FIA EPTA’s response to the EC’s Green Paper on Building Capital Markets Union

27 May 2015


In the aftermath of a severe financial and economic crisis, Europe is still struggling to return to even keel, reduce unemployment and stimulate economic growth. We therefore applaud the aims of the Capital Markets Union to increase capital markets’ effectiveness, efficiency and size and believe it is critical that the current post-crisis regulatory framework supports, rather than impedes, these goals.

FIA EPTA strongly believe capital markets are the key to diversifying the means by which companies of all sizes can obtain access to capital, as well as to lowering Europe’s dependency on banking channels for funding. Open markets are the best way to allocate capital efficiently, as they facilitate the flow of funds between individuals and other entities, matching the wealth of savers with those who can put such funds to beneficial use, and generate flexibility for investors to enter and exit investments whenever they choose. Independent market makers are essential to creating deep and liquid stock markets and allowing those markets to serve as an alternative to the banking system as a source of capital for jobs and growth.

In particular, the support and financing of non-financial SMEs (Small and Medium-sized Enterprises) through capital markets is often linked to the presence of financial SMEs. Small and medium banks, investment firms or collective investment schemes may be more motivated than big financial institutions to invest into or act as providers of liquidity for SMEs. Therefore excessive, high impact regulation of financial SMEs, limiting their capability to provide liquidity or capital, may potentially damage non-financial SMEs.

In the last five years, the EU has promulgated an almost unprecedented amount of markets regulation. We believe a practical agenda for achieving the Capital Markets Union objectives should include reviewing existing European legislation affecting markets, rather than simply issuing further regulation. A review should be designed to ensure that market participants critical to the functioning of markets are not overly hindered by legislation. The points we believe call for review include:

Third country impact: ensuring that equivalence decisions are granted in a timely manner and obstacles to participation in European markets by third country firms are avoided.

Technical standards for MiFID II/R and the regulatory burden on small and medium financial market enterprises: ensuring that finalisation of rules on microstructural issues, transparency, and investor protection do not further harm market liquidity by reducing the number of existing participants in the market ecosystem or deterring new participation.

New technologies have contributed to the development of today’s highly transparent electronic trading platforms, the pricing and cost efficiencies made possible by algorithmic low-latency trading, and the competition and innovation ushered in by "FinTech" companies. Therefore, it is important to ensure that European market regulation promotes the continuing innovation and development of new technologies as an important driver of the integration of capital markets by ensuring regulatory authorities apply the European law principle of proportionality based on the nature, size and complexity of affected firms.

Provisions on market making: ensuring rules applicable to market makers are not disproportionate and do not have the consequence of decreasing the number of liquidity providers. We are concerned that the current regulatory and market environment, if not carefully calibrated, could serve to render the market-making model uneconomic and obsolete; this would reduce the overall quantity and quality of liquidity in European markets.

Capital/prudential requirements under CRR/CRD IV: ensuring that prudential regulation does not have the unintended consequence of making it prohibitively expensive or impossible to continue to operate in the markets. Proprietary trading firms, which do not hold customer accounts, should not be subject to the same prudential requirements as banks holding customer money; different risks apply to these different types of participant. In particular, independent market making firms that deal exclusively on own account, do not hold third party monies, provide services to the market place rather than named clients and therefore do not present systemic risk, should be granted relief from CRR/CRD IV capital requirements to enable them to continue to efficiently and nimbly fulfil their important role in providing liquidity to markets.

Non-discriminatory access to trading venues: ensuring detailed legal safeguards to achieve transparent and non-discriminatory access rules for OTC derivative trading venues. Only then will it be possible to ensure that organised trading facilities under MIFID II specify access parameters in an open and transparent manner rather than using their defined ability to determine and restrict access based on obligations to customers.

Financial transaction tax: completely reconsidering the implementation of a Financial Transaction Tax regime. The imposition of a Financial Transaction Tax would produce harmful effects to both the financial sector and the real economy: the EU Commission has already estimated that the introduction of the FTT would reduce real GDP by 0.28% over time, with reports from other sources (such as Oxera) anticipating reductions of up to 2.42%. The introduction of new taxes will always result in financial institutions passing on the additional costs to end investors, and this would act as a barrier to accessing financial markets.