiate a different information setting. Professional clients would thus gain much 
more flexibility without giving up their high level of protection. The disadvantage connected 
to an opt-out is that it would be considerably less suitable for reaching the objective of freeing 
up resources due to the policies and procedures firms would need to have in place to cater for 
the provision of the documents.  

Policy choice 

The  preferred  policy  choice  is  option  1.  ECPs  and  professional  clients  using  other  services 
than  investment  advice  and  portfolio  management  are  deemed  familiar  with  the  way  that 
capital  markets  function.  Their  need  for  information  and  for  protection  are  significantly 
different  from  those  of  the  more  heterogeneous  group  of  retail  clients.  Cost  information  is 
supposed to provide investors with basic levels of transparency regarding pricing and enable 
them  to  compare  different  offers.  ECPs  and  professional  clients  have  access  to  cost  and 
charge  information  as  part  of  individual  negotiations  with  their  financial  service  providers. 

12   https://www.esma.europa.eu/sites/default/files/library/esma35-43 

2126_technical_advice_on_inducements_and_costs_and_charges_disclosures.pdf 
13   https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_upreg .  
14   EBA  report  on  investment  firms,  response  to  Commission's  call  for  advice  of  December  2014 
(EBA/Op/2015/20),  Table  12:  Population  of  investment  firms,  by  category,  by  country,  page  96.   
https://www.eba.europa.eu/documents/10180/983359/EBA-Op-201520+Report+on+investment+firms.pdf  

16 

 
                                                           
ECPs and professional clients furthermore generally place a large number of high value orders 
compared  to  those  placed  by  retail  investors  and  attach  great  importance  to  swift  order 
execution.  

Cutting red tape has become even more urgent during the COVID-19 pandemic, which placed 
the EU’s economy and financial system under strain. Streamlining the investment process for 
wholesale clients will further channel alternative financing option to those enterprises that are 
in need of new equity. In order to simplify the administrative procedure as much as possible, 
the  provision  of  opt-ins  or  opt-outs  will  not  be  required.  In  order  not  to  reduce  the  level  of 
information  made  available  to  retail  investors,  the  proposed  exemption  should  not  apply  to 
cost and charges disclosures for retail clients who have not opted into the professional client 
status. 

4.1.3  Delayed transmission of cost and charges disclosures 

Problem to be addressed 

The  information  requirement  in  Article  24(4)  of  MiFID  II  also  has  an  important  timing 
element:  the  information  should  be  provided  in  “good  time”.  Many  transactions  with  all 
categories of clients  tend to  be concluded over the phone or by online  means. However,  all 
client  categories  have  come  to  expect  immediate  execution  of  such  “distance  orders”  as  a 
standard service.  

Options 

One option to tackle the current impediment to the usage of distant communication would be 
to only allow professional clients to make use of the general possibility to opt-out to consent 
into a delayed transmission of this information. While this option would maintain a high level 
of protection of retail clients, it would also put retail clients at a disadvantage as regards to the 
swiftness with which a transaction can be executed by means of distance communications.   

The  second  option  is  to  align  the  cost  and  charges  information  requirements  with  the 
requirement set-up in the Regulation (EU) No 1286/2014 and Directive 2002/65/EC. Where 
the  agreement  to  buy  or  sell  a  financial  instrument  is  concluded  using  means  of  distance 
communication,  the  investment  firm  may  provide  the  information  in  an  electronic  format 
without undue delay after the client is bound by any agreement, provided both the following 
conditions  are  met:  the  investment  firm  has  given  the  client  the  option  of  delaying  the 
transaction and the client has consented to receiving the information without undue delay. The 
decision to undertake transactions on the phone is mainly driven by timing constraints. This 
option will thus enable all investor categories to invest fast.  

Further, this option will not only follow the advice received by ESMA on 1 April 2020, but is 
also in line with the feedback received during the public consultation on the MiFID II review: 
almost  all  stakeholders  agreed  that,  when  using  distant  communication  (telephone  in 
particular), the cost  information  could  also  be provided after the transaction is  conducted in 

17 

 
order to avoid delays. As many participants were of the view that the existing ESMA Q&As 
already authorised the delayed provision of this information anyways, this option will finally 
harmonise diverging practices and address the existing legal uncertainty within the EU. This 
proposal is also best suited to free up resources to help the recovery from the crisis resulting 
from the COVID-19 pandemic and help to foster investments in the real economy.  

Policy choice 

In line with the views of ESMA and the majority of stakeholders in the MiFID II consultation, 
the preferred policy is an option for all investors, including professional investors as well as 
retail  investors,  to  agree  to  the  ex  post  delivery  of  cost  and  charges  disclosures,  in  case  an 
order is placed by means of distance communication. This corresponds to option 2. 

4.1.4  Periodic statements and loss reports 

Problem to be addressed 

MiFID  II  requires  investment  firms  to  send  a  quarterly  statement  to  clients  describing  the 
services they have received. Wholesale clients (ECPs and professional clients) have indicated 
that  they  see  no  value  in  receiving  these  statements.  Stakeholders  have  therefore  requested 
that  these  client  categories  are  given  the  choice  to  stop  receiving  all  of  the  regular  reports. 
According  to  the  majority  view  of  participants  in  the  MiFID  II  consultation,  these  client 
categories should be given the possibility to decide whether they see value in receiving these 
periodic  statements  or  whether  they  do  not  derive  any  benefit  from  receipt  of  such 
standardised disclosures.  

Article  25(6)  of  MiFID  II  requires  investment  firms  to  send  service  reports  to  clients 
regarding  the  services  they  have  provided.  These  reports  include  the  loss-reporting  reports 
that are triggered by 10% portfolio losses. When markets are extremely volatile, these reports 
can  even  have  negative  effects  on  the  clients  when  redeeming  too  early.  These  reports  also 
include,  client  execution  reports,  quarterly  performance  reports  and  quarterly  statements  of 
client financial instruments or funds. Stakeholders have informed us that these reports provide 
little  added  value  in  wholesale  relationships.  The  information  is  either  already  obtained 
through other means, or is not helpful or even potentially detrimental.  

Client execution reports require firms to provide to clients information about the execution of 
an  order.  This  information  is  potentially  duplicative  to  trade  confirmation  requirements  in 
EMIR and therefore should not have to be applied in case a wholesale client does not need it. 
Similarly for the quarterly statements on the performance of the portfolio wholesale clients, in 
particular other financial institutions, have other means of tracking their portfolio and might 
not  be  interested  in  receiving  mandatory  statements.  The  end  of  day  loss  reporting 
requirements  are  triggered  when  the  overall  value  of  a  portfolio  depreciates  by  10%,  and 
every multiple of 10% thereafter. When markets are extremely volatile, these reports can have 
negative  effects  on  the  clients,  inciting  them  to  redeem  their  investments  at  a  point  in  the 
market cycle which is least favourable to them.    

18 

 
Options 

The first option is to exempt ECPs and professional clients from all the service reports that do 
not touch upon portfolio management or investment advice (general exemption).  

The  second  option  is  to  exempt  eligible  counterparties  and  professional  clients  from  all  the 
service  reports  and  to  offer  professional  clients  the  flexibility  to  choose  to  receive  them  by 
allowing them to opt-in (individualised opt-in).  

Both option 1 and option 2 contribute to the objectives of freeing up resources and fostering 
investments  in  the  real  economy  by  firms  no  longer  having  to  draw  up  and  provide  service 
reports and investors no longer having  to  receive and  go through hem.  Option  2 potentially 
frees  up  more  resources  as  covers  services  reports  in  relation  to  all  MiFID  services  (in 
particular  in  relation  to  portfolio  management).    The  service  reports  would  not  have  to  be 
provided  anymore  but  professional  clients  could  still  opt-in.  This  flexibility  under  Option  2 
allows  the  individual  interests  and  needs  of  professional  clients  to  be  taken  into  account 
instead of providing them standardised and automatically triggered information. Therefore the 
individualised treatment granted by option 2 is the preferred option 

Policy choice 

The policy choice is option 2. Periodic reports will therefore no longer apply with regard to 
eligible counterparties and professional clients,  while professional clients have the choice to 
opt-in to receiving any or all of the reports. We propose to add Article 25(6) of MiFID II to 
the list provisions (laid down in Article 30(1) of MiFID II) that do not apply with regard to 
eligible  counterparties  and  to  the  list  in  the  newly  to  be  created  Article  29a  of  MiFID, 
containing  the  exemptions  for  professional  those  articles  for  which  professional  clients  can 
opt-in to.  

Retail clients will keep receiving all the service reports but the frequency of these reports will 
be  amended  (e.g.  the  reporting  obligations  for  portfolio  management  will  become  biannual 
instead  of  quarterly)  as  the  regular  active  provision  of  several  reports  will  be  unnecessary 
when clients will have constant digital access to their accounts (see phase out of paper-based 
information).   

4.1.5  Best execution reports  

Problem to be addressed 

Article  27(3)  of  MiFID  II  requires  that  each  trading  venue  and  systematic  internaliser  for 
financial  instruments  subject  to  the  trading  obligation  in  Articles  23  and  28  of  Regulation 
(EU) No 600/2014 (‘MiFIR’) and each execution venue for other financial instruments, makes 
available to the public data relating to the quality of execution of transactions on that venue 
periodically.  These  periodic  reports  need  to  include  details  about  price,  costs,  speed  and 
likelihood of execution for individual instruments.  

19 

 
The Delegated Regulation (EU) 2017/575 provides regulatory technical standards that the best 
execution  reports  have  to  meet.  The  reports  need  to  contain  large  amounts  of  detailed 
quantitative  information  about  the  execution  venue  and  financial  instrument,  the  price,  the 
costs  and  the  likelihood  of  execution.  In  reply  to  the  public  consultation  almost  70%  of 
respondents  who  provided  input  on  best  execution  indicated  that  they  do  not  find  the  best 
execution reports useful. An even larger percentage stated that the current granularity of best 
execution  reports  does  not  strike  the  right  balance  between  the  costs  of  generating  best 
execution  reports  and  the  benefits  for  investors.  Stakeholders  indicate  that  the  reports  are 
rarely read by investors, evidenced by very low numbers of downloads from their website. It 
is  therefore  assumed  that  investors  cannot  or  do  not  make  any  meaningful  comparisons 
between firms on the basis of this data.  

Buy-side  firms  informed  us  that  they  receive  all  the  relevant  information  on  best  execution 
through  other  means  (e.g.,  via  brokerage  meetings).  Stakeholders  mention  that  firms  have 
spent  significant  amounts  of  money  to  implement  the  requirements,  they  mention  numbers 
around EUR 1 million. Several stakeholders indicate further that the production of the reports 
is costly. The current crisis has increased the urgency to address problems with regard to the 
best  execution  reports.  This  is  evidenced  by  ESMA’s  statement15  that  firms  may  need  to 
deprioritise  efforts  for  the  publication  of  these  reports  due  to  the  exceptional  circumstances 
created by the COVID-19 pandemic.  

Options 

The Commission’s services compared two options to the baseline of doing nothing. The first 
option  is  to  provide  an  amendment  to  Article  27(3)  of  MiFID  II  in  order  to  considerably 
simplify  the  reporting  requirements.  The  second  option  is  to  suspend  the  requirement  to 
publish  the  best  execution  reports  altogether  until  2022  in  order  to  make  an  assessment 
whether changing the requirements would create meaningful information for investors. Given 
that it is clear that the reports in their current form provide little or no useful information and 
are  therefore  not  read  by  investors,  but  that  the  production  of  these  periodic  reports  is 
burdensome, doing nothing would be the least favourite option.  

It is essential that investment firms use resources efficiently and effectively. This is especially 
true  now  they  need  additional  resources  to  recover  from  the  crisis.  Due  to  the  significant 
implementation costs, stakeholders advised to not make any changes to the reports that would 
necessitate  additional  implementation  measures  and  costs,  without  a  thorough  cost-benefit 
analysis.  All  the  measures  proposed  in  this  Capital  Markets  Recovery  Package  need  to  be 
adopted  and  implemented  urgently.  As  a  consequence  it  is  not  possible  to  investigate 
sufficiently which requirements an effective best execution report would need to meet.  

https://www.esma.europa.eu/press-news/esma-news/esma-provides-clarifications-best-execution-reports-

15 
under-mifid-ii. 

20 

 
                                                           
The first option would therefore not meet the objective to free up resources and to contribute 
to foster investments in the real economy. The second option, to suspend the best execution 
report altogether, would free up resources currently used for production of the report, without 
requiring firms and venues to invest in costly implementation. This option does not lead to a 
decrease of investor protection since investors currently do not read the reports at all and buy-
side  firms  receive  the  relevant  information  through  other  means.  In  the  context  of  the  full 
review of MiFID II in 2021 the Commission will assess whether the requirement to publish 
the report should be deleted permanently, or if the reports need to be reintroduced in a revised 
manner.  

