The EC has Published the Draft Text of a Regulation on Sovereign Bond-Backed Securities and Seeks Market Feedback on its Proposals


On May 24, 2018, the European Commission (“EC“) published a proposal for a Regulation of the European Parliament and of the Council on sovereign bond-backed securities (2018/0171 (COD)). Sovereign bond-backed securities (“SBBS“) are euro-denominated debt securities, created by private entities and backed by a pre-determined, diverse pool of bonds issued by euro-area national governments.

Akin to securitisation bonds, this new type of financial instrument is designed to be issued in tranched notes, appealing to a range of risk appetites. Senior ranking notes would pay a lower return than junior notes, in exchange for a lower risk profile. Junior notes would bear losses before senior notes but would be rewarded with a higher coupon.

Rather than being subject to the same regulatory treatment as securitisation bonds, the proposal seeks to grant SBBS the same regulatory treatment as national euro-area sovereign bonds denominated in euro; reflecting the relatively low risk and high liquidity of the pre-determined and diverse underlying portfolio of sovereign debt.

The draft Regulation follows the Commission’s publication of an impact assessment on enabling a regulatory framework for the development of SBBS, in January 2018.

The proposal includes measures relating to:

  • Eligibility and composition of the underlying portfolio and tranching of SBBSs issues (Articles 4 to 6 of the draft Regulation).
  • Issuance and management of SBBSs (Articles 7 and 8).
  • Use of the designation “Sovereign Bond-Backed Securities” (Article 9).
  • SBBSs notification and transparency requirements (Articles 10 to 12).

Specifically, the proposed Regulation requires:

  • The underlying portfolio to include sovereign bonds of all euro area Member States, with relative weights in line with each Member State’s contribution to the capital of the European Central Bank (the so-called ECB capital key).
  • The size of the senior tranche to be fixed at 70% of the overall SBBS issuance. The remaining 30% can be divided in as many sub-senior (or subordinate) claims as the issuer finds best suited to the demand of its investors.

The Commission is inviting market feedback on its proposals. The feedback period is open and ends on July 26, 2018.