Commenting on the European Commission’s adoption of a draft Memorandum of Understanding between the EU and UK, Adam Farkas, Chief Executive of the Association for Financial Markets in Europe (AFME) said: “AFME strongly welcomes that the European Commission has today adopted a draft MoU establishing a framework for structured regulatory cooperation between the EU and the UK. The MoU should put in place a joint EU-UK Financial Regulatory Forum to ensure structured cooperation on regulatory initiatives and priorities. This should include transparency and dialogue in the equivalence process as envisaged in the Joint Declaration accompanying the Trade and Cooperation Agreement. We hope that the MoU will now be ratified by the Council, and that the MoU will serve as a basis for a cooperative, stable, and trustful long-term relationship between the EU and the UK in the area of financial services.” – Ends –

The Global Financial Markets Association (GFMA) together with Boston Consulting Group (BCG), Clifford Chance and Cravath, Swaine & Moore LLP, have today published a new report highlighting the potential transformative benefits of Distributed Ledger Technology (DLT) for capital markets and calling for market participants to proactively shape its future use, as well as for greater regulatory clarity from policy makers. The report, “The Impact of Distributed Ledger Technology in Global Capital Markets” evaluates the opportunities and risks of DLT and DLT-based securities and assesses the applicability of existing legal, regulatory, and risk management frameworks. To illustrate the potential of DLT in capital markets, the report examines three emerging use cases: collateral management; tokenization of assets; and sovereign and quasi-sovereign bonds. The report finds that DLT could unlock transformative cost-saving and operational efficiency benefits (for example, approximately $20 billion annually in global clearing and settlement costs) and innovation-led growth, broader market access, and new liquidity pools when operating at scale (e.g., approximately $16 trillion global market for tokenized illiquid assets by 2030). Despite the growing momentum in developing DLT use cases, the report also acknowledges that, there is still no widespread adoption in securities markets, with most DLT-based issuances to date largely experimental exercises due to the challenges identified. GFMA therefore sets out five calls to action, for industry participants and regulators, to overcome existing barriers to adoption and advance the development of DLT-based capital markets: Harmonize global regulatory and legal frameworks for clear and unambiguous definition of the key terms and risk mitigants required to support the development of a transparent, disciplined, risk-focused, and effective digital market infrastructure. Enable interoperability by building consensus on common standards and vision for DLT-based markets to guide market linkages with traditional market infrastructure. Drive faster adoption by prioritising resources in asset classes where DLT has the most upside potential to help pool and deepen liquidity, particularly for illiquid assets. Collaborate on the advancement of DLT to promote technical solutions, including around scalability, cybersecurity and regulatory compliance. Continue the development of DLT-based payment solutions, such as tokenized commercial bank money and deposits, to facilitate safe and efficient settlement processes. The GFMA has developed an approach to the classification of digital assets that reflects the principle that the treatment of digital assets should be underpinned by a clear methodology for identifying different types of digital assets’ risk. This will allow for tailored regulatory treatment, to mitigate reputational risks caused by conflating different use cases of DLT, as well as promoting legal clarity and confidence for asset managers, investors, and issuers. Adam Farkas, Chief Executive of the GFMA, said: “Distributed Ledger Technology holds promise for driving growth and innovation. This potential should not be ignored or prohibited where regulatory oversight and resiliency measures already exist. Policymaking should focus on creating a regulatory framework that supports financial stability and responsible innovation in digital asset markets while also setting out a level playing field for both new entrants and regulated financial institutions. A technology-neutral and outcomes-based approach to regulation is crucial. The goal of our latest report is to help policy makers and financial market participants to find a way forward that ensures appropriate stability and protections, while also allowing the industry and economy to harness the benefits of this new technology.” Roy Choudhury at BCG said: “Distributed ledger technology has the transformative potential to further improve efficiency across the capital markets value chain. However, there are critical barriers to large-scale adoption beyond just legal and regulatory roadblocks, including a lack of cross-industry alignment on use cases, limited operational readiness, and a need to further develop interoperable technology standards and infrastructure. Our report examines these barriers and outlines actions to unlock potentially game changing efficiency and innovation across the capital markets industry. We expect global infrastructure, operational cost, and financial resource efficiencies to deliver more than $100 billion (USD) in annual savings and freed capital when adopted at scale globally, driven by smart contract process automation, streamlined back office functions, and lower settlement and counterparty credit risk.” Simon Gleeson, Consultant at Clifford Chance said: “The introduction of distributed ledger technology across finance poses a whole new series of challenges for legal and regulatory frameworks. Legal structures must deliver clarity of ownership rights, settlement finality and robust insolvency treatment. Regulatory structures must deliver high levels of investor protection without impeding the development of new products and services. However, those apparently simple objectives require deep and sophisticated thought and analysis. This report is a significant step towards these goals.” Scott Bennett at Cravath said: “Distributed ledger technology offers significant potential to foster financial innovation. It has the capability to accelerate payments, streamline capital markets transaction settlements and enhance liquidity. However, there is significant uncertainty around how existing legal and regulatory frameworks apply to this emerging technology. This report provides industry participants and policymakers detailed analysis related to these issues and a foundation to help support effective market infrastructure.” The report also sets out the foundations of a global taxonomy for digital assets to encourage both industry participants and policymakers to work from a consistent baseline with globally harmonised definitions, particularly as frameworks for digital assets continue to emerge.