Policy choice 

The preferred option is therefore to insert a new subparagraph in Article 27(3) of MiFID II in 
which the reporting requirement will be suspended until 2022 which corresponds to option 2. 
The  time  limit  reflects  that  there  will  be  a  new  assessment  of  the  reports  during  the  review 
with legislative initiatives, if appropriate, that is provided for in 2021.  

4.1.6  Cost-benefit analysis in case of switching 

Problem to be addressed 

As part of their suitability assessment, investment firms are currently required to undertake a 
cost-benefit  analysis  of  certain  portfolio  activities,  which  involve  a  “switching”  between 
products. In this context, before executing a product switch, investment firms are required to 
obtain the necessary information from the client and be able to demonstrate that the benefit of 
the product switch outweigh the costs. 

Article 25(2) of MiFID requires firms to perform a suitability assessment when they provide 
investment  advice  or  portfolio  management.  This  provision  applies  to  retail  clients  and  to 
professional clients. Eligible counterparties are excluded by virtue of Article 30(1) of MiFID. 
With  regard  to  clients  that,  based  on  Annex  II,  chapter  II,  paragraph  II,  MiFID  are 
professional clients on request, firms need to obtain such information as is necessary to have a 
reasonable basis for determining that the specific transaction to be recommended, or entered 
into  meets  the  investment  objectives  of  the  client,  including  the  client’s  risk  tolerance,  and 
that  the  client  is  financially  able  to  bear  any  related  investment  risks  consistent  with  his 
investment objectives. With regard to professional clients in Annex II, paragraph I, firms may 
assume that the client is able to financially bear the investment risks.  

In  case  of  ongoing  relationships  firms  are  currently  required  to  undertake  a  cost-benefit 
analysis of certain portfolio activities, which involve a “switching” between products. In this 
context,  before  executing  a  product  switch,  investment  firms  are  required  to  obtain  the 
necessary information from the client  and be able to demonstrate that the benefits outweigh 
the costs. Suitability testing in case of a product switch is viewed as applying to all portfolio 
activity, rather than primarily to switches between comparable products, such as the sale of a 

21 

 
European Equity investment fund and the purchase of a European Equity ETF, with broadly 
the same underlying components.  

Options 

The  Commission  compared  two  options  to  the  baseline  of  doing  nothing.  The  first  option 
allows professional clients to opt-out of the suitability assessment altogether. The second and 
preferred option is a targeted exemption of the cost-benefit analysis in case of switching for 
professional clients, with the possibility to opt-into the requirement.  

Doing  nothing  would  have  no  effect  with  regard  to  achieving  the  objectives  of  freeing  up 
resources  and  contributing  to  foster  investments  in  the  real  economy.  Allowing  all 
professional clients to opt-out of the suitability assessment altogether would free up resources 
in  firms  that  would  have  to  perform  less  assessments  and  would,  by  allowing  professional 
investors to invest in a wider range of instruments, contribute to fostering investments in the 
real economy. Currently, however, we do not have concrete numbers to quantify this effect. 
The category of professional investors consists of credit institutions and investment firms, but 
also  to  large  undertakings  that  not  necessarily  have  extensive  financial  experience  or 
knowledge. Allowing them  to  be exempted from the suitability assessment  exposes them to 
potential risks, which is the main disadvantage of option 1.  

Option 2 would free up resources as a consequence of firms no longer having to perform the 
cost-benefit  analyses  in  the  course  of  portfolio  management.  In  this  option  the  professional 
investors  will  remain  protected  by  the  firm’s  general  suitability  requirements  against  taking 
unwanted  risks,  and  moreover  by  the  cost  benefit  analysis  in  case  they  have  opted  into  this 
requirement. Option 2 is therefore the preferred option. This option is effective in achieving 
the  objectives  to  free  up  resource,  neutral  with  regard  to  fostering  investments  in  the  real 
economy,  but  has  the  advantage  over  option  1  that  professional  investors  will  remain 
protected against mis-selling. For retail clients the requirement remains unchanged.  

Policy choice 

The policy choice is option 2. The proposal is to insert a new paragraph to Article 25(2) of 
MiFID II setting the requirements for the cost-benefit analysis as they are currently in Article 
54(11) of Delegated Regulation (EU) 2017/565, and to add a reference to this new paragraph 
in the new Article 29a of MiFID, thus exempting them, while allowing them to opt-in.  

4.1.7  Changes to the product governance rules 

Problem to be addressed 

The  product  governance  requirements  currently  apply  to  all  financial  instruments  and 
regardless of the client, even though there seems little benefit in assessing the particularities 
of  a  plain  vanilla  bond  when  transactions  take  place  between  eligible  counterparties.  In  its 
guidelines  on  product  governance,  ESMA  has  already  partially  addressed  this  lack  of 
proportionality by explicitly recommending further flexibility for “non-complex products”.   

22 

 
Stakeholders have submitted evidence in the MiFID II consultation that product  governance 
rules  for  certain  instruments,  which  are  often  referred  to  as  “plain  vanilla”  issuances  have 
prevented  an  optimal  allocation  of  capital  by  means  of  vibrant  secondary  markets. 
Stakeholders have also put forward the opinion that removing product governance obligations 
from,  e.g.,  “plain  vanilla”  shares  or  corporate  bonds  with  “make-whole”  clauses  would  not 
increase the likelihood of mis-selling. Their argument is that for simple products such as plain 
vanilla  shares  or  corporate  bonds,  the  main  protection  against  mis-selling  are  the  suitability 
assessment, for advised sales and discretionary portfolios, and the appropriateness assessment 
in  others  cases.  Product  governance  requirements  for  these  asset  classes  have,  on  the  other 
hand, the consequence of making these plain vanilla corporate issuances unavailable to retail 
investors.  This  is  because  compliance  with  the  product  governance  rules  tend  to  tip  the 
balance of costs and benefits from the issuers’ point of view in favour of selling even plain 
vanilla issuances to professionals only. 

The debate on an immediate reform of product governance rules has a specific focus on debt 
issuances  that  contain  a  “make  whole”  covenant  in  their  bond  indentures.  Currently,  debt 
issuances  that  contain  a  “make-whole”  covenant  are  considered  as  complex  products  that 
require a detailed assessment of potential target markets before being sold to retail investors.  
“Make whole” clauses are covenants that protect the investors (“make them whole”) in case a 
bond  is  called  by  the  issuer  ahead  of  its  natural  expiry.  Normally  a  make  whole  clause 
(MWC) provides that if the bond is paid early, the issuer must pay to the investor not only the 
capital amount but also a premium. The premium will be calculated as the net present value of 
future coupon payments that will not be paid as a result of the recall, with the premium being 
calculated  using  a  pre-determined  reference  rate  (mostly  LIBOR).  At  the  time  the  bond  is 
issued,  the  investor  knows  the  mechanism  (formula)  used  to  calculate  the  premium,  and,  in 
most cases, also which Treasury bond be used to determine the reference rate. Therefore, as 
long as the Treasury bond that acts as a reference is known, the debt investor can calculate the 
anticipated value of the MWC at any point in time. In any event, if the bond is recalled, the 
issuer will confirm the value being paid to investors.  

Options 

Option  1  would  consider  lifting  the  product  governance  requirements  for  simple  corporate 
bonds  with  make-whole  clauses  (which  are  investor-protective  features).    The  aim  of  this 
exemption, which would need to be complemented by a clear rule that a make-whole clause 
does  not  of  itself  make  these  instruments  a  PRIIP,  is  to  make  more  plain  vanilla  corporate 
bonds  available  to  retail  investors.  With  Option  1,  issuers  who  wish  to  raise  capital  in  the 
bond markets would be faced with the choice of having: 

  a  retail-compliant  prospectus  (from  the  Prospectus  Regulation  point  of  view)  and 
being able to  issue in  whatever size they think appropriate (including the very small 
EUR 1 000 and EUR 5 000 cuts that are popular in certain Member States); or  

  opting for a denomination > EUR 100 000 and a shorter prospectus.  

23 

 
The key feature in Option 1, from the point of view of the issuer who needs access to funds,  
is that accessing the retail market would be less costly than before (because there would be no 
product governance requirements). On the other hand, the option of choosing the institutional 
market only would remain in place, as more sophisticated retail investors ready to invest EUR 
100  000  could  still  be  addressed  with  the  shorter  prospectus  applicable  to  that  investor 
category.  

Option  2  would  go  further  and  remove  product  governance  requirements  for  several 
simple/vanilla shares or corporate bonds. A broader exemption from the product governance 
requirements could help issuers to raise capital in both the debt and equity markets.  On the 
other hand, suitability and appropriateness testing would continue to apply when these simple 
equity  and  corporate  bonds  are  sold  to  retail  investors,  so  advisers  and  portfolio  managers 
would still need to check whether the products fit the objectives and risk profiles of the clients 
to whom they are recommended. Appropriateness would still apply as it does today, with the 
addition that once these products are clearly identified as non-complex it would be open for 
them to be accessed by clients directly in certain circumstances.  

Initial  consultation  by  the  Commission’s  services  show  that  there  is  some  hesitance  among 
regulators  to  dis-apply  product  governance  rules  for  a  widely  defined  asset  class  of  “non-
complex” products. An easy agreement on how to populate this asset class is not achievable at 
short notice.  While there is  some urgency to  address  the issue with  respect  to  plain vanilla 
bonds  (especially  instruments  with  a  “make  whole”  clause),  there  is  less  agreement  on 
whether  plain  vanilla  equity  (shares)  traded  on  a  regulated  market,  initial  public  offerings 
(IPOs)  and  services  provided  by  market  makers  and  on  an  execution-only  basis  should  be 
included in the “non-complex” category. 

Policy choice 

On  balance,  a  targeted  exemption  for  bonds  with  “make  whole”  clauses  (not  applicable  to 
structured bonds or other complex products), such a proposed in Option  1, would achieve a 
number of the objectives the Commission’s services aim to target with the recovery proposal: 
it would allow issuers to tap a broader base of investors, it would  allow sophisticated retail 
investors’  to  access  a  larger  choice  of  instruments  and  it  would  retain  protection  for  all 
categories of investors, however categorised, when accessing complex products.  

In order to deploy immediate effects, Option 1 preferred as it would also allow retail investors 
to invest in the European corporate bond markets. It is an essential part of a Capital Markets 
Recovery  Package  that  retail  clients  can  obtain  exposure  to  fixed  income  products,  as  such 
products are essential for diversification and risk-reduction reasons.  

Option 1 would have an immediate effect in allowing that retail investors invest a proportion 
of their investments in plain vanilla corporate bonds. This is a better alternative than to limit 
access to fixed income investments to vehicles such as complex structured bonds or units in 

24 

 
collective  investment  schemes,  with  the  additional  costs  that  those  indirect  investment 
vehicles inevitably entail.  

The preferred option which is  option 1 is therefore to  consider a debt  issuance containing a 
MWC as a non-complex product.  The clause is designed to ensure that investors receive back 
at least the market value of the bond at the time of early redemption and in no case less than 
par. This gives investor an opportunity to reinvest in an equal of (usually) better credit at the 
same yield. For this reason, an MWC is entirely in the investor interest and should not trigger 
the product governance requirements.  

4.1.8  Research on small and mid-cap issuers and fixed income instruments 

Problems to be addressed  

In  the  immediate  aftermath  of  the  crisis  resulting  from  the  Covid-19  pandemic,  small  and 
mid-cap issuers will need to be supported by a strong ecosystem. This will be important for 
the economic recovery and it is also an important objective of the Capital Markets Union. One 
element of this ecosystem is investment research that helps issuers to connect with investors. 
Investment  research  ensures  increased  visibility  of  issuers  and,  in  turn,  a  sufficient  level  of 
investment  and  liquidity.  Issuers,  and  in  particular  small  and  mid-cap  companies,  have 
experienced  a  decline  in  research  coverage  for  several  years.  Fixed  income  research 
documents have also showed a steady declining trend. After the entry into application of the 
new MiFID II provisions, and in particular the “research unbundling” rule, the overall trend of 
decline continues largely along the same trajectory.  

The  market  for  investment  research  has  evolved  since  the  MiFID  II  rules  on  research, 
including  the  unbundling  rule,  became  applicable  on  1  January  2018.  The  profitability  of 
research departments has declined and the higher relative cost of covering small and midcap 
issuers relative to the smaller target market meant it was often difficult for brokers to justify 
maintaining  their  small  and  midcap  coverage.  The  additional  requirements  imposed  by  the 
unbundling  rule  has  convinced  many  asset  managers  that,  rather  than  operating  a  separate 
research payment account, to move toward paying for investment research directly out of their 
own profit and loss account. But direct payment from the Payments and Loss account (P&L) 
have, for obvious reasons, accelerated the existing trend to reduce research expenditure across 
all asset classes.  

