Savings and Sustainable Investment Union. The Next CMU High-Level Group (bijlage bij 22112,nr.2829) - Hoofdinhoud

Officiële titel	Savings and Sustainable Investment Union. The Next CMU High-Level Group (bijlage bij 22112,nr.2829)
Document­datum	10-10-2019
Publicatie­datum	18-10-2019
Nummer	2019D40331
Kenmerk	22112, nr. 2829
Externe link	origineel bericht
Originele document in PDF

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xt CMU High-L

v ings and Sustaina

Sa The Ne

Savings and Sustainable

Investment Union

The Next CMU High-Level Group

Report to Ministers and presented

to the Finnish Presidency Index

October 2019 Executive summary

4

Introduction 11

Chapter 1 15

Chapter 2 21

Chapter 3 29

Chapter 4 37

Conclusion 45

Next CMU HLG composition 46

List of contributors 47

Acknowledgements 50

Netzwerkverteilerschrank einer EDV-Anlage mit Glasfaser-Kabel und Kupferkabel, KfW-Bildarchiv/-,

Germany, Dezember 1999

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exeCUTIVe SUMMARY 1. Generate more Long-Term Savings and Investment opportunities 2. Massively develop Equity Markets

• 3. 

  Increase financial flow fluidity between EU financial market places 4. Develop Debt, Credit and Forex financing tools in a manner that increases the

The Next CMU High-Level Expert Group (“Next CMU Group”) is composed of high-level experts from international funding currency role of the Euro

Germany, France, the Netherlands, Italy, Spain, Poland and Sweden and reflects various parts of capital markets with public, private and academic experience. The task put by the Ministers to the Next CMU The European Commission could even consider proposing to establish a Monitoring Steering Committee Group is to analyse, with a “fresh eye”, the EU’s market-based financing capacity five years after the of interinstitutional nature in charge of setting concrete key performance indicators and expected launch of the Capital Markets Union (“CMU”) and to make appropriate recommendations. An initial outcomes and to periodically monitor progress and report. approach was presented at the informal ECOFIN on the 13th of September 2019 at the invitation of the Finnish Presidency. Transformational Recommendations:

The overall feeling of the Next CMU Group is that, since the financial crisis, the financial sector has not Generate more Long-Term Savings and Investment opportunities yet fully regained citizens trust and that the purpose of the CMU project should be better articulated and more widely spread. 1. Launch an adequacy-test for multi-pillar retirement savings.

Member States should set medium to long-term targets for achieving adequate pensions. These

Accordingly, the Next CMU Group proposes a priority shift. From a first phase of the CMU that focused targets should be made public and progress towards these targets should be measured regularly on revitalizing EUs’ capital market ecosystem, it recommends that the new phase gives priority to against a common European methodology that can be used as an indicator in the European responses to citizens’ needs and to the investment in the real, digital and sustainable EU economy. Semester. People, sustainability and digitalization are the three priorities of the new European Commission.

• 2. 

  Strengthen measures to enable and incentivise savers to turn into investors.

Should political leaders of the three Institutions wish to widely signal such new orientation they could Assisting private individuals and households in transforming from passive savers into more active even consider changing the name of the CMU. This would make the purpose of such Union clearer for investors should become a topic of highest priority for the Union. Investor protection, fair treatment citizens and the wider economy. The Next CMU Group proposes the following new name: Savings and and cost transparency rules should be consistently applied and enforced and consumers should have Sustainable Investment Union. access to fair advice. The EU should further encourage collective ‘workplace savings’ and ‘employee

shareholder plans’. Consider establishing a minimum harmonized tax incentive for general savings in

Within the current geopolitical, social and economic context, the Next CMU Group invites political simple and transparent long-term financial instruments like single shares and ETFs. leaders to focus on two EU major objectives:

• 3. 

  Increase measurable and comparable Sustainable Investments.

• 1. 

