Significant technological advances have changed the way we work, live and interact. This is no different for securities markets, where the industry continues to seek opportunities to improve efficiency through advancements in technology and standardisation. For example, recently, the US, Canada and India announced their intention to shorten settlement cycles to one business day (T+1), while most securities transactions are currently settled within two business days. The US and Canada plan to adopt T+1 in what is understood to be a “big bang” implementation in late 2024. 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. The question arises on whether Europe should also follow suit. The European region is characterised by a multitude of currencies, market infrastructures, and distinct legal frameworks. Compared to the US, Canada or India, which are single national markets, Europe’s capital markets are notable for their diversity, the complexity of their legal, fiscal and regulatory frameworks, and for the large number of regulatory, supervisory and infrastructure bodies. These structural differences have historically brought challenges when it comes to harmonisation and efficiency of post-trading in European financial markets, making the adoption of T+1 in Europe a more complex proposition. The case for and against settlement cycles in Europe is not straightforward. While many of the benefits of the US adapting T+1 stand for Europe, there is simply more complexity to consider. What is a settlement cycle? Simply explained, a settlement cycle is the time period between when a transaction is agreed and executed by a buyer and a seller (i.e. the trade date) and when the transaction is completed and the securities and cash are exchanged (i.e. the settlement date). This process is not much different to that of any other commercial transactions that happen across a shop counter. However, while the transfer of cash and goods happens simultaneously in a shop, the settlement process of securities transactions occurs at a different time than the execution of the trade. There is a time window between trading and settlement which allows for several important processing steps to take place, ensuring a high degree of control and efficiency, as required for processing high volumes and values of securities transactions. European markets were operating on a three business-day settlement cycle (T+3) until 2014, when a majority of European markets adopted a two business-day approach (T+2) in preparation for the direct application of Article 5 of the Central Securities Depositories Regulation (CSDR). The US followed suit in 2017 and adopted a similar move to T+2. Over the years, advancements in technology and standardisation have allowed for this window to be reduced. More efficient and competitive capital markets There are immediate benefits of Europe moving to T+1, reducing risk is a notable example, which the US has set as one of its main reasons of moving to T+1. In recent years, capital markets have been characterised by periods of significant increases in trading volume and volatility, increasing levels of counterparty risk. Reducing the number of days between trade execution and settlement could lead to a reduction of risk across the settlement ecosystem, especially during periods of market volatility. By reducing firms’ open exposures over the settlement period, there will also be a reduction in costs. Decreasing the margin requirements could lead to market participants better managing capital and liquidity risk. Modern capital markets are becoming more accessible than ever, with much of the transactional world moving towards real-time operations, and many emerging asset classes – such as crypto-currencies – offer investors instant settlement. Against this background, T+1 settlement may contribute towards the continued attractiveness and relevance of traditional financial markets. Settlement cycles have gradually reduced over time, at each stage driving further advancement in post-trade efficiency. The adoption of T+1 would necessitate renewed industry focus on opportunities to automate manual processes, create and adopt industry standards. Significant challenges for Europe A transition from T+2 to T+1 would represent a significant time constraint and model shift, because there would be significantly fewer hours between trading and the beginning of the settlement cycle for post-trade operational processes. There are many post-trade activities that need to take place between the close of trading and the beginning of settlement. Being able to modify systems and processes to accomplish all of these activities during a shorter time frame will be a significant undertaking. The compressed timeline for the completion of operational processes, as well as the reduced opportunity to complete securities lending transactions to cover short positions, could potentially lead to an increase in the number of settlement fails in the market. At a regulatory level, these fails could incur cash penalties under CSDR rules, as well as having Risk Weighted Assets implications under Basel III requirements. Moreover, a compression of the settlement cycle would create operational complexities for all firms transacting in European securities markets, but in particular for investors from other regions, for whom time zone differences will impact the possibility of same-day matching processes, and vastly reducing the time available to communicate and resolve any breaks or exceptions. Industry collaboration is the next step Before making any decisions on the future of settlement cycles, Europe needs to do some preparation. One of the first steps should be to conduct an industry-wide consultation to identify and quantify the potential challenges, followed by a robust cost-benefit analysis. It will also be crucial for global market participants to give their feedback to ensure that a migration to T+1 will not hurt the competitiveness of European markets or diminish their attractiveness to global investors. The interconnected and complex nature of European capital markets shows how challenging it might be to implement a shorter settlement cycle in Europe. The barriers to timely settlement today on a T+2 basis need to be fully understood and overcome before moving to T+1 in order to avoid exacerbating existing issues. Successful implementation will depend on a high degree of coordination and agreement across all stakeholders. Ideally, a cross-industry taskforce, with representation from all market participants, should be established to drive forward the initiatives. A rushed or uncoordinated approach could result in increased risks, costs and inefficiencies in European capital markets.

