Capital Markets Union: Council adopts legislative reforms

The Council today adopted a set of legislative reforms which are part of progress towards the capital markets union. The texts concern:

• the creation of a new category of benchmarks contributing to sustainable finance;
• transparency obligations for sustainable investments;
• a new prudential framework for investment firms;
• a harmonised framework for covered bonds;
• rules promoting access to SME growth markets.

All the texts will be signed in Strasbourg in the week of 25 November and will then be published in the Official Journal of the European Union.

Sustainable finance

The Council adopted two regulations aiming at making finance greener and bringing it more in line with the objectives of the Paris agreement on climate change.

The first reform introduces disclosure obligations on how financial companies integrate environmental, social and governance factors in their investment decisions.

The second reform creates new types of benchmarks aimed at giving greater information on an investment portfolio’s carbon footprint: the EU climate transition benchmarks, which aim to lower the carbon footprint of a standard investment portfolio, and the EU Paris-aligned benchmarks, which have the more ambitious goal to select only components that contribute to attaining the 2°C reduction set out in the Paris climate agreement.

Investment firms

The package of measures adopted today sets out new prudential requirements and supervisory arrangements for investment firms. The reform adapts the requirements to the firms’ risk profiles and business models while preserving financial stability.

The largest firms that are considered systemic will be subject to the full banking prudential regime and will be supervised as credit institutions, while smaller firms will enjoy a new bespoke regime with dedicated prudential requirements.

Covered bonds

The Council adopted a set of new rules on harmonised product requirements and supervision of covered bonds, in order to ensure a high level of investor protection. This framework also specifies a common definition for receiving an EU covered bond label and benefit from preferential capital treatment. Harmonised regulatory framework would provide a stable funding source for credit institutions, which would be better placed to provide affordable mortgages for consumers and businesses and would make alternative safer investments available to investors.

Covered bonds are financial instruments issued by a credit institution and backed by a separate pool of assets – typically mortgages or public debt – to which investors have a preferential claim in case of failure of the issuer. Covered bonds are an efficient source of financing of the economy which ensure a high level of certainty for investors.

SME growth markets

The Council adopted a new framework to help small and medium businesses access new sources of funding. This concerns specifically access to “SME growth markets”, a recently introduced category of trading venue dedicated to small issuers.

The proposal contains amendments to the market abuse and the prospectus regulations which make the obligations placed on SME growth market issuers more proportionate while preserving market integrity and investor protection.