Research coverage of a company decreased with its market capitalisation. Many stakeholders 
believe  that  increasing  small  and  midcap  research  would  lead  to  greater  liquidity  in  those 
issuances - decreased availability of information about an issuer leads to lower liquidity.  

This is not only true for small and midcap research, there have also been frequent stakeholder 
calls for reducing the scope of the unbundling rules to exclude non-equities. The unbundling 
requirement  for  fixed  income  research  was  controversial  from  the  outset  of  the  unbundling 
rules. The main argument was that, contrary to equity markets, the fixed income markets are 

25 

 
principal  markets,  there  are  no  brokerage  commission  that  could  or  need  to  be  unbundled 
from the cost of research.  In addition, bid-offer spreads in fixed income depends on factors 
other than the provision of research to a counterpart (e.g. cost of capital, cost of hedging, size 
of the security and size of the market). Moreover, as fixed income research costs were not and 
are not embedded in spreads, introducing the unbundling rules added to compliance costs, but 
also lead to additional fees required to obtain research. The Commission’s services therefore 
expect  an  exemption  from  the  unbundling  rules  for  fixed  income  research  to  result  in  an 
increase  of  business  continuity  resources  and  an  increase  the  availability  of  information  on 
fixed income issuances.  

The exceptional circumstances resulting from the COVID-19 pandemic have instilled a sense 
of  urgency  into  the  debate  on  research  on  small  and  mid-cap  issuers  and  fixed  income 
instruments. Increasing the visibility of European companies to investors will promote more 
investment for the economic recovery.  

There  is  also  evidence  that  independent  research  providers  are  expected  to  be  the  biggest 
losers  from  the  unbundling  of  research  from  brokerage  commissions.  The  majority  of 
respondents  to  a  recent  survey,  including  the  independent  research  providers  themselves, 
predicted  that  they  will  be  the  biggest  eventual  losers  from  a  strict  unbundling  rule.16  The 
overall reduction in buy-side research budgets that are an inevitable consequence of a research 
unbundling  rule,  the  cost  of  managing  all  the  reporting  and  accounting  requirements 
associated with the new unbundling rules, as well as the ensuing difficulty to invest time and 
capacity in producing research that “stands out”, make it difficult for independent research to 
be profitable.  

According  to  an  OXERA  study17  that  focuses  on  small  and  midcap  research  provision,  the 
unbundling  rules  –  rightly  focused  on  concerns  about  inducements  (i.e.  preventing  brokers 
from competing on the basis of ‘free research’) - have not addressed another market failure: 
that relating to the positive externality that lies in the production of research. The new rules on 
unbundling  further  accelerate  the  trend  of  reducing  the  allocation  of  buy  side  resources  to 
procuring  research  which  results  in  a  shrinking  pool  of  analysts.  A  lower  pool  of  analysts 
wold result in less analysts dedicated to the production of high-quality research on small and 
midcap  companies.  While  the  unbundling  rules  may  have  been  successful  in  addressing  the 
“over-production” of relatively ‘low-quality’ large cap research, an overlooked consequence 
of the streamlining of research budgets is an under-provision of small and midcap research.    

Options 

Option  1  would  allow  for  an  exemption  of  the  current  research  unbundling  requirement  if 
brokerage  and  research  provision  pertain  to  a  small  and  midcap  issuers.  The  application  of 

16   https://www.fixglobal.com/home/independent-research-providers-will-lose-most-under-mifid/ 
17   https://www.oxera.com/wp-content/uploads/2019/11/Unbundling-what’s-the-impact-on-equity-research.pdf  

26 

 
                                                           
such  an  exemption  to  the  MiFID  unbundling  rules  should,  however,  be  optional,  so  that 
investment  firms,  even  when  executing  trades  in  small  and  midcap  issuers,  would  not  be 
obliged to make expensive IT changes to their order and accounting systems. The exemption 
would  therefore  mostly  benefit  investment  firms  that  specialise  in  small  and  midcap 
investments,  but  would  also  provide  an  “opt-in”  for  larger  investment  firms  that  run  a 
dedicated small and midcap trading desk.  

Option 1 would also  apply to the provision of fixed income research, including rates, credit 
and loan research.  Fixed income trading was never commission-based in the first place and 
therefore  does  not  pose  the  conflicts  of  interests  prevalent  in  broker  commissions  that 
comprise a mixture between brokerage and research.  

Option 2 would aim to improve the availability of small and midcap research by establishing a 
clear set of rules on how to address the conflicts of interest that are commonly perceived to 
make  both  issuer  sponsored  and  exchange  sponsored  research  less  reliable  and  useful  for 
investors.  Beyond  the  existing  requirements  aiming  to  address  all  potential  conflicts  of 
interest, such as disclosure of sponsorship, clear rules on how conflicts inherent in sponsored 
research  are  managed,  as  well  as  clear  definitions  on  the  borderline  between  investment 
research  and  marketing  communications  would  help  to  improve  credibility  of  sponsored 
forms of investment research and avoid the perception that sponsored research is more in the 
realm of advertisement or marketing material.  

Policy choice 

The  preferred  short-term  option  is  Option  1.  One  would  consider  an  alleviation  from  the 
unbundling regime in order to create a positive signal on research in the immediate aftermath 
of the strained economic situation that results from the Covid-19 pandemic. The Commission 
therefore  expects  that  an  exemption  from  the  unbundling  rule  for  small  and  mid-cap 
companies  should  result  in  an  increase  of  research  coverage  for  those  companies.  
Implementation of Option 2 would be more complex and would require further analysis with 
research  providers  and  national  competent  authorities  to  ensure  that  the  conflict  of  interest 
rules are conceived in an appropriate manner.  

In  line  with  Option  1,  targeted  amendments  to  Article  13  of  MiFID  II  Delegated  Directive 
(EU) 2017/593 would create a narrowly defined exception authorising the joint payment for 
execution services and research on small-cap issuers and research on fixed income. Small and 
mid-cap  issuers  would  be  defined  as  issuers  that  did  not  exceed  a  market  capitalization 
threshold of EUR 1 billion over a 12 month period.  

In  the  case  of  joint  payments  for  the  execution  of  trades  in  the  above  described  market 
segment,  the  current  requirement  to  set  up  a  research  payment  account  (RPA)  or  to  issue 
separate invoices for investment research would not apply. As a counter-balance, there would, 
however,  joint  payments  would  only  be  allowed  in  case  of  an  agreement  between  the 
investment firm and the research provider on what part of the joint payments are attributable 

27 

 
to the provision of investment research. In addition, the investment firm would be required to 
inform its clients of the joint payment.  

ESMA could continue to collect the necessary data for monitoring the effects of the decline of 
research coverage. Additionally, the Commission services will continue to carefully monitor 
the  latest  developments  and  to  engage  in  the  relevant  fora,  such  as  the  European  Securities 
Committee (ESC).  

4.2  Measures for reviving nascent energy derivative markets  

4.2.1  Position limits and hedging exemption 

The  COVID-19  pandemic  caused  an  energy  demand-shock  followed  by  unusual  changes  in 
prices and volumes. The ability to cover against the risk of price fluctuations is crucial for the 
real  economy  in  order  to  be  able  to  produce  effectively  and  alleviate  their  potential  losses, 
thereby avoiding costs that would otherwise be eventually borne by the end consumers. The 
necessity  to  execute  as  many  trades  as  needed  has  been  particularly  critical  to  small 
businesses  who  do  not  have  large  balance  sheets  to  wear  through  the  crisis  or  the  bilateral 
relations to rapidly adapt to supply and demand changes. 

The  COVID-19  pandemic  and  its  economic  consequences  have  exacerbated  the  issues 
regarding  the  position  limit  regime  and  its  inflexibility.  Various  position  limits  in  energy 
derivatives markets  are  proven to  be out  of date, whilst  adjusting them to  accommodate  for 
rapidly  changing market  conditions  requires the  completion of lengthy change processes.  In 
the  upcoming  recovery  there  is  a  strong  case  for  a  different  approach,  to  promote  trading, 
position  taking  and  turnover  in  the  market  which  would  underpin  efficient  and  transparent 
price  formation  and  contribute  to  market  confidence.  Many  energy  derivatives  traders  will 
reassess their trading strategy in light of the crisis. Energy commodity exchanges have already 
seen  increased  trading  activity  in  otherwise  illiquid  markets.  However,  as  a  direct 
consequence  of  the  position  limit  regime,  some  market  participants  were  prevented  from 
adequately entering the security and transparency of on-venue trading. 

Problems to be addressed 

Position limits 
MiFID II requires the application of position limits to every individual commodity derivative 
contract.  Position  limits  indicate  the  number  of  derivatives  (expressed  in  a  standardised 
number of units or lots) a trader is allowed to own in a specific derivative. There is a broad 
consensus among stakeholders that position limits for energy derivatives have very limited to 
no  (positive)  impact  on  market  abuse,  orderly  pricing  and  settlement  conditions.  However, 
there  is  a  common  understanding  that  the  position  limit  regime  has  negatively  affected  the 
liquidity in new energy derivative markets. The impact is to such an extent that several new 
initiatives have not been able to become real alternatives to Over-The-Counter (OTC) trading. 
In  energy  derivatives  with  a  low  total  number  of  outstanding  derivative  contracts  that  are 
available for trading (i.e. open interest), there is typically only a small number of rather large 

28 

 
counterparties  trading  these  derivatives.  Participants  who  seek  liquidity  in  the  derivative 
contract  join  typically  only  at  a  later  stage.  Due  to  position  limits,  those  initial  large 
counterparties are often forced to reduce their positions, reducing the overall open interest and 
this ultimately affects the growth of the derivative18.   

For new energy derivatives, participants  cannot  trade that amount of lots without exceeding 
the position limit. At the same time, competent authorities cannot raise the limit until the open 
interest has sufficiently increased. The COVID-19 pandemic and its economic consequences 
have exacerbated the impact of the inflexibility of the position limit regime. Current market 
conditions  require  near  real-time  adjustments  to  position  limits.  Under  the  existing  rules, 
following the issuance of an adjustment request, an energy exchange needs to engage with its 
competent authority. It is not uncommon such a request takes about three to nine months to 
process. 

Hedging exemption 
The COVID-19 pandemic negatively impacts the ability of non-financial firms to make use of 
the  hedging  exemption  under  the  position  limit  regime19.  Competent  authorities  generally 
only  process  applications  for  hedging  exemptions  when  a  market  participant  is  able  to 
demonstrate  a  clear  short-term  need  for  relief  under  the  position  limit  regime.  Under  the 
current  market  circumstances  market  participants  can  develop  an  urgent  need  to  obtain 
hedging exemptions.  However, in  crisis  conditions they may struggle to  prepare and submit 
an  application  for  a  hedging  exemption  before  a  position  limit  unduly  restricts  their  trading 
activity.  

In crisis situations, it is even more important to make sure that all market participants whose 
positions  are  objectively  measurable  as  reducing  risk  are  able  to  do  so.  The  most  extreme 
price  fluctuations  have  been  witnessed  in  even  the  most  liquid  energy  derivatives.  When 
important  market  players are not  able to  trade because of a lack of hedging exemption,  this 
has a direct impact on the market participants from real economy who find less liquid energy 
markets at the moment they most need them. 

The  lack  of  a  hedging  exemption  for  financial  counterparties  providing  liquidity  to  non-
financial  counterparties  that  seek  to  hedge  their  positions,  proves  especially  challenging  in 
markets with low open interest (often characterised by one player or a very limited number of 

18   An example is the ‘Italian PSV Gas market’ where the growth in open interest started in the last month of 
Q4 2017 from 5 000 to almost 10 000 lots. In the first period of 2018, the introduction of MiFID II position 
limits regime reversed the growth trend as large counterparties  were about to hit the de  minimis position 
limit  of  2  500  lots.  Another  example  is  the  ‘ICE  Futures  Europe  TD20  West  Africa  to  UK-Continent 
(Baltic) Future’ where hedging is only effective when trading a specific amount of lots. To hedge a fleet of 
ten tankers on a year forward basis - the trade size will be 15 600 lots to hedge freight rates exposure for a 
single calendar year. 

19   Under  MiFID  II,  positions  that  are  held  by,  or  on  behalf  of,  non-financial  entities  which  are  objectively 
measurable  as  reducing  risk  (hedge),  must  not  be  counted  towards  the  position  limits.  This  hedging 
exemption  is  subject  to  prior  approval  by  the  relevant  competent  authorities.  Investors  must  apply  for  it 
before entering into a position. 

29 

 
                                                           
players  acting  as  market  maker  or  liquidity  provider).  Stakeholders  note  that  some  market 
participants  have  ceased  to  provide  liquidity  in  energy  derivatives  for  fear  of  breaching  the 
position limit. Prior to MiFID  II,  commercial  groups decided to  register their market-facing 
entity as an investment firm, for the risk reducing transactions of the commercial entities of 
the  group.  Because  they  are  now  financial  entities,  these  entities  within  a  predominantly 
commercial group are not eligible for the hedging exemption. 