The EUis dealing with many challenges: war on its borders, rising inflation and persisting financial fragmentation across the Eurozone are all cause for concern. These issues were at the heart of discussions among leading policymakers and banks at AFME and OMFIF’s 2nd Annual European Financial Integration (EFI) Conference last week in Frankfurt. Most speakers agreed that Europe needs to strive for more competitive and integrated capital and banking markets and that there is a key role for technological innovation to help overcome fragmentation in European markets. Panellists also found that there were considerably sharper trade-offs now than during the pandemic, but that these were political rather than economic. Nonetheless, on a European scale there needs to be scope for better policy coordination to fight inflation and build a robust and competitive banking system. Competition, speakers found, needed to be interpreted in a nuanced way. While the single market in the EU is still incomplete, regulatory action needs to embed competition, so that enforcement and regulation can be complementary. Philipp Hartmann, Deputy Director General Research at the European Central Bank (ECB), presented the ECB’s bi-annual report on financial integration and structure. Previous crisis, Mr Hartmann reflected, were able to teach us a lesson and prompt monetary policy measures and agreement on the EU recovery fund had made a fundamental difference in supporting financial integration, although this has still not returned to pre-GFC levels. Commenting on the structure of the EU’s financial system, Mr Hartmann, considered how European equity markets can be made fit for green & digital transformation. In its report, the ECB points to Next Generation EU (NGEU), initiative having large public investments in digital and green projects that firms can benefit from. However, this is still far from the EUR 650bn investment per year, which the European Commission estimates is needed. Substantial private investment will be necessary to finance these transitions and equity finance is well suited for innovation-oriented investment. The 2020 CMU action plan could produce tangible progress for developing and integrating European equity and risk capital markets, yet efficiency and harmonisation of regulatory frameworks still need to be enhanced. Unicredit’s CEO, Andrea Orcel, reflected on how the geographical footprint and scale of European banks is key for competitiveness. Mr Orcel pointed out that the EU has more or less the same GDP as the USA, yet, leading banks in the States spend 10 times more on technological innovation. Over time, this leads to a lack of level playing field, to the detriment of European competitiveness. Scaling up would bring about a more unified pan-European market and for this technology is paramount. In terms of regulation, Mr Orcel said that the prudential framework and profitability need to be balanced against each other. If there is an excessive focus on prudence, it can make entire sections of banking unprofitable. Furthermore, rules differ from country to country and capital and liquidity can remain trapped locally. In contrast to the US, Europe is not one market. In light of such fragmentation, which limits scale, but also as a result of a likely conscious choice from policy-makers post-GFC, European banks do not feature highly on the league tables of the worlds’ investment banks and global market players. Edouard Fernandez-Bollo, Member of the Supervisory Board at The European Central Bank (ECB), gave a supervisory perspective on the European banking industry. He noted that one of the ECB’s aims is to help banks realise their M&A projects if these have a valid basis. The ECB is also focused on assisting firms in operationalising and integrating ESG policy into their risk management. When it comes to leveraged finance and industry concerns surrounding supervisory expectations rendering banks uncompetitive compared to international peers, Mr Fernandez-Bollo responded that the ECB is concentrating on outliers to create a safer market. Profitability of the sector has returned to pre-pandemic levels, but remains structurally low. While the ECB has seen progress in the areas of diversification and harnessing technology to reduce cost base, it is not enough. The ECB has been encouraging banks to look at their cost and revenue structures, while investment in technology is something that needs to be monitored more closely. The CFOs of Société Générale, Claire Dumas, and Santander, José Antonio García Cantera, spoke about the key driving factors behind lower evaluations of European banks compared to international peers, reiterating the problem of Europe’s fragmentation and issues deriving from this, such as fewer opportunities to streamline their businesses and higher costs. Regulatory issues and differences in requirements between European countries are also a cause for concern. Both speakers noted that banks themselves can improve their profitability and efficiency, through partnerships, as well as focusing on diversifying their business mix, such as insurance and leasing. Digitalisation and disruption is another area that banks should focus on, as operational efficiency and new business models become increasingly important. Other panels delved into the regulatory environment for the banking industry, with speakers debating the impacts of Basel 3 implementation on the sector’s ability to continue financing the real economy. The real need to address deficiencies in the securitisation framework was flagged as being key in this respect, while providing a bridge between bank and market-based financing. Following this, the conference examined the listing, trading and post-trading landscape in the EU, with panellists querying why many EU firms continue to go public outside of the EU. Panellists commented on the fragmented market structure for trading and complexities of post-trade organisation compared notably to the US as being part of the reason behind this. They noted that differences in tax processes and insolvency laws across Member States continue to be high amongst barriers to achieving more efficient capital markets in the EU. Overall, AFME and OMFIF’s EFI conference brought renewed attention to how fragmentation in European banking and capital markets is impacting the financial sector’s ability to serve the economy and what can be done to combat it. Given the size of our investment needs, deeper, more liquid and competitive markets will be necessary to allow the financing of the green and digital transition to be supported in addition to ensuring that banks continue to have capacity.

