CMU must focus on primary issuance, industry insists

Banks and exchanges are calling on the European Commission to prioritise measures to boost primary markets in its recently unveiled blueprint to create a capital markets union in Europe.

Banks and exchanges are calling on the European Commission (EC) to prioritise measures to boost primary markets in its recently unveiled blueprint to create a capital markets union (CMU) in Europe.

Earlier this week, the Federation of European Securities Exchanges (FESE) released a report – co-sponsored by EuropeanIssuers and the European Private Equity and Venture Capital Association – which identified five areas for reform to stimulate initial public offerings (IPOs), including tax incentives and better market access for investors, more flexible regulation for issuers and a more supportive ecosystem for growing firms.

FESE director general Rainer Reiss said a lot of effort will be required “over a sustained period” to make Europe’s equity and debt capital markets more conducive to issuance by smaller corporates, but noted that simplification of the information provided by an issuer prior to IPO and  “a better calibration” between company disclosure and investor information would help increased issuance.

“Harmonisation of tax and insolvency rules are long-term goals that would truly build a capital market union and allow for easier comparability of companies as well as reducing burdens on companies. But the standardisation of information provided to investors is a starting point. The EC’s Green Paper mentions the standardisation of credit information, but this could be expanded to equity to help investors get easier access to information,” said Riess. 

The Association for Financial Markets in Europe (AFME), a sell-side body, has recommended that the CMU focus on developing more efficient and liquid markets for debt and equity, in part by reviewing current rules on capital requirements and the existing prospectus and takeover directives, as well as through pan-European frameworks for high-quality securitisations and private placements. AFME also calls for reforms to incentivise greater use of long-term savings for equity investment and to promote a more open and integrated capital market infrastructure in Europe.

Initially a key plank of new EC President Jean-Claude Juncker’s vision for Europe, proposals for CMU were outlined in a Green Paper in February. At a high level, the aim is to improve the supply of markets-based funding to reduce the reliance of European corporates on bank lending, which became much scarcer in the aftermath of the financial crisis, contributing to sustained low GDP growth in Europe over the last five years.

The EC’s consultation document proposes that the building blocks for CMU are put in place by 2019 with the overall aim of improving access to financing, particularly for start-ups and SMEs, removing barriers to cross-border investment, diversifying sources of funding from investors, and reducing costs of capital. The project, orchestrated by new financial services commissioner Lord Hill, emphasises “market-driven solutions” over legislative change, but does not rule out new powers for pan-European regulators, such as the European Securities and Markets Authority. It also targets ‘quick wins’ on securitisation and private placements alongside long-term changes that may run into political opposition from member states.

AFME recently issued proposals for a pan-European framework for private placements, in association with other trade bodies, and supports a review of the prospectus directive to support cross-border issuance. But Paul McGhee, AFME’s director of strategy, says more specific targets are needed to the CMU’s broad objectives. “The CMU’s policy emphasis and priorities are right, but we’d like the Commission to be more ambitious and clear in its aims,” he said. 

To that end, AFME has backed FESE’s call for European stock market capitalisation to increase from around 75% of GDP to 100% over five years, but it also believes that a doubling of securitisation and private placement issuance volume and an increase in the share of SME funding from equity and debt capital markets sources are also achievable.

The consultation period for the Green Paper closes on 13 May. The EC plans to complete the consultation process with a conference in the summer and will publish an action plan later in the year.