Single Market and Capital Markets Union – European Commission’s View on the Role of Financial Market Infrastructures
By Eric de Gay de Nexon, Head of Strategy Market Infrastructures for SGSS
“There is an open question regarding the commitment of the European Commission to market integration in the wake of the UK vote to leave the European Union. Will the same level of resources be available for dealing with harmonization and standardization initiatives in the post trading area? Or will resources be diverted into efforts related to the exit of the UK from the Union? If there is no political will to commit to further integration and harmonization work, progress will be difficult.”
A functioning Single Market stimulates competition and trade, improves efficiency, raises quality, and helps cut costs. Complemented by the Capital Markets Union, the European Commission’s vision is to create deeper and more integrated capital markets to lower costs and make the market more resilient. How far are we from achieving this vision and what challenges need to be overcome? What is the role of Financial Market Infrastructures? What will be the tangible benefits for market participants and end-users?
- The creation of a single financial market and capital markets union is a very long story. Sixteen years ago the Giovannini Group started work on identifying barriers to integration of Europe’s capital markets. Fifteen barriers were found in total, the removal of which would create a harmonised technical, legal and fiscal environment in financial markets. This harmonised environment would help to develop cross-border investments and also to foster a consolidation in the number of market infrastructures. However, the aim to remove all barriers by 2006 was not met and has still not been achieved, even if some progress has been made to pave the way towards further harmonisation and consolidation.
- The number of market infrastructures across the European Union has increased since 2000, eased by regulations such as MIFID in 2007, but also CSDR and EMIR. And as MiFID II comes into effect, even more market infrastructures will emerge, including multiple consolidated tape providers. This is the result of the European Commission’s desire to promote competition, whereas market participants would prefer a utility approach to some functions that they consider non-competitive. A utility will help to keep costs down and improve efficiency.
- In Europe, we still have multiple market infrastructures, unlike in countries such as the U.S. and Japan. At present, there are 102 regulated markets, 151 multilateral trading facilities (MTFs), 20 central counterparties (CCPs), 42 central securities depositories (CSDs) or securities settlement systems (SSS), and six trade repositories. This demonstrates that the European region is very far from the initial objectives set in 2000 of having fewer market infrastructures. There is even more fragmentation now despite the efforts taken by the industry over the past 16 years – although there have been some moves towards consolidation, mainly at the exchange level, and Euroclear has brought a number of CSDs together.
- Since the financial crisis, the priority of European regulators has been to strengthen the financial stability of the EU and reinforce trust in the financial system. This has resulted in many regulations targeted at reframing the regulatory framework of European financial markets, but the aim of fostering market integration has taken a backseat during this period.
- In the post-crisis environment financial authorities have recognised the importance of market infrastructures at the trading and post-trading levels, given the significant role they played in minimising the impact of the crisis and the fact that none failed during the crisis. This was reflected in the revised regulatory framework, as regulators began to expand and to strengthen the role of market infrastructures (particularly in the post-trade environment), providing regulatory guidelines targeting CSDs and CCPs, and aiming to organise their activities in an harmonised way. However, this remains a very long process that is still ongoing.
- Nevertheless, regulations such as CSDR and EMIR bring further harmonisation in the fragmented post trade area, and coupled with the launch of T2S and the initiatives launched by the European Commission in the context of the Capital Market Union, have the potential of allowing the integration process to be relaunched, in order to create a more harmonised context for financial institutions.
- The experience with Target2 Securities demonstrates how difficult and lengthy the creation of single market infrastructures is. The idea was first mooted in 2006 and the platform will not be fully operational until the end of 2017.The industry should therefore be in a position to benefit from what the single platform will bring only after the full migration to T2S. In addition, T2S covers only the Euro, although the Danish Kroner is expected to go live some time in 2019. Moreover, T2S only handles transaction settlements, which is arguably the easiest part of the securities process. There is still much work to be done on the harmonisation and integration of asset servicing, which is the most complex part of the securities chain – that is why the European Central Bank is calling for T2S to become a catalyst for greater harmonisation across Europe, not just in settlement but also in areas such as asset servicing. For instance, work is under way to bring standardisation to corporate actions processing, which is a very complex matter.
- Earlier this year the European Commission set up the EPTF (European Post Trade Forum), a group of European post-trade experts whose findings will be released later this year. This will provide an assessment of the current environment and of the status of the various Giovannini Barriers. It is possible that some new barriers will have arisen since the original report and these will also be identified. Based on this assessment, the group of experts will identify and make proposals on avenues of progress in removing these barriers to further integration to the European Commission. We already know that there is still work to be done by public authorities to remove legal and tax barriers.
- An integrated capital market in the European Union will provide a deeper pool of investors for issuers to tap into. Investors, many of whom invest only in their domestic markets, will be able to branch out into other markets. Integration of market infrastructures will benefit service providers, such as global custodians, by reducing the costs of connectivity and adaptation to local market specificities.