Brussels, 25 November 2021
Overview of 2021 Capital Markets Union (CMU) package
Today’s CMU package consists of the following legislative and non-legislative elements:
- A Communication: ‘CMU– Delivering one year after the Action Plan’;
- a legislative proposal to establish a European Single Access Point (ESAP);
- a legislative proposal to review the European Long-Term Investment Funds (ELTIFs) Regulation (Regulation 2015/760/EU);
- a legislative proposal to review the Alternative Investment Fund Managers Directive (AIFMD) (Directive 2011/61/EU);
- a legislative proposal to review of the Markets in Financial Instruments Regulation (MiFIR) (Regulation 600/2014/EU).
1. The CMU Communication – a look forward to 2022
Today’s Communication ‘Delivering one year after the Action Plan’ looks at progress on the September 2020 CMU Action Plan and provides an overview of today’s proposals. All of these proposals are designed to contribute to achieving the objectives of the CMU. Progress on other CMU actions continues, paving the way for further ambitious deliverables. The Communication looks ahead to 2022 and sets out the legislative proposals and other initiatives that can be expected:
- Listing review to help companies raise funds on public markets. The Commission will adopt a legislative proposal in the second half of 2022 to cut red tape for companies that want to raise funds on EU public markets.
- Open finance framework to support capital markets and add value for consumers and companies. Building on a review of the Payment Services Directive II, the Commission will kick off work on an open finance framework to explore how data could be shared and re-used by financial institutions to create new services in line with EU data protection rules.
- Better financial literacy to help individuals make the most of capital markets. Based on joint work with the OECD and Member States, a financial competence framework for adults, laying out the skills and knowledge they need to be financially literate, will be published by the end of 2022.
- Initiative on corporate insolvency to ensure a more predictable outcome for businesses and investors. Next year, the Commission will propose an initiative to harmonise targeted aspects of the corporate insolvency framework and procedures.
2. A European Single Access Point (ESAP) for Financial and Non-Financial Information
Why is the Commission proposing this?
In order to make sound investment decisions, investors in capital markets need information about the companies they are interested in, ideally in a digital format. Companies are required to publish financial and sustainability-related information under EU law. But today, access to this information is scattered across Member States and is not very digitally useable. The ESAP will improve this situation, by giving easy digital access to companies’ financial and sustainability-related information, as well as on investment products.
How is the ESAP going to be set up?
The ESAP has three main components:
- Access to data: Determining how the information will be collected from private entities, such as issuers of securities, funds, auditors, banks, insurance companies or intermediaries. For this, the ESAP will build on existing channels. Depending on the type of information, entities will be required to file the information only once with a collection body which can be an existing repository (for instance the Officially Appointed Mechanisms) or an existing authority (a national competent authority in the financial services area or a European Supervisory Authority). Each collection body will then make the information fully available to the ESAP.
- Data infrastructure: The European Securities and Markets Authority (ESMA) will design the necessary infrastructure, possibly building on cloud or other technologies. For example, the ESAP will offer automated translation services and search tools.
- Data availability: barriers to the use and re-use of data will be removed. The information will be available for free, including for downloads. Data will not generally be subject to any conditions for use or re-use. For any situations where conditions are required, they will be based on permissible open standard licences. Open formats will be used which will enable data extraction, with an increasing amount of information made machine-readable in the long-run.
Why did you choose ESMA to run the ESAP?
An overwhelming majority of stakeholders expressed their preference for putting an EU body in charge. The Commission is proposing to give ESMA the responsibility of building, operating and governing the ESAP. This will be the most effective, predictable and coherent way to run the ESAP. Public funds (EU and Member States) will fully cover the costs necessary to build and manage the ESAP.
Why should public funds support all the costs associated with the ESAP, as the private sector will benefit the most out of this?
Information relevant for financial services, capital markets and sustainability, published by private entities is seen by many stakeholders as a public good. An approach where costs would have to be supported by sources of revenues, such as user fees, would contradict the open data policy goal of this project. Enabling free access would be necessary because even the slightest barrier might have widespread effects on users. In addition, this approach reduces risks of conflicts of interests or of a de facto monopoly on information.
