10 minute read | December.16.2025
After lengthy negotiations with Member State representatives, the Danish Presidency of the Council of the European Union (“Council”) is expected to secure endorsement this week for its finalised reform proposals to the EU Securitisation Regulation (“Sec Reg”) and Capital Requirements Regulation (“CRR”).
Such proposals will now constitute the Council’s negotiating position (“Council Position”) going into “trilogue” discussions with the EU Parliament and European Commission, set to take place next year. Further changes to the reform proposals may be made during this process before they are finalised.
While the Council Position is generally consistent with the changes proposed and adopted by the European Commission earlier this year (“Commission Proposal”) there are some notable differences.
In addition, on 11 December, the Rapporteur of the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) published a draft report on the Commission Proposal (“Parliament Draft Report”). We discuss key aspects of the Parliament Draft Report below.
The Parliament Draft Report is scheduled to be discussed in ECON in mid-January and MEPs will have the opportunity to submit amendments until the end of January, with a final ECON vote on the Parliament Draft Report and potential amendments penciled in for early May (“Final Parliament Position”).
Later next year, the European Commission, the Council and the European Parliament will enter trilogue, where all three bodies will debate and agree a final compromise position, which may of course differ materially from the Council Position, the Commission Proposal and/or the Final Parliament Position.
The Council Position on Sec Reg represents a welcome improvement on the Commission Proposal in three key areas:
Administrative Sanctions
The Council Position fully reverses the Commission Proposal’s extension of the existing Sec Reg administrative sanctions regime to investors who breach their due diligence obligations. Under the Council Position, the Sec Reg status quo will prevail. This means that investors will face sanctions under their applicable sectoral rules (such as punitive capital charges under the CRR for banks) without the potential for “double-up” under the Commission Proposal.
This reversal is to be welcomed since an extension of the Sec Reg sanctions regime to the buy-side would in our view create a significant disincentive for EU investors to invest in securitisations, contrary to one of the European Commission’s stated policy objectives behind the reform proposals.
Third Country Securitisations
The Council Position removes the requirement for EU investors to verify compliance with the ESMA disclosure templates by non-EU sell side parties issuing to EU investors. The Sec Reg currently requires such verification, effectively burdening non-EU sell side parties with ESMA template reporting if they wish to obtain EU investment – even though they are not directly subject to the EU Sec Reg. The Commission Proposal retained this requirement.
Instead, the Council Position seeks a middle ground. It acknowledges that non-EU issuers need to meet substantively equivalent disclosure requirements to those applicable to EU issuers (to avoid placing EU issuers at a competitive disadvantage). At the same time, it ensures that the effective imposition of disclosure requirements on non-EU issuers does not disincentivise them from seeking EU investment. This approach helps EU investors obtain the diversification benefits of access to global securitisation markets, ultimately supporting the growth of EU securitisation markets as well.
Public Versus Private Securitisations
The Council Position fully removes the expanded definition of “public” securitisation proposed under the Commission Proposal. That expanded definition would have captured, for example, private transactions where debt instruments were listed on an EU venue for technical reasons – such as tax efficiency or specific investor requirements – rather than to promote secondary market liquidity.
By contrast, under the Council Position, the Sec Reg status quo would prevail. This means, for example, that only transactions with instruments listed on an EU-regulated market would be considered “public” securitisations by virtue of such listing.
In our view, the Council Position is welcome. It will ensure that truly private transactions – such as CLO warehouses and other types of asset-backed finance transactions – remain classified as “private” under the rules.
These are transactions where terms are negotiated between all parties (including investors) and no secondary market for such instruments exists, despite the relevant debt instruments being listed in many cases. By remaining “private”, these transactions benefit from significantly lighter disclosure requirements and additional confidentiality safeguards.
The Parliament Draft Report is generally consistent with the Council Position described above.
Administrative Sanctions
The Parliament Draft Report reintroduces sanctions for investors who breach due diligence obligations, in line with the Commission Proposal (the Council Position had removed these sanctions entirely, as mentioned above). However, the Parliament Draft Report adds some balance: sanctions would be capped at twice the value of initial investment, and Member States must take applicable sectoral rules into account when setting sanctions to avoid duplication of sanctions regimes for investors.
Third Country Securitisations
By contrast with the Council Position outlined above, in third country securitisations, the Parliament Draft Report requires investors to verify compliance with the applicable disclosure templates by non-EU sell-side parties, like the Commission Proposal. The Parliament Draft Report emphasises the removal of securitisation repository reporting for private transactions (which would include the great majority of third country transactions), together with the lighter template requirements – particularly for private transactions – in terms of meeting the objective of reducing the reporting burden for third country transactions where there are no EU sell-side entities directly subject to the Securitisation Regulation.
Public Versus Private Securitisations
The Parliament Draft Report retains the status quo as to the definition of “public” securitisation, in line with the Council Position. In addition, no securitisation repository reporting is required for private transactions, which is in our view an improvement on the Council Position – even though reporting for private transactions would be subject to confidentiality safeguards were it required.
