Derivatives repos and securities lending

While derivative, repurchase (repo) and securities lending transactions are key components of the European capital market ecosystem, they do not feature as a main area of focus in the European Commission’s Action Plan on Capital Markets Union (CMU). However, the regulatory landscape for these kinds of transactions has already faced seismic changes as, among others, the Markets in financial instruments (MiFID) regime and European Market Infrastructure Regulation (EMIR) came into force.

Derivatives still have a part to play in the CMU project. For example, the proposed Securitisation Regulation creates a category of ‘simple, transparent and standardised’ (STS) securitisations for favourable (or at least, less punitive) capital treatment. In order for a securitisation transaction to be eligible for the STS label, all currency and interest rate risk must be hedged through the use of derivatives. It should be noted, however, that the use of derivatives that go beyond providing a simple hedge will cause the securitisation to fall outside of the STS definition.

At the end of September 2015, the Commission published a call for evidence on the EU regulatory framework for financial services as part of its wider CMU initiative. The purpose of this consultation is to study the cumulative impact of financial regulation that has been enacted since the outset of the financial crisis. The intention is to review existing legislation to reduce duplication or improve regulations that are contradictory, overly complex or causing unintended consequences. The fact that the Commission now recognises there may be areas of EU legislation that impose burdens not commensurate with the intended policy objectives represents a marked departure from the relentless ‘stability above all else’ approach adopted as a result of the financial crisis. It is entirely possible that the MiFID and EMIR regimes will be included in this review.

As the CMU plan develops further (which may continue into 2019), it may broaden from a focus on growth of markets in debt and equity securities to include derivatives, repos and securities lending. This site will be updated if and when the Commission publishes new information in this respect. In the meantime, the Commission will report on the main findings on the EU regulatory framework review and next steps by mid-2016, by which time the proposed Securitisation Regulation should be closer to its final, agreed draft.