Following the publication today of the FCA’s proposed rule changes to improve the UK framework for listing of commercial companies’ equity shares, Gary Simmons, Managing Director of Equity Capital Markets at the Association for Financial Markets in Europe (AFME) said: “These are welcome proposals which will go a long way towards increasing the attractiveness of the UK as a venue for company listings. “In particular, we welcome the intention behind the proposed single listing segment, which builds upon the FCA’s proposed disclosure-based approach to financial information, and will replace the more prescriptive rules requiring, for example, a three-year revenue track record.This change will provide more flexibility for companies to tailor their disclosure to their own particular company or circumstances and to provide investors with more relevant information on which to make their investment decisions. “Implemented properly, we believe that these changes will help to make the listing process simpler and more flexible and also provide greater transparency between issuers and investors.”

As EU trilogues on the Markets in Financial Instruments Regulation (MiFIR) Review begin this week, the Association for Financial Markets in Europe (AFME) has issued a warning on the state of equity market liquidity in Europe and is calling on the negotiators to consider the impact of this important financial markets regulation on the attractiveness of Europe’s capital markets. AFME has found that European equity markets are markedly less dynamic and liquid than their US peers. From mid-2016 to end 2022, the equity turnover ratioincreased by 40% in the United States but remained completely flat in Europe over the same period. This trend in Europe’s equity turnover ratio is largely explained by the EU’s nationally fragmented equity markets which operate under a regulatory framework that limits choice and introduces even more complexity through arbitrary restrictions that deter liquidity. (The European equity market is less than half the size of the US but it has three times as many exchange groups; more than 10 times as many exchanges for listings; more than twice as many exchanges for trading; and roughly 20 times as many post-trade infrastructure providers[2].) This complexity is likely to be one of the factors motivating European high-growth companies to list outside the EU. Therefore, AFME is calling on policy makers to ensure a variety of trading mechanisms remains in place as the backbone of a healthy, vibrant market, but also that an ambitious real-time pre-trade consolidated tape is implemented to reverse the worrying trend in EU equity market turnover. Together, these measures will facilitate equity capital raising and support dynamic economic growth. Adam Farkas, Chief Executive of AFME, said: “As inter-institutional negotiations begin, AFME is urging policymakers to keep the attractiveness and liquidity of EU markets at the forefront of its considerations. “To do this, first, we need a meaningful consolidated tape. This means a real-time, pre-trade tape to help overcome the current fragmented picture of the EU’s liquidity and provide a much-needed window where all users of capital markets can have a complete view of that liquidity. This will also help reinvigorate lacklustre European markets, creating further opportunities for both investors as well as companies seeking to list in the EU. After many years where a tape of any sort has failed to materialise, we are now closer than ever to achieving this goal. It is high time that the co-legislators set aside the interests of any particular group of market participants and make policy choices to the benefit of the EU as a whole. “Second, we must ensure that sufficient choice in trading mechanisms remains to attract investment within and into Europe. Here again, the EU’s geographically fragmented equity markets and its complex regulatory framework risk holding the bloc back from making policy choices that could benefit the EU overall. It is critical the co-legislators continue to recognise the important role that banks’ systematic internalisation plays in the liquidity ecosystem. For example, AFME has found systematic internalisers provide an additional EUR 3 trillion - or 14% of total European liquidity - because they place their capital at risk to enable trading to take place which otherwise might not. This is very different to exchanges which bring buyers and sellers together, but do not facilitate trading by using their balance sheet. Both types of trading mechanisms have key roles to play in creating a vibrant market environment we commonly strive for. What is important is that we work in partnership to grow overall liquidity within the EU, and we urge policymakers to put a legal framework in place which will ensure the best possible outcomes for the users of capital markets such as investors and savers. ” – Ends – [1] Turnover ratio is a commonly used liquidity metric which is calculated as equity trading value relative to market capitalisation. Using turnover ratios as a proxy for market liquidity strips out price performance of assets across regions, and shows how quickly assets are moving hands. [2] New Financial, THE PROBLEM WITH EUROPEAN STOCK MARKETS, 2021 (see EQUITY MARKET STRUCTURE IN EUROPE on page 6)