Europe’s economy is on another unpredictable course. The outbreak and resurgence of the COVID-19 pandemic over the last two years and now the economic impact of the war in Ukraine underscore why the European Union (EU) needs a resilient and diversified financial system able to withstand sudden economic shocks. Meanwhile, the financing needs associated with the green and digital transitions remain as urgent as ever: Europe’s financial system needs to be geared towards channelling the significant scale of investment required to enable these transformations. Capital-market financing will need to play a central role in meeting these challenges. Yet, the EU’s capital markets remain fragmented and under-sized. Deepening integration and expanding the international reach of EU capital markets are, therefore, paramount to Europe’s economic prospects and overall strategic goals. European capital markets and regulatory frameworks continue to evolve in the post-Brexit environment. Major legislative proposals that may have far-reaching impacts on the European banking sector, capital-markets ecosystem and sustainable-finance advancement are under consideration. In light of such changes, the EU needs to pursue regulatory outcomes that not only preserve and reinforce financial stability and investor protection but, crucially, encourage increased participation in EU capital markets from both local and international players. A strong focus on this principle will be essential to further developing the EU’s capacity in primary and secondary capital markets. Increasing markets’ competitiveness will be vital for Europe’s economic strength. Financial markets in the EU—or any other jurisdiction—do not function in isolation. They are interconnected, and financial centres across the globe compete with each other. This is especially true for wholesale markets in which sophisticated investors and market participants are themselves active in multiple jurisdictions and have choices to make regarding deploying their capital and accessing liquidity pools. This is why policymaking should contribute, where possible, to strengthening the attractiveness and competitiveness of EU capital markets. In turn, this will support current efforts to scale up the Union’s market ecosystem, promote the international use of the euro and achieve greater strategic autonomy in financial services. Promoting international cooperation and regulation supporting market development The major successful global financial centres are characterised by their high regulatory standards, quality of their legal frameworks, openness to global pools of capital and scale of their underlying financial ecosystems. Maintaining openness and connectivity with non-EU markets is essential in continuing to build the EU’s capital-market capacity. The EU should continue to champion open capital markets that allow EU participants access to international capital pools and funding opportunities while ensuring market integrity and fair treatment between EU firms and third-country entities. Furthermore, greater importance needs to be placed on supporting global regulatory cooperation, particularly in the areas of digitalisation and sustainability, as jurisdictions grapple with common objectives and challenges. It is in the interests of European companies and investors to have globally aligned standards while maintaining the EU’s strong and ambitious leadership role in these areas. Strengthening Europe’s primary and secondary markets The EU is at a critical juncture in its decision-making around the future of its capital markets. The next two years will see the advancement and completion of major policy debates in areas such as market structure, prudential requirements for banks, sustainable finance and digitalisation, which will have the potential for significant change. For example, as the EU competes with other global markets to attract company listings, attractive and harmonised listing rules on European public markets will be vital to support crucial access to market finance for EU companies. The EU is, therefore, undertaking a comprehensive review of company listing rules to encourage more companies to list on EU public markets, particularly small and medium-sized enterprises (SMEs). This should ensure that strong levels of legal certainty, transparency and investor protection are retained. Meanwhile, legislators are currently debating a set of major, potentially transformational proposals for Europe’s secondary markets in the ongoing review of the Markets in Financial Instruments Regulation (MiFIR), which governs how markets function. This work is critical to promoting globally competitive capital markets in the EU. An attractive, well-regulated trading ecosystem can nurture innovative, world-leading market infrastructures and promote enlarged liquidity pools within the EU. The promotion of market efficiency, competition among service providers and strong outcomes for investors and corporate and SME issuers should be at the forefront of the debate around these proposals for Europe’s market structure. In this respect, proposals for establishing a consolidated tape—similar to a price-comparison tool for investors—should be particularly supported. A well-designed tape will promote more attractive and competitive capital markets and reduce home-country bias (where an investor tends to prefer companies or investments from his or her own country) in the Union. As these debates progress, it is important to consider the wider international context—including, for instance, the United Kingdom’s parallel review of its wholesale-market architecture. As the EU reviews its own market legislation, if there is a shift towards a market structure that is ultimately less supportive of investor choice and prevents investors from accessing the most optimal trading conditions, this will not only result in additional costs for pensioners and savers, it also risks discouraging global market players from participating in EU capital markets, thus undermining their competitiveness in relation to other jurisdictions. Now is the time to complete CMU. To conclude, EU capital markets have many strengths enabling them to thrive in today’s global environment—among them, the scale of the EU single market, the euro as a leading international currency and global leadership in ESG (environmental, social and corporate governance) financing. In the recent Versailles declaration, the EU Heads of State agreed to create an environment that facilitates and attracts private investment by “creating more integrated, attractive and competitive European financial markets, enabling the financing of innovation and safeguarding financial stability, by deepening the Capital Markets Union (CMU) and completing the Banking Union.” These objectives are achievable and within reach, but the EU must find the political momentum to deliver policies that will foster a globally competitive CMU that can support sustainable long-term growth in the coming years.