Options 

The policy options set out for positon limits and the hedging exemption are interlinked. The 
table below sets out two policy options to deal with nascent commodity derivatives markets in 
the areas of oil, coal, natural gas and power (energy derivatives). Agriculture derivatives, in 
particular those that have food for human consumption as underlying, would not be touched 
and remain under the position limit regimes.  

Position  limits  should  not  prevent  the  real  economy  from  entering  into  risk  reducing 
transactions for energy derivatives. Therefore, reducing the scope of the position limit regime 
to only the most developed energy derivatives leaves less need for hedging exemptions.  

Table – Interaction between policy options for position limit regime and hedging exemption 

Position limit regime 

Hedging exemption 

Option 1  Dis-applying  position  limits  for  a 
certain  period  (‘Black  out  period’) 
only for new energy derivatives.  

Sub-option 1.1: 
‘Black out period’ 
of 12 months 

Sub-option 1.2: 
out 
‘Black 
period’  of  24 
months 

Option 2  Limit  the  scope  of  position  limits  to 
significant  or  critical  derivatives. 
Significant  or  critical  derivatives  are 
those  derivatives  that  have  an  open 
interests of at least 300 000 lots. 

Broad hedging exemption 

Extend the hedging exemption to all 
financial institutions (FI), in 
addition to non-financial 
counterparties (NFC) that already 
have an exemption. 

Mandatory liquidity provision 

exemption both for FI and NFC 

Targeted hedging exemption 

Extend the hedging exemption only for 
FI belonging to predominantly 
commercial group  

Mandatory liquidity provision 

exemption both for FI and NFC 

Under  option  1,  the  Commission  mandates  ESMA  to  develop  specific  measures  concerning 
new energy derivatives in the above mentioned asset classes. This entails a ‘black out period’ 
where no position limits apply so long as the derivative is ‘new’. The ‘black out period’, after 
which  the  position  limits  should  start  applying,  could  be  12  months  (sub-option  1.1)  or  24 
months  (sub-option  1.2).  A  large  majority  of  respondents  to  the  MiFID  public  consultation 
noted that although such a black out period would mitigate the problems for nascent markets, 
the overall competitiveness of the EU energy derivatives markets would not be achieved.  

30 

 
 
 
 
 
 
Option 1 would introduce a broad hedging exemption that extends the hedging exemption to 
all  financial  institutions,  in  addition  to  non-financial  institutions  that  already  have  an 
exemption.  An overwhelming majority in the industry (both market operators and commodity 
traders)  welcome  this  option.  However,  ESMA  notes  that  introducing  a  broad  hedging 
exemption  would  not  be  consistent  with  the  objective  of  limiting  excessive  speculation. 
Respondents to the MiFID public consultation stated that financial counterparties play a vital 
role in providing smaller commercial players with access to commodity derivatives markets. 
They  argue  that  financial  counterparties  themselves  need  to  offset  their  risk  exposure  to 
commercial  players  through  hedging  and  that  not  permitting  them  to  do  so  likely  reduces 
liquidity in cleared, exchange traded derivatives by financial counterparts.  

Option  1  also  covers  positions  resulting  from  transactions  undertaken  to  fulfil  mandatory 
liquidity  provisions.  Non-financial  counterparties  could,  subject  to  certain  conditions,  act  as 
market  makers  in  commodity  derivatives  without  having  to  be  authorised  as  investment 
firms20.  This  exemption  would  mirror  the  exclusion  of  transactions  entered  to  fulfil 
obligations  to  provide  liquidity  on  a  trading  venue  from  the  ancillary  activity  test.  The 
procedure  to  apply  for  the  exemption  would  be  clarified  in  a  RTS.  A  vast  majority  of  the 
respondents  to  the  MiFID  public  consultation  supported  this  option.  As  the  current  position 
limit  regime  fails  to  recognise  the  unique  characteristics  of  those  instruments  securitised 
derivatives should be deleted from the position limit regime. 

Option  2  limits  position  limits  to  commodity  derivatives  traded  on  trading  venues  and  in 
economically  equivalent  OTC  (EEOTC)  derivatives  designated  as  significant  or  critical  and 
derivatives  with  agricultural  commodities,  in  particular  food  for  human  consumption,  as 
underlying. The criteria  to  be used to  define those significant  and  critical  derivatives would 
include the open interest, the number of active market participants, the size of open interest 
and  underlying  commodity.  When  it  comes  to  the  size  of  open  interest,  respondents  to  the 
MiFID public consultation stated that a 300 000 lot threshold would be a suitable threshold in 
order  to  define  a  critical  contact.  This  threshold  is  also  mentioned  in  the  ESMA  report  on 
position limits. Respondents to the MiFID public consultation stated that the threshold would 
lead to around 20 significant or critical derivatives. This approach would produce an outcome 
broadly comparable with the US regime for position limits.  

The “non-critical” energy derivatives would remain subject to the position reporting regime, 
to  the  pre-existing  position  monitoring,  to  the  trading  venue's  position  limits,  position 
management measures by exchanges and oversight of the exchanges’ market supervision and 
market surveillance. Thus removing position limits for such derivatives would not pose a risk 
to the transparency and functioning of the respective markets. On the contrary, attracting more 
volume  to  regulated  venues  instead  of  OTC  contributes  to  a  more  transparent  trading 
environment.  Moreover,  position  management  controls  are  an  important  tool  to  ensure  the 

20   Article 2(1)(j) of MiFID II 

31 

 
                                                           
integrity  and  functioning  of  energy  derivatives  markets.  ESMA  notes  that  significant 
dissimilarities  exist  in  the  way  positions  are  managed  by  trading  venues.  Therefore,  ESMA 
will  be  mandated  to  reinforce  position  management  controls  where  necessary.  Finally,  for 
competing venues trading commodity derivatives based on the same underlying and sharing 
the  same  characteristics,  the  current  definition  of  “same  contract”  is  detrimental  to  the  less 
liquid market. To ensure the level playing field, the concept of “Same contract” is deleted and 
replaced with a more cooperative approach between competent authorities (CAs).  

Option 2 is combined with a targeted hedging exemption. ESMA considered that there could 
be  legitimate  cases  where  financial  counterparties  could  benefit  from  a  hedging  exemption. 
ESMA  sought  views  on  the  possible  introduction  of  a  hedging  exemption  for  a  financial 
counterparty  acting  within  a  predominantly  commercial  group,  where  such  positions  are 
objectively  measurable  as  reducing  risks  directly  related  to  the  commercial  activities  of  the 
non-financial entities of the group. The overwhelming majority of respondents to the MiFID 
consultation support this approach. This hedging exemption would be available where, within 
a predominantly commercial group, a person has been registered as an investment firm on a 
voluntary basis and acts as a market facing entity of the group. The exemption would apply to 
the positions held  by that  financial counterparty that are objectively measurable as reducing 
risks directly related to the commercial activities of the non-financial entities of the group.  

Just  like  Option  1,  Option  2  also  covers  the  same  positions  resulting  from  transactions 
undertaken to fulfil mandatory liquidity provisions and excludes securitised derivatives.  

Policy choice 

The  preferred  option  is  Option  2.  Limiting  position  limits  to  the  significant  and  critical 
derivatives allows for more Euro denominated trading while safeguarding the energy markets 
from  excessive  speculation.  Moreover,  the  targeted  hedging  exemption  for  financial 
counterparties  that  are  part  of  a  predominantly  commercial  group,  and  obligatory  liquidity 
provision ensures that all relevant market participants are able to enter into positions that are 
objectively  measurable  as  reducing  risk.  This  allows  the  energy  markets  to  continue  their 
important  role  to  allow  the  real  economy  to  cover  risk  of  price  fluctuations.  This  option 
entails changing Article 57 of MiFID whereby the scope of position limits would be amended 
to  only  agricultural  derivatives  and  significant  or  critical  derivatives.  The  preferred  option 
would also introduce in the last paragraph of Article 57(1) of MiFID a hedging exemption for: 
(i) financial  counterparties acting as the market  facing entity of  a commercial  group  for the 
positions  held  to  reduce  the  risks  of  the  commercial  entities  of  the  group,  (ii)  financial  and 
non-financial counterparties for positions which are objectively measurable as resulting from 
transactions  entered  into  to  fulfil  obligations  to  provide  liquidity  on  a  trading  venue,  in 
accordance  with  letter  (c)  of  the  fourth  subparagraph  of  Article  2(4)  of  MiFID,  and  (iii) 
securitised derivatives.  

32 

 
4.2.2  Ancillary activity test 

Market participants who trade in energy derivatives on a professional basis are exempt from a 
MiFID authorisation under certain conditions. This is the case when market participants deal 
on  own  account  or  provide  investment  services  to  the  customers  or  suppliers  of  their  main 
business.  This  exemption  is  only  available  for  each  of  those  cases  individually  and  on  an 
aggregate basis where this is an ancillary activity, when considered on a group basis. Market 
participants  have  to  notify  annually  their  competent  authority  that  they  make  use  of  this 
exemption and provide necessary elements to satisfy the quantitative tests. These quantitative 
tests  are  particularly  complex  and  during  the  crisis  present  a  significant  burden  for  market 
participants working in business continuity mode. Moreover, any reduction of administrative 
burden would be most welcome to help facilitate the recovery process. 

Problem to be addressed 

The new EU commodity derivatives landscape will  have a dramatic impact  on the ancillary 
activity test and more specifically on the market size test. This entails more entities potentially 
being considered as financial counterparties and no longer eligible to the hedging exemption. 
Since the application of MiFID II, no commodity firm has failed the ancillary activity test21. 
This makes the EU regime so far comparable to the US, Singapore and Switzerland. However, 
the  necessary  elements  for  the  quantitative  tests  in  the  EU,  compared  to  other  jurisdictions, 
are  associated  with  a  considerably  higher  organisational,  administrative and  thus  financially 
burdensome effort while leading to the same result. Whereas Singapore and Switzerland both 
apply  only  a  qualitative  test,  the  US  uses  a  combination  of  a  qualitative  and  simpler 
quantitative test. 

Options 

Option 1 keeps a quantitative element in the test but simplifies the current quantitative test to 
determine whether a non-financial entity would be obliged to obtain a MiFID license for its 
own account trading activity. The quantitative elements of the current test would be replaced 
by a single threshold that  is  similar to the quantitative threshold of USD 8 billion for Swap 
Dealers under the US rules. 

21   The  Delegated  Regulation  2017/592  ('RTS  20')  sets  out  the  method  that  allows  non-financial  entities  to 
determine  whether  their  trading  activity  is  ancillary  to  their  main  business.  This  method  consists  of  two 
tests.  The  first  test  (market  share  test)  compares  the  size  of  an  entity's  speculative  trading  activity  to  the 
total  trading  activity  in  the  Union  on  an  asset  class  basis,  to  determine  that  entity's  market  share.  The 
second test (ancillary activity test on group basis) compares the size of the speculative trading activity, with 
all asset classes included, to the total trading activity in financial instruments by the entity at group level. 
There is an alternative form of the second test, which consists of comparing the estimated capital used for 
the speculative trading activity to the actual amount of capital used at group level for the main business. If 
one  of  the  thresholds  set  by  RTS  20  has  been  exceeded,  the  entity  must  apply  for  authorization  as  an 
investment firm. 

33 

 
                                                           
For  Option  1,  the  ancillary  activity  test  will  need  to  be  further  aligned  with  the  US  rules 
whereby:  (i)  The  threshold  will  be  determined  on  the  basis  of  financially  settled  OTC 
Derivatives;  (ii)  The  threshold  does  not  apply  to  (a)  exchange  traded  products  and  (b) 
transactions  which  are  physically  settled  or  intended  to  be  physically  settled;  (iii)  In 
consequence,  bilateral,  physically  settled  commodity  forwards  are  not  included  in  the 
calculation as long as they do not fall under the MiFID II definition of commodity derivatives; 
(iv) The current scope of privileged transactions in Art. 2 (4) of MiFID II would remain as is; 
and (v) The threshold would be calculated on the basis of trading in the EU. This means that 
transactions  concluded on exchanges in  third countries are not  counted as OTC transactions 
against the proposed threshold. 

Stakeholders have indicated that the new quantitative test, although simpler than the current 
quantitative test, would still entail considerable cost and changes to their systems. Moreover, 
many alterations are required in order to make sure that entities can continue to benefit from 
the ancillary activity exemption. Regulators have noted that focusing on the OTC space brings 
specific  challenges  in  terms  of  measurement  that  could  reduce  the  benefit  of  the  simplified 
quantitative test. 

