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Completing Capital Markets Union COMPLETING CAPITAL MARKETS UNION Enabling EU-27 markets to play a bigger role in the financing of the Union’s economy LOGO + ACRONYME CEPS-ECMI provided the background analysis of the report, and do not necessarily endorse or subscribe to the recommendations put forward by AMAFI. PAGE 3 LOGO + ACRONYME Association française des marchés financiers (AMAFI) AMAFI is the trade organisation working at national, European and international levels to represent financial market partici- pants in France. AMAFI members consist of investment firms and credit institutions (French, European and global firms), PAGE 3 operating in and/or from France (corporate and invest- ment banks (CIBs), brokers-dealers, exchanges, and private banks). As far as financial products are concerned, we mostly represent all issuers/manufacturers of products (CIBs) and, through our private bank members, distributors as well. AMAFI has more than 150 members operating in equities and fixed-income and interest rate products, as well as commodities, derivatives and structured products for both professional and retail clients. Centre for European Policy Studies CEPS is one of Europe’s leading think tanks and forums for debate on EU affairs, with an exceptionally strong in-house research capacity and an extensive network of partner ins- titutes throughout the world. As an organisation, CEPS is committed to carrying out state-of-the-art policy research that addresses the challenges facing Europe and maintaining high standards of academic excellence and unqualified inde- pendence and impartiality. It provides a forum for discussion among all stakeholders in the European policy process and works to build collaborative networks of researchers, poli- cy-makers and business representatives across Europe. European Capital Markets Institute ECMI conducts in-depth research aimed at informing the debate and policy-making process on a broad range of issues related to capital markets. Through its various activities, ECMI facilitates interaction among market participants, policy- makers and academics. These exchanges are fuelled by the various outputs ECMI produces, such as regular commen- taries, policy briefs, working papers, statistics, task forces, conferences, workshops and seminars. In addition, ECMI undertakes studies commissioned by the EU institutions and other organisations, and publishes contributions from high-profile external researchers. 2 AMAFI / 20-40 TABLE OF CONTENTS PART A An ambitious path of reforms to successfully accelerate the market-based financing of the Union’s economy 7 Introduction 8 A.1 The structure of EU financial markets 11 Bank based vs market based financial system 11 Equity and debt securities markets 12 Stock markets 12 Bond markets 12 OTC derivatives market 12 The securitisation market 12 The asset management sector 13 Private equity and venture capital 13 Households 13 Non-financial corporations 13 Insurance companies and pension funds 14 In a nutshell 14 A.2 Key challenges for EU-27 financial markets 15 2.1 The four main financing challenges 15 2.1.1 The Union’s economic recovery 15 2.1.2 The mitigation of climate change 16 2.1.3 Fostering the development of EU champions especially in the digital and energy transition spheres 16 Enabling the Union’s economic sovereignty 16 Adapting to the digital revolution 17 Ensuring the Union’s autonomy for energy transition 18 2.1.4 The ageing of the population 18 AMAFI / 20-40 3 2.2 Brexit: the importance of the UK in the functionning of EU financial markets 19 2.2.1 The emergence of London as a global financial centre 19 2.2.2 Trading 19 The primary equity markets 19 The secondary equity markets 19 The primary bond markets 20 The secondary bond markets 20 Foreign exchange 20 Derivative markets 20 2.2.3 Clearing and settlement 21 Clearing 21 Settlement 21 A.3 Reforming EU-27 financial markets 22 PRIORITY 1 Revamping the securitisation market 22 PRIORITY 2 Developing the flexibility of the prudential regulatory framework 23 PRIORITY 3 Managing Brexit and potential hard-Brexit implications 23 PRIORITY 4 Creating an EU safe asset 26 PRIORITY 5 Strengthening supervisory convergence 26 PRIORITY 6 Developing an ecosystem of pension funds 27 PRIORITY 7 Facilitating companies’ access to investors 27 PRIORITY 8 Encouraging debt-equity swap transactions 29 PRIORITY 9 Creating the regulatory conditions for the emergence of European champions in the digital and energy transition fields 29 Proposed reforms with a more medium to long term perspective 31 Consolidation of EU post trade infrastructures 31 Harmonizing procedures for repayment of withholding taxes to investors 31 Enabling EU-27 investment banks to play a central role in the financing of EU economy to compete at EU and international levels 32 Simplifying the EU regulatory framework for financial markets 32 The importance of financial literacy for EU citizens 33 A targeted public support from EU institutions 33 Connecting