What are the benefits of giving small and medium-sized enterprises (SMEs) the ability to post information voluntarily on the ESAP?
Market fragmentation affects particularly SME access to finance, which can in turn hamper their ability to expand beyond their own national borders. Data integration will remove part of this fragmentation. The ESAP will enable any entity, in particular SMEs, to file relevant information voluntarily. This will enhance SMEs’ visibility towards EU and international investors, such as business angels, venture capital or private equity funds and diversify their sources of funding.
How will stakeholders and consumers benefit?
The ESAP will increase the availability of company and investment product information, both within and among Member States. It will make companies more visible to investors, analysists, intermediates, researchers or funds, regardless of their size or the size of their national market. This will open up funding opportunities and ensure a better allocation of capital, thereby contributing to a lower cost of capital. It will offer easy access to a wider array of information in a timely and efficient manner. The ESAP will also help address a growing demand for sustainability-related data by investors, companies, NGOs and civil society contributing to the objectives of the European Green Deal. By making information available in an extractable format or in a machine-readable format, ESAP would also enable the use and re-use of companies’ data and would also make a significant contribution to the digital transformation of finance, in line with the Commission’s Digital Finance Strategy.
3. European Long-Term Investment Fund (ELTIF) framework review
Why is the Commission proposing this review?
ELTIFs have a crucial role to play by providing a dedicated investment product to mobilise capital for the financing of long-term projects such as transport infrastructure, sustainable energy generation or distribution, or social infrastructure (such as housing for older people or hospitals). The ELTIF market is still relatively new, but it is evident that it has not scaled up to the extent originally envisaged, with only 57 authorised ELTIFs in four Member States as of October 2021. Amendments are necessary to improve the attractiveness and effectiveness of the framework for investment managers and investors. This review aims to increase the uptake of ELTIFs across the EU. This, in turn, would support the continued development of the CMU, which also aims to make it easier for EU companies to access more stable and diverse long-term financing.
What are the key elements of the review?
Based on the outcome of the review, amendments are proposed in three key areas:
- Broadening the scope of eligible assets and investments, and reducing certain fund rule limitations to allow greater flexibility for fund managers to design appropriate investment strategies and portfolio compositions for ELTIFs.
- Reducing the barriers to entry for retail investors while ensuring appropriate levels of investor protection.
- Introducing an additional liquidity window redemption mechanism that will allow investors the possibility to exit an ELTIF investment earlier subject to certain conditions.
Will the proposed changes reduce the level of investor protection, particularly for retail investors?
No. The proposed changes to the treatment of retail investors will make it easier for retail investors to invest in ELTIFs as part of their overall investment strategy but maintain appropriate levels of investor protection with the MIFID II suitability test. One of the core objectives of the ELTIF Regulation is to establish a retail alternative investment fund product to meet long-term investment needs with a well-regulated framework that allows retail customers to invest in these funds.
How will stakeholders and consumers benefit?
Fund managers will be able to invest in a broader range of eligible assets making it easier and to design investment strategies. More flexible rules will make it easier for fund managers to set up ELTIFs. Retail investors will have greater access to ELTIF investments, allowing them to meet their long-term investment and savings needs. The liquidity window redemption mechanism will allow investors the possibility to exit their ELTIF investments prior to the fund’s maturity but only under specified conditions that minimise the impact on the fund value and the remaining investors.
4. Alternative Investment Fund Managers Directive (AIFMD) review
Why is the Commission proposing this review?
The Commission is reviewing the application and the scope of the AIFMD, as foreseen in article 69 of this Directive. While the review shows that in principle the AIFMD framework works well, some targeted changes were needed to better integrate the market for alternative investment funds, ensure investor protection and better monitor risks to financial stability posed by AIF.
What are the key elements of the review?
The review proposes targeted and proportionate improvements to the current regulatory framework, addressing a number of regulatory gaps, and where EU action is needed.