Following the European Commission’s publication of its proposed Crisis Management and Deposit Insurance Framework (CMDI) review today, Sahir Akbar, Head of Resolution Regulation at AFME said: “Today’s targeted proposals are another step along the journey to completing the Banking Union. They will improve the resolution framework so that any possible bank failures are effectively managed, irrespective of size, model and location. “In particular, we note the proposals for more harmonisation through amendments to the Public Interest Assessment (PIA) and Least Cost Test (LCT). This will increase predictability and credibility, ensuring a coherent application of rules across Member States. We therefore consider this essential for ensuring a level playing field. "Nevertheless, we note that the proposal broadens the framework to enable wider use of the Deposit Guarantee Scheme (DGS). Here we would caution thatsuch fundsshould not be usedin a way that createsmoral hazard. It is also important that internal loss-absorbing capacity remains the first line of defence. Furthermore, in keeping with the ‘polluter-pays’ model, the wider use of DGS compounds the need for contributions to the scheme to be proportionate with the risk a bank poses to the fund. “Other elements of the proposals, such as changing the creditor hierarchy, will need to be considered carefully to ensure they do not give rise to any unintended consequences, and to ensure that any reforms to the resolution framework do not prejudice the extensive progress made so far. “At AFME we have always supported the development of effective recovery and resolution framework in Europe and look forward to actively engaging with the European Commission and the co-legislators on these latest proposals.” AFME believes that the co-legislators should focus, in particular, on the following elements in the upcoming negotiations: Enhancing the credibility, predictability and consistency of the CMDI framework, further enhancing financial stability, without adversely impacting the progress made to date on resolution. Not increasing contributions to mutualized funds, but better aligning contributions with the risk that an individual institution poses to the fund. Minimizing risk to taxpayers and moral hazard by ensuring a consistent, harmonized and careful approach across EU member states to the use of common or mutualized funds to absorb losses, subject to the Least Cost Test, supporting market discipline and avoiding competitive distortions. Being consistent in the tools and application of the framework at EU level in order to ensure that all banks regardless of their size or country of origin can fail in an orderly manner, have a plan in place to provide for this and have the resources to support it. Supporting strong cross-border cooperation and minimize fragmentation both within the EU and with third countries. - ENDS -

