Whether you follow the news on the new institutional cycle of the European Commission and European Parliament or you have attended any policy conferences in Europe lately, every conversation finds a way back to discussing the European Union’s ongoing Capital Markets Union debate.
I certainly experienced this last month during a visit to Budapest.
The Draghi Report on EU competitiveness
Mario Draghi’s highly anticipated report on European Union (EU) competitiveness permeated our discussions. Long awaited, the report suggested the EU must raise an additional €800 billion per year in investment – equivalent to 5% of the EU’s gross domestic product – to keep pace economically with the US and China and meet its key competition and climate targets.
If the 400-page report feels overwhelming, I won’t judge. Check out our recent MarketVoice article summarizing it and highlighting the potential impacts on our industry.
Of particular note, the report recommends:
- transitioning the European Securities and Markets Authority (ESMA) from a coordinator of national regulators into a single regulator for all EU securities markets – similar to the US Securities and Exchange Commission,
- a single clearinghouse and a single central securities depository for all securities trades,
- a “separate jurisdiction,” commonly referred to as a “28th regime,” for big, cross-border banks, and
- harmonizing insolvency rules in the EU and removing tax-related obstacles to cross-border investing.
To say the least, some of the recommendations received more kudos than others, just as some of them feel rooted more firmly in reality than others.
FIA’s CMU white paper
Ahead of my trip, FIA outlined its position on the role of derivatives in capital markets in the EU with a new white paper: Capital Markets Union at a critical juncture.
On behalf of our members and our industry, we sought to inform the debate and educate the new policymakers at the start of the institutional cycle and European Parliament.
In particular, we appreciate the Members of the European Parliament and their staff do not live and breath our issues, potentially far from it. So, we structured our paper to focus on education while sharing several key suggestions to inform the policymaking process.
Generally, we advocated for:
- Promoting an open, competitive, pragmatic, predictable, safe, well-regulated and fair marketplace for domestic and international financial institutions alike,
- Increasing transparency, public stakeholder engagement and certainty to ease the often complex and lengthy legislative process in the EU,
- Establishing a fit-for-purpose regulatory environment that benefits both regulated financial institutions and their customers, and
- Facilitating client choice on where to clear and protecting the international competitiveness of EU market participants.
And we believe the EU can accomplish these objectives largely through fine-tuning existing regulations, rather than overhauling them, and by international dialogue with peer regulators and global standard setters to avoid a patchwork of regulations that increases costs for all involved and disincentives investment.
In particular, we offered several specific steps EU policymakers could undertake:
- Establish clear definitions of scope in EU legislation (Level 1) and early clarifications on territorial and personal scope,
- Allow sufficient time for implementation of requirements before carrying out regulatory and legislative reviews and align compliance dates of Level 1 and Level 2 requirements,
- Conduct public engagement/consultation with industry and independent experts on important Level 3 rules before publishing them,
- Provide meaningful cost-benefit analysis before proposing new requirements and add a competitiveness test as part of important policy proposals,
- Optimize further CCP equivalence reviews and improve transparency
- Establish appropriate capital requirements and reduce other restrictive measures to alleviate clearing capacity for intermediaries,
- Scrutinize the active account requirements under EMIR 3.0 that could, if not properly calibrated, adversely impact the competitiveness of EU firms,
- Ensure the IFR regime for investment firms is proportionate to the risks these firms bring to their counterparties, themselves and the market as a whole,
- Ensure globally consistent margin requirements to enable clearing margin transparency, and
- Harmonize certain aspects of non-bank insolvency laws in the EU.
A whirlwind of meetings
In a quick three days, we held more than a dozen meetings with leaders from across the global financial space.
A few highlights include meeting with the Bank of England, Banco de España, ESMA, ESA, US Mission to the EU, ECB, Banque de France, ESRB and Bundesbank.
In these meetings, we shared FIA’s perspective on regulations like EMIR and DORA, discussed consolidation in the financial markets infrastructure, extraterritorial issues, equivalence, T+1, tokenization and the important role CCPs play in the market. And, of course, many asked for our view on the Draghi report and how the EU can establish a more open and competitive CMU – including the eye-catching suggestion of consolidating to one CCP in the EU for clearing futures.
While it felt a little like speed dating in the moment, these key stakeholders sought our opinions and asked where our members stand on several key issues up for debate in the coming years.
Key takeaways
Everyone we talked with recognized the significant challenges ahead for the EU on revitalizing its CMU.
We also heard a consistent refrain about the importance of centrally cleared derivatives and how they bring transparency and risk management to the market.
EU leaders are keenly interested in attracting capital to its markets. The question of whether they will tackle the difficult issues will determine their overall success.
