DG FISMA officials have been told, “don’t fix what is not broken” when preparing an EU covered bond legislative proposal for Q1 2018, according to head of unit Didier Millerot, who said the Commission will try to balance this imperative with drawing up a text that “means something”.

The Commission announced on 8 June that it will put forward a legislative proposal for an EU-wide covered bond framework, targeting the first quarter of next year, as part of its Capital Markets Union project, and, speaking at a European Covered Bond Council (ECBC) plenary in Barcelona yesterday (Wednesday), Didier Millerot, head of unit, banks and financial conglomerates, DG FISMA, said the Commission is now holding discussions with EU Member States on technical issues and is translating the Commission’s decision to present a framework into operational terms.

“We are fully bearing in mind the fact that every political master that is talking to us is making it very clear that they don’t want us to create a revolution,” he said. “What is already there and working well should be maintained – we got this message loud and clear.

“But there is potential elsewhere. There is potential in those countries that do not know these markets, and there’s potential to do more with what is working well. This is the kind of balance we are trying to strike now.”

The Commission’s proposal will probably provide “general ideas and general guidance,” Millerot said, stating that compulsory guidance to Member States will not get into the level of detail of, for instance, defining what liquidity measures must be in place nor how special public supervision should be organised and detailed.

“But of course, that is not always an easy thing to do, because at the end of the day the text also has to mean something, and it has to, let’s say, allow those countries that do not have a well-functioning legislation in place to get sufficient guidance from us to develop a regime that works well,” he said. “We will try to find that balance.”

Millerot indicated that the proposals will take the form of a Directive, but said there will also probably be a Regulation to make adjustments to Article 129 of the CRR and possibly other provisions.

“Most of the key elements will be found in that Directive,” he said, “and the Directive will replace what we have now in the UCITS Article 52, and serve as a new reference for defining what a covered bond is in the EU.”

Before deciding on a legislative framework, the Commission set out various options for covered bond harmonisation for a public consultation. Millerot said there is no time for a second public consultation, but said it is very important for the Commission to keep open a dialogue with stakeholders in the industry, adding that he is very grateful for the “very high quality and frank dialogue” held so far.

Luca Bertalot, secretary general of the EMF-ECBC, agreed there is no time for a second consultation, but said the industry body’s EU legislation working group stands ready to support the Commission.

The European Parliament in July voted through an own-initiative report from the Committee on Economic & Monetary Affairs (ECON), which represents the Parliament’s early input into discussions how to harmonise EU covered bonds. Millerot said it is helpful for the Commission to know in advance what Parliament has in mind, noting that the report contains very detailed views.

“I think we are 90% on the same page – there are a couple of things on which we think the Parliament is a bit more ambitious than we plan to be, about, for instance, the push from the Parliament to have ESNs nearly at the same time as the traditional model,” he said. “There are also a couple of more technical issues that we may not follow, but obviously it is important for us to know in advance what kind of starting position the Parliament will take.”

The ECON report called for a legal framework for ESNs to be included in any Directive.

Millerot said the Commission did not have such a level of granular feedback from Member States, but that the Commission met with the European Council’s Financial Services Committee in July for technical discussions, and said further discussions will be held later this month.

“The motto there was ‘don’t fix what is not broken’, and I told them I got the message loud and clear,” he said. “But importantly there was support for legislation.

“They share our analysis of the fact that all elements being weighted, there is really added value in us having more detailed rules at the EU level.”

Referring to the next ECBC plenary being in Canada in April 2018, Millerot concluded: “I hope that indeed next year, if we meet again in Vancouver, we’ll have something to look at together, and you will be able to tell me whether we managed to strike that balance.”

At the same time as announcing that it will present a legislative covered bond framework, the Commission announced that it will assess the case for developing European Secured Notes (ESNs), with any announcement to come in the second quarter of 2017.

Millerot said the Commission is not as advanced in its reflections in this field as it is regarding traditional covered bonds, and therefore decided to take more time. While studying what could be done, the Commission will engage with stakeholders, hold discussions with the EBA and will probably launch a study, he said.

“One of the first questions we need to ask ourselves is if we have, let’s say, structural elements of what describes an ESN which are quite similar to the elements that define covered bonds in terms of dual recourse and supervision and so on, what does it mean in terms of preferential treatment, knowing that the assets are different and probably more risky and diverse,” he said.

“Can we afford to give them the same preferential treatment? Should we give them a specific dedicated one, or should we not give them any preferential treatment at all? And then the same question in terms of resolution and liquidity and so on.”