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ISLA Blog – Reflections of the CEO

Capital Markets Union (CMU) | Market Liquidity | CSDR | SFTR

As I am writing this week’s piece, the weight of history is very much on my mind. On the 7 May 1945, the Nazi forces surrendered to the Allies. This single event defined much of the world we live in today, especially here in Europe. Although it is not the role of this blog to delve further into the events of WW2, it is important that we acknowledge the suffering and loss of life on both sides of the conflict. From that moment in May 1945, we can trace the origins of today’s political order including the formation of the European Coal and Steel Community in 1950, and the subsequent Treaty of Rome in 1957 that essentially created the European Union (EU) as we know it today. Interestingly, those original aspirations to create a common market for coal and steel are still evident when we look at something like the Capital Markets Union (CMU).

The CMU aims to foster stronger, sustainable economic growth by creating deeper and more integrated capital markets across the EU, removing barriers to cross-border investments, increasing competition, reducing costs of raising capital, and improving access to financing for businesses (especially for small and medium-sized enterprises (SMEs)). At its core, the CMU promotes those same economic values as contemplated some seventy years ago. Inevitably the world today is more complex, and as we look at the CMU, different questions around these core themes have to be addressed. In particular, the role of SMEs warrants further consideration. If we want SMEs to attract inward investment from institutional and retail investors alike, they need to see certain market fundamentals in place, such as the provision of market liquidity, efficient price discovery, timely market making, and the support for short selling techniques. This will allow them to properly enter and exit these markets as they develop. By their very nature, SMEs present particular challenges, as any debt or equities issued by this group will tend to be relatively small compared with similar securities issued by larger public companies. Bridging the gap between institutional investors and this group will demand creative thinking by both market participants as well as regulators. The most obvious parallel between the developing needs of SMEs in the context of the CMU and today’s markets, is the corporate bond market. This is a well-developed market in both North America and to a lesser extent, in the UK and some European markets. Experience from these markets suggests that they suffer from liquidity squeezes from time to time, with the position likely to be compounded if the mandatory buy-in elements of CSDR push more lenders away from making these securities available in programmes. Although it is hard to necessarily advocate for special treatment of these securities, I do believe that there needs to be some sort of regulatory recognition in the importance of fostering liquidity in these markets. From there will come the broadly-based capital markets eco-system that the CMU is striving for.

Whilst the development of the CMU framework is an ongoing initiative that will continue over the coming months and years, we should not forget that the revised arrival of daily reporting under SFTR is now only two months away. The industry has certainly been able to undertake better and more rigorous testing afforded by the delays granted by ESMA, which suggests that the vast majority of in-scope participants should be prepared come July. Having said that, and whilst there is no doubt that our members and their clients should understand when their specific obligation to submit data under Article 4 of SFTR starts, we have heard that some, predominantly institutional clients or their agents are not recognising the need to provide minimal data to borrowers on day one, given their own reporting obligation may not start for several months. Full details of each market segment’s obligations and reporting deadlines are available to our members via the ISLA SFTR Best Practice Handbook.

As ever during this difficult period, I hope that all of our readers and their families remain safe and well.

Andrew Dyson, CEO

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