By contrast with the Sec Reg reforms, Member State negotiations on the proposed CRR reforms reached an impasse on certain key aspects. As a result, the Council Position diverges little from the Commission Proposal, particularly regarding rules for “non-STS” transactions such as CLOs.
Consequently, the overall impact for non-STS transactions under the Council Position remains neutral to negative, as described below.
Risk Weight Floor
The Council Position generally retains the risk-sensitive risk weight floor formula per the Commission Proposal – in particular, there is still no cap on the formula’s output. Unfortunately, this means that the risk weight floor (and therefore risk weights) for securitisations where the underlying assets are “higher risk” – such as the most senior CLO positions – are likely to increase from the current fixed floor level of 15%. This is because the new formula penalises the high-risk weights of the leveraged loans backing CLO positions.
While the Council Position does provide for a decrease in the risk sensitivity of the formula (by lowering the formula’s coefficient of sensitivity), this will only apply to non-STS positions that are classified as “resilient” – and it is unlikely that CLOs will meet all the conditions required for such classification. In any case, the reduction in risk-sensitivity provided for is modest and would be unlikely to be sufficient to avoid an overall increase in the floor (relative to the current level) for securitisations of leveraged loans, such as CLOs.
P-factor
Similarly, the p-factor has been reduced for non-STS transactions from 1.0 (which currently applies under CRR) to 0.6 under both the Council Position and the Commission Proposal. All else equal, more senior securitisation tranches will therefore benefit from lower risk weights under the risk weight formulae.
However, the Council Position retains what is, in our view, an unnecessary distinction between “originators” and “investors” – conferring the benefit of the p-factor reduction solely on “originators” (and in so doing, ruling out any potential benefit from a reduced p-factor for bank investors who have not acted as originators).
Definition of “Senior”
On a more positive note, the Council Position fully reverses the changes to the definition of “senior” set out in the Commission Proposal. This definition applies for CRR purposes and to other regulations that utilise the definition, including the securitisation capital rules applicable to certain EU insurers under the Solvency 2 framework.
The Commission Proposal had added a minimum attachment point to the existing requirement for the relevant position to be “first-pay” (i.e., the most senior position in the transaction’s capital structure). Because the minimum attachment point referenced the capital charge applicable to the underlying portfolio of securitised exposures, it introduced a time-varying element to the definition (as portfolio capital charges change over time with changes in portfolio composition and defaults).
By contrast, the Council Position ensures that the seniority test will remain static over the life of the transaction. If enacted, this would provide much-needed certainty for those investors relying on “senior” characterisation to deliver regulatory capital benefits – including EU insurers applying the new stresses under the revised Solvency 2 framework to their senior securitisation positions.
Unlike the Council Position, the Parliament Draft Report makes some significant and, in our view, welcome changes to the framework set out in the Commission Proposal.
Originators Versus Investors
The Parliament Draft Report removes the distinction between originators/sponsors on the one hand and investors on the other, for the purposes of regulatory capital relief across the board. In our view, this represents a significant improvement on the Commission Proposal and the Council Position, particularly for bank investors in transactions such as CLOs of broadly syndicated loans, where no natural “originator” exists.
Resilience Classification
The “resilience” category has also been narrowed in its application under the Parliament Draft Report so that it only applies to senior “synthetic” transactions (to enable such transactions to obtain the regulatory capital benefits applicable to senior positions in “traditional” securitisations). The resilience concept is therefore no longer relevant for traditional senior non-STS transactions such as CLOs.
Regulatory Capital Relief: P-factor and Risk Weight Floors
In terms of the regulatory capital benefits themselves under the Parliament Draft Report for senior, non-STS traditional securitisations such as CLOs (and synthetic securitisations that qualify as resilient as mentioned above), substantial revisions have been made relative to the Commission Proposal and the Council Position.
Firstly, the p-factor has been reduced to 0.3, compared with 1.0 currently and under both the Commission Proposal and the Council Position for investments by non-originator investors.
Secondly, the Parliament Draft Report applies a cap to the risk weight floor formula introduced by the Commission Proposal, setting the cap at the current floor level of 15%. Additional benefits include a lower floor-to-the-floor and a smaller risk-sensitivity coefficient than under the Commission Proposal or the Council Position.
This cap is particularly significant for securitisation positions in higher credit risk assets such as leveraged loans as it will enable these positions to avoid incurring an increased capital charge that would otherwise result from the risk weight floor formula (the formula was originally proposed under the Commission Proposal and has been retained, subject to the changes mentioned, under both the Council Position and the Parliament Draft Report).
Definition of “Senior”
The Parliament Draft Report also reverses the change to the definition of “senior” introduced under the Commission Proposal, in line with the Council position. This means that the minimum attachment point (which referenced the capital charge applicable to the underlying portfolio assets) has been removed.
Accordingly, under the Parliament Draft Report, whether a position is classified as “senior” will continue to depend only on whether it has “first-pay” status in the transaction’s priority of payments.