Financial Engineering Coupled with Regulatory Incentives: Is There a Strong Market Case for Sovereign Bond-Backed Securities (SBBSs) in the Euro-Area? A Brief Analysis of the European Commission's Proposal for a Regulation on SBBSs

Abstract

The aim of this paper is to present and briefly analyse the provisions of the recent (24 May 2018) European Commission’s proposal for a Regulation of the European Parliament and the Council, whose objective is to lay down a general framework for sovereign bond-backed securities (SBBSs). It is structured in six (6) Sections: (1) Section A, entitled “A general overview”, briefly summarises the work of the European Systemic Risk Board (ESRB) on sovereign bond-backed securities, which forms the basis for the latest regulatory initiative (Sub-section 1), and then presents the main considerations underlying the proposed Regulation (Sub-section 2). (2) Section B addresses the proposed Regulation’s subject matter and scope, as well as the proposed limitations on the use of the designation ‘SBBS’ (Sub-sections 1-2, respectively). (3) The (relatively lengthier) Section C analyses Articles 4-8 of the proposed Regulation concerning: • the eligibility and composition of the underlying portfolio of SBBS issues, the maturity of the underlying assets and the tranching of issues (Sub-section 1), as well as • the issuance of SBBSs by special purpose entities (SPEs), the obligations of these entities and the management of SBBSs (Sub-section 2). (4) The notification, transparency and information requirements laid down in Articles 10-12 of the proposed Regulation are presented in Section D (Sub-sections 1-3, respectively). (5) Section E, on the so-called “product oversight”, deals with the proposed Regulation’s provisions (Articles 13-20) concerning the supervision of SPEs and the related cooperation arrangements between competent authorities and the European Securities and Markets Authority (ESMA), the sanctioning regime, as well as the macro-prudential oversight of the SBBS market by the ESRB (Sub-sections 1-3, respectively). (6) Finally, Section F is devoted to the presentation of the proposed Regulation’s rules (Articles 21-26) governing the amendments to existing legal acts which constitute sources of EU financial law, the evaluation clause and the application of the “comitology procedure” (Sub-sections 1-3, respectively). The study ends with the concluding remarks. The cut-off date for information contained in this study is 26 August 2018.