Option  2  entails  a  pure  qualitative  ancillary  activity  test.  This  would  maintain  the  current 
scope  of  the  ancillary  activity  exemption  in  terms  of  covered  firms  and  activities,  which  is 
welcomed  by  all  stakeholders.  Moreover,  the  alleviation  in  terms  of  administrative  burden 
will  be  highest  as  no  figures  have  to  be  collected,  processed,  transferred  by  the  market 
participants and then verified by the respective competent authorities. Stakeholders note that 
Option 2 delivers the level playing field that is deemed essential for European companies to 
avoid  administrative burden and focus upon recovery of the COVID-19 pandemic.  It  would 
maintain  their  competitiveness  vis-a-vis  the  US,  Singapore  and  Switzerland.  It  should  be 
noted that relying on qualitative measures does not entail that there would be no supervision 
of the derivatives traders. Competent authorities remain vigilant using position reporting. As 
soon as questions are raised with regard to the activity of a derivatives trader, the competent 
authority  will  investigate  and  ensure  whether  the  derivatives  trader  does  not  breach  the 
ancillary activity test. 

Policy choice 

The preferred option is therefore option 2 to delete all quantitative elements and to retain the 
qualitative elements from the ancillary activity test. This would bring most benefit in terms of 
lower administrative burden for non-financial counterparties and competent authorities and it 
would avoid misalignment with global competitors. 

34 

 
 
Chapter 3 – Changes to the 
Securitisation framework 
(Securitisation Regulation and CRR) 

5  PROBLEMS THAT THE SECURITISATION PROPOSAL AIMS TO ADDRESS 

Credit institutions today are well capitalized and much more resilient than they were in 2008. 
Nevertheless, ongoing uncertainty related to the extent of economic damage and the  pace of 
the  subsequent  recovery  of  economic  activity  has  a  negative  impact  on  the  banking  sector. 
Therefore,  it  will  remain  key  for  banks  to  be  able  to  continue  lending  to  corporates  in  the 
coming months once the immediate shock of the COVID-19 pandemic will have passed. To 
that  extent,  it  is  important  to  prepare  today  the  tools  to  allow  banks  to  maintain  and  even 
enhance their capacity to lend to the real economy, in particular to SMEs, and securitisation 
can  be  a  key  enabler  in  this  respect.  By  transforming  loans  into  tradable  securities, 
securitisation  could  free  up  bank  capital  for  further  lending  and  allow  a  broader  range  of 
investors to fund the economic recovery. 

A new securitisation framework is in place since January 2019, promoting a safe, deep, liquid 
and  robust  market  for  securitisation,  which  is  able  to  attract  a  broader  and  more  stable 
investor base to  help allocate  finance to  where it  is  most needed in  the  economy. This  new 
framework  is  an  important  building  block  of  the  Capital  Markets  Union.  The  revamped 
framework  includes  a  specific  regime  for  simple,  transparent  and  standardised  (STS) 
securitisation, which aim to provide to investors a product, whose risk is easier to assess, and 
therefore  is  easier  to  invest  in.  Robust  safeguards  are  built  in,  in  order  to  revive  this  very 
useful instrument on a safe and sustainable basis, while keeping out of its scope structures that 
suffered significant losses in the global financial crisis. The EU framework for securitisation 
is significantly more robust than any other world-wide and it includes safeguards limiting the 
exposure of EU investors to complex risks imported from foreign markets. 

Notwithstanding  these  improvements,  the  legal  regime  for  securitisation  can  be  further 
enhanced in two specific respects to encourage a broader use of securitisation, thereby better 
supporting banks in their effort to increase lending to households and businesses in order to 
both  face  the  dire  financial  situation  created  by  the  falling  economic  activity  during  the 
lockdown  period,  and  to  foster  the  economic  recovery.  The  proposed  changes  to  the 
prudential  treatment  of  securitisations  of  non-performing  exposures  (NPEs)  will  also  make 
NPE  securitisations  a  more  economically  viable  avenue  for  banks  to  manage  the  foreseen 
increase in non-performing loans due to the economic impact of the COVID-19 pandemic.  

5.1  On-balance-sheet synthetic securitisation 

Securitisation  techniques  that  use  guarantees  or  similar  instruments  to  transfer  the  risks  of 
loans that remain on the balance sheet of the bank (a form of synthetic securitisation we refer 
to as on-balance-sheet synthetic securitisation in the following text) are out of the scope of the 

35 

 
STS framework. This is an important risk management tool for bank lending to corporates, in 
particular SMEs. However, its use remains below its potential as investors cannot  rely on a 
sound standard for these securitisations comparable to the one for traditional (true-sale) STS 
securitisations.  Moreover,  without  incentives  for  the  STS  label,  which  result  from  reduced 
capital  requirements  reflecting  the  higher  quality  of  STS  securitisation  structures,  banks 
would be less inclined to use this instrument to free up capital for additional lending. As such, 
both  the  STS  framework  and  the  prudential  framework  should  be  reviewed  together  to 
promote further use of STS synthetic securitisation.  

The unavailability of data has so far prevented a comprehensive review of both frameworks 
for synthetic securitisation. As such, synthetic securitisations are currently treated as true-sale 
non-STS  securitisation,  with  the  consequence  that  they  cannot  benefit  from  the  preferential 
prudential treatment reserved to STS securitisation under the CRR.  

Article  270  of  the  CRR  allows  only  a  differentiated  treatment  for  a  subset  of  synthetic 
transactions fulfilling a set of limitative criteria: 

 

  70% of the securitised exposures must be exposures to SMEs; 
 

the  securitisation  must  meet  the  traditional  STS  criteria  as  applicable  to  a  synthetic 
securitisation; 
the credit risk not retained by the originator has to be transferred through a guarantee, 
or counter guarantee, subject to the following criteria: 
o 

the guarantee/counter-guarantee complies with CRR requirements on credit risk 
mitigation; 
the guarantor/counter-guarantor is either of the following: 

o 

  a central government or central bank of a Member State, a multilateral 
development bank or an international organisation, provided that it can 
be  assigned  a  0%  risk-weight  under  the  standardised  approach  for 
credit risk; 

  an institutional investor, provided the guarantee or counter-guarantee is 

fully collateralised by cash on deposit with the originators. 

These limitations, however, drastically narrow the use of the Article 270 of the CRR and as a 
result most of the synthetic securitisations are treated like true-sale non-STS securitisations.  

The  absence  of  a  preferential  capital  treatment  of  synthetic  securitisation  goes  against  the 
purpose  of  synthetic  securitisation  to  reduce  the  capital  requirement  linked  to  underlying 
assets, and therefore is detrimental to the interest banks can have in using this instrument to 
free additional lending capacities. 

5.2  Securitisation of non-performing exposures 

The  current  framework  is  not  entirely  fit  for  purpose  for  the  securitisation  of  NPEs  and  in 
particular  it  contains  disincentives  for  banks  to  avail  themselves  of  this  possibility  to  free 
themselves from the burden that non-performing exposures entail.  

36 

 
NPE securitisations have particular features that distinguish them from securitisations, which 
are issued on the back of performing assets with stable and predictable cash flows (see table 
below). These differences have consequential implications for the calibration of risk weights 
in the securitisation framework.  

By  definition,  NPE  securitisations  differ  from  typical  securitisations  because  the  securitised 
loans are already defaulted when NPE securitisations are issued. While underlying loans from 
typical  securitisations  always  have  a  chance  of  defaulting  in  the  future,  at  inception  of  the 
securitisation  transaction  the  loans  are  still  performing.  For  this  reason,  in  a  typical 
securitisation  the  main  role  of  the  servicer  is  to  receive  the  contractual  payments  from 
securitised loans and to pass them on to the holders of the securitisation instruments as they 
become due. This can be characterised as “passive” servicing.  

Due to the reliance on cash flows from securitised loans to generate returns, investors in these 
transactions are essentially exposed to credit risk with respect to the underlying exposures. In 
contrast  to  these  typical  cases,  since  in  NPL  securitisations  the  borrowers  have  already 
defaulted  before  their  loans  are  securitised,  these  loans  do  not  generate  cash  flows 
automatically.  Hence,  repayment  to  the  securitisation  investors  require  cash  flows  to  be 
generated  through  the  workout  of  NPEs,  or  “active”  servicing.  This  usually  includes  the 
renegotiation of the defaulted loans with borrower or enforcement of collateral (for example 
by taking possession of the collateral and selling/auctioning it). 

Source: EBA. 

The  current  Basel  and  CRR  frameworks  are  designed  to  account  for  the  most  common 
features  of  typical  (i.e.  non-NPE)  securitisation  transactions,  thus  using  credit  risk  as 
capitalised under the credit risk framework as its main regulatory driver, while correcting for 

37 

 
 
“non-neutrality”  factors  reflecting  the  agency  and  model  risks  that  are  prevalent  in 
securitisations.  When  applied  to  NPEs,  this  framework,  based  on  credit  risk,  yields  capital 
requirements  that  are  considered  to  be  disproportionate  since  the  calibrations  of  the 
securitisation  –  internal  ratings-based  approach  (SEC-IRBA)  and  the  securitisation  – 
standardised  approach  (SEC-SA)  are  generally  not  consistent  with  the  risk  drivers  of  NPE 
securitisations. 

While  repayment  risk  for  investors  in  typical  securitisations  derives  mostly  from  credit  risk 
associated  with  the  underlying  loans,  the  repayment  risk  for  the  bondholders  in  an  NPE 
securitisation mainly arises from two factors:   

• 

• 

the  ability/skill  of  the  servicer  in  working  out  the  loans  to  generate  sufficient 
recoveries to repay the bonds;   
the  correct  pricing  of  the  NPL  assets  at  inception  of  the  transaction  (collateral 
valuation risk).  

With respect to the first factor mentioned above, it should be noted that the servicer’s success 
will depend to a great extent on a sufficiently conducive “servicing environment”, that is, the 
jurisdiction’s  legal  framework  and  its  judicial  and  extra-judicial  infrastructure  and  remedies 
for debt restructuring and foreclosure. 

The valuation  risk results  from  the special purpose entity’s (SPE) purchasing the NPEs  at  a 
non-refundable  discount  on  the  NPEs’  gross  book  value  (GBV),  which  is  their  nominal  or 
outstanding value at the time of inception. This non-refundable purchase price discount (the 
NRPPD) reflects the buyer’s assessment of the loss level in the portfolio and on the likelihood 
that the work-out of the NPEs may generate sufficient recoveries to (at a minimum) cover the 
NPEs net value (their GBV minus the NRPPD). The net value of the NPEs constitutes their 
residual value after losses have been written off and the maximum loss that the investors are 
exposed  to  (assuming  an  extreme  scenario  of  zero  recoveries).  The  larger  the  NRRPD,  the 
smaller  the  amount  of  recoveries  needed  to  cover  the  NPEs  net  value  and,  hence,  the  more 
likely  that  the  NPE  securitisation  will  be  able  to  repay  the  holders  of  the  securitisation 
instruments in full. In other words, the larger the NRPPD, the lower the non-repayment risk 
for investors. 

The  credit  rating  assignment  process,  as  applied  by  the  credit  rating  agencies,  can  be 
reasonably expected to have better regard to the preeminent NPL securitisation risk drivers, as 
described above.  

Conversely,  SEC-IRBA  and  SEC-SA  rely  on  quantitative  credit  risk  information  from  the 
pool  and,  as  a  result,  yield  risk  weights  that  are  considered  too  high  when  compared  to  the 
risk-weights  applicable  under  the  securitisation  –  external  ratings-based  approach  (SEC-
ERBA). The impact is particularly acute on the NPE securitisation senior tranches, which are 
subject  to  proportionately  larger  risk  weights  under  the  SEC-IRBA  and  the  SEC-SA  than 
other tranches. 

38 

 
With the EU economy projected to shrink sharply in 202022, the economic recession, sparked 
by  the  COVID-19  pandemic,  is  expected  to  result  in  a  considerable  amount  of  bank  loans 
becoming non-performing as borrowers struggle to keep up with payments. With a high level 
of delinquent  assets  on their balance sheets and the resulting increased  capital  requirements 
and  operational  challenges,  banks  would  be  effectively  hampered  to  lend  in  sufficient 
quantities  to  underpin the economic recovery. That  would happen at  a time when banks are 
called to expand their credit support to corporates, large and small, as much as possible within 
the current prudential framework.   