  Adopting and promoting a capital market that offers saving products to serve citizens’ Institutional investors and other financial market participants should take an active role in impleneeds and that allocates capital to value creating investments in the real, innovating and menting the new EU Regulation on sustainable investment disclosures and commit to public

sustainable economy. reporting on clear objectives for their investment strategies. The European Commission, together with other interested parties, should utilise its leading role in sustainable finance to trigger the

• 2. 

  Building/strengthening an integrated, competitive, deep and liquid European Capital process of creating a set of high quality non-financial reporting standards with international reach to

Market, to maintain the EU as one of the top 2 financial centres of the world. measure companies’ contribution to sustainable economic and social growth for which the governance of companies take responsibility.

To do so, the Next CMU Group has reached the conclusion that strong and determined political action on an EU and national level should focus on four capital market components, where significant progress 4. develop a straightforward eU procedure for repayment of withholding can be achieved and drive the entire process to create a deeper and more robust capital market for the taxes to investors. EU. The Next CMU Group unanimously recommends the Union to concentrate on the following four The EU should establish a European harmonized procedure with one form to be used by all Member Absolute Priorities, for which twenty Transformational Recommendations have been identified, adopted States and a maximum period in which a decision on a request for repayment must be made, after as priorities that should guide any new initiative and/or be a test against which all decisions should be which the institutional investor concerned can resubmit its request to the European Commission, measured at political level: which may then mediate between the Member State and tax payer concerned.

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Massively develop Equity Markets Increase financial flow fluidity between EU financial market places

• 5. 

  Accelerate private investments by directing public funding towards Venture Capital 10. Allow the emergence of competitive pan-european and regional market players with and Private equity funds, and local fund of funds targeting midsize institutional critical mass, by supporting cross-border mergers and acquisitions in the financial

investors. sector.

The EU should increase the funding of Venture Capital and favour the emergence of large late-stage Supporting cross-border mergers by rebalancing liquidity, capital restrictions and legal constraints Private Equity funds. It should also boost ELTIF, EuVECA and EuSEF to develop pan European “UCITS without endangering the overall EU financial stability. like” vehicles for private assets. 11. Review the Central Securities depositaries (“CSd”) Regulation.

• 6. 

  Introduce the definition of a new category of experienced High net Worth (“HnW”) Such revision should aim at facilitating more efficient cross border post trading services for issuers investors with tailor made investor protection rules. and investors. CSD Regulation should not reduce the ability of CSDs to offer collateral management, HNW investors could be defined as those that have sufficient experience and financial means to securities lending and borrowing services to market participants. Furthermore, the efficiency of CSDs understand the risk attached to a more proportionate investor protection regime. The EU Commisshould be improved by widening the scope of instruments they are allowed to use.

sion should carry an impact assessment of the cumulative dis-incentivizing effect of investor protection provisions of several pieces of legislation (UCITS, MiFID, PRIIPs) on investors access to 12. establish a single market data Consolidated Tape. markets and suggest appropriate measures. The European Commission should specify criteria for a single Consolidated Tape covering all execution venues in a delegated act based on MiFID II. The consolidated tape should be non-profit, fall

• 7. 

  Significantly simplify access to the public markets for SMes and Mid-Caps. under the responsibility of ESMA and may as a first step cover equity post-trade data.

A revision of the SMEs definition adopted under MiFID to qualify an SME Growth Markets (“SME GM”) by raising the threshold from 200 million euros to 500 million euros, in line with other EU legislative 13. Avoid supervisory competition through a strong and coherent eU supervisory measures (Growth Prospectus, ELTIF). Such a category of SMEs and Mid-Caps could also be granted framework, special access to segments of Regulated Markets. To enable intermediaries and financial analysts to which progressively allocates the supervision function at different layers with respect to the level of produce research on SMEs and Mid-Caps the research unbundling introduced with MiFID II could be market integration, every time a Directive or Regulation is reviewed. Start by providing ESMA with exempted for such category of companies. Create a regulated market segment devoted to SME and direct or compulsory indirect supervision function on EU-significant equity trading and post trading Mid-Caps benefiting from an alleviated regulatory regime, 5 years after IPO. In addition, EU funds venues. can be channelled to the IPO phase through private and/or public funding: EU structural, EIB or national public funds could be used to support listing of SMEs and Mid-Caps, notably through the 14. Reassess the regulatory and supervisory balance. creation of a ‘Cross Over IPO Fund’. Reduce overreliance on prescriptive and detailed rules and compensate that by more consistent and rigorous supervision and enforcement. This could also be obtained by a more principle based

• 8. 

