ICMA (the International Capital Market Association) represents issuers, lead managers, dealers, asset managers, investors and market infrastructure providers in the international capital markets. ICMA has over 580 members, based across Europe and globally, and has set standards of good market practice in the international fixed income market for over 50 years. ICMA’s mission is to promote resilient well-functioning international and globally coherent cross-border debt securities markets, which are essential to fund sustainable economic growth and development.
CMU (Capital Markets Union) has been a major initiative of the outgoing European Commission. Launched in September 2015, the European Commission’s CMU Action Plan was built around four principles:
- creating more opportunities for investors;
- connecting financing to the real economy;
- fostering a stronger and more resilient financial system;
- and deepening financial integration and increasing competition.
ICMA understands and supports efforts which have been made to achieve financial stability, which in overall terms is in everybody’s interest. Nevertheless, ICMA is concerned that the regulatory response to the crisis has comprised a series of individually designed measures without there being an overall understanding of the way in which the pieces would fit together. Accordingly, it is very welcome that ongoing efforts are being made to evaluate impacts and is important that there be a willingness to recalibrate elements in order to try and address unintended consequences.
More fragmentation
ICMA has been particularly concerned about impacts on the market, especially ways in which regulation has created fragmentation. Our studies have shown the importance of fixed income markets as a financing channel and drawn attention to the fact that increasing regulatory burdens, in particular tighter capital constraints on banks, have put market making activities, in both cash bonds and repos, under significant strain. This implies that a higher price should have to be paid on bond issuance in order to cover the reduced market liquidity – although this has been masked by the exceptional monetary policy measures taken by Central Banks which have, for important and well-intentioned reasons, continued to make available large amounts of cheap cash and thus acted to compress issuance spreads.
Europe’s direct regulation of markets, in particular through MiFID (Markets in Financial Instruments Directive) II has added costs and complexity while failing to adequately deliver intended benefits. Much work is needed to clean up data and make better information available, including through the establishment of a suitably designed and governed consolidated tape. CSDR (Central Securities Depository Regulation) market discipline will helpfully bring in a regime of settlement penalties, but also includes the imposition of mandatory buy-ins which are very poorly suited to fixed income markets and liable to simply drive more liquidity out of the market. Combined reporting burdens, particularly including those under MiFID II, EMIR (European Market Infrastructure Regulation) and SFTR (Securities Financing Transaction Regulation), are significant and ought ideally to be streamlined in order to more efficiently and cost effectively deliver accurate, timely information.
Unsatisfactory results
CMU is conceptually a good further step to develop well-integrated EU capital markets, all the better to boost financing options and meet the challenges of continuing to deliver economic growth in mature economies, but despite progress on many potentially worthwhile initiatives, results thus far have been underwhelming in their impact. Many measures are only just agreed by the co-legislators and their effects therefore remain to be seen. Others are further advanced but there have been significant problems with implementation, including where Level 2 technical standards have not been agreed in time.
The STS (Simple, Transparent and Standardised) Securitisations Regulation has thus far proved especially problematic, with the challenge of complying with its incompletely specified multiple requirements serving to constrain rather than boost securitisation and threatening to eliminate ABCP (Asset-Backed Commercial Paper) in Europe. The new prospectus regulation may be significant for EU capital markets, but when placed alongside the constraints imposed by MiFID and PRIIPS (Packaged Retail Investment and Insurance-Based Products) will not do anything to boost meaningfully the development of retail fixed income markets, albeit that bonds should in principle be more retail-friendly than (first-loss exposed) equities.
New regimes established for ELTIFS (European Long-Term Investment Funds) and for the PEPP (Pan-European Personal Pension Product) are further examples of important steps taken which move in the desired direction. Yet, in each case, the potential of what has been done is hampered by the introduction of too many detailed constraints, leaving it likely that the take-up of these new forms of investment vehicle will fall far short of the desired level. While remaining respectful of the need to provide the right degree of control to satisfy legitimate concerns, such as investor protection, more work to better facilitate take-up of these vehicles could boost their contribution towards the financing of much needed longer-term investment – to the benefit of the real economy.
