Market initiatives

European Secured Note (ESN)

EMF-ECBC proposal for the European Secured Note

In the context of the Capital Markets Union debate, the EMF-ECBC has analysed the potential for the creation of a new financial instrument in the European Union, the European Secured Note (ESN), that could benefit from the market best practices of both traditional covered bonds (for funding purposes) and securitisation (for funding and risk-sharing purposes). This instrument, with the proposed name of European Secured Note (ESN), would cover a funding segment located between the traditional covered bond and the high-quality securitisation spaces, and would complement the long-term funding toolkit for European Lenders financing SME loans and potentially other types of assets, such as infrastructure loans.

The ESN would have anti-cyclical features as it could also combine a robust legal and supervisory framework, dual recourse and standardised asset data disclosure. Indeed, two major implementation structures/options are presently identified for this potential financial instrument: (i) an on-balance sheet dual recourse instrument with a dynamic pool for long-term financing purposes; or (ii) an off-balance sheet dual recourse instrument with static pool that could also offer risk sharing (and capital relief) as a response to deleveraging needs, as well as promoting risk transfer and risk-sharing.

The ESN, which ideally would be embedded in national legal supervisory frameworks (UCITS compliant), could contribute to the CMU growth objective by ensuring a substantial and positive regulatory recognition for this financial instrument that, regardless of the structure, focuses on SMEs. Regulatory incentives could be tangible in terms of eligibility for LCR and ECB repo eligibility, lower risk weight for the SME asset class in CRR and Solvency II, CRA III Regulation, bail-in exception, etc.

Various modalities and options for the national implementation of this instrument should allow regulators, supervisory authorities and market participants to identify the best way of introducing this instrument in the different market and legislative environments. This would:

  • facilitate a rapid legislative implementation of common pan-European qualitative standards with a bottom-up approach;
  • guarantee homogenous and comparable characteristics;
  • facilitate lenders’ and investors’ due diligence; and
  • create the preconditions for a future pan-European cross-border SME financing landscape.

The EMF-ECBC has been acting as the market catalyst in developing this pan-European initiative which should have, among other things, a transparent and comparable European-level market platform infrastructure setting, eligibility criteria, risk parameters and IT solutions.

Finally, the ECBC welcomes the intervention of the European Commission and other European Institutions as catalysts of this initiative by (i) supporting and coordinating institutional interventions which would ensure the implementation of a common set of guidelines at national level, (ii) promoting  the national and supranational institutions’ potential role in investing in or in guaranteeing some of the tranches of the off-balance sheet instrument proposed, (iii) considering in the future a preferable regulatory treatment of such a potential instrument, e.g. via repo or capital requirements, and (iv) setting clear guidelines in terms of micro foundations, e.g. SME categorisations and definitions.

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