6  CONTENT OF THE SECURITISATION PROPOSAL AND COST-BENEFIT ANALYSIS 

6.1  Extension  of  the  STS  regime  in  the  Securitisation  Regulation  to  on-balance-sheet 

synthetic securitisation 

On-balance-sheet  synthetic  securitisation,  which  is  a  way  for  banks  to  share  risks  on  their 
books via guarantees and similar instruments with investors thus creating additional capacity 
for new lending, is currently out of the scope of the STS regime. This type of securitisation is 
easier and quicker to execute than traditional true-sale securitisations and is used in particular 
to  securitise  assets  such  as  large  corporate  loans  or  SME  loans.  On-balance-sheet  synthetic 
securitisations  are  also  a  considerably  easier  way  to  execute  on  portfolios  from  different 
Member  States,  given  that  the  legal  complexities  associated  with  the  true  sale  of  the 
underlying  exposures  subject  to  different  legal  regimes  fall  away.  Furthermore,  this  is  a 
particularly  suitable  instrument  to  share  with  investors  the  junior  and  mezzanine  risks  of  a 
credit portfolio that bear the highest losses and therefore bind most of the capital. In addition, 
this  type  of  securitisation  is  a  particular  efficient  means  to  reduce  risk  and  thus  capital 
requirements when obtaining liquidity from the sale of exposures is not in the focus of bank 
managers.  By  extending  the  STS  standard  to  on-balance-sheet  synthetic  securitisation 
investors  will  find  the  instrument  more  attractive  and  banks  will  thus  get  better  access  to  a 
highly useful tool to create space to further increase lending capacities without any lowering 
of the prudential standards for bank lending. 

Extending  the  STS  quality  label  would  in  particular  help  market  participants  distinguish 
soundly structured on-balance-sheet securitisation from other forms of synthetic securitisation 
that were exposed to important losses during the great financial crisis and are understandably 
perceived  as  complex,  risky,  exposed  to  arbitrage  and  fraud,  and  involve  information 
asymmetries.  

6.1.1  Cost-benefit analysis 

Policy option 1: Maintain the status quo 

After  nearly  disappearing  as  a  practice  in  the  years  following  the  global  financial  crisis, 
balance sheet synthetic securitisation has been slowly coming back to the EU market in recent 

22   https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-

forecasts/summer-2020-economic-forecast-deeper-recession-wider-divergences_en 

39 

 
                                                           
years.  Indirect  benefits  following  the  introduction  of  the  STS  regime  for  traditional 
securitisation,  such  a  reduced  stigma  towards  securitisation  in  general  among  investors  and 
supervisors, could reinforce this general resurgence in the coming years. 

Maintaining the status quo, i.e. not expanding the STS regime to on-balance-sheet synthetic 
securitisations  would  have  the  benefit  that  the  EU  regime  would  stay  within  the  Basel 
framework (apart from the limited deviation already provided for in Article 270 of the CRR). 
It would also allow more time to monitor the market of synthetic securitisations and to decide 
at a later juncture whether the STS regime should also include synthetic securitisations. 

However, maintaining the status quo would have no positive effect whatsoever for achieving 
the goal of maintaining and enhancing the lending capacities of banks in the post-COVID-19 
environment.  

It would also uphold the inconsistent treatment of traditional and on-balance-sheet synthetic 
securitisation.  Indeed,  the  EBA  analysis  did  not  find  any  technical  reasons  to  justify  this 
inconsistency as the synthetic securitisation structure does not inherently lead to higher risk of 
losses compared to the traditional true-sale structure.  

Policy  option  2:  Introduce  a  specific  STS  framework,  limited  to  on-balance-sheet  synthetic 
securitisations with no concurrent changes to the prudential treatment in the CRR: 

The  analysis  conducted  by  the  European  Banking  Authority  (EBA)  in  its  report  on  an  STS 
framework for synthetic securitisation23 shows that extending the specific STS framework to 
on-balance-sheet synthetic securitisations would bring a number of benefits for achieving the 
legislative goal to maintain and enhance the lending capacities of banks. This new framework 
would recognise the relevance of this product for the economy, taking account of its specific 
characteristics  and  the  types  of  assets  that  are  usually  associated  with  it,  namely  corporate 
loans and in particular SME loans. In addition, the market would be incentivised to develop 
within the robust STS framework, which entails greater transparency, easier due diligence and 
monitoring, as well as higher standardisation which could open the market to smaller players. 
The regulatory endorsement that is associated with the STS label would contribute to reducing 
the  stigma  associated  with  the  product,  encouraging  more  banks  to  issue  synthetic 
securitisations,  which  would  also  expand  the  investor  base.  It  would  bring  balance-sheet 
synthetic  securitisations  to  the  same  footing,  in  terms  of  regulatory  treatment,  as  traditional 
transactions  thus  ensuring  consistency  on  the  market  and  allowing  the  two  types  of 
securitisation to develop hand-in-hand.  

Just like with the traditional securitisation, creating a specific STS framework for on-balance-
sheet synthetic securitisation might entail increased risk of moral hazard, such as negligence 
by  less  sophisticated  investors,  due  to  a  possible  perception  that  the  STS  label  inherently 
means  a  low-risk  product  independent  of  differences  between  individual  transactions  or 

23   https://eba.europa.eu/eba-proposes-framework-sts-synthetic-securitisation  

40 

 
                                                           
positions within transactions. Thus, the introduction of a specific STS framework for balance-
sheet  synthetic  securitisation  needs  to  be  diligently  accompanied  by  supervision  to  avoid 
negative consequences. 

The  prudential  treatment  of  the  new  product  will  likely  be  a  material  factor  in  its 
attractiveness to the market. Compliance with the STS criteria will inevitably entail additional 
costs for originator banks, who are usually also investors in the senior tranche. At the same 
time,  investors  in  the  sub-senior  tranches  are  usually  entities  that  do  not  have  capital 
requirements  who  would benefit mainly through  increased investment  opportunities, in  case 
of higher supply, and a more standardised and easier to assess product. Therefore, keeping the 
capital  treatment  of  STS  on-balance-sheet  securitisations  unchanged  will  mean  higher  costs 
for banks that wish to issue such transactions (but no change for those that do not wish to seek 
the  STS  label),  with  no  concurrent  benefit  in  terms  of  capital  treatment.  This  inconsistency 
will likely obstruct the growth of the market and would not contribute to the policy objective. 

Different prudential treatment of on-balance-sheet synthetic securitisation vis-à-vis traditional 
securitisation is not justified by available performance data24. Indeed, the lifetime default rates 
of on-balance-sheet synthetic transactions appear to outperform traditional securitisations for 
all rating grades and asset classes.  

Finally, it should be noted that currently, the international framework for simple, transparent 
and  comparable  securitisation,  developed  by  the  Basel  Committee  on  Banking  Supervision 
(BCBS)  and  the  International  Organization  of  Securities  Commissions  (IOSCO),  excludes 
synthetic securitisation from its scope. Based on the data collected and the technical analysis 
performed by EBA, there is prudential evidence to consider a specific STS framework for on-
balance-sheet synthetic securitisations.. 

Policy option  3:  Introduce  a specific STS  framework, limited to  on-balance-sheet  synthetic 
securitisations, and a limited, differentiated regulatory treatment for qualifying transactions 

Taking  into  account  the  eligibility  criteria  that  the  on-balance-sheet  synthetic  securitisation 
would need to meet in order to qualify for the STS label, the agency risk and modelling risk of 
that securitisation will reduce compared to non-STS on-balance-sheet synthetic securitisation. 
Provided that the underlying asset classes of the securitisation are eligible under Article 243 
of  Regulation  2017/2401,  this  would  justify  a  differential  regulatory  treatment  compared  to 
non-STS on-balancesheet synthetic securitisation. 

Preferential capital treatment, extending the scope of Article 270 of the CRR, can be expected 
to  lead  to  higher  demand  and  issuance  of  on-balance-sheet  synthetic  securitisations,  thus 
increasing banks’ lending  capacity,  freeing up capital,  provided that significant  risk transfer 
has been achieved, and ensuring a broader risk diversification across the financial system. As 

24   Even  though  availability  of  data  on  volumes  and  historical  performance  of  synthetic  securitisation  has 
improved considerably as a result of the EBA’s work, it likely does not yet capture the market in its entirety. 

41 

 
                                                           
such, it would contribute significantly to achieving the goal of maintaining and enhancing the 
lending capacities of banks in the post-COVID-19 environment.  

This  approach,  however,  would  create  a  misalignment  between  the  EU  securitisation 
framework vis-à-vis  synthetic securitisation and the Basel  regime, which  does not  foresee a 
risk-sensitive  capital  treatment  for  qualifying  simple,  transparent  and  comparable  synthetic 
securitisations. As explained under option 2, such a misalignment, however, is justified by the 
fact  that  synthetic  securitisation  for  the  time  being  falls  outside  the  scope  of  the 
BCBS/IOSCO framework for simple, transparent and comparable securitisations. 

Moreover, seeking to extend the benefits of the STS label might be premature at this stage as 
there  is  not  yet  sufficient  data  and  practical  experience  with  the  revamped  securitisation 
framework to support a claim that an STS-compliant on-balance-sheet synthetic securitisation 
deserves  any  preferential  prudential  treatment.  Indeed,  the  STS  framework  has  been  in 
application since January 2019 and the first traditional STS transaction was notified only in 
March  2019.  The  technical  analysis,  however,  does  not  indicate  reasons  why  an  STS  on-
balance-sheet securitisation would be riskier than a traditional STS securitisation, justifying a 
different capital treatment. 

Policy choice 

Overall,  the  analysis  conducted  by  the  EBA  shows  that  it  is  possible  to  set  standards  for 
synthetic  securitisation  that  allow  mitigating  the  main  drivers  of  structuring  risk,  such  as 
agency  and model risks, in the same way as for traditional securitisation, thereby creating a 
subset of synthetic securitisation that is comparable to STS traditional securitisation. In fact, 
evidence shows that historical performance of on-balance-sheet synthetic securitisation tends 
to exceed that of traditional securitisations for the same asset class. Indeed, from a technical 
perspective,  there  is  no  evidence  that  would  suggest  that  synthetic  securitisation  structure 
inherently results in higher losses than traditional securitisation structure. A sound synthetic 
structure does not negatively affect the performance of the securitisation.  

The analysis does not point to any material negative consequences that could be foreseeably 
generated  by  the  creation  of  a  specific  STS  framework  for  balance-sheet  synthetic 
securitisations.  On  the  other  hand,  reviving  the  synthetic  securitisation  market  and  ensuring 
that  it  develops  within  the  robust  STS  framework  entails  a  number  of  positive  benefits  for 
banks, financial market and financial stability in general. The risk transfer from banks to the 
non-banking  sector  is  one  of  the  main  objectives  of  the  Capital  Markets  Union  and  by 
facilitating the availability of credit to those who need it, could promote economic growth. 

On balance, creating a specific STS framework for on-balance-sheet synthetic securitisations 
would be most beneficial for the stated policy goal. In terms of the prudential treatment of the 
new product, taking into account lingering data limitations and the specific characteristics of 
on-balance-sheet  synthetic  securitisations  and  its  usage,  a  limited  differentiated  regulatory 
treatment, rather than a fully-fledged preferential regulatory framework similar to the one for 
traditional  STS  securitisation,  represents  a  balanced  approach.  The  preferential  regulatory 

42 

 
treatment would extend only to the senior tranche of the STS on-balance-sheet securitisation 
when it is retained by the originating bank. 

6.1.2  Description of the proposal 

The Securitisation Regulation only allows traditional true sale securitisation to obtain the STS 
label. In a true-sale securitisation the ownership of the underlying exposures is transferred or 
effectively  assigned  to  a  securitisation  special  purpose  entity,  whereas  in  on-balance-sheet 
synthetic  securitisations  the  credit  risk  associated  with  a  pool  of  underlying  exposures  is 
transferred  to  investors  (protection  sellers)  by  way  of  financial  guarantees  or  credit 
derivatives,  while  the  assets  themselves  remain  on  the  balance  sheet  of  the  originating 
institution  (the  protection  buyer).  On-balance-sheet  synthetic  transactions  are  distinct  from 
other  synthetic  securitisations  where  the  originator  of  the  securitisation  does  not  own  the 
underlying assets and, instead of hedging credit risk, seeks to benefit from real or perceived 
arbitrage opportunities in the pricing of different tranches of credit portfolios.  

The  EBA  has  published  its  Report  on  an  STS  framework  for  Synthetic  Securitisation  (the 
‘STS  synthetic  report’),  analysing  the  feasibility  of  a  specific  framework  for  STS  synthetic 
securitisation,  limited  to  balance-sheet  synthetic  transactions,  and  the  Commission  followed 
up with the report accompanying this legislative proposal. Both reports have been drawn up in 
accordance with to Article 45 of the Securitisation Regulation. On this basis, the Commission 
proposes to define a set of STS criteria for on-balance-sheet securitisations that is consistent 
with  the  STS  criteria  for  traditional  securitisations,  adapting  them  where  necessary  and 
introducing new criteria to capture the specificities of using guarantees or similar instruments 
to tranche and transfer credit risk. Securitisations that meet these requirements should be able 
to claim the STS label and be able to benefit for capital relief limited to the senior tranche.  

The  creation  of  a  STS  label  for  on-balance-sheet  synthetic  securitisation,  coupled  with  a 
targeted  review  of  the  Article  270  of  the  CRR,  would  allow  to  extend  to  synthetic  STS 
securitisation a partially  similar preferential capital treatment  currently applied to traditional 
STS securitisation. This extension of the preferential capital treatment would be targeted, with 
a partial review of the Article 270 of the CRR in order to: 

  broaden the types of underlying assets used for the STS synthetic securitisation; 

 

limit  the  preferential  treatment  to  the  senior  tranche  of  the  STS  synthetic 
securitisation retained by the originator.  

