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10 March 2017

ICMA response to the commission consultation on capital markets union mid-term review

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ICMA’s response is preceded by two brief notes on broader themes: the importance of minimising the impact of UK withdrawal from the EU on the Capital Markets Union project; and the importance of ensuring EU global competitiveness.

There is a strong case for the Capital Markets Union project to continue in the EU27 when the UK leaves the EU, as capital market financing represents a lower proportion of total financing in the EU27 than in the UK, and the need for the EU27 to develop capital markets to finance growth is correspondingly greater than in the UK.

Even so, the proposed withdrawal of the UK from the EU represents a significant risk to the potential benefits which Capital Markets Union can bring to Europe as a whole, given London’s role as an international financial centre.

The UK Government has proposed that the UK should leave the Single Market when it leaves the EU, but plans to negotiate access to the Single Market as a third country. It remains to be seen whether the UK will remain equivalent with regulation in the EU27 and whether appropriate regulatory and supervisory arrangements can be put in place between the FCA and ESMA. There are some technical difficulties relating to equivalence which need to be overcome during the bilateral negotiations between the UK and the EU27.

It is important to ensure that the EU regulatory framework for financial services remains competitive in relation to the rest of the world. The European Commission should place global competitiveness of the EU regulatory framework at the heart of its Capital Markets Union project.

At a time when the new US Administration appears to be giving priority to “de-regulation” and avoiding “over-regulation”, the global competitiveness of the EU regulatory framework is likely to be of increasing importance. But the importance of maintaining the EU’s global competitiveness should not be seen as engaging in regulatory competition. Rather, it should require intense focus on maintaining effective EU-wide regulation in a manner which is proportionate, and which does not unnecessarily inhibit business flows into or out of the EU. In a globally competitive market place, this will necessitate continued efforts to well balance appropriately determined and applied EU and Member State requirements alongside global standards.

Single-name CDS not only provides an efficient and standardised tool for market-makers and investors to hedge credit exposures, but given its close relationship with the underlying reference bonds, an active and liquid single-name CDS market could help stimulate liquidity in the corporate bond market. Measures to revitalize the market could include reviewing CVA capital charges and NSFR funding requirements under CRD IV/R.

ICMA believes that, while new initiatives and protocols that reduce dependency on the market-making model should be fully explored and encouraged, there is still an important need to support, and even revitalise, the market-making function of banks and broker-dealers. The retrenchment of banks and broker-dealers from providing market-making services, and the evolution of traditional liquidity providers from principal traders to principal brokers, is now well recognised. While the forces driving this are multiple, and often difficult to isolate, it is clear that the regulatory impacts on the cost of capital required to support market-making is proving to be the primary constraint. This not only relates to the cost of dealers holding long or short positions, but also the associated costs of hedging and financing their positions. Thus, the regulatory impacts on the functioning and efficiency of both the single-name CDS market and credit repo market are also of critical importance when considering the disincentives to market-making.

Full response


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