EU agrees new venture capital rules in CMU regulation spree [updated]

The European Union has agreed new rules aimed at stimulating venture capital investments in the EU and reviving the region’s securitisation market.

The agreements on both sets of regulations are part of the European Commission’s action plan to create a Capital Markets Union (CMU) in the EU.

The revised regulations on European venture capital funds (EuVECA) and European social entrepreneurship funds (EuSEF) will open these areas up to larger fund managers and expand the range of companies in which the funds can invest.

The new rules will also make cross-border marketing of the funds cheaper, and simplify registration processes.

The Commission said the changes would help make the funds more attractive to investors.

Invest Europe, the association for European private equity and venture capital, said it welcomed the agreement reached by the three EU institutions.

“Several positive elements of the Commission’s proposal were accepted, including those extending the regime’s scope and flexibility on eligible investments,” it said. “We anticipate that the final text will be appropriate and proportionate for the venture capital industry’s needs, to improve take-up of the EuVECA label and facilitate greater investment in Europe.”

In November last year the Commission and the European Investment Fund – a branch of the European Investment Bank – launched a pan-European venture capital fund of funds in a bid to attract capital from major institutional investors.

In Denmark, a recent proposal from the country’s IT industry association for a state-supported venture capital fund drew a cautious response from some pension funds.

Securitisation rules take a step forward

Also this week, EU lawmakers agreed a new regulatory framework on securitisation which they hope will free up €150bn for investment into the European economy.

It is hoped this will revive interest in the asset-backed securities (ABS) market by setting out criteria to distinguish “simple, transparent, and standardised” (STS) securitisations from more opaque and complex ones.

In a statement, the Commission said the regulatory package “bears no relation” to the securitisation of sub-prime mortgages in the US that was a major factor in the 2007-08 financial crisis.

“The European Commission does not intend to go back to the days of opaque and complex sub-prime instruments,” it said. 

The new regulatory framework for securitisation comprises two legislative measures: a regulation on securitisation that includes rules on due diligence, risk retention, transparency, and criteria defining STS securitisations; and an amendment to the capital requirements regulation for banks.

Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency, said that it would help “relaunch the securitisation market”.

The Council in a separate statement said: “Developing a securitisation market will help create new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups.”

However, the framework still faces some hurdles, especially over the so-called “retention rate”, which sets how much an issuer of a securities package has to hold onto as a guarantee of propriety.

The Commission’s initial proposal was for ABS issuers to retain 5% of the whole issuance. A draft text from the European Parliament raised the minimum to 10% or, in certain circumstances, higher. Dutch rapporteur Paul Tang supported the latter position on the grounds that the market needed to survive “in good times but also in bad times”.

Finance Watch, a public interest association in Brussels, argued: “Unfortunately, at 5%, the risk retention requirement is too low to provide a meaningful [disciplinary] effect for banks.”

The Association for Financial Markets in Europe added that it understood there would be “provisions for supervisors to monitor build-up of excessive risks on the market and to be ready to step up with warnings or recommendations”. However, there were still “technical details” to be agreed.

On the other side of the fence, Austrian MEP Othmar Karas said too many limits would prove detrimental: “If you were to build a car that has seven safety belts, eight airbags and can only drive a maximum of five kilometres per hour, nobody would buy it.”

The European Commission has called the securitisation rules “one of the cornerstones of the CMU”.

“Securitisation can allow diversification of funding sources and a broader distribution of risk by allowing banks to transfer the risk of some exposures to other institutions or long-term investors, such as insurance companies and asset managers,” the Commission said.

“This allows banks to free the capital they set aside to cover for risks of those exposures, allowing them to generate new lending to households and SMEs. STS securitisations will also provide new investment opportunities for institutional investors such as pension funds and insurance companies.”