  Strengthen incentives for institutional investors to hold more equity approach in the level 1 legislation and by a reduction of national transposition options and more by adapting the Solvency 2 regime and refining the IFRS 9 accounting standard. extensive use of Regulations (MiFID).

• 9. 

  Accelerate and set a calendar for the implementation of a european electronic Access 15. Reinforce effectiveness of insolvency regimes across the eU.

Point and extend it to companies listed on SMes Growth Markets. Continue the harmonization effort as defined by the European Commission. Pursue the harmonization of insolvency regimes applicable to credit institutions and in parallel, complement the Statute for European Company with a specific chapter on Insolvency.

• 16. 

  elaborate an ambitious eU wide digital Finance Action Plan. Such an Action Plan should capture the inherent cross-border dimension of digital finance which calls for establishing a European Sandbox and strengthening an Innovation Hub Program, for screening of EU legislation for digital readiness and, for ensuring consumer and investor trust with respect to data protection and cyber security. The aim should be a competitive, secure, fair and innovative European digital single financial market, with ESMA granted with a compulsory convergence role in this area.

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Develop Debt, Credit and Forex financing tools in a manner that increases the international funding currency role of the Euro

• 17. 

  Create the conditions to establish the euro as a reference asset currency. Member States, Institutions and market participants should create conditions to develop a common market for reference assets for the euro area that truly meet the criteria for reference assets. The euro area lacks a euro area-wide benchmark yield curve.

• 18. 

  establish Sovereign Green Bonds as a flagship product for eU’s capital markets. The issuance of Green Bonds by Member States has a significant signalling effect to the capital market and should become an integral part of their funding strategy. Member States with significant activity on the debt market should have issued a Green Bond and agreed common standards for budgeting and reporting requirements by 2021.

• 19. 

  Revitalise securitization markets. A deep and well-functioning securitisation market that can recover strongly from the lows of 2013/14 is an essential element of a dynamic capital market and for euro area lending, including for SMEs. Where possible the regulatory and supervisory framework for STS Regulation should be accelerated and when reviewed, a key task will be to ensure that regulation is neutral between securitization and similar instruments like covered bonds. In view of such a revision the revitalisation of the securitizations market should be closely monitored.

• 20. 

  ensure an efficient and competitive pan-european payment market. Europe already has a highly efficient and secure payment infrastructure. Digital innovations and global trends have moved the demand for retail instant payment services into focus. To avoid fragmentation of the payment market, pan-European solutions should be decisively supported. Instant payments as a new payment infrastructure within the Single Euro Payments Area (SEPA) can play a major role.

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InTRodUCTIon

The Next CMU High-Level Expert Group (“Next CMU Group”) is composed of high-level experts from Germany, France, the Netherlands, Italy, Spain, Poland and Sweden and reflects various parts of capital markets with public, private and academic experience. The task put by the Ministers to the Next CMU Group is to analyse, with a “fresh eye”, the EU’s market-based financing capacity five years after the launch of the Capital Markets Union (“CMU”) and to make appropriate recommendations 1 . An initial approach was presented at the informal ECOFIN on the 13 th of September 2019 at the invitation of the Finnish Presidency.

This report is not a call to revisit recently adopted legislation as all legal instruments should first be implemented and they contain review clauses that allow reconsideration in due course after thorough study by the European Commission. In addition, the Next CMU Group has not interfered with the negotiations relating to the UK leaving the European Union (Brexit). Conclusions and recommendations of this report are in full consistency with the Banking Union and the Economic and Monetary Union.