This proposal is deemed balanced, as it would promote further use of STS on-balance-sheet  
securitisation through a preferential treatment of the senior tranche, but also maintain a certain 
degree of conservatism both through the application of adapted STS criteria to obtain the STS 
label and the limitation of the preferred capital treatment to the senior tranche, considered the 
less risky.  

6.2  Targeted  amendments  of  the  Securitisation  Regulation  and  CRR  in  order  to 

remove the constraints to securitising NPEs 

The  securitisation  framework  was  designed  with  performing  assets  in  mind  and  therefore 
certain  elements  of  it  are  not  entirely  fit  for  purpose  to  be  able  to  absorb  non-performing 

43 

 
exposures from credit institutions’ balance sheets. In its opinion submitted to the Commission 
in  October  2019,  the  EBA  has  highlighted  this  problem.  The  assessment  of  the  EBA  is 
supported  by  data  on  market  developments  that  show  that  currently  sales  of  whole  NPE 
portfolios  are  more  often  used  for  off-loading  NPEs  from  the  bank  balance  sheet,  while 
securitisation  plays  so  far  no  big  role  in  the  EU.  Amending  the  securitisation  framework  to 
cater for the specificities of NPE securitisations, while maintaining high prudential standards, 
could enable the broader use of this tool by banks to offload non-performing portfolios from 
their balance sheets. 

6.2.1  Cost-benefit analysis 

Policy option 1: Maintaining the status quo 

Keeping  the  current  capital  treatment  of  NPE  securitisations  would  continue  limiting 
substantially  the  role  of  securitisation  as  a  funding  tool  for  reducing  NPEs  banks’  balance 
sheets due to comparatively high capital requirements, in particular under the SEC-IRBA and 
the SEC-SA.  

The  comparatively  high  capital  requirements  generated  by  the  current  framework  make 
holding NPE securitisation instruments particularly capital intensive for banks, in particular in 
the case of senior tranches25.  

Higher funding costs would continue translating into higher price discounts and, as a result, 
higher  losses  for  the  bank  seeking  to  dispose  of  its  non-performing  loans,  making 
securitisations  particularly  unattractive  for  EU  banks  to  off-load  NPEs  from  their  balance 
sheets. 

Policy option 2: Implementing a more risk sensitive capital treatment of NPEs 

Under  option  2  the  calibration  of  capital  requirements  of  NPE  securitisation  would  be 
adjusted  in  a  very  simple  and  straightforward  way.  In  addition,  a  clarification  would  be 
included that the cap provided for in Article 268 of the CRR must be calculated making use of 
the full net basis approach.  

With  regard  to  the  adjustment  to  the  calibration,  in  line  with  the  emerging  international 
standards, the capital requirements for NPE securitisations (defined for the purpose of capital 
requirements as securitisations that are backed by credit exposures with an impairment level 
of 90% or higher) would be amended as follows: 

 

senior  tranches  of  traditional  NPE  securitisations  with  a  non-refundable  purchase 
discount equal to or above 50% of the securitised portfolio’s outstanding amount will be 
subject to a flat 100% risk weight; 

25  According to the EBA, the return on equity (RoE) for senior tranches under the above  assumptions (1.5-
4.5%) would materially underperform European banks equity (RoE targets of over 10%). To achieve a 10% 
RoE, the margin on senior tranches of NPE transactions would have to more than double (e.g. 6.8% under 
SEC-SA). 

44 

 
                                                           
 

all  other  exposures  to  NPE  securitisations,  either  traditional  or  synthetic,  would  be 
subject to the usual securitisation framework and to two specific provisions: a general 
100% floor for these exposures and a ban on the use of Foundation IRB parameters in 
the SEC-IRBA. 

With regard to the clarification to Article 268 of the CRR, in line with the EBA opinion on the 
regulatory treatment of NPE securitisations (‘the EBA NPE Opinion’), it would be made clear 
that  a  “full  net  basis  calculation”  should  be  the  preferred  approach  for  the  computation  of 
expected losses. This means that the expected losses referred to in Article 268(1) of the CRR 
should  be  netted  by  the  amount  of  the  relevant  NPEs’  NRPPD  and,  in  the  case  of  the 
originator,  any  additional  specific  credit-risk  adjustments.  This  would  reflect  the  fact  the 
NRPPD has the effect of writing off the underlying exposures’ expected losses and leaves a 
residual  value  subject  to  the  risk  that  recoveries  may  be  insufficient  to  repay  that  residual 
value (unexpected losses). 

The  option  under  discussion  would  enhance  the  coherence  of  the  CRR  securitisation 
framework, better reflect the actual riskiness of securitisation of NPEs and incentive banks to 
use  this  tool  to  free  capital  to  support  the  real  economy  in  the  post  COVID-19  pandemic 
recovery  context.  The  proposed  option  would  have  a  limited  impact  on  the  administrative 
burden for institutions and on the costs for them to adapt their internal operations. The limited 
costs would be largely offset by benefits derived in terms of capital availability and reduced 
funding costs.  

Policy choice 

Option  2  is  the  preferred  option  since  it  would  be  the  one  able  to  remove  the  regulatory 
constraints  in  the  area  of  capital  treatment  on  the  use  of  securitisations  for  banks  and  to 
increase the capacity of banks to use it as an economically viable funding tool. It will help the 
process of reducing NPE holdings for the banking system as a whole. 

6.2.2  Content of the proposal 

Based  on  the  recommendations  included  in  the  EBA  ‘NPE  Opinion’  and  the  latest 
developments of relevant international standards, the Commission proposes to: 

  Amend the Securitisation Regulation by allowing risk retention in the case of NPE 
portfolios based on the discounted value of the portfolio (after taking into account 
the non-refundable purchase price discount) and by allowing the risk retention by 
the servicer under certain preconditions; and 

 

Introduce  a  more  risk-sensitive  capital  treatment  of  NPE  securitisations  in  the 
CRR. 

Amendments to the Securitisation Regulation 

NPEs  are  securitised  at  a  discount  on  their  nominal  or  outstanding  value  and  reflect  the 
market’s assessment of, inter alia, the likelihood that the debt workout process will generate 
sufficient cash flows and asset recoveries. The risk for investors is, therefore, that the workout 

45 

 
of the assets generates insufficient recoveries to cover the net value at which they have been 
purchased. 

The requirement of at least 5% risk retention by originators, sponsors or original lenders aims 
to  ensure  alignment  of  interest  between  such  actors  and  investors  in  a  securitisation.  The 
Securitisation  Regulation  foresees  that  the  retained  amount  is  calculated  on  the  basis  of  the 
nominal value of the securitised exposures. In the case of NPE securitisations, however, using 
nominal  values  for  risk  retention  purposes  disregards  the  price  discount  at  which  the 
underlying assets are transferred and which represents the actual risk loss for investors. This is 
inconsistent  with  the  economics  of  the  transaction,  constrains  the  flexibility  for  the  parties 
involved  in  originating  and  structuring  NPE  securitisations  and  distorts  the  intended  risk 
alignment between the sell-side and the buy-side. Therefore, the EBA recommends to allow 
calculating  risk  retention  amount  in  case  of  NPE  securitisations  after  applying  the  non-
refundable purchase price deduction. 

Figure: Risk retention in an NPE securitisation: an illustrative example for a transaction 
with original principal amount of EUR 100 million and a non-refundable purchase price 
discount of 90% 

Source: EBA 

An additional element of the risk retention requirement that impacts NPE securitisations is the 
identification of the party obliged to retain the risk. Typically, in securitisations of performing 
assets  the  prevalent  interest  on  the  sell-side  is  that  of  the  originator,  who  is  often  also  the 
original  lender.  The  originator’s  interest  is  that  the  assets  continue  to  be  serviced  as  if  they 
were  not  securitised,  making  sure  that  they  provide  the  expected  cash  flow  and  that  the 
relationship  with  the  borrower  is  uninterrupted.  On  the  contrary,  in  NPE  securitisations 
originators  seek  to  offload  the  defaulted  assets  from  their  balance  sheets  as  they  may  no 
longer  wish  to  be  associated  with  them  in  any  way.  Furthermore,  NPEs  tend  to  be  sold  to 
intermediate parties before being securitised, so the original lender is often not involved in the 

46 

 
 
securitisation. In these cases, the servicer of the assets might have more substantive interest in 
the workout of the assets and value recovery. In addition, the servicer may retain a non-senior 
tranche in the transaction and its fees would usually be payable from the asset collections. It is 
sound market practice for the servicer to have “skin in the game” in the transaction and thus 
align  its  interest  with  investors.  Accordingly,  the  Securitisation  Regulation  should  allow, 
specifically  for  NPE  securitisations,  that  also  the  regulatory  requirement  for  “skin  in  the 
game”, the retention requirement, may be fulfilled by the servicer. 

Finally, the credit-granting standards requirement in Article 9 of the Securitisation Regulation 
also does not cater for NPE securitisations. The aim of the verification duty in Article 9 of the 
Securitisation Regulation is to protect against the risks of asymmetric information producing 
an  “originate  to  distribute”  model  whereby  assets  of  inferior  quality  are  selected  for 
securitisation to the detriment of investors, who would end up with more risk then they might 
have  intended  to  take.  While  the  overarching  principle  remains  appropriate  for  NPE 
securitisations, the concrete terms of the requirement are problematic as it cannot be required 
that “sound and well defined credit granting criteria” were applied where the originator has 
already  knowingly  purchased the  exposures as  NPEs.  In fact, the  requirements have to  take 
into  account  the  specific  circumstances  of  the  purchase  of  the  assets  and  the  type  of 
securitisation. In these cases, it may not be possible to gain certainty around the circumstances 
in which the assets were created, but it is nonetheless possible to carry out a due diligence on 
the  quality  and  performance  of  the  assets  in  order  to  make  a  sensible,  well-informed 
investment decision. 

Amendments to the CRR 

As regards the calibration of capital charges, based on the work carried out by the EBA and 
on the consultation paper published by the BCBS26, it is proposed to introduce a more risk-
sensitive  treatment  of  NPE  securitisation  through  the  following  amendments  to  the  CRR 
securitisation framework: 

  NPE  securitisations  will  be  defined  for  the  purpose  of  capital  requirements  as 
securitisations that are backed by credit exposures with an impairment level of 90% or 
higher; 

  Senior tranches of traditional (i.e. true sale) NPE securitisations with a non-refundable 
purchase  discount  equal  to  or  above  50%  of  the  securitised  portfolio’s  outstanding 
amount will be subject to a flat 100% risk weight; 

  All  other  exposures  to  both  traditional  and  synthetic  NPE  securitisations  would  be 
subject to the usual securitisation framework and to two specific provisions: a general 
100% floor for these exposures and a ban on the use of Foundation IRB parameters in 
the SEC-IRBA. 

26   https://www.bis.org/bcbs/publ/d504.htm 

47 

 
                                                           
In addition, to achieve the objective of a framework better suited for the specific features 
of the NPE securitisation, a couple of minor adjustments are also proposed: 

 

 

In line with the recommendation included in the EBA opinion of 2019, it is clarified 
that  when  institutions  apply  the  cap  provided  for  in  Article  268  of  the  CRR  to 
positions they hold in NPE securitisation, the expected losses referred to in paragraph 
1 of this Article should be calculated net of the NRPPD and of any additional specific 
credit risk adjustments; 

It is also proposed to amend paragraph 3 of Article 249 of the CRR thereby aligning 
the credit risk mitigation rules applicable to the securitisation exposures to the general 
framework and to the revised Basel standards. Indeed, according to Article 249(1) and 
(2) of the CRR, an institution may recognise funded or unfunded credit protection with 
respect to a securitisation position in the same way and under the same conditions as 
provided in the general credit risk mitigation framework applicable to non-securitised 
exposures.  However,  paragraph  3  of  this  Article  introduces  an  exception  to  that 
general  treatment  for  institutions  applying  the  standardised  approach.  In  particular  it 
introduces an additional eligibility criterion in the form of a minimum credit rating for 
almost  all  types  of  providers  of  unfunded  credit  protection,  including  central 
governments.  

This provision appears to be inconsistent with the general credit risk mitigation rules 
set out in the CRR and with the objectives of the CRR. It is indeed hard to justify why, 
for  instance,  a  guarantee  provided  by  an  institution,  or  a  central  government,  that 
meets the eligiblity criteria for protection providers contained in the general credit risk 
mitigation rules but that does not fulfil the minimum credit rating criterion in Article 
249(3)  of  the  CRR  cannot  be  accepted  as  eligible  credit  risk  mitigation  under  the 
securitisation framework, but  can be accepted  as eligible credit risk mitigation when 
provided  for  a  non-securitisation  exposure.  In  that  respect,  the  revised  Basel  III 
framework  agreed  in  December  2017  imposes  a  minimum  credit  rating  requirement 
only  to  a  limited  set  of  protection  providers  in  case  of  securitisation  exposures. 
Specifically,  in  the  revised  Basel  III  framework,  the  requirement  only  applies  to 
entities  which  are  not  sovereign  entities,  public  sector  entities,  institutions  or  other 
prudentially regulated financial institutions.  

