Exchanges pivotal for EU’s Capital Markets Union

By Magnus Almqvist, Head of Sales at Exberry

April 30, 2024

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The EU’s Capital Markets Union (CMU) is receiving strong backing, with widespread enthusiasm evident among stakeholders who are optimistic about its successful rollout. A significant concern has been the persistent lack of on-screen liquidity in European markets, dominated as they are by over-the-counter (OTC) trading. This contrasts sharply with the US where, according to the European Central Bank (ECB), 75% of corporate financing is conducted through capital markets, compared to Europe’s reliance on traditional bank loans.

Furthermore, the investment culture in Europe is due for a significant transformation to foster greater equity market participation. This shift is seen as essential for reducing the current market fragmentation and enhancing the efficiency and competitiveness of European financial markets. Stakeholders are calling for critical regulatory reforms and a closer collaboration between regulators and the markets to facilitate this growth. There is also a strong focus on increasing retail investor involvement and easing investment restrictions for pension funds, alongside harmonising data and rulebooks across countries.

The CMU initiative has, therefore, been developed to integrate European capital markets to unlock funding, stimulate growth and open up investment opportunities. Key developments include: the proposed Listing Act to simplify public listing requirements, especially for SMEs; the creation of a European Single Access Point (ESAP) to improve access to company information; and measures to strengthen EU clearing services and retail investor protection. The EU is also working to address barriers to cross-border investment and promote a competitive, integrated capital market to support the EU’s economic and sustainability goals.

What stands in the way of the CMU, according to a European Parliament research briefing, is “a reluctance to agree to irreversible transfers of competence, uncertainty over the distribution of gains, mistrust of partner Member States, and distrust of the common institutions”.  An EU commissioner told the Financial Times that two major obstacles are withholding tax procedures and insolvency laws, while also bemoaning the lack of ambition of some member states regarding central clearing.  

Notwithstanding these hindrances, if the EU succeeds in addressing these liquidity, cultural and regulatory challenges, the CMU could catalyse substantial growth, making European capital markets more robust and integrated. This is a chance for Europe to redefine its financial landscape and enhance its standing in the global economy.

 

What does this mean for regulated stock exchanges?

As the CMU is aiming to redefine European financial markets through enhanced liquidity and market integration, regulated stock exchanges must adapt to promote and accommodate an influx of retail investors and a broader array of transaction types. Innovations such as new order types and technology that ensures an equal playing field will be essential to protect smaller, less frequent traders from the faster strategies of sophisticated players.

Exchanges will also need to integrate digital infrastructures like the ESAP to facilitate smoother transactions and quicker settlements. This includes embracing API-driven access that links mobile and web platforms seamlessly, supporting the CMU’s objectives to unlock capital and boost economic growth across Europe.

As reforms progress, exchanges will play a pivotal role in leveraging their capabilities to meet the EU’s economic and sustainability goals. The adaptation and innovation of exchanges in response to these changes will be crucial for their future success and resilience in the evolving global financial landscape. By working together, Europe has a chance to enhance its financial infrastructure and secure a competitive edge in the global economy.

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Ambitious financial exchanges need to keep growing. Yet in the world of capital markets this is not always a straightforward task. Each jurisdiction has its own national characteristics and different way of doing things. If an exchange decides to build its own trading or clearing infrastructure, unless it is happy paying an exorbitant cost, it will typically have to wait a number of years for delivery. So, what are the alternatives for exchanges?

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