Securitisation is a structured finance tool in which an entity pools together identifiable cash flows and transfers the interest in those cash flows to investors, either with or without the support of further collaterals, for the purpose of financing.
Following the US subprime crisis, securitisation suffered from bad press that tainted its reputation. However, securitisation is still considered an essential component of well-functioning financial markets. If it is structured soundly securitisation is an important channel for diversifying funding within the economy.
Because of this, the European Supervisory Authorities worked to implement a number of reforms to make securitisation dealings within the EU safer and simpler, and to ensure proper control mechanisms to mitigate risks and protect investors.
Malta has also jumped on the bandwagon and developed a legal framework in line with EU regulations, for securitisation in Malta, stoking interest among investors wanting to establish structured finance vehicles.
The European Union has been working on efforts to strengthen the securitisation market and to build a Capital Markets Union by end 2019. Towards this end the European Commission proposed two new regulations: the Securitisation Regulation and the Securitisation Prudential Regulation, introducing rules for simple, transparent and standardised securitisations and setting out the framework under which investors like banks and investment firms can potentially benefit from more favourable regulatory capital treatment for STS securitisation exposures.
After the coming into force of the Prospectus Regulation in July 2017, the new securitisation regulatory framework represents the next most significant step in the EU’s set of reforms. In May last year, during Malta’s EU presidency, representatives from the European Parliament agreed on the Commission’s recommendations intended to facilitate the growth of a securitisation market in Europe, voted in on October 26, 2017. This legislative package is expected to restore market activity in EU securitisation transactions in order to generate new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups.
Last November, the European Council adopted the implementing rules and technical standards developed by the EC and ESAs. This is a positive step forward towards the development of a securitisation market which will help create new investment possibilities and provide an additional source of finance, particularly for SMEs and start-ups. It is anticipated that most of the new regulations will be in place by 2019.
It is anticipated that most of the new regulations will be in place by 2019
The development of an efficient legal framework for securitisation in Malta, together with the Malta Stock Exchange strategic plan for National Capital Markets, has created interest among investors to use Malta as a hub for establishing structured finance vehicles in a very efficient manner. But why is it attractive to set up a securitisation structure in Malta?
One of Malta’s most appreciated advantages is the accessibility of the regulator, who fosters constructive working relationships with companies investing in Malta. Another important selling point is that as an EU Member State, businesses in Malta can passport their services to all other Member States. Moreover, Malta provides a robust and effective legal framework for securitisation and for the segregation of different sets of assets within a single SPV, allowing the formation of several securitisation cells without incurring any risk of cross-contamination between the different creditors and investors of the individual cells.
Malta has a lot of opportunities for further growth in the securitisation market. Although the solid legislative framework for securitisation in Malta is important for the growth of this market, it is the costs to set up a securitisation vehicle that give Malta its unique competitive edge. For example, when compared to other EU jurisdictions such as Luxembourg and Ireland, Malta’s key cost advantages in relation to corporate, legal and accounting services make Malta highly attractive, especially for those securitisation arrangements below the €100 million level.
With this background and in a wider context of local and international business growth, Malta is set to experience exponential progress in the securitisation market.
Nicholas Warren is a senior manager and Alistair Cuschieri is an assistant manager in the Financial Services Practice Group at Chetcuti Cauchi Advocates.
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