The European Union last week stepped up its troubled six-year attempt to create a capital markets union, proposing to set up a "consolidated tape" of stock and bond prices and a central repository for regulatory news to try to harmonise securities markets across the bloc.
The European Commission said its latest proposals would improve the ability of companies to raise capital across the EU, rather than rely on bank funding, and deliver on several commitments made in its 16-point capital markets union action plan published last year.
"Today's proposals take us a significant step closer towards creating the capital markets union," said Valdis Dombrovskis, European commissioner for trade. He said the package would help smaller companies in particular access alternative finance and “enhance the international competitiveness of the EU as a place to trade".
But many of the points in last year's action plan and earlier schemes to ramp up capital markets were not taken up at this stage, notably over harmonising corporate insolvency across the bloc and simplifying securitisation rules.
The latter initiative was first set out when CMU was mooted in 2015, but little progress has been seen. That has left the EU securitisation market just a 10th of the size of the US market. A consultation has been completed on this framework with a report due in the first quarter of 2022.
The commission said it plans to review listing rules, particularly to assist smaller firms, in the third quarter of next year – more than a year after a consultation finished in the area. It will also propose a directive on harmonising “targeted aspects of the corporate insolvency framework” at the same time, but warned it was hard to get agreement in this "complex" area.
“We are not stopping here; we are also announcing today more ambitious CMU initiatives to come in 2022,” said Mairead McGuinness, financial services commissioner.
Other initiatives also expected next year include a legislative proposal on how withholding tax is applied; amendments to rules on cross-border settlements; and a review of supervision rules following the Wirecard debacle.
"Glazed shop window"
The most significant of the four proposals announced last week was a change to trading rules to create a consolidated tape.
That would provide consolidated data on prices and volume of traded securities, providing all investors near real-time trading data for stocks, bonds and derivatives across all 500 or so trading venues in the EU.
The commission said this would improve price transparency across venues and improve competition between them by giving investors "access to considerably improved market information at a pan-European level". It is seen as particularly useful for corporate bond issuance and for increasing liquidity of secondary trading in euro-denominated debt instruments.
Small equities trades would be banned from dark pools and large investment banks would have to be fully transparent about how such deals were executed.
The commission said the plans would not hurt stock exchange providers by forcing them to provide data to the tape at a bargain price, saying faster proprietary feeds would still be allowed with the consolidated feed only being “close-to-real time”, which could be anything from one to 15 minutes post-trade.
It said the tape would “reduce the information advantage that the biggest market players have compared to other market players, in particular smaller asset managers, banks and retail brokers who may not be able to afford expensive services of data vendors”. IFR is owned by the London Stock Exchange Group.
Kalin Anev Janse, chief financial officer at the European Stability Mechanism, said the tape “would open access to data for all European tradeable entities to the rest of the world – rather like an internet search engine does".
It would be useful pre-trade, allowing investors to glimpse in real-time where the terms of a trade are best, Janse said in a speech at an International Capital Market Association event on Wednesday. Market regulators would also benefit from a common reference point for best execution and transaction cost analysis.
“The problem for investors in Europe is much the same as for consumers who want to buy something – they see through a glazed shop window,” said Janse.
For equities, the commission said the tape, by introducing more accurate pricing, could save €1bn annually for investors. It said it was hard to quantify an equivalent saving in the bond markets, but estimated prices would be up to 5bp tighter.
14% global share
The EU's plan to set up a CMU has struggled for years and was hit hard by Brexit, which meant the dominant London financial hub left the bloc. It also leaves a big financial competitor on its doorstep, and Britain has said it will adapt rules to become a more attractive destination to raise money or trade securities.
The commission said the need for unified markets has intensified as companies rush to raise funds to meet climate goals and recover from the Covid-19 pandemic.
But there is much to do to build the capacity. A September report by think-tank New Financial said the EU is still over-reliant on London as a financial centre in areas like derivatives trading, clearing and asset management, and there isn't sufficient domestic capacity in other countries.
"EU capital markets are significantly smaller as a result of Brexit and are punching below their weight on the global stage," the report said. It estimated the EU accounts for just 14% of global capital markets activity, compared with 22% before Brexit. The US accounted for 42% of global activity, and 28% was in Asia.
The report said some countries, including the Netherlands, Sweden, Denmark and France, have well developed and deep capital markets, but markets in Germany, Italy and Spain are all "significantly underdeveloped".
In areas such as foreign exchange and derivatives trading the EU's share of global activity has slumped to 10% or less from 60% or more before Brexit. The EU's share of global bond market activity was about 20% and about 15% of equity issuance, and in securitisation issuance the bloc accounted for just 3% of global activity, New Financial estimated.