Priorities revealed for EU capital markets union

Pan-European pension products, cross-border crowdfunding schemes and perks for infrastructure investment have emerged as some of Brussels’ early priorities for a capital markets union, according to a leaked discussion paper.

Lord Hill, the EU financial services chief, is unveiling a consultation document next month that aims to flesh out the “union” concept with deliverable steps to boost investment and funding costs for European business over the next five years.

A draft version, seen by the Financial Times, lists potential initiatives. These include: driving high-quality securitisation standards; relaxing capital requirements for insurers and banks investing in infrastructure; streamlining the prospectus requirements on companies raising capital; and aligning standards for covered bond and corporate debt markets.

The thrust of the reforms notably sidesteps the thorny political issue of further centralising the supervision of markets. This shift in power is resisted by Britain in particular.

Instead, as a long-term agenda, the draft document highlights the need to tackle the badly divergent tax and insolvency regimes “hindering the emergence of pan-European equity and debt markets”.

“We need to identify the barriers that are stopping capital from flowing, and work out how to knock them down one by one. That will be the purpose of the green paper we will launch in a few weeks’ time,” said Lord Hill.

One of the most interesting measures for industry is the promise of rules on small companies’ distributing their fundraising prospectus in the region. Another is developing local private-placement markets for unlisted companies and potential infrastructure projects.

Several options are mentioned to increase cross-border investment and product marketing.

This includes crowdfunding, which to date has largely been based in domestic markets. This is because of different countries’ tax treatments, few accepted standards for trading in shares on secondary markets, and the lack of a European central registry of shares that could verify ownership of an asset for investors.

On personal pensions, the paper suggests that a so-called “29th regime” may be necessary to remove the obstacles to cross-border provision.

This standardised pan-EU product would have its own legal regime, alongside Europe’s 28 existing national regimes.

Officials will also consider looking at exempting smaller companies from having to follow the full International Financial Reporting Standards, particularly those companies that want to access dedicated trading venues known as multilateral trading platforms.

The paper floats the idea of a “simplified, common, high-quality accounting standard tailored to the companies listed on certain trading venues”.

In an effort to standardise rules, the paper will examine ways to better integrate covered bond markets and to provide investors with more detailed information on the underlying collateral. It will also explore both industry and regulatory options to develop a common European corporate debt market.

To underpin the functioning of capital markets, the commission confirmed it would bring forward a legislative proposal to create a European framework for the recovery and resolution of clearing houses which manage high-value swaps in the over-the-counter derivatives market.

It also called for a consolidated tape of trading data. This would be a tape of record of the best bid, offer and execution prices from more than 20 European trading venues.

It also warned that the commission would appoint a commercial entity to run the service if the market was unable to find a solution.

The driving purpose of the union plan for capital markets is to broaden sources of funding.

“Europe has traditionally been more reliant on bank finance, with bank lending playing a significantly larger role in the finances of the corporate sector than the issuance of debt securities in the market,” the paper noted.

“In aggregate, this greater dependence on bank lending makes the European economy more vulnerable when bank lending tightens, as happened in the financial crisis.”

Equity markets in the EU remain characterised by a home bias, it said. “Even the best performing national markets in the EU lack critical size,” it added.

www.ft.com/tradingroom