EU trading venues for SMEs 33 Enhancing insolvency regimes 33 Corporate actions 33 Conclusion 34 4 PART B An analysis based on economic data illustrating the challenges faced by EU-27 markets 35 B.1 The unified legal, regulatory and fiscal framework of the US 36 B.2 The consolidation of the US banking system 38 B.3 The depth of the US securities market 40 B.4 The consistency of the US pension funds ecosystem 41 B.5 Bank-based versus market-based financial system 44 B.6 Debt and securities markets 46 B.7 Stock markets 47 B.8 Divided and diverse bond markets 50 B.9 London as the epicentre of the OTC derivative market 52 B.10 The difficult recovery of the EU securitisation market 54 B.11 Asset management: a growing sector since 2008 56 B.12 Private equity and venture capital 60 B.13 Households’ risk-averse behaviours 63 B.14 Non-financial corporations 65 B.15 Insurance companies and pension funds 67 B.16 The mitigation of climate change 71 B.17 The adaptation to the digital revolution 73 B.18 The ageing of the population 75 B.19 The emergence of London as a global financial centre 77 B.20 Primary and secondary equity markets 81 B.21 Primary and secondary bond markets 86 B.22 Foreign exchange 91 B.23 Derivative markets 93 B.24 Clearing and settlement 96 B.25 Market fragmentation and the role of UK CCPs 101 B.26 The liquidity of EU-27 financial markets 105 Table of figures 108 Table of tables 110 References 111 PP 34 These clickable icons throughout Part A lead to further information in Part B. 5 GLOSSARY OF ACRONYMS PART A CCP Central clearing counterparty HLF High-Level Forum CEE Central and Eastern European IPO Initial public offering CEPS Centre for European Policy Studies ICPF Insurance company and pension fund CIB Corporate & Investment Banking IRD Interest rates derivatives CMU Capital Markets Union LSE London Stock Exchange CRR Capital Requirements Regulation MAR Market Abuse Regulation CSD Central Securities Depository MiFID Markets in Financial Instruments Directive CSDR Central Securities Depositories MiFIR Markets in Financial Instruments Regulation Regulation MTF Multilateral trading facility CVA Credit valuation adjustment NCA National competent authority D2C Dealer to customer NFC Non-financial corporation DTO Derivative trading obligation NSFR Net stable funding ratio EC European Commission OTC Over the counter ECB European Central Bank OTF Organised trading facility ECMI European Capital Markets Institute PE Private equity EDDI European Distribution of Debt Instruments PEPP Pandemic Emergency Purchase Programme EIB European Investment Bank PRIIPs Packaged Retail Investment and EMIR European Market Infrastructure Regulation Insurance Products ESG Environmental, social & governance QE Quantitative easing ESMA European Securities and Markets Authority SA-CCR Standardized approach for counterparty EU European Union credit risk Eu VECA European venture capital funds SME Small and medium enterprise FRTB Fundamental review of the trading book STO Share trading obligation FX Foreign exchange UK United Kingdom GDP Gross domestic product US United States GFC Global financial crisis USD US dollar GSE Government-sponsored enterprise VC Venture capital 6 PART A An ambitious path of reforms to successfully accelerate the market-based financing of the Union’s economy 7 Introduction The Capital Markets Union initiative With this in mind, initiatives to revamp the CMU was fully justified in the context born project were initiated in the second half of 2019 of the Global Financial Crisis shortly after a new European Parliament was elected and not long before the new European Commission In the wake of the Global Financial Crisis (GFC), the was officially due to take office. While the European issue of the stability of the financial system in gene- Parliament’s own-initiative report is still underway as ral, and the banking system in particular, has become these lines are being written, two main workstreams central. Various regulations, particularly in the pru- deserve being mentioned: one at Member States’ dential field, have thus been adopted, one of the very level, the Next CMU High-Level Group chaired by Fa- direct effects of which is the considerable increase brice Demarigny whose report published in October in the constraints weighing on banks and on their 2019(2) very much inspired the Council’s conclusions ability to distribute credit. This has resulted in the on the deepening of the CMU adopted in December need to change the financing model of the European 2019(3), and the other at the European Commission economy, which has hitherto been credit-based, to (EC) level with the High-Level Forum chaired by ensure that it could increasingly rely on financial Thomas Wieser whose final report has been recently markets. issued(4). The Capital Markets Union (CMU) Action Plan Building on the contributions it has been making unveiled in September 2015(1) aimed to achieve this for many years to the process of developing an transition.
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