An appropriate supervision
Continuing to build and develop CMU offers benefits but also potentially brings new risks, which should of course be carefully considered and suitably addressed. For instance, the aim of complementing the bank financing channel and hence avoiding excessive economic retraction during periods of bank instability or weakness should not be allowed to be undermined by market risks introduced through the capital market channel and spread across borders by the union dimension of CMU. Already much progress to adapt EU supervision and oversight, especially through the establishment of the ESFS (European System of Financial Supervision), has been made. This foundation can continue to be appropriately built upon, in parallel with the journey towards the realisation of CMU. This evolution should remain mindful of the distinction, which can be expected to remain even in an EU single market context, between retail markets that have a strong domestic orientation and wholesale markets which act widely across borders, both inside the EU and in a broader global markets context. Linking this to continued efforts to ensure that the EU’s single rulebook is consistently administered across the whole of the EU can potentially bring at least as much benefit as the promulgation of yet more rules and regulations.
Other initiatives are needed
It is also widely recognised that CMU is a complement to the EU’s well-advanced endeavour to introduce Banking Union. Completion of the latter is of significant importance, not only to ensure that the objectives of Banking Union are secured, but also since the CMU can itself benefit from the EU having a robust EU-wide banking system – given that banks are themselves important actors in capital markets.
Alongside this, progress with other initiatives to further strengthen EMU (the Economic and Monetary Union) also offer significant potential to act in ways which will greatly benefit CMU and vice-versa. Two elements discussed in this context which are particularly germane are the possible steps to boost the international role of the euro and the examination of how to create a European safe asset. Each of these can do much to add to the strength and depth of European markets, making them more attractive and better able to deliver CMU’s objectives.
The Brexit effect
Brexit adds a significant further layer of complexity, exacerbating the risk of market fragmentation and ICMA has contributed to efforts to avoid or mitigate cliff-edge risks. The EU27 continue to anticipate wishing to develop capital market capabilities (ie CMU looking ahead) but greater clarity is needed about how best to do this in a way which maximises the opportunity to attract investment to Europe through open and integrated capital markets, as opposed to cutting off Europe through excessively inward-looking protective measures.
The coming debate about the EU/UK relationship and the extent to which a model of regulatory equivalence can facilitate market access, suitably respecting the importance of safeguarding EU markets and their users while also facilitating their abilities to benefit from UK financial market capabilities, will prove important as Brexit progresses. Other regulations, such as the EU BMR (Benchmarks Regulation), already illustrate the difficulty of creating EU rules which go beyond those anticipated elsewhere while, at the same time, suggesting that equivalence is the way to accommodate third country considerations. Appropriately and pragmatically resolving these tensions, also evident in recent decision making regarding the EU’s relationship with Switzerland, will play an essential part in shaping the EU’s future position in global capital markets. Done well, this can bring significant value to the financing of the EU’s economy and help the EU to achieve better outcomes in a highly competitive global environment.
Focus on sustainability…
The swift rise in focus on sustainability has been anticipated by the significant development which ICMA has helped to guide in relation to green and social bonds, working through market-led principles. Taking note of this some countries have already moved to legislate, and the EU is now progressing rapidly along this path, with its taxonomy and green bond standard proposals, together with steps to integrate sustainability in other regulations, such as MiFID II, UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFMD (Alternative Investment Fund Managers Directive). There is much further to go on this journey and CMU will need to be shaped in such a way that it helps to drive the coming shift to sustainable finance.
…and digitalisation
Alongside this, at the same time as technological development holds the potential to boost economic productivity in most fields of human endeavour, FinTech (Financial Technology) offers a way in which to potentially rise to many of the challenges of formulating and regulating better markets. By thinking ahead, rather than looking back, the EU can seize this opportunity to build and develop its market capability in ways which already integrate and capitalise upon the potential which digitalisation offers, while simultaneously instigating safeguards in respect of associated technological risks.
While many more detailed steps need to be taken to progress CMU and better fulfil its objectives, ICMA considers that the big opportunity which currently lies in front of the EU is to fully exploit the synergies between each of the CMU, the sustainability action plan and the FinTech action plan. At the same time, it will be essential to maintain the EU’s competitiveness in globally interconnected capital markets and to avoid that the fragmentation inherent in Brexit has an unduly negative impact.
