Speaking on a regulatory panel at the Best Execution and Trading Summit Europe today, panellists including KPMG’s Kay Swinburne, CONSOB commissioner Carlo Comporti, European Banking Federation director of financing sustainable growth Burcek Inel, thinktank New Financial founder William Wright and co-head of BlackRock’s global public policy group Stephen Fisher came together to analyse the current gaps in regulatory policy as it relates to securities trading and the wider UK and EU capital markets – warning that a review is now urgently needed.
Speaking on the issues surrounding Mifid II, one speaker suggested that it would have been more effective – and efficient – to have passed the regulation in several separate sections, rather than pushing it through as one big package. “If it had been done separately, it would have been more data-driven,” they said, noting that the holistic approach had been a challenge. Another concern is that when Mifid II was being developed, post-the 2008 financial crisis, a lot of decisions were made without data – notably around insolvency and double volume caps.
“There is no excuse now,” they said. “The regulator can choose to ignore the data, but that’s their decision. Either way, I hope the Commission has learned its lesson. Markets are not all one. If you’re applying something to the fixed income market, you don’t necessarily have to apply it to the equities market – we don’t need to drive towards one homogenous market, and that should be clear by now. It’s definitely time for a review.”
Although the EU has seen some capital markets growth since Mifid II was passed, the panel agreed it has been patchy. “Since 2010, the total EU share of capital markets globally has halved, from 19% to just 11% last year,” said one speaker. “The vast majority of growth has come from already developed markets – we’ve seen no convergence. Highly developed markets have just become more developed, while others have actually gone backwards in terms of capital market depth, and the least developed have made no progress whatsoever. We need urgent reform of the capital markets.”
The general consensus, widely shared amongst the panel speakers, was that the focus of the original Capital Markets Union (CMU) first launched by Jean-Claude Juncker (former president of the European Commission) back in 2014, has lost its way. “We’ve focused so much on the detail and the harmonisation that we’ve lost sight of the important things,” said one. “There’s a danger that we’re missing the wood for the trees.”
“We all know that the landscape for European stock exchanges is absurd,” added another. “In Europe, we have 22 exchange groups operating 31 exchanges for listings, 36 for trading, 18 CCPs, 22 CSDs. Compared to the US where there are just seven exchange groups, just one CSD for equities. Maybe that’s part of the reason the US market is more than four times the size of the European market. We’re focusing too much on harmonisation of markets, and not enough on building capacity in national capital markets. Most of the levers are national – pension, taxation, and so on. These are not levers the EU can pull. These are levers the national governments have to pull on their own.”
However, it was stressed that it is crucial for the industry to achieve a long-term, deep pool of liquidity – and that means updating and improving access to asset owners. “You can’t have effective capital markets without it,” said one speaker. “If it was up to me, I’d introduce compulsive automatic enrolment for pensions tomorrow, to build these pools – and until we do, CMU is just a pipe dream. The time to do it was 30 years ago, but the next best time is now.”
Of course, there has been progress. “Twenty years ago, we wouldn’t have been discussing whether the glass was half full or half empty – there was no glass,” said a speaker. “But is it enough? Of course not.”
So what will it take to effect real change? “There doesn’t seem to be enough of a sense of crisis yet to really get governments to bang heads together and sort things out,” said one. “We’ve had it in the banking industry, but not yet in the securities trading industry – but what more crises are they waiting for? We’ve got the energy crisis, climate change, Brexit, Ukraine – what more needs to happen?”
One challenge is that the EU approach – and CMU in general – appears to have become more introspective since Brexit. “The language was originally about making the EU more attractive as a global investment destination, and it feels like that has dropped off the radar a little bit since,” said a speaker.
“If you take the UK out of it, you’re basically left with a collection of relatively small and disparate member markets,” argued another. “The original vision of Juncker is now completely different, with London out of the picture. They need to go back to the drawing board, perhaps with a slightly less ambitious target. But they still need to be looking outwards rather than inwards.”
The concern is that industry objectives and regulatory objectives appear to be diverging – and that’s a worry. “Regulatory priorities are shifting, and not necessarily in line with the industry,” warned one panellist. “It’s a potential source of problems in the future.”
So what are today’s priorities, and do we have the right goals today for achieving an effective and well-calibrated market structure tomorrow?
In terms of EU capital markets growth, the most strongly urged objective was the move towards a single market across the EU. “We need to force European exchanges to come together and create single markets,” stressed a speaker. “We’ve seen a consolidation of exchanges, but not of markets yet. We’ve got Euronext, Nasdaq – they’ve already got multiple markets, so it’s a good starting point, but that’s what needs to happen next.”
Finally: “We need joined-up public policy, from the cradle to the grave,” urged another.
“And we need to embrace innovation. This notion of trying to control everything simply doesn’t work. There needs to be risk in the system, and innovation is a way of introducing that. The people in this room are able to innovate, but they need to be given the policy space in order to do that. Risk is not always a bad thing.”