In particular:
Common rules on loan-originating funds: The proposal introduces common minimal rules regarding direct lending by alternative investment funds (AIFs) to companies. These rules will allow loan-originating funds to operate cross-border and ensure that they can be an alternative source of funding for companies in addition to bank lending. At the same time the proposed rules will address potential risks related to this type of lending.
Efficiency of reporting to the supervisory authorities: The proposal aims to improve access to relevant data collection for both national and EU authorities and remove inefficient reporting duplications.
Harmonised Liquidity Management Tools (LMT): The legislative proposal harmonises the set of liquidity management tools to better facilitate liquidity risk management by managers of open-ended alternative investment funds, in line with recommendations by the European Systemic Risk Board (ESRB) and the European Securities and Markets Authority (ESMA).
Improved availability of depositaries in concentrated markets: The objective is to address the problems in concentrated markets with few depositaries, by enabling National Competent Authorities to allow the AIFs concerned to appoint a depositary situated in another Member State.
Smooth functioning of the custody chain: The Central Securities Depositaries appearing in the custody chain will be regarded as delegates of the depositary. This enables the depositaries to obtain the necessary information on portfolio movements and to perform their oversight duties where the fund’s assets are kept by a Central Securities Depositary.
Ensuring the protection of investor interests in case of delegation: The proposal provides improved clarity on the rules on delegation and ensures that fund managers adhere to high standards applicable across the EU when they make use of delegation. The proposal seeks to achieve a coherent approach to delegation activities by AIFMs and their supervisors. In order to develop a reliable overview of the delegation activities in the EU, the European Securities and Markets Authority (ESMA) will receive data on delegation and conduct peer reviews, and report its conclusions to the Commission and the co-legislators.
Why is the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) changed?
When considering these changes, the impact on the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) was also considered. As such, we will update UCITS to reflect changes to AIFMD where necessary, for instance on liquidity management tools, delegation, and reporting.
Why did you not make further changes on delegation?
There are great merits in delegation. Delegation allows fund managers to source necessary expertise in a particular geographic market or asset class. It has contributed to the global success of EU funds, notably UCITS. As fund managers remain bound by EU rules and maintain full liability towards their funds and investors, investors are covered by investor protection measures provided for in EU law. Therefore, no major overhaul of the current rules is needed. Today’s proposal contains a number of clarifications and requires information exchanges between supervisors and convergence measures, in particular peer reviews, to be performed by ESMA. These peer reviews should focus on measures preventing AIFMs – which delegate performance of portfolio management or risk management to entities located in third countries – from becoming letter-box entities.
How will stakeholders and consumers benefit?
While in principle stakeholders consider that the AIFMD framework works well, the majority welcome the approach of clarifying certain rules. The key benefit for stakeholders will be the common rules on loan-originating funds. These will foster the establishment of a stable and diversified supply of alternative credit for EU companies. Increased availability and competition between loan-originating funds will increase the availability and lower the cost of credit, particularly for SMEs and other companies in Member States where this activity is currently prohibited. In addition, investors will benefit from increased investor protection from better managed loan-originating funds and more transparency around their activities. They will also benefit from the clarification of delegation rules, which facilitates better enforcement of the rules. The new requirements on liquidity management tools will strengthen the liquidity risk management process, particularly in times of crisis.
5, Review of the Markets in Financial Instruments Regulation (MiFIR) (consolidated tape) and Markets in Financial Instruments Directive (MiFID)
Why is the Commission proposing this review?
