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It’s High Time to Build a Truly Integrated EU Capital Market

by Piebe Teeboom

Hands up if you want up-and-coming European companies to have sufficient access to the money they need to grow and to drive prosperity across the EU?  

It’s a no brainer – and one of the reasons why European politicians and regulators are keen to push forward the Capital Markets Union (CMU). 

Here’s a couple of details to flesh out the argument: equity finance in Europe is 67% of the eurozone GDP versus 125% in the US. More than two-thirds of lending to small and medium (SME) sized business in the EU comes from banks. 

 A simple analysis suggests it’s a lot harder for companies to raise money on the capital markets in the EU than in the US, leading to lower levels of investment and growth for the businesses and the EU as whole. 

The Capital Markets Union is essential for building up a stronger equity culture in Europe and for opening up or expanding other sources of capital for financing. And, a more diversified financial system is also more resilient and stable.  

In the words of the European Commission itself, the CMU will ‘’provide businesses with a greater choice of funding at lower costs and provide SMEs in particular with the financing they need’’. It also paves the way for deeper economic integration between member states. 

All market participants can help reach this goal of a stronger and more diverse European capital market – from long-term investors such as pension funds and asset managers, to independent  market making firms who jointly make up the FIA European Principal Traders Association (FIA EPTA). 

Market makers help to ensure end-investors get a better deal when they execute their investment decisions; they are estimated to provide up to 45% of the on-exchange liquidity in EU capital markets.  

“Market makers help to ensure end-investors get a better deal when they execute their investment decisions; they are estimated to provide up to 45% of the on-exchange liquidity in EU capital markets.”

By improving the quality of the secondary markets, market makers help to create the conditions that are key for companies looking to raise the capital that funds innovation, jobs, and growth for the European economy. 

Market makers enthusiastically support the CMU. Proportionate regulation of the financial markets is key to achieving the twin goals of strengthening economic growth and ensuring financial stability. Currently, there’s a very important piece of regulation going through the policy-making process:  

Newly launched initiatives by the European Commission, are bringing fresh energy to tackling the above points under the umbrella of a new CMU Package. European market makers strongly support these efforts, and in particular those that look to update the regulatory rulebook for the trading markets (the so-called MiFIR Review), as critical to achieving more efficient markets to support economic growth . 

European market makers see  three key areas where ambitious policy action is required to ensure European capital markets can make a greater contribution to the EU economy. These are: 

                    1. Building a truly integrated  EU single market for financial instruments – for which  a properly designed and executed pan-European Consolidated Tape is critical. Europe needs a utility-type single price ticker that offers real-time, post-trade price information enabling end-investors to have a full and democratised overview of European trading markets. 

 FIA EPTA will continue to advocate for real-time post trade Consolidated Tape that that is equally comprehensive across equities, ETF, bond and derivatives markets. 

                     2. To improve data quality and transparency in European equities, bonds and derivatives markets. This will help end investors to make better informed trading decisions as the price formation process is improved and search costs are lowered. Nowhere is this more needed than for post-trade data in the EU bonds market.  

We welcome the European Commission’s proposal to harmonise the delays by which post-trade price information is made public in the bond and derivatives markets, the so-called deferral regime – Now it’s also critical to ensure the transparency regime does not become overly complex and fragmented by applying different time deferrals. Based on market experience, we suggest a consistent 15-minute deferral as an appropriate length. Alongside, we advocate for a volume masking regime so that investors with large positions are properly protected without hampering the efficiency of the price formation process through unduly reduced transparency.

                    3. Strengthen investor protection standards, so that retail investors can have justified trust in their intermediaries not to be exposed to corrosive conflicts of interest or suboptimal order execution in non-competitive markets.  

The EC’s proposed ban on  Payment for order flow (PFOF) practices as currently allowed in some EU markets rightfully intends to address these concerns. However, the current draft is ineffective, and loopholes need to be closed to prevent unfair competition and protect retail investors. To guarantee fair competition between market participants as well as best execution for end clients. all direct and indirect monetary and non-monetary inducements and all possible execution and routing scenarios need to be included.

In sum: the proposed MiFID / MiFIR II review proposals are an important step forward to a CMU that benefits all Europeans. European market making firms are committed to sharing their on the ground knowledge and working with officials towards greater accessibility, transparency, and choice for end-investors  

We are resolute in our desire to see the CMU spark true integration and new momentum for capital markets activity  across all Member States, including those that are currently underserved (and underused). This will benefit economic and talent growth everywhere in the EU – not limiting it just to the leading centres as is the case today. Reforms take time, but it’s important to get it right as we level the playing field and open up a new era for European capital markets.