By way of clarification, it is therefore necessary to amend Article 249(3) of the CRR 
and align the credit risk mitigation rules applicable to the securitisation exposures to 
the  general  framework  in  line  with  what  was  agreed  at  international  level  by  the 
BCBS.  This  amendment  will  enhance  the  effectiveness  of  national  public  guarantee 
schemes  assisting  institutions’  strategies  to  securitise  NPEs  in  the  aftermath  of  the 
COVID-19 pandemic. 

48 

 
 
 
Chapter 4 Consultation 

7  CONSULTATION AND STAKEHOLDERS 

7.1  MiFID II/MiFIR consultation and stakeholders 

7.1.1  Public Consultation by the Commission  

The public consultation on MiFID II/MiFIR which ended on 18 May 2020 showed that there 
were mixed views on whether MiFID II has been successful in achieving or progressing 
towards  more  investor  protection.  However,  the  vast  majority  of  respondents  disagrees 
with  the  statement  that  the  costs  and  benefits  of  the  MiFID  investor  protection 
requirements are balanced.  

With  regard  to  the  ex-ante  cost  information  the  vast  majority  is  of  the  opinion  that 
professional  clients  and  ECP’s  should  be  exempted  without  specific  conditions,  only  a  few 
stakeholders indicated that only ECP’s should be able to opt-out unilaterally. A large majority 
does not think specific conditions should apply to the opt-out. A large majority does not think 
that retail clients should be allowed to opt-out.  

Almost  all  respondents  would  support  a  phase-out  of  paper-based  information.  The  vast 
majority does not think that clients should explicitly opt-out of paper-based information, but 
that the client should be allowed to request to receive information on paper.  

Almost all stakeholders agree that in case of distant communication (phone in particular) the 
cost  information  could  also  be  provided  after  the  transaction  is  conducted  in  order  to  avoid 
delays. Many are of the view that ESMA Q&As already authorised the delayed provision of 
this information. Further, the recording of telephone conversations is considered a useful tool 
by  the  majority  to  protect  the  retail  client  from  mis-selling.  Some  stakeholders,  however, 
criticise that the recording requirements interferes with the privacy and data protection rights 
of the client.  

The majority disagreed that the best execution reports were of sufficiently good quality 
to  provide  investors  with  useful  information.  The  majority  of  stakeholders  suggested  a 
deletion  of  at  least  the  quarterly  reports  by  execution  venues  on  the  quality  of  transaction 
execution (‘RTS 27 reports’), as these reports were a part of the annual audit but not used by 
the  clients.  Those  reports  were  very  difficult  to  understand,  often  more  than  40  pages  and 
would  not  allow  for  meaningful  conclusions.  Further,  those  ‘RTS  27  reports’  are  not 
comparable  across  different  investment  firms  as  information  is  reported  in  an  inconsistent 
way and in different formats.  

The comments on the best execution reports (‘RTS 28 reports’) were slightly more positive. 
Those  reports  would  enable  firms  to  provide  some  further  information  on  their  execution 
strategy per financial instrument and client type. There was the general view that Transaction 

49 

 
Cost  Analysis  (TCA)  reports  were  the  primary  source  of  information  used  by  clients  to 
monitor their brokers for best execution in the equities markets.  

In the section on research, participants were asked what was their overall assessment of the 
effects of unbundling research. A vast majority of respondents did not consider that it had a 
positive  effect.  Amongst  options  presented  in  the  consultation,  authorizing  joint  payment 
(bundling) for SME research was one of the options most favoured by respondents.  

With regard to commodity derivatives, users, market operators and regulators agree that while 
the position limit regime has worked for mature benchmark contracts, it introduced adverse 
effects on the development of new, illiquid and liquid non-benchmark contracts. Due to 
overly  restrictive  (de  minimis)  limits  and  the  inflexibility  in  the  current  regime,  market 
participants  are  discouraged  from  on-venue  trading  which  negatively  impacts  the  orderly 
pricing of contracts and transparency in the market. A vast majority of respondents does not 
agree that the cost and benefits are balanced.   

A vast majority of respondents states that the current scope of the position limit regime is 
not fit for purpose. An overwhelming majority sees clear merits in limiting the application of 
the regime to a restricted set of critical commodity contracts. The most supported criterion to 
identify  critical  and  significant  contracts  is  open  interest,  type  and  variety  of  market 
participants.  

A  very  large  majority  suggested  that  a  position  limit  exemption  for  a  financial 
counterparty under mandatory liquidity provision obligations should apply in a similar 
manner to the liquidity provision exemption set out in Article 2(4) of MiFID. Furthermore, a 
majority  of  respondents  were  of  the  opinion  that  such  an  exemption  should  also  extend  to 
non-financial counterparties and that the exemption is needed also for liquid contracts. 

A very large majority of the respondents are supportive of extending the hedging exemption 
to  financial  counterparties.  Most  of  those  respondents  favour  including  all  financial 
counterparties in the hedging exemption. . 

7.1.2  ESMA’s work  

From 17 July to 6 September ESMA ran a “Call for evidence on Impact of the inducements 
and  costs  and  charges  disclosure  requirements  under  MiFID  II”.  The  responses  were 
published27  and  summarised  in  ESMA’s  final  advice28  sent  to  the  commission  on  1  April 
2020.  

27   https://www.esma.europa.eu/press-news/consultations/call-evidence-impact-inducements-and-costs-and-

charges-disclosure  

28   ESMA’s  Technical  Advice  to  the  Commission  on  the  impact  of  the  inducements  and  costs  and  charges 
disclosure  requirements  under  MiFID  II  :  https://www.esma.europa.eu/sites/default/files/library/esma35-
43-2126_technical_advice_on_inducements_and_costs_and_charges_disclosures.pdf  

50 

 
                                                           
From  24  May  2019  to  5  July  2019  ESMA  ran  a  “Call  for  evidence  on  position  limits  in 
commodity  derivatives”.  The  responses  were  used  to  build  on  for  the  ESMA  public 
consultation  from  5  November  2019  to  8  January  2020.    The  responses  of  the  public 
consultation  were  published29  and  summarised  in  ESMA’s  MiFID  II  Review  report  on 
position  limits  and  position  management30  sent  to  the  commission  on  1  April  2020.  On  17 
December  2019,  ESMA  organised  a  roundtable  with  a  limited  number  of  stakeholders 
(trading  venues,  financial  and  non-financial  counterparties)  to  allow  for  a  more  in-depth 
discussion on the different issues discussed in ESMA’s Consultation Paper. 

7.1.3  Member States Consultations (EGESC/FSC) 

A  list  of  measures  to  be  part  of  a  targeted  Capital  Markets  Recovery  Package  containing 
amendments in MiFID II and in the Prospectus Regulation has been discussed with Member 
States in the course of three EGESC meetings, respectively on 11 May, 29 May, 16 June and 
3 July, and during one FSC meeting on 5 June. 

MiFID requirements on information and product governance  

Experts  were  generally  supportive  of  the  amendments  as  long  as  they  would  not  negatively 
affect the protection of retail clients. In particular, a majority can accept the default switch to 
paperless  documentation,  the  delayed  transmission  of  information  documents  for  distance 
communication  and  the  exclusion  of  corporate  bonds  with  “make  whole”  clauses  from  the 
product governance requirements, also for retail investors, as long as retail investors have the 
opportunity to opt back into receiving information on paper.  

Commodities 

There  is  overwhelming  support  on  the  proposed  reforms  to  the  position  limit  rules  for  only 
significant  and  critical  contracts,  hedging  exemption  for  mandatory  liquidity  provision  and 
financial counterparties that are part of a predominantly commercial group and a qualitative 
ancillary activity test.  

Investment research 

A  majority  of  delegations  agree  that  research  coverage,  in  particular  for  small  and  mid-cap 
companies, is too low across the Union and that urgent measures should be taken to improve 
this situation, which is particularly detrimental in the current crisis environment.  

29   https://www.esma.europa.eu/press-news/consultations/consultation-mifid-ii-review-report-position-limits-

and-position-management#TODO  

30    MiFID II Review report on position limits and position management: 

https://www.esma.europa.eu/sites/default/files/library/esma70-156-
2311_mifid_ii_review_report_position_limits.pdf 

51 

 
                                                           
A consensus emerged that would favour the authorisation of joint payment for brokerage and 
services provided that this exemption to the unbundling rule is narrowed to brokerage services 
relating to companies with a market capitalisation of less than EUR 1 billion.  

7.2  Prospectus consultation of stakeholders 

7.2.1  Member States Consultations (EGESC/FSC) 

The new EU Recovery Prospectus was supported by a majority of delegations and understood 
as a measure that could  help issuers in the recovery phase after the crisis resulting from the 
COVID-19  pandemic.  A  majority  of  delegations  stated  that  they  would  prefer  the  EU 
Recovery Prospectus to be limited in time (temporary regime) and in scope (this prospectus 
can only be used by issuers already listed for 18 months that want to issue shares).  

The  fact  that  market  participants  raised  technical  concerns  about  the  operation  of  the 
obligation of timely notification of prospectus supplements was not contested during EGESC 
meetings.  A  majority  of  delegations  agree  with  the  principle  of  targeted  amendments  to 
financial intermediaries’ obligations to notify prospectus supplements as necessary to free up 
resources for financial intermediaries and make the provision workable. A further temporary 
alleviation for the issuance of non-equity securities by credit institutions was discussed at the 
EGESC meeting on 3 July 2020.  

7.3  Securitisation consultation of stakeholders 

7.3.1  EBA’s work and the Basel Committee 

In  preparing  its  report  on  synthetic  securitisation,  the  EBA  published  a  discussion  paper  in 
September 2019 for a two-month consultation. With most of the responses expressing strong 
support  both  for  the  analysis  of  the  market  and  for  the  rationale  for  the  development  of  an 
STS framework for synthetic securitisation, EBA was able to publish its report building on a 
pretty broad strong consensus among stakeholders, for both the feasibility of such framework 
and the relevant criteria that would make synthetic securitisation part of it. Moreover, both the 
EBA synthetics report and it opinion on NPEs were approved by a wide majority in the EBA 
Board of Supervisors, where all supervisory authorities – national and SSM – are present. 

In  addition,  the  adjustments  to  the  NPE  prudential  calibration  are  based  on  the  public 
consultation  launched by the Basel  Committee on 23 June 2020, where all the major global 
jurisdictions are represented. 

7.3.2  Member States Consultations (EGBPI/FSC) 

On 5 June 2020, the proposed changes to the Securitisation framework were discussed in the 
FSC.  In  that  context,  Member  States  had  the  chance  to  express  their  opinions  and 
observations. A vast majority of MS showed support for the proposed targeted amendments.   

On  the  proposal  on  synthetic  securitisations,  a  broad  majority  was  in  favour  of  a  specific 
framework for STS on-balance-sheet securitisation and they considered it useful to link such a 

52 

 
regime  with  a  clearly  defined  differentiated  prudential  regulatory  treatment  in  CRR.  Only  a 
small  minority  of  Member  States  expressed  formal  opposition,  while  a  few  Member  States 
had  reservations  about  the  timing  of  the  proposals  or  their  concrete  implementation,  rather 
than on the substance of the proposals. 

The proposal on NPE securitisations was also supported by the majority of Member States. A 
few Member States  expressed concern about  the timing and practical  implementation  of the 
proposal, with only one Member State disagreeing on substance. A substantial majority also 
considered it useful to follow the compromise solution pursued by the Basel Committee. On 
the suggested amendment concerning the deletion of Article 249(3) of the CRR, a majority of 
Member  States  expressed  their  support  for  this  proposal,  with  a  few  only  more  reluctant  to 
take a position yet.  

A discussion on the changes in the securitisation framework (including both the Securitisation 
Regulation  and  CRR)  took  place  at  the  EGBPI  meeting  on  30  June.  Overall,  the  meeting 
showed opinions very similar to the ones already presented by Member States in the FSC. On 
the general rationale, few Member States raised doubts about the usefulness of the legislative 
changes  and  questioned  whether  these  changes  should  be  introduced  according  to  the 
proposed  timeline.  On  the  suggested  extension  of  the  STS  framework  to  synthetic  balance 
sheet securitisations, on the proposed amendments to the Securitisation Regulation and CRR 
to  facilitate  NPE  securitisation  and  on  the  deletion  of  Article  249(3)  of  the  CRR  Member 
States experts’ views broadly aligned with those expressed during the FSC. 

53