Distributed ledger technology (DLT) has the potential to fundamentally change the financial services landscape. The underlying technology itself holds great potential for existing financial markets including, accelerating payments, improving fraud prevention and allowing banks to clear and settle trades much more efficiently. Both banks and new market entrants in the Fintech space have been developing DLT based solutions to reduce costs, transform their offerings , and respond to growing demand by customers for the tokenisation of traditional assets (e.g. real estate, fine art) as well as the inclusion of the emerging asset class of crypto-assets. Crypto-assets, such as Bitcoin, harness DLT and are seen by many to have plausible value for future generations. As the industry looks to implement the technology across their business lines, and crypto-asset markets continue to expand, global regulators are also reviewing and developing the regulations required to manage the risks arising from these new assets to financial stability, investors, and consumers. MiCA (Markets in Crypto-assets), the framework proposed by the European Commission, aims to create EU-wide minimum requirements for all crypto-assets issuers and service providers. It is currently being discussed by the European Parliament and the Council of the EU and is expected to be adopted later this summer. However, while good progress is being made towards implementing a standardised European framework that brings regulatory protection, concerns remain. The most critical is related to the requirements imposed on custodians of crypto assets, and, in particular, to what extent they are responsible if something goes wrong. ‘Crypto custody’ refers to the securing of crypto assets by a third party, which is important to protect investors from theft or hacks. Custodians are essential for secure crypto-asset adoption by both consumers and institutional investors. However, despite the enhanced protection that custody offers, things can still go wrong. For instance, there may be circumstances beyond the custodians control, such as sanctions. In this respect, the drafting of MiCA causes concern, because as currently proposed, banks providing custody services are liable for crypto-asset losses that are outside of their control, for example, in the event of regulatory or government action (e.g. banning or outlawing a particular crypto-asset). This is inconsistent with current global liability regulation for other asset classes, and would strongly disincentivise traditional finance institutions from offering crypto-asset custody solutions. If unresolved, MiCA may inadvertently cause the opposite impact of its stated intent – i.e. protecting investors from loss by driving clients to look for unregulated solutions in other jurisdictions or self-custody in the EU. These solutions ultimately put them at a greater risk of loss, and also outside of all courses for redress. As with the risks that may arise from the current drafting of the broad liability requirements, there are other pieces of the proposal that may inadvertently drive crypto-asset investors to conduct their business outside of regulated providers. For example, further consideration should also be given to risks concerning decentralised finance (known as DeFi). The European Commission proposed MiCA in September 2020, when other crypto-asset developments such as Non Fungible Tokens (NFTs) and DeFi offerings (such as Decentralised Autonomous Organisations or DAOs) were still nascent. Since then, they have evolved rapidly with billions in DAOs globally. Policy makers are considering whether these innovations also deserve a home in MiCA, but if DeFi and its associated activities are in fact regulated products (such as securities) it is critical that they are brought within the regulatory perimeter in an appropriate way to manage risks to market integrity, financial stability and end users. The EU is taking a leading role in regulating crypto-assets and the finalisation of MiCA will undoubtedly harmonise the regulatory approach across the EU, and make it an attractive and competitive market for crypto-assets . However, in order to implement an EU framework that protects investors from severe losses, regulators must be mindful of the potential unintended consequences that could arise if the framework disincentivises banks from offering crypto-asset services and forces clients to seek out new players outside of the protection MiCA should guarantee them. It is also crucial that both EU and global regulators work cooperatively to build a balanced and harmonised framework, fit for the digital age, where market participants can engage with crypto-assets from within the regulatory perimeter.