The aim of the review is to remove the main obstacles to the creation of a consolidated tape, enhance transparency and increase competitiveness of EU markets in the global landscape. The main objective is to introduce an EU-wide consolidated tape for shares, bonds, exchange-traded funds (ETFs) and derivatives. Today, financial instruments are traded across various execution platforms. All these platforms need to publish information, such as the volume, time and price of each individual transaction. For smaller investors, including retail investors, it is impossible to obtain a complete picture of the market. Even for the most sophisticated investment firms, it is complex and expensive. This means that no one can really be sure that they are getting or offering the best deals. The introduction of a consolidated tape will therefore eliminate the obstacles that currently prevent a consolidated view of this information across the EU. Furthermore, while the Commission recognises that large orders should benefit from exemptions to the general transparency framework, this is much less the case for small orders. That is why the proposal also aims to ensure that small orders are always transparent, regardless of whether they are executed on a multilateral platform or via investment banks. Finally, the review will introduce measures to increase the competitiveness of EU market players in the global markets, by fine-tuning the derivative trading obligation and the share trading obligation, and by removing the open access obligation. Better information on prices for financial investments in shares, ETFs and bonds makes the Union more attractive for international investors.
What are the key elements of the review?
1) The establishment of an EU wide consolidated tape
The review will create the conditions for the emergence of a consolidated tape. First, all data contributors will be mandated to contribute their data to the consolidated tape provider. Second, the data contributions need to be made by means of harmonised data standards to ensure that the data is usable and comparable. Third and final, for the tape on shares, the consolidated tape would share its revenue with the data contributors to compensate for their loss of revenue. Such a consolidated tape is crucial for investors. Since it will give all investors, large and small, timely and transparent access to market data, investors will have a consolidated view of trading conditions across the EU. An EU consolidated tape would provide investors with information on whether they obtained the best price for selling or buying securities. It could also improve competition between trading venues, by attracting orders to trading facilities with better prices and better liquidity. Since the consolidated tape will also be available to retail investors, it will contribute to the democratisation of trading in the EU and increase the participation of citizens in capital markets.
Better information on prices for financial investments in shares, ETFs, bonds and derivatives will make the EU more attractive for international investors. The proposal also contains provisions on publishing bond prices earlier than currently. This makes the price comparison tool even more valuable. All of this information will be available also for international investors. This will lead to EU capital markets becoming more attractive, not only internally, but also internationally.
2) Other changes to market structure
- Boosting transparency and levelling the playing field
The proposal aims to change EU trading rules to enhance transparency in EU financial markets and level the playing field between execution platforms. Small trades in equities (such as shares) will be banned from being executed in “dark pools” (i.e. traders not subject to transparency requirements). When they are executed via large investment banks, they should be made fully transparent. Furthermore, for non-equities (such as derivatives and bonds), transparency will be significantly increased by reducing recourse to so-called ‘deferrals’ that allow for the delayed publication of core details of transactions. These measures improve the price formation process and increase the level playing field between various execution platforms. The practice where retail brokers forward the orders from their clients to a limited number of traders in exchange for compensation (‘payment for order flow’ or ‘PFOF’) will be banned. This will ensure that brokers are acting in the best interest of their clients.
- Increasing competitiveness
Another key objective of the proposal is to strengthen the competitiveness of EU financial markets. We are doing so by removing the ‘open access obligation’ for exchange-trade derivatives and by adjusting the scope of the EU share trading obligation and derivatives trading obligation. In order to incentivise innovation in the market for exchange traded derivatives, central clearing houses no longer are required to make available their clearing systems for the purpose of clearing exchange traded derivatives from non-affiliated trading venues. The ‘open access’ rules may remove incentives for exchanges to create new and innovative financial products. It was already postponed multiple times and will now be abandoned.
The obligation to trade shares on eligible execution platforms in the EU will be streamlined so that it only applies to shares with a primary listing in the EU. EU shares traded on a third country venue will be exempted as far as they are denominated in local currency. Furthermore, the obligation to trade certain derivatives on exchanges will be aligned with the scope of the clearing obligation. Lastly, the Commission will be able to suspend the trading obligation in cross border relationships when necessary. This could for example be the case when conflicting trading obligations in two jurisdictions prevent an EU counterparty to enter into a derivatives contract with a non-EU counterparty.
Will the consolidated tape have a negative impact on the business model of stock exchanges?
