by Mirzha de Manuel Aramendía
The European Commission recently unveiled its roadmap to improve the long-term financing of the European economy, which many see as a sort of "legacy agenda" for the next legislature, after elections take place in May. The roadmap contains a total of 31 actions, some ongoing but most to be proposed or carried out in 2014. Of these actions, only five make reference to legislation, with the rest alluding to reports, studies, consultations, and recommendations.
Actions are planned in six major fields:
- Prudential standards for banks and insurers
- A single market for personal pension funds and saving accounts
- Equity and corporate bond markets, securitisation, covered bonds, and private
- Access to finance by small and medium enterprises (SMEs)
- Corporate governance and engagement
- Accounting standards
The Commission also proposes measures to improve the legal and tax environment.
Actions to Develop Capital Markets
As highlighted by Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), at a recent event supported by the CFA Institute, "As our banking systems are going through an important phase of transformation, markets and policymakers increasingly look to securities markets for fresh impulses".
The Commission's plan to develop capital market comprises actions both in wholesale and retail markets:
Initial public offerings: The Commission will assess the implications and effects of the Prospectus Directive by the end of 2015. This will likely include the introduction of a specific framework for SME issuances, at least under €5 million in 12 months, for which no EU-wide transparency requirements exist currently. The Commission may also propose at this point specific requirements for issuer transparency for offerings through crowdfunding platforms.
Private placements: The Commission will re-examine its project, initiated in 2007, to develop private placement markets in Europe. It notes that, while these markets exist in certain EU countries, a significant number of issuers still prefer to place in the U.S. ($20 billion in 2012). It remains cautious, however, as these markets tend to be characterised by a relative lack of transparency and high illiquidity that the Commission would like to tackle.
Specialised SME markets: The revised Markets in Financial Instruments Directive (MiFID II) creates a new category of multilateral trading facilities specialising in SME growth markets. The Commission will introduce measures to foster the use of these markets, lessening the administrative burden on SMEs while keeping them attractive to investors by providing enough transparency and protections.
Corporate bond markets: MiFID II introduces a number of measures to improve the functioning of non-equity markets in the EU, including the establishment of a consolidated tape. The Commission, however, indicates its willingness to move further to enable the creation of liquid and transparent secondary markets for the trading of corporate bonds in the EU. It proposes to conduct an exploratory assessment as a first step but has not indicated a timeline.
Securitisation: The Commission wishes clearly to revive securitisation but is cautious because it needs to find a workable arrangement to differentiate "high quality" from complex and opaque operations without creating an opportunity for regulatory arbitrage. If it does, it is willing to forego punitive capital charges for high quality tranches, as reflected in its proposal on banking structural reform and the ongoing discussions for implementing Solvency II.
Covered bonds: To develop the covered bond market in Europe, the Commission proposes to review its prudential treatment, taking into account aspects such as credit quality, eligible collateral, and transparency. In addition, it will explore potential measures to strengthen the enforceability of preferential rights within the bankruptcy regimes of member states, which it aims at coordinating more broadly to stimulate investing and entrepreneurship.
Personal pensions: The Commission recalls its recent request for advice to the European Insurance and Occupational Pensions Authority (EIOPA) on the creation of a single market for personal pension products, which are underdeveloped in most member states. EIOPA will deliver its final advice in the second half of 2014. In its preliminary report, EIOPA focuses on life-cycling, guided choice, simplicity, affordability, and communications with plan holders.
UCITS eligible assets: Undertakings for Collective Investment in Transferable Securities (UCITS funds) need to comply with strict liquidity requirements, which typically make investments in less liquid asset classes inadequate to the redemption profile offered to investors. The Commission, however, proposes to review the eligible assets under the UCITS directive to include SME stocks, but only if they fulfill certain liquidity characteristics, in line with MiFID II.
Finding the Right Balance for Investors
Investors should welcome the renewed interest of European policymakers to develop capital markets. It is a well-known fact that Europe relies on banking and that capital markets only account for about one-third of funding provided to the real economy, in stark contrast to the U.S. Many blame this apparent lack of diversity in funding channels for the difficulties experienced by Europe to regain growth and finance innovation.
Deeper and more transparent and liquid capital markets will expand opportunities to investors, including retail investors who will be able to access a wider variety of securities, either directly or through packaged products such as investment funds or pension plans. However, it is crucial that any initiatives have the interests of end investors at heart in order to stimulate their participation and preserve their trust over time.
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