Recommendations aim at strengthening the global competitiveness and attractiveness of EU financial markets in their ability to finance, in a self-sufficient and open manner, the EU economy, its growth and its job creation.

The Next CMU Group has worked in an inclusive and fully transparent manner. It has widely consulted interested parties and has received numerous contributions and responses to its online questionnaire 2 and profited from research already done by think tanks and others 3 . During its deliberations, it has always been guided by an EU vision and the mutual interest of Member States. It has neither been influenced by any specific political or market player interest nor by competition between EU financial centres.

A first conclusion is that the rationale behind the launching of the CMU is still very valid (reduction of internal cross border barriers, diversification of financing sources and complement to the Banking Union) but progress to date has not yet produced sufficient tangible results in the market, although the Commission has been quite successful in driving the legislative agenda 4 and the European Parliament clearly set out its priorities in several resolutions 5 .

1 https://nextcmu.eu 2 See Annex 3 3 A particular mention has to go to “Rebranding Capital Markets Union: A market finance action plan”, CEPS-ECMI Task Force Report: Karel Lannoo and Apostolos Thomadakis, Centre for European Policy Studies, Brussels, June 2019 4 European Commission contribution to the European Council in Sibiu, Romania, 9 May 2019: “Capital Markets Union: progress on building a Single

Vogelschwarm (Kuhreiher), KfW-Bildarchiv / Bernhard Schurian, Market for capital for a strong Economic and Monetary Union”, 15 March 2019, plus accompanying Staff working paper, which can be found on: https://ec.europa.eu/info/publications/190315-cmu-progress-report_en

Brasil, December 2012 5 The most important resolutions are:

• • 

  2015 - http://www.europarl.europa.eu/doceo/document/TA-8-2015-0268_EN.pdf on Building a Capital Markets Union

• • 

  2016 - http://www.europarl.europa.eu/doceo/document/TA-8-2016-0006_EN.pdf on Stocktaking and challenges of the

  EU Financial Services Regulation • 2016 - http://www.europarl.europa.eu/doceo/document/TA-8-2016-0358_EN.pdf on Access to finance for SME’s and increasing

the diversity of SME funding in a Capital Markets Union • 2018 - http://www.europarl.europa.eu/doceo/document/TA-8-2018-0215_EN.pdf on Sustainable Finance 12 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 13

A second conclusion is that since 2015, geo-political, social and economic developments, including Within this new context, the Next CMU Group unanimously invites EU Institutions political leaders to concerns about a slowdown of growth, create a vivid sense of urgency, reinforced further by an expected focus on two EU major objectives:

Brexit. As a minimum, the following trends should be highlighted:

• 1. 

  Adopting and promoting a capital market that offers saving products to serve citizens’ • Shock absorption capacity: needs and that allocates capital to value creating investments in the real, innovating and

The EU needs more risk sharing mechanisms through the financial markets to increase its asymsustainable economy. metric shock absorption capacity. Furthermore, a paradigm shift in trade relations may lead to long run uncertainty about market access and further threats to stability, 2. Building/strengthening an integrated, competitive, deep and liquid EU Capital Market, to maintain the EU as one of the top two financial centres of the world.

• • 

  Digital Finance:

Digitalization, Artificial Intelligence and Blockchain technology are disrupting established business Various analysis and numerous consultations carried by the Next CMU Group lead to the conclusion that models more rapidly than expected and trigger significant opportunities to create pan-European deep pools of liquidity allowing better capital allocation exist where there is both significant long-term access to finance and to improve efficiency, savings and a sophisticated and dynamic equity market. Multiple other market segments and a diverse ecosystem prosper where such market realities are present. All other major economies and financial

• • 

  Aging population and inadequate saving structure: centres benefit from these two structural features. The EU 27 capital market will be spread over several

According to the EC’s 2018 Pension adequacy report 6 , with the observed demographic evolution, market places and with such fragmentation, there is a risk that the EU Capital market is not perceived as based on current pension policies, 18% of older people in the EU remain at risk of poverty or social a single pool of liquidity. In addition, as in other economies with large capital markets, a broad use of a exclusion. In addition, citizens’ savings are held in short term financial savings products which creates funding currency in international capital markets contributes to depth and liquidity. a predictable mismatch with their long term saving needs. Recent reports from the IMF 7 and AFME 8 contain interesting material on relative strong points of the

