Traction is growing for the long-awaited European Savings and Investments Union (SIU), with the European Commission adopting a package to integrate the region’s markets. With intentions to increase the European Securities and Markets Authority’s (ESMA) supervisory remit, cut down cross-border processes and encourage the use of distributed ledger technology (DLT), the monster proposals have been described by ESMA as “ambitious”.
Much of the proposals centre around reducing “persistent fragmentation” across European trading and post-trading infrastructure and supervision.
Presenting the package during a press conference, European Commissioner Maria Luís Albuquerque said, “With every proposal I have stood here and stressed the political urgency driving our strategy, choosing not to act, sticking with the status quo, choosing to tolerate the barriers and fragmentation we know so well leads only one way to a Europe that invests too little, grows too slowly, and loses ground geopolitically and economically. That is not a path that the Europeans or Europe can afford.”
In the Commission’s explanations of the proposal, it added, “This fragmentation prevents financial entities from taking advantage of the treaty freedoms that should be inherent to the single market, causing them to miss out on potential economies of scale and efficiency gains. This results in higher costs being passed on to users of financial services.”
One element of the new package includes improvements to passporting opportunities across regulated markets and central securities depositories, with trading venues able to hold a ‘Pan-European Market Operator’ status. This will help with Europe’s ongoing fragmentation issues, remove barriers to cross-border trading and streamline cross-border distribution of investment funds, the Commission said. Operations would be conducted under a single licence and through a single entity.
If the proposals are approved, the European Securities and Markets Authority’s (ESMA) direct oversight of trading venues significant to the EU economy, which the Commission expects to be a collection of nine trading groups. This will simplify procedures, improve supervision consistency and cut down on paperwork, the Commission states.
In its response to the proposal, ESMA affirmed, “ESMA stands ready to take on these specific responsibilities, drawing on almost 15 years of growing experience supervising diverse and selective parts of our capital markets. ESMA would work hand in hand with the National Competent Authorities (NCAs) to develop the capacity and expertise to take on such new responsibilities.”
“We will have to increase the funding for ESMA. We will also increase the proportion of fee-based activities, so there will be more contribution from market participants,” Albuquerque said during a press conference.
Calculations in the proposal expect ESMA’s budget to increase by between €100 million and €110 million, with 10% contributed by the EU budget, 5% from NCA contributions, and the remained made up of extra fees from newly supervised entities.
A total of 480 new staff will also be onboarded to the regulator.
“By removing barriers in trading, post-trading and asset management, and by enabling more harmonised supervision, the package will help market participants operate more seamlessly across the single market and support scale, efficiency and better outcomes for investors and businesses,” ESMA added.
European Principal Traders Association (EPTA) secretary general Piebe Teeboom agreed that removing trading barriers is important, but warned that a cut-back in market choice would be a mistake.
“That would be rolling back 20 years of progress since MiFID I. The right way to reduce market fragmentation is to address operational fragmentation and gold plating in EU post trade markets. Instead, we need full harmonisation of rules and operational procedures as well as safeguards for true competition. This requires full interoperability of systems.”
On ESMA’s expanding remit, be added, “The need to improve supervision must not get lost in a fight over which agency does the supervising. A single supervisor makes sense for some pan-European infrastructures, but most important is full convergence and consistency in supervision of all EU firms and market activities.”
The proposals also include amendments to the Central Securities Depositories Regulation (CSDR), increasing interoperability and introducing a ‘hub and spoke’ model. With this approach, CSDs operating across member states and processing high levels of settlement instructions would connect to one another, while smaller CSDs would have to connect to at least one larger ‘hub’ as a ‘spoke’. Reducing fragmentation in this space would cut down costs, increase access to financial instruments, the Commission argues.
ESMA would also hold direct supervisory authority over significant CSDs, introducing structured supervisory fees and procedures and clear pricing and fee disclosures.
Alongside these supervisory changes, the Commission has also proposed relaxing limits on distributed ledger technology (DLT) to push for innovation and adaptability around new technology.
Proposals will be negotiated and approved by the European Parliament and European Council, and combined into a cohesive set of reforms, before they are implemented.
“Maintaining the unity of the package is crucial,” the European Commission affirmed. “The Commission is dedicated to collaborating closely with the European Parliament, Member States, and other stakeholders to ensure the swift and effective implementation of these measures.”
While ESMA called the Commission’s proposal “ambitious”, Teeboom opined, “The greatest risk to the SIU is that policy makers set their ambitions too low to actually achieve the reforms needed to make Europe a globally competitive economy supported by a strong capital market.”