AFME returned to Madrid this year for the 13th time to host its annual Spanish Capital Markets conference, in collaboration with the Spanish Banking Association, AEB. The event brought together speakers and delegates from across the capital markets with panels centred around the need to strengthen the competitiveness of European and Spanish capital markets. The unfavourable macroeconomic environment created by the Russian invasion was much discussed, demonstrating how important it is for capital markets to have enough liquidity to protect Europe against future challenges. Further, speakers discussed how the current geopolitical tensions have revealed to what extent Europe is reliant on gas, providing opportunities for economies to follow a faster path toward renewable energy. For sustainability procedures to be successfully put in place in the next decade, the European Commission estimates that around 350 billion Euros each year will be required. But, this amount of money cannot solely be raised through traditional financing, such as bank loans, but will require a unified response from European capital markets. At SCM, many speakers saw the solution as the Capital Markets Union (CMU), launched by the European Commission in 2014. The CMU has three goals – for new companies to have an easier time to access capital markets to accelerate growth and support the European economy; to improve long-term profitability of savings for an aging generation by making the market more viable for retail investors; and third, improving the diversification of financing sources through encouraging more equity-based financing of companies. The latter would lessen the reliance on bank credit in the future. One of SCM’s keynote speakers, Rodrigo Buenaventura, Chairman at the Spanish National Securities Market Commission (CNMV), expressed that Spanish stock markets, for example, need to boost the number of companies listing in Spain. Comparing the Spanish stock market to an inverted pyramid, Mr Buenaventura described the top of the pyramid with around 130 listed companies on the main regulated market, while the Growth market, also called the SME stock market, only has 50 listed companies at the bottom. The regulated market has the strictest obligations and regulations, while the Growth market has significantly lower but yet still prudent requirements and centres on developing and growing companies. While more companies are joining the growth market every year, Mr Buenaventura called for faster progress to ensure Spain remains competitive. The CNMV Chairman concluded that to aid companies to scale up, EU capital markets need to be fostered further. However, to achieve this, a delicate balance needs to be struck. Complete deregulation, which could bring unintended consequences, needs to be avoided, but lowered listing requirements, quicker access to markets and fewer information constraints for investors need to be supported. For EU capital markets to be successful, all stakeholders need to be involved. The Listing Act is an example of how this can function. The purpose of it is to make capital markets more competitive by attracting EU corporations and helping SMEs find funding. Although the Listing Act is promising step in the right direction towards a unified capital market, the general consensus at SCM was that more needs to be done.

At AFME’s European Sustainable Finance Conference in Amsterdam last week, speakers and delegates from across the banking industry, capital markets and policy sector came together to discuss the future of sustainable finance. A key theme across many discussions was the importance of the work to enhance the availability of sustainability data – in terms of quantity, quality, but also consistency. This credible and comparable information should be readily available for all market participants, shareholders and other stakeholders to increase transparency, drive capital to climate solutions, and clamp down on greenwashing. The conference came at a key time as draft sustainability reporting standards have been published for consultation by the European Financial Reporting Advisory Group (EFRAG) in the EU, the Securities and Exchange Commission (SEC) in the USA, and the International Sustainability Standards Board (ISSB) which has been tasked to develop common baseline global standards. The question that arose on several panels was whether a globally consistent approach, with a common baseline but also the possibility for jurisdictions to level up, could really be achieved. Delegates heard from Mardi McBrien from the IFRS Foundation on the progress made in establishing the ISSB, its proposed approach and coordination with other standard-setting and jurisdictional bodies. We were also pleased to hear from Patrick de Cambourg, who chaired EFRAG’s work on sustainability reporting standards. The objective of cooperation and the benefits of globally compatible standards were clearly appreciated across the board from private and public sector speakers. The discussion considered some differences in the philosophy, scope and articulation between the draft EU and international standards. It was emphasised that the EU standards were mandated under EU legislation and needed to take account of the existing EU regulatory framework which has embedded concepts such as “double materiality” and the scope extending beyond climate change to cover other environmental factors as well as the S (Social) and G (Governance) side of sustainability. While the EU is clearly going faster and further than other jurisdictions, the hope remains that there can be compatibility of standards, at least with respect to the scope covered by the international baseline standards, and that these can form a basis upon which jurisdictions may build. Beyond standards and disclosures, the conference offered the opportunity to unpack other key elements of the European and international efforts to channel investment in line with sustainability goals, assess whether the regulation is achieving its objective and identify priorities for the future. A few other highlights included hearing from MEP Paul Tang on many important aspects of the framework, from continuing work on the EU taxonomy to the integration of climate-related risks into credit ratings and bank capital requirements, as well as sustainability standards and labels as tools to help channel finance to companies, issuers and investors. We also heard from regulators as to how they are approaching climate and environmental (C&E) risks through their supervisory and regulatory frameworks. Steven Maijoor spoke about how these risks affect the financial system and how supervisors and banks must respond to these risks. He introduced the idea of fundamental changes to banks’ prudential framework to address concentration risks originating from C&E. How risks should be addressed in the regulatory capital framework was also discussed in a panel with the European Banking Authority (EBA) and the Bank of England. There were insightful discussions on evolving regulatory initiatives including hearing from ESMA and IOSCO on the how to improve the availability, integrity and transparency of ESG ratings. Both agreed on the need for intervention, but it will be important to adopt an inclusive approach to avoid excluding smaller players from the market. The European Commission and MEP Lara Wolters joined a conversation about the recently proposed Corporate Sustainability Due Diligence Directive (CSDD) which would introduce new due diligence and corporate governance requirements for companies to identify and address human rights and environmental impacts in their supply chains. The exchange of views was a window into the political negotiations that will begin in autumn, where European legislators will try to find the right balance between credible duties and pragmatic rules. Furthermore, the conference looked beyond climate change to the important area of biodiversity and nature. The Task Force on Nature-related Disclosures (TNFD) called all market participants to begin implementing voluntary reporting and start testing their beta disclosure framework. Aside from regulatory developments, there was a clear focus from market participants on how ESG bond markets are developing, how investors are approaching impact investing and the potential for the important role which green securitisation can play. The key to unlock its potential hangs on targeted adjustments to the securitisation regulation, and in effective EU Green Bond Standard criteria applicable to securitisation structures. While there has been rapid progress on all these fronts, we heard clear messages emphasising the importance of continued action, of ensuring the coherence of the regulatory framework, and of international coordination. AFME continues to engage with and on behalf of its members across the sustainable finance agenda and is committed to contributing to the efforts to establish an effective regulatory framework and supporting the development of markets in sustainable finance.

