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The landscape for European equity trading and liquidity
1 Jun 2021
A new report published today by Oxera and commissioned by the Association for Financial Markets in Europe (AFME), provides evidence that the majority of equity trading in Europe (83%) takes place on venues[i]. A much smaller share (17%) takes place off-venue on alternative trading mechanisms known as systematic internalisers[ii] (SIs) and over the counter (OTC). This in-depth analysis counters claims that SIs and OTC transactions are disproportionately dominating the European equities landscape. These misperceptions have been based on raw trading data compiled by ESMA from national authorities and is not granular enough to distinguish between different trading modalities. As such, it does not provide an accurate picture of the equities trading landscape in the EU. Adam Farkas, Chief Executive of AFME, said: “This latest analysis from Oxera highlights how existing raw equity trading data reported to ESMA can inaccurately represent the trading landscape and to influence policymaking with the risk of perpetuating the dominance of exchanges in equity trading. This is cause for concern because an overly concentrated trading landscape hampers competition, investor choice and keeps costs of trading high. Ensuring sufficient diversity of trading is to the benefit of individuals’ pensions and savings, whether it is via their direct participation in markets, or via the institutional investors which represent them. A lack of competition in trading on the EU’s secondary markets may also be holding back the growth of primary markets which are underdeveloped compared to the size of the EU economy.” “AFME is therefore calling for improvements to regulatory data definitions and collection processes to be prioritised in the upcoming MiFIR Review so that policymakers have an accurate picture of EU market developments and can compare them internationally. The Review should not privilege any particular trading mechanism - otherwise we risk running counter to its objectives of improving market liquidity and investor outcomes.” Reinder Van Dijk, Partner at Oxera, said “When considering the European equity trading and liquidity landscape, policymakers and market practitioners may have different questions depending on their perspectives of interest. A significant volume of OTC and SI reported transactions are technical in nature. While technical trades may be relevant from a supervisory and/or post-trading perspective, it is not informative to include them in an analysis of the trading and liquidity landscape. Oxera’s analysis of the trading and liquidity landscape in this report applies filters to the full universe of reported equity transactions to distinguish true economic trading activity from the reporting of technical transactions. Although Oxera’s report provides more clarity, further work is required to obtain a precise view of the equity trading and liquidity landscape in Europe.” – Ends – [i] Trading venues are Regulated Markets and Multilateral Trading Facilities (MTFs). Trading mechanisms that take place under the rules of a trading venue can be broken down into the categories: lit order book, auctions, dark venues, and off-book on-exchange. [ii] Systemic Internalisers are investment firms using their balance sheets to trade with clients at their own risk. By doing so, they play an important role allowing trading to still take place when other market participants are unable or unwilling to trade. Their trades are made visible to the rest of the market after execution to avoid market prices moving before the trade takes place, which would otherwise amplify the risk they take.
