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Commission said to be planning new initiative to facilitate securities issuance.
Following the arrival of a new president, the European Commission (EC) is expected to begin another round of capital-markets reform aiming to facilitate access for midsize and smaller companies and to improve the trading infrastructure, lowering costs for all companies.
The EC will likely lay out its initial thoughts in the first quarter, prompting a number of individuals and organizations have filed letters to offer ideas.
Shortly after being nominated as the new EC president in July, Jean-Claude Juncker set out his priorities, which included a capital-market reform initiative he referred to as “capital markets union (CMU).” Little detail was provided, but the term was written into the job description of Jonathan Hill, who was confirmed as the new European commissioner for “financial stability, financial services and capital markets union” in October.
In anticipation of the EC laying out early considerations about CMU and its priorities, The Association for Financial Markets in Europe (AFME) submitted a comment letter earlier in December indicating its support for the initiative and laying out goals. “We’re also trying to offer a bit of conceptual framework … people are saying CMU needs standard definitions, scope and common terms to guide the debate,” said Paul McGhee, director of strategy at AFME.
The CMU initiative will ultimately facilitate companies’ access to capital. AFME proposes three objectives for specific financial markets, including increasing debt financing from capital markets to 35 percent of the current total from 25 percent, without lessening the ability of Europe’s banks to provide credit. The trade organization also recommends increasing Europe’s stock market capitalization to 100 percent of GDP from the current 75 percent; at least doubling the European issuance volume of securitization and private placements; and increasing the share of capital markets funding to small and medium enterprises (SMEs).
AFME also highlighted three “complementary” objectives. The first is to develop more efficient and liquid equity and debt markets, in part by reviewing applicable regulation such as capital requirements and the tax regime. The second is to promote long-term savings and promote investment by methods such as harmonizing European Union insolvency rules, maintaining viable models for capital markets research, and widening investors’ product choices.
A third objective is to promote an open an integrated capital markets infrastructure, which means close integration of clearing and settlement systems, removing barriers to cross-border collateral use, and ensuring broad and insurable access to market data.
While those measures more directly impact financial institutions, the outcome should improve access to the capital markets for more than just the biggest issuers while lowering capital markets costs for all companies. The AFME letter points to measures to tackle first.
“Signals from the commission suggest it wants to go for measures it’s sure to get through and have a real impact; we still have to see how far they’re willing to commit to big cross-country changes, such as harmonizing insolvency or tax laws,” said Paul McGhee, director of strategy at AFME. “Areas such as securitization, private placements, and addressing long-term investment funds—all things to make markets more accessible—will likely be early initiatives.”