On March 1, AFME and Linklaters held a conference to discuss the Future of wholesale financial markets in the UK. Discussions on the day centred around a speech from John Glen, Economic Secretary to the UK Treasury and City Minister, announcing reforms to capital markets regulation and listing rules changes in the UK. With Secretary Glen announcing that some powers will soon be devolved to the UK markets regulator, the Financial Conduct Authority (FCA), the first panel of the day featured discussions between the FCA’s Fabio Braga, Manager – Trading and Wholesale Conduct Policy and capital markets participants, explaining the intention behind the announced reforms. Braga highlighted plans for establishing a markets advisory committee to support FCA work in delivering the targeted changes. He admitted that while the FCA has been good at engaging with market participants, this is the right time to establish a permanent committee to not only provide feedback on policy proposals, but to help the FCA in the early stages of drafting policy. Braga then outlined that the FCA would perform targeted changes in relation to pre-trade and post-trade regimes for fixed income trading, to name a few. Following Braga’s comments, panellists from Citi and Barclays reiterated the need for change in Europe’s pre-trade transparency regime for fixed income markets. They highlighted that the data being provided in compliance with the MiFID regime is being left unused by market participants, with the production of the data itself involving trading risk for their firms. Matthew Coupe, Director, Global Head of Cross Asset Market Structure, Markets EMEA, Barclays, described the existing MiFID transparency regime as a “plate of spaghetti” due to its complexity. Ashlin Kohler, Director, EMEA Rates eCommerce, Citi, added that the regime could do with being simplified and the regime should be led by data, focusing the regime on instruments that participants care about. The second half of the conference discussed the technical impact of the changes set out by the UK Treasury for equities markets. On the panel, Claudia Trauffler, Head of Capital Markets, Securities and Markets, HM Treasury, provided an overview of the changes planned, emphasising that systematic internalisers will be allowed to execute at the mid-point and the calibration of pre-trade waivers will be delegated to the FCA. Market participants from the buy and sell sides expressed their support for the proposed changes and reiterated the importance of speed on the topic of implementing a consolidated tape. Wrapping up proceedings, Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision at the FCA, delivered a speech, highlighting FCA plans in 2022 to change elements of the UK equity market and other areas of potential change. To those unable to attend the conference, the full recording is now available online here.