Recapitalising EU businesses post COVID-19: How equity and hybrid markets instruments can drive recovery
19 Jan 2021
A report by the Association for Financial Markets in Europe (AFME) and PwC reveals that an equity shortfall of up to €600bn threatens Europe’s economic recovery despite the significant public support measures and private capital made available across Europe to support economies during the pandemic. AFME calls on the European Commission and members states to introduce measures to bolster Europe’s equity and hybrid markets and expand funding avenues for businesses, further enabling Europe’s economic recovery In a report published today (19th) in partnership with PwC, AFME warns that Europe needs to bridge a gap of€450-600bn[1]in equity needed to prevent widespread business defaults and job losses as COVID-19 state support measures are gradually reduced. The reportRecapitalising EU businesses post COVID-19reveals that despite the support provided by governments and the private sector since the start of the pandemic, 10% of European companies have cash reserves to only last six months. The pan-European trade association is calling on authorities to explore and develop further short-term measures to support Europe’s equity and hybrid markets and accelerate the Capital Markets Union to help fund the recovery. Unless urgent action is taken, a spike in insolvencies could start as early as this month and threaten the EU’s recovery prospects, AFME warns. The report presents insights from interviews with businesses and private sector investors from across the continent to propose solutions to Europe’s emerging funding gap. The findings reveal that many mid-size and SME corporates do not wish to give up control of their business but are willing to pay a premium not to dilute their voting rights, as well as are willing to distribute a share of profits to investors. Hybrid instruments are ideally suited to address these needs. In order to bolster capital markets to support businesses in the recovery phase, AFME is outlining the following recommendations: Proposing a new EU-wide hybrid instrument designed specifically for the corporate sector. This could be in the form of a new preferred shared instrument, which is state-aid compliant, to build scale and liquidity, and which ideally could be developed to comply with social investment objectives to attract maximum investor interest. Scaling up existing EU-wide recovery support schemes such as the EIF European Guarantee Fund tailored to the needs of SMEs, particularly the smallest companies. Replicating existing member state best practices on hybrid instruments, as well as raising awareness of the range of capital markets instruments available to mid-caps and SMEs who may be unaware such options exist Exploring further use of innovative instruments, such as dual class shares to address the control concerns of companies as well as debt for equity swaps to reduce leverage. Recalibrating state aid rules for a systemic crisis. Accelerating equity investment measures under the Capital Markets Union project.
Governance of Market Abuse Surveillance Controls: An industry perspective
11 Jan 2021
Video overview The introduction of the Market Abuse Regulation in 2016, saw financial institutions implement a series of systems and controls to mitigate the risk of insider dealing, market manipulation and unlawful disclosure of inside information. Since then firms have needed to continually adapt and evolve their controls in order to continue to meet regulators expectations. The impact of the Covid-19 pandemic resulted in firms having to ensure their approaches were agile and able to manage the emerging risks caused by market volatility and unprecedented numbers of colleagues working from home. AFME in collaboration with EY, have today published ‘Governance of Market Abuse Surveillance Controls – An industry perspective’. The report provides insight into firms current state of surveillance governance and considers what the future state could look like, whilst addressing the key questions firms are actively addressing as they develop their future strategic roadmap. Drawing on survey responses and deep dive interviews with AFME Members and European regulators. We hope that the insights in this paper will help to frame the key aspects of this debate and provide firms with industry insight to advance the effectiveness of their surveillance governance The report considers five key themes: Restructuring the operation model Navigating risks through the STOR process Establishing a well governed framework Chasing completeness and A change in approach: focusing on risk driven methodologies This report sits alongside a series of compliance papers we have produced in partnership with EY, including the The Future of the Compliance Control Environment and the Scope and Evolution of the Compliance Function
The Future of the Compliance Control Environment
23 Nov 2020
In 2018, AFME published a paper in collaboration with EY on the ‘Scope and Evolution of the Compliance Function’. It identified that the availability of more complex data would allow Compliance to adopt different ways of managing risks, for example, anticipating or predicting risk events more proactively. This would be likely to result in broader demands from Compliance’s stakeholders, both within and outside the firm. Alongside these, it was anticipated that there would be further structural changes across the 3 Lines of Defence, driven in part by operational efficiency and cost effectiveness, as well as heightened regulatory expectations. While this transformation has been taking place to varying degrees, the disruption to the capital markets industry caused by COVID-19 has resulted in immediate and fundamental changes to AFME’s Members, e.g. large-scale remote working and accelerated developments in the use of technology. The lessons learned during the 2020 pandemic period are likely to inform new ways of working, which will undoubtedly lead to a more fragmented workforce going forward and thus the need for greater supervision and surveillance techniques, including the use of a broader set of data points combined with enhanced analytical tools. This paper focuses on four key areas with respect to the compliance control function and offers some considerations for firms thinking about how to ensure that the control environment continues to be robust, and can evolve to address new and developing risks in these conditions: Enhancing data and analytical tools Surveillance, testing and monitoring Conduct, culture and well-being Remote working and location strategy”