„Europe is suffering from fragmentation“
Adam Farkas is convinced that the consolidation of market infrastructure in Europe – from listing and trading to post-trade services – would help advance the European capital markets. „The number of trading venues, central securities depositories, central counterparties and clearing houses is large,“ says the CEO of the lobbying group Association for Financial Markets in Europe (Afme) in an interview with Börsen-Zeitung.
„Europe is suffering from fragmentation," he states, and changing this would be extremely beneficial, since anyone listed in Copenhagen would immediately be in the pool of investable assets across Europe, with an increase in liquidity.
Anyone who listed in Copenhagen would immediately be in the pool of investable assets across Europe.
National legislators should not slow down consolidation, Farkas demands. They should not stand in the way of processes that lead to greater consolidation of market infrastructure. There is often a concern that consolidation will lead to a loss of business in one's own country, but the Afme boss counters this by asserting that „everyone involved can benefit from consolidation.“
Learning from one another
Farkas illustrates his position with an example: No one doubts the benefits of a uniform data ticker. Nevertheless, there are plenty of reservations on the part of national governments in the EU that such a consolidated tape would lead to the concentration of listing and trading. He is convinced that it would be an advantage even for small member states to be part of the large pool, because it would open up access to a huge liquidity pool. It is not a question of simply copying „what the neighbours in the Netherlands or Sweden, for example, are doing.“ EU countries should learn from one another, and draw on each other's experiences to arrive at a pan-European solution.
Strengthening the second regulatory level
However with regard to the question of whether the Europeanisation of the supervision of market infrastructure can contribute to the attractiveness of European capital markets, Farkas is a bit sceptical. He does not think it is helpful to „dictate everything in detail at the highest EU level“. Instead, more technical specifications should be transferred to the second regulatory level, such as the EBA, ESMA or BaFin. Which ones would have to be considered on a case-by-case basis.
Money is mostly invested nationally. This negates the advantage of broad risk diversification.
Like many other capital markets experts, he also points to the predominant allocation of European citizens' financial savings within Europe – primarily in savings accounts or life insurance contracts. In other economies, these savings are invested more heavily in capital market products, something that Afme highlighted in its most recent CMU Key Performance Indicators report.
As a result, companies in Europe have more difficulty obtaining venture capital „to translate innovations into their business models or to scale up businesses“. In addition to crucial differences in pension systems, where in the USA, for example, a tax-advantaged capital market component is available in retirement provision with the 401k, the „lack of market integration“ is another disadvantage in Europe. „Money is mostly invested nationally,“ says Farkas. This works against the advantages of broad risk diversification.
National fragmentation
Market integration, Farkas emphasises, does not only refer to products. „If a company issues shares today, it does so under national law, and if it is listed on a stock exchange, then it is a national stock exchange. An investor who wants to include the US market in their portfolio can do so at a low cost. If you want to do the same in Europe, i.e. if you want to buy the European market, it will be much more complex.“
In the case of loans, too, a deepening of the capital market has not yet made the progress that would be desirable. „Reviving the securitisation market could be a quick win,“ explains Farkas. This would create a bridge between bank loans and the capital market. Minor adjustments to the supervisory framework for banks and insurance companies will be required. Banks' liquidity management must be adjusted, and due diligence simplified. Last but not least, a simplification of the criteria for simple, transparent and standardised (STS) transactions is needed. This reform could be implemented relatively quickly, he says.
