Sowing the Seeds of Deeper Capital Markets: Europe’s Problem With Risk

The growing debate over whether to raise the UCITS 10% single-issuer limit for securitisations reveals a lot about Europe’s relationship with risk. Europe wants deeper capital markets, more investment, more diversified sources of financing for the real economy, and a greater role for market-based finance. Yet there continues to be discomfort with the risk-taking that capital markets require. 

Capital Markets Need Investors, Not Just Issuers 

That tension is particularly clear in securitisation. Policymakers want securitisation to help unlock bank balance sheets, support lending, and channel more capital into the European economy. But Europe also needs investors that are willing and able to buy transactions in meaningful size. Capital markets require demand, and demand requires a regulatory framework that allows risk to be managed. 

If Europe wants securitisation to become a deeper and more useful source of market-based finance, it must find a way for UCITS funds to participate effectively. UCITS funds are one of Europe’s most successful channels for pooling capital and investing it through regulated markets. The issue is not whether the limit should increase, but whether Europe is prepared to let one of its most successful regulated fund structures play a meaningful role in developing the securitisation market.  

A Rule Designed for Corporate Issuers 

Article 56(2)(b) of the UCITS Directive limits the amount of debt securities a UCITS may acquire from a single issuing body. This rule was designed to ensure that a UCITS cannot build a position that gives it undue influence over a corporate issuer or creates excessive concentration in one company. 

A securitisation vehicle, however, is not a corporate operating company with a business strategy, board direction, or management decisions that a UCITS investor can influence. It is generally a dedicated financing vehicle issuing securities backed by a pool of assets.  

Applying the same issuer-based rule to securitisations can therefore constrain UCITS investment in a way that does not improve investor protection. Securitisation issuances are often smaller than corporate bond issuances. As a result, a UCITS may reach the 10% limit even where the position would remain modest within the fund’s overall portfolio and consistent with its diversification and risk management framework. 

Existing Safeguards Already Address the Risks 

UCITS already operate within a robust investor protection framework. They are subject to diversification requirements, liquidity management obligations, valuation standards, disclosure rules, eligible asset requirements, and supervisory oversight. Securitisations are also subject to a dedicated EU regulatory framework, including due diligence, transparency, risk retention, and disclosure requirements. Those safeguards do not eliminate risk; they provide a framework through which risk can be assessed, managed, and disclosed. 

The question is whether the 10% issuer limit is the right tool for the risk policymakers are trying to address. If the concern is portfolio concentration, UCITS already have diversification rules. If the concern is liquidity, UCITS managers already must manage liquidity in light of the fund’s strategy and redemption terms. If the concern is transparency, the EU securitisation framework already imposes detailed disclosure and due diligence obligations. The issuer limit does not do that work in a targeted way. 

Europe Cannot Neglect Investor Demand 

Much of the debate on securitisation reform has focused on encouraging issuance and making the market more attractive for originators. But a successful securitisation market also requires a deep and diverse investor base. 

The UCITS 10% issuer limit is one barrier, but investors are looking more broadly at the cumulative impact of the reforms. Unresolved issues in the treatment of third-country due diligence paired with the introduction of a new sanctions regime are likely to hamper investor participation in the securitisation markets. If these are maintained and UCITS remain unnecessarily constrained in their ability to invest in securitisations, Europe will be limiting one of the most natural sources of demand. 

A More Confident Approach to Risk 

Recalibrating the UCITS 10% issuer limit for securitisations would allow UCITS managers greater flexibility to invest in a regulated asset class that can support bank lending and capital market development. And it would do so without undermining the broader UCITS framework. 

If the EU wants securitisation to support lending, growth, and the financing of the real economy, it cannot focus only on encouraging issuance while leaving demand-side barriers in place. 

The UCITS issuer limit, the sanctions regime, and the third-country due diligence rules are three strands of the same problem: a review that talks about reviving the market while still struggling to treat securitisation as a regulated asset class and accept the risk-taking and flexibility that EU investors need. EU investors are left operating on a different footing than their global counterparts at precisely the moment Europe is asking them to help revitalise the market. 

Fixing these would send an important signal that Europe is prepared to treat securitisation as a normal part of a regulated capital market, rather than as a risk to be tolerated only at the margins. Deeper capital markets will not grow in soil where risk is never allowed to take root.