When policymakers congregate at COP26, there will be a sense of urgency. The world is falling short in its battle against climate change. To limit temperatures from rising above 1.5 degrees in the next two decades transformational changes are needed in the global economy. One key lever in this transformation will be to achieve a rapid scaling and deepening of carbon markets. What are compliance and voluntary carbon markets? Carbon markets are based on the purchasing of credits (allowances) that enable an entity to offset its carbon output. These markets are split into two categories: compliance and voluntary markets. Compliance markets aim to establish a carbon price by laws or regulations which control the supply of permits that are then distributed by national, regional and global regimes. These permits are then traded within a controlled emissions trading scheme (ETS), which economically incentivises emitting organisations to reduce their carbon footprint. In contrast, voluntary markets are not legally mandated and consist of companies and individuals choosing to offset their emissions. This could be motivated by an organisation looking to offset longer-term climate risks facing their organisation or for ethical or other reasons. Due to the carbon credits in voluntary markets not being administered by a specific government, they are accessible to every sector globally in contrast to compliance markets. Both compliance markets and the voluntary carbon market can play significant and complementary roles in the decarbonization of the global economy. However, both categories are undersized. A report produced by the Global Financial Markets Association (GFMA) and the Boston Consulting Group (BCG) finds that close to 80% of greenhouse gas emissions are not covered by regulated carbon pricing in compliance carbon markets. This limits their effectiveness in accelerating the global green transition. Expanding ETS Scale Within ETS coverage/compliance markets there is scope to expand not only within and across sectors but also the number of countries or municipalities. By including sectors that will need to acquire sizeable credits to offset their carbon output, the ETS will gain scale and more accurate pricing that will aid in the global green transition. To accelerate the expansion of the ETS scheme, policymakers should look to include more high-intensity emission sectors. These include energy and power as well as transportation, oil and gas industries (to name a few). Furthermore, the integrity of the ETS scheme needs to be facilitated. Collecting verified emissions data and classifying carbon allowances as financial instruments, as already done in the EU, would help ensure financial and price stability. The Integrity of Voluntary markets Similarly, voluntary carbon markets have the potential to channel finance into carbon removal projects and address the residual emissions of firms, but they are held back by issues of market integrity. This includes a lack of consensus on how the market credits align with science-based decarbonisation pathways, the overall “quality” of the credits available, as well as fragmented reporting standards. For voluntary markets to fulfil their potential, standard-setting bodies need to develop a consensus on the role of voluntary carbon market credits. This includes providing guidance on the accounting and disclosure for the credits and how they relate to net-zero/carbon-neutral claims. Providing this guidance will help remove ambiguity from the market and avoid greenwashing. Regarding the “quality” of credits, standard-setting bodies should also apply consistent standards for the underlying projects. By providing transparency and clarity surrounding the quality of credits, participants can gravitate to the credits that suit their needs. Lastly, market participants should also create global registries that reduce the fragmentation of the voluntary credit market across regions. A unified registry will enable more seamless transactions and enable authorities to track global progress toward the Paris Agreement goals. This would also allow them to identify the next necessary steps to accelerate the global transition. When key stakeholders and policymakers gather at COP26, scaling carbon markets should be pursued with a sense of urgency. If the world is to prevent global temperatures from rising beyond 1.5 degrees in the next two decades, ambition in scale, interoperability and market integrity will need to be achieved in carbon markets. Like any flourishing financial market, carbon market credits need to be regulated, valued and trusted. Carbon markets are very much still in their infancy, but the world cannot afford them to remain this way for much longer. To learn moreread GFMA and Boston Consulting Group's report titled,“Unlocking the Potential of Carbon Markets to Achieve Global Net Zero”.

Today the European Commission launched its proposed Directive and Regulation – CRDVI/CRR3 which seeks to implement the final Basel III standards in Europe. Despite assertions by the authorities to the contrary, these proposals will require European banks to raise significant additional amounts of equity capital to maintain their current ratios. They come at a time when banks hold record capital levels and have demonstrated considerable resilience throughout the Covid-19 economic collapse. Not only this, but they have exhibited their ability to withstand catastrophic stress test scenarios and have started to release bad debt provisions. The proposals themselves limit the extent to which banks can make use of their internal models to calculate their capital requirements. One way they do this is by not allowing modelled capital needs to fall below 72.5% of those calculated using a simpler standardized approach. They also introduce fresh rules on market and operational risks, imposing more precise capital requirements on areas of banks’ activities that were hitherto less specifically targeted. The December 2017 Basel III agreement is supposed to be the final element of the post 2008 financial crisis repair programme. As part of this, the Basel standard setters committed to no further post crisis regulatory capital increases and also claimed that the proposals would not lead to any significant overall increase in banks’ minimum capital requirements. Unfortunately, impact studies requested by the European Commission from the European Banking Authority and the Commission’s updated study published today - which suggests single digit capital increases - are based only on minimum required capital standards. So not only do the studies assume that all proposals are fully accepted by the co-legislators, but they also completely fail to show the real capital increase. This is likely to be in double digit percentages especially for the largest European banks which will to continue to operate at capital levels well in excess of minimum standards. In monetary terms therefore it is probable that the true capital shortfall compared to market required levels is a multiple of what the Commission is suggesting. This in turn could have negative consequences for lending and broader economic activity as balance sheet growth is constrained to conserve capital. Since the last financial crisis, European banks have raised hundreds of billions of equity capital taking their average Core Equity Tier 1 ratio – the best measure of capital strength - to a record 15.9% at March this year. Recently, banks have proved their resilience throughout the Covid-19 induced economic crisis. They have also been subjected by the EBA to its harshest ever stress test based on assumed massive falls in GDP, huge increases in unemployment and catastrophic falls in asset and market prices, emerging with a strong average CET1 ratio of over 10%. So what is the purpose of additional capital requirements? While significant financing is still required to aid the recovery from Covid-19; rather than taking on additional debt, businesses need more equity or equivalent instruments which should be raised on the capital, rather than the banking markets. In this respect, progress has already been seen with capital raising of €52bn by euro area corporates so far this year. This compares to net bank lending to euro area corporates of €56bn. However, smaller and medium sized entities - unable to easily access capital markets - are likely to continue to rely on banks for their financing needs. To the extent that the new EU proposals constrain banks’ ability to satisfy this requirement, (particularly through the application of the Output Floor, introducing a less risk sensitive approach to lending), then this may harm economic recovery. Some will also point to the need for additional capital to meet the risk of increased credit losses from banks’ customers as government support is withdrawn. While a pickup in losses is anticipated, this is likely to be manageable. And having built up significant reserves against prospective losses, banks have recently been releasing some of these suggesting confidence over provisioning levels. There are of course new risks on the horizon which could hit banks’ capital. The threats from climate change are often mentioned in this context. Yet climate related risks are very largely the amplification of already well-established risk categories such as credit, interest rate, counterparty, and foreign exchange. And while such amplified risks should certainly be incorporated in banks’ overall risk assessments and capital requirements, it is unclear that they need their own separate pot of additional capital. The Basel capital standards have played a major role in improving the resilience of banks, removing their implicit funding subsidy, and reducing systemic risk. The Basel Committee was right when it said that no significant additional system wide capital requirements should result from its final standards. European banks are already very well capitalized, and while some modest adjustments to requirements might be appropriate, European co- legislators should keep this firmly in mind as they evaluate the Commission’s latest proposals.