• • 

  A more diversified funding system to support citizens’ and companies’ needs: capital markets of individual Member States. The report “Unlocking the Growth Potential in European

First phase of CMU was very much focused on revitalizing an ecosystem damaged by the crisis and Capital Markets” of think tank New Financial 9 takes this one step forward in demonstrating how much on alleviating banks’ balance sheets. This new phase should be more ‘purpose’ oriented. A genuine benefits could be gained if all Member States would perform as good as the present top five per identified EU capital market (made of domestic ecosystems and cross border activity) should improve returns strong points. Indeed these reports do not only legitimize further action at the EU level, but also make on long-term savings for EU citizens through a wider range of investment products; provide more evident that there still is a lot be to gained by appropriate reforms at the national level as well. diversified funding options for the real economy, SMEs and innovative companies, through private and public equity; and unleash the potential of institutional investors in addressing financing The Next CMU Group has reached the conclusion that strong and determined political action on an EU sustainable growth, and national level should focus on the following four capital market components, where significant progress can be achieved and drive the entire process to create a deeper and more robust capital market

• • 

  Sustainability: for the EU:

Climate change awareness is rapidly modifying behaviours in society and the financial sector can be a powerful transformational tool, 1. Generate more Long-Term Savings and Investment opportunities 2. Massively develop Equity Markets

• • 

  Competitiveness of the EU financial sector: 3. Increase financial flow fluidity between EU financial market places

Removing cross border barriers and encouraging consolidation of EU market players will increase 4. Develop Debt, Credit and Forex financing tools in a manner that increases the their competitiveness and their market share, international funding currency role of the Euro

• • 

  Brexit: Accordingly, the Next CMU Group unanimously recommends that the EU concentrates on the above

A major international financial centre (including an advanced equity market) which is the global hub mentioned four Absolute Priorities during the new phase of the CMU and that they are adopted as for EU market financing is expected to leave the Union. Some activity and talent will be transferred priorities that should guide any new initiative and/or be a test against which all decisions should be and spread over several financial centres however it will also translate into losses of capacity which measured at political level. Policies not in accordance with these Absolute Priorities should be reconsidwill need to be rebuilt by the EU 27 to maintain its ranking and full capacity. ered before final decision. This report is articulated around each Absolute Priority, for which the Next CMU Group proposes specific recommendations with real transformational effect. In addition, it has identified several areas where key objectives and indicators could be developed to periodically measure progress.

7 IMF discussion note: A Capital Market Union for Europe; SDN/19/07, September 2019, para 39, page 13 8 AFME, Capital Markets Union. Measuring progress and planning for success, September 2018, in particular Appendix 1 and 2, pages 42 and 43. (Update for 2019 expected)

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Chapter 1

GeneRATe MoRe LonG-TeRM SAVInGS And InVeSTMenT oPPoRTUnITIeS

Why financial assets show that there is significant potential

for increased participation of retail investors in EU

To provide citizens with adequate opportunities for capital markets 1 . There is a clear need for better, planning and saving for their long-term financial needs, in cheaper and simpler investment products. Financial particular pension savings, is one of the key social and literacy is either not available or not as detailed and economic roles of capital markets. This creates long-term informative as citizens would need it to be aware of available capital to finance economic growth notably to risks and diversification opportunities or pre-digested facilitate the transition towards a more sustainable savings products, and of working distribution chains for economy and to provide long-term equity financing for cost efficiency.

companies and SMEs. Long-term savings are therefore a

key component of an efficient EU capital market. • Financing Sustainable growth and SMEs. The Next CMU Group recommends that building and Reaching a climate neutral economy requires signifiproposing long-term market-lead responses to citizens’ cant investments in long-term projects that will needs becomes an Absolute Priority for the second phase produce benefits only after a long transition period. of the CMU for the following reasons: Investors with sufficient available long-term capital

have a direct interest to do so. Similarly, innovative

• • 

  Citizens’ retirement and saving needs. Start-ups or SMEs need investors that accompany