No, the consolidated tape will not negatively affect the business model of stock exchanges. This new tool could even constitute a big opportunity. The consolidated tape will offer a consolidated view of the entire European markets that today is not widely available, thereby making European trading more attractive and dynamic. The data published by the consolidated tape will not be a substitute for other market data, such as fast proprietary trade feeds that are sold by exchanges and represent a significant part of their market data revenues. Moreover, the consolidated tape provider for shares will remunerate exchanges for their role as data contributors. Smaller exchanges play an essential role for listing companies and for the life of the shares they admit to trading since in general these shares remain largely traded on them. It is therefore appropriate to safeguard the role of these smaller exchanges for a rich and vibrant local ecosystem, in line with the objectives of the Capital Markets Union. As their data is essential for the tape, they are entitled to receive a preferential tranche in the revenue generated by the share consolidated tape. This redistribution mechanism will be an essential feature of the consolidated tape framework that will guarantee that interests of different parties are aligned.
Open access: why not keep this provision?
The open access provisions for exchange-traded derivatives have been suspended multiple times by the co-legislators for a variety of reasons. In order not to endanger the orderly functioning of markets or financial stability, the Commission deems it necessary to remove this open access obligation. Open access could reduce the attractiveness for stock exchanges of investing in new products, as competitors may be able to get access without the upfront investment. Therefore, removing the open access obligation would foster innovation and the development of exchange-traded derivatives in the EU. This in turn benefits the EU’s market participants when stock exchanges offer affordable, attractive and innovative products. Furthermore, it would reflect the long-standing international trend of vertical integration between trading and clearing for derivatives.
Will the consolidated tape offer real-time information on trading?
Our assessment shows that to meet the multiple needs of the different stakeholders and attract many subscriptions, a close-to-real time as technically possible consolidated tape seems most appropriate. The exchange would provide investors such as asset managers and pension funds with an essential tool to manage their investments. While the legislative framework will not mandate a specific speed of delivery for the tape and leave it to market forces to decide what is best for the tool, this aspect will be one of the key criteria for a tender process.
How will stakeholders and consumers benefit?
The consolidated tape is a centralised database that will provide easy access to consolidated market data to all investors, large and small (asset managers, pension funds, retail investors), and to financial intermediaries, such as brokers. Today, many people do not realise financial instruments may trade on multiple different markets and at different prices across the EU. The consolidated tape will reduce the advantage that the biggest market players enjoy over the rest of the market, which includes not only retail investors but also smaller European asset managers and banks, which represent the majority of institutional investors. It should help intermediaries to decrease trade execution risks and lead to an improvement of best execution that can be more easily documented by brokers and checked by different types of investors. In the meantime, the consolidated tape will increase the visibility of financial instruments across European markets, bringing benefits to issuers as well as exchanges and the whole market ecosystem. This should in particular help SME stocks gain wider visibility than that achieved by their own local markets. This will reinforce the attractiveness of investments and the possibility of shares being included in investment funds or investment portfolios. Ultimately, this could favour the effectiveness of raising capital for these stocks.
Finally, the prohibition of PFOF (‘payment for order flow’) ensures that brokers obtain the best deal for their clients by exploring various execution options and selecting the best ones based on objective measures including the best price and trading conditions, instead of basing their choice on the remuneration they receive from the executing party.
How will the mechanism on the trading obligation for derivatives (DTO) work in practice? Does it undermine cooperation with other jurisdictions?
According to the derivatives trading obligation (DTO) rules, derivatives that are in-scope of the requirements must be traded on EU venues or on third-country venues that have been granted equivalence. The suspension mechanism for the DTO will be a self-standing mechanism, independent of the suspension of the clearing obligation. The mechanism could be activated by the Commission in the form of an Implementing Act at the request of a national competent authority, with respect to an investment firm that is a market maker in a derivative subject to the DTO and interacts with non-EU counterparts. The suspension needs to be accompanied by evidence from the national competent authority that the conditions for suspension are met and the Commission will take into account whether such suspension would have a distortive effect on clearing. The suspension mechanism has absolutely no effect on international cooperation. It does not take away the importance of equivalence decisions.
For More Information
Factsheet: European Long Term Investment Funds (ELTIFs)