Moderator: Pedro Pinto, Director, Head of MiFID, Advocacy, AFME Speakers: Tanya Panova, Head of the Capital Markets Unit. European Commission, DG FISMA Christiane Hölz, Managing Director, DSW (Deutsche Schutzvereinigung für Wertpapierbesitz e.V.) Elisa Menardo, Director, Public Policy Europe and UK, Credit Suisse Neil Ryan, Consultant, Finbourne Technology Keshava Shastry, Managing Director and Head of Capital Markets, DWS Tanguy van de Werve, Director General, EFAMA (Tanya Panova, Keynote speech recording) On 30th September AFME, EFAMA hosted a joint webinar on the establishment of a consolidated tape for the benefit of all investors. The webinar featured a range of perspectives from the capital markets landscape, including the views of Tanya Panova, head of the Capital Markets Unit, at the European Commission DG FISMA. The webinar kicked-off with Tanguy van de Werve, EFAMA, outlining the need for Europe to remain relevant and attractive to global investment flows. In this regard, he highlighted how there has been a consolidated tape in the US for decades, and similarly UK Treasury has been consulting on a tape for the UK market. Pre-empting later conversations, he highlighted the importance of data quality to the functioning of the tape and how retail investors may benefit from the use of the tool. Tanya Panova, EC, provided a keynote on the Commission’s work on the CMU project over the past year. She outlined how much of their work has gone on behind the scenes, stating that she expects many of their proposals to come out in the coming period (the Solvency II reform was already proposed on 22 September). The intention behind the proposals will include plans to help address barriers to financing companies. She highlighted that there will be two proposals focussed on data, addressing its fragmentation, and increasing value, as well as a proposal related to the establishment of a consolidated tape. She explained that the tape would only make a difference if done properly, highlighting that one of the main reasons why the tape did not emerge since the application of MiFID II is due to poor data quality. Among the points Panova raised on data, she stated that it needs to be consolidated efficiently, but also have extensive coverage. Only if most of the venues and their data are included will it be of value to brokers and all groups of investors. She also noted that the tape is likely to coexist with any other data products. Neil Ryan, FINBOURNE, acknowledged that there are existing vendors such as his organisation who can already deliver a consolidated tape with an independent view, applying cutting-edge technology to solve the data quality challenge. Singing the praises of the benefits a consolidated tape could bring, Elisa Menardo, Credit Suisse, stated that it would help democratise access to data and access to funding. By giving greater visibility to businesses that choose to list on a particular venue, it makes them more likely to raise more funding next time they go to market. Keshava Shastry, DWS, concurred stating that the added visibility would be helpful to investment managers and end-investors and outlined a number of use cases where a real-time consolidated tape for equities would help asset managers managing their investments in a more effective way. However, Christiane Hölz, DSW (Deutsche Schutzvereinigung für Wertpapierbesitz e.V.) argued that the consolidated tape’s use case is not clear yet. She highlighted that there are urgent and serious issues facing the real economy that need to be addressed first. This included trading on dark venues, as well as data quality and access. Panova in response emphasised that taking such an approach would bring about more challenges and would not bring markets closer to the final result of establishing a tape that benefits investors. Menardo concurred stating that data quality issues can be addressed during the legislative process. As the webinar drew to a close panellists agreed that despite the challenges to establishing a consolidated tape, the transparency benefits make it a tool worth pursuing.