The Association for Financial Markets in Europe (AFME), as a leading voice on the debate surrounding a move to a one-day settlement cycle (T+1) in Europe, has today announced it is setting up a new industry taskforce. The Association is issuing a call for interest for participation from a broad and diverse group of industry associations representing stakeholders who will be impacted by a shortening of the securities settlement cycle in Europe. The task force will assess two key questions. Firstly, whether Europe should follow the US and other jurisdictions in moving to shorter settlement cycles, based on a robust cost-benefit analysis. Secondly, if so, how and when the potential move should happen. Further consideration will be required to identify the changes to the current post trade operating environment that would be necessary to facilitate T+1, and to agree on actions required to deliver those changes, including an appropriate timeframe. Adam Farkas, CEO of AFME, said: “With the US having announced its intention to move to T+1 settlement by May 2024, the discussion on whether Europe should follow suit has become more pressing. Addressing this important topic will require a collaborative approach, and therefore all impacted stakeholders are encouraged to join the industry taskforce.” Pete Tomlinson, Director of Post Trade at AFME, said: “AFME is convening this industry task force to ensure all aspects of T+1 adoption in Europe are considered, including direct economic costs and savings to the industry, as well as less tangible factors such as global alignment and market attractiveness. It is important that such a move is carefully considered. A rushed approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.” Tanguy van de Werve, Secretary General of EFAMA said: “An Industry Task Force on T+1 settlement is a logical and necessary step for Europe, both in terms of managing the impacts of the US move to T+1, and in considering a European timetable for a possible similar move . Given the high degree of exposure to one another’s markets, the shortened settlement cycle will invariably require changes to existing processes for European firms and US investors exposed to European securities. It is important that we leverage on these shorter-term priorities to build an industry view on the need for, and potential roadmap to, a shortened settlement cycle in Europe.” - ENDS -

The Association for Financial Markets in Europe (AFME) has today issued a comment welcoming the provisional agreement reached on the establishment of an EU Green Bonds standard. Oliver Moullin, Managing Director, Sustainable Finance General Counsel of AFME, said: “We welcome that the agreement maintains the original objective of establishing a voluntary, science-based “gold standard” for bonds funding activities aligned with the EU Taxonomy. “AFME research has shown that EU sustainable bond issuance is not immune to adversities and uncertainty in the market, and we believe that the establishment of an EU standard for green bonds based on the Taxonomy Regulation should complement existing market standards, further developing the market for environmentally sustainable bonds. To maximise the adoption of the standard, it is important that work continues to enhance the usability of the EU Taxonomy.” “In turn, the usability of the Standard will largely depend on the degree of flexibility with the Taxonomy-alignment of proceeds, the treatment of green securitisation, and the grandfathering provisions. We thus look forward to seeing the details of the text agreed upon yesterday.”

The Association for Financial Markets in Europe (AFME) has today issued a comment in response to the vote of the European Parliament's Committee on Economic and Monetary Affairs (ECON) on the MiFIR Review. Adam Farkas, Chief Executive of AFME, said: “Today’s vote is a significant step forward towards finalising the MiFIR review which governs how financial markets function in the EU. In light of today’s agreement, we are optimistic that the file can be concluded under this legislative term. “AFME particularly welcomes the constructive approach the ECON has taken in relation to the scope of the consolidated tapes, with its clear proposals to include both pre-trade and post-trade information in the equity consolidated tape, and post-trade information only in the bonds consolidated tape. We strongly urge the co-legislators to retain the design features put forward by the ECON as they are a necessary condition to ensuring the tapes will be as useful as possible for investors and effectively contribute to improving the integration and competitiveness of the EU’s capital markets. We also take note of the emergence of various potential tape providers, which is a good sign that consolidated tapes will effectively materialise once the legislative framework is in place. “On equity market structure issues, we have consistently argued in favour of reducing complexity and safeguarding investor choice across equities trading mechanisms as this allows for cheaper and more efficient execution to the benefit of end investor returns. The ECON’s approach to restrictions on certain trading mechanisms, such as volume caps and limits on execution sizes and mid-point trading, impede investor choice and best execution. These features remain at odds with international practices and risk contributing to the continued decline of the EU’s attractiveness as a global capital markets centre. “While the ECON’s approach represents an important improvement on the Commission’s original proposals, AFME continues to be concerned by the relatively rigid approach both co-legislators are taking in relation to bond market transparency. Hard coding corporate bond deferral periods that are not informed by thorough data analysis into Level 1 legislation creates the risk that liquidity provision in illiquid or large sized bond trades will be hampered, particularly during periods of stress. As recent examples of market stress episodes highlight the need for continued focus on financial stability perspectives, we encourage the co-legislators to exercise caution and not - unintentionally – place additional pressure on markets. We also encourage the co-legislators to revisit the deferral framework for non-EU sovereign bonds during the trilogues. At present, they would fall under the corporate bond regime which simply does not cater to the characteristics of sovereign markets. “As we approach inter-institutional negotiations, AFME urges policymakers to keep the competitiveness and attractiveness of EU fixed income, equities and commodities markets for investors at the forefront of its considerations” In more detail: On Equities: AFME has consistently advocated for a fair, proportionate and data-led framework, which supports diversity and competition in EU equity markets. Thresholds on certain trading mechanisms and on banks providing liquidity to their clients (e.g. pension and investment funds who invest and manage assets on behalf of clients) is damaging to investors’ pursuit of best execution, and their ability to access liquidity that would otherwise not be available. This, over time, impacts the value of investments in EU equities and disincentivises investment in EU capital markets. On Fixed Income: On corporate bonds, while we support having 5 categories of bond deferrals, we are disappointed that the ECON has retained maximum deferral periods within the Level 1 framework, instead of making greater use of delegations to ESMA for the purpose of data-based calibration. In bond markets, which are characterised by a large degree of heterogeneity in the instruments traded, liquidity is notoriously difficult to source in a timely fashion. Investors in bonds are therefore particularly reliant on banks acting as market makers and using their own capital to provide liquidity to facilitate trades. The fixed income transparency regime needs to be better calibrated than proposed to ensure continued provision of liquidity so trades in large sizes and as well as in illiquid instruments can be efficiently managed by allowing sufficient time for market-makers to hedge or unwind their positions, both in a benign environment as well as during periods of high market volatility. The level one text should set out the principles which need to be considered when determining these calibrations, but the calibration exercise itself, should be delegated to ESMA on the basis of a thorough impact assessment. On sovereign bonds, AFME does not support non-EU sovereign bond deferrals being subject to the same timeframes proposed under the corporate bond deferral framework. The paradoxical result would be that the transparency on non-EU sovereign bonds is significantly shorter than that which would be available for EU sovereign bonds. We find it hard to justify such a different regulatory treatment for financial instruments which can present similar characteristics. We support the view that pre-trade transparency requirements for bonds should only apply to trading on central limit order book and periodic auction systems on trading venues. We encourage the Co-Legislators and the EU Commission to make that clear in the final text. On the Designated Publishing Regime: Whilst we are supportive of the Designated Publishing Regime which seeks to eliminate uncertainty about which party to a trade should report a transaction and reduce the regulatory burden on investment firms, particularly smaller ones, it should not be implemented at an individual instrument level. This would make it more complicated and provide no greater benefit than what is currently in place today

Following the announcement of a political agreement on a Northern Ireland protocol deal today, Adam Farkas, Chief Executive of the Association for Financial Markets in Europe (AFME) commented: “AFME strongly welcomes the agreement reached today between the EU and the UK. This should now unlock formal regulatory cooperation in the area of financial services based on the joint declaration accompanying the EU-UK Trade and Cooperation Agreement. It is crucial that both sides now activate the Memorandum of Understanding to establish regulatory dialogue and enable enhanced cooperation and coordination, including allowing for regular exchanges on trade and market access issues as well as equivalence provisions.” - ENDS -

Following the announcement by the US Securities and Exchange Commission today that the US will move to a one-day settlement cycle (T+1) by May 2024, Pete Tomlinson, Director of Post Trade at the Association for Financial Markets in Europe (AFME), commented: “The May 2024 goal for moving to one-day settlement in the US is ambitious and will be a significant challenge for all market participants globally. AFME is supporting its members and the broader industry in preparing for this implementation. “The move to accelerated settlement cycles is seen as a way to lower risks to financial systems and drive greater efficiencies in post-trade processes and other jurisdictions are now commencing their reflections on this process. However, adopting T+1 settlement in Europe will be significantly more challenging, given the fragmented nature of European markets and the greater operational, structural and regulatory complexity. “Further analysis is required across the industry to quantify the costs and benefits, and the changes required to the current operating environment to facilitate such a move. AFME will work closely with all stakeholders to ensure a collaborative industry approach to this topic.” - ENDS -