The demographic evolution of EU citizens, translates them in the long run through long-term equity

into an aging population and the ratio between active financing.

workers and those in retirement will deteriorate

substantially. In addition, given the current low interest • Alleviating Public Finance.

rate environment, investing in capital markets across a Citizens’ long-term pension savings can significantly

range of assets over the long-term generates higher reduce the future economic burden of pension

returns than keeping savings in a traditional bank provisions on taxpayers and governments’ budgets

account. Multi-pillar retirement savings could provide under pay-as-you-go pension systems. In addition,

citizens with a better future income during retirement. market based financing energy transition investments

This includes retirement savings via additional capital and other investment towards a sustainable economy

based occupational pensions, and/or individual will complement public spending that will not be

pension products. Citizens save for other life goals as sufficient.

well. However, EU investors overall participation in

capital markets is relatively low. Data on EU household

1 See ESMA, 2019: report on performance and cost of retail investment products in the EU, 16 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 17

Tranformational recommendations to depends on future economic developments and is less Pensions Authority (“EIOPA”) is working on a new Defined 2. Strengthen measures to enable generate more long-term savings and vulnerable to financial shocks. A capital based additional Contribution Blueprint for occupational pensions that and incentivise savers to turn investment opportunities second pillar is more effective in coping with ageing. may help tailor pension solutions to individual Member into investors

State situations. Increased participation in occupational

• 1. 

  Adequacy-test for multi-pillar Substantial progress could therefore be made at the pension schemes can become a substantial catalyst for Assisting private individuals and households in transform retirement savings national level, if Member States were to commit to certain creating new demands for long-term investments in ing from passive savers into more active investors, thereby

  objectives and would agree for progress to be clearly and equity. increasing the opportunities for improved long-term The way Member States organise their pension system is regularly assessed, and publicly discussed in the Council financial planning should become a higher priority for the fundamentally a social and political choice. However, and in the European Parliament. Reinforcing the Euro For citizens to save and invest for retirement by them Union. Commission, ESAs, Members States and national differences between Member States make clear that some pean Semester could establish a framework for this. selves, they should have an easy access information about supervisors should continue to share best practices and Member States do considerably better than others 2 . their personal situation from the public first pillar pensions significantly strengthen their efforts to increase access Reaching an adequate pensions level for citizens is much It also is recommended to analyse which tax incentives and the second pillar occupational pensions. In some Surveys, including the Eurobarometer analysis, show that more important than which system may or may not be work best within each specific Member State context and Member States, efficient web based pension tracking investor confidence in financial markets remains relatively appropriate in any given Member State. Accordingly, the to combine such information with data on pension systems have been established to provide actual individual low 9 . A 2018 study of the Commission on the distribution Next CMU Group recommends that Member States adequacy available from the triannual pension adequacy information. The European Commission supports a systems of retail investment products highlighted the should set long-term targets for achieving adequate reports of the European Commission. Member States project to set up a voluntary European Tracking System 8 . limited availability of ETFs for retail investors and found pensions 3 . These targets should be made public and would then be asked to report on the effectiveness of their Should that not be already the case, Member States that in each Member State, non-independent advisors at progress towards them should be measured regularly own systems and incentives. The Structural Reform should ensure that a national pension tracking system is banks and insurance companies almost exclusively along a common European methodology that can be Support Service of the European Commission can assist setup and that such system can be connected to a EU proposed in-house products 10 . Conversely, third party used as an indicator in the European Semester 4 . In as far Member States to reform their pension systems. wide tracking system. products were proposed only in rare cases. Costs associas

collective or individual capital based pension saving will ated with obtaining financial products are important, in

be part of national pension systems, a KPI could be In short, depending on the national context, mandating In Member States where the occupational pension sector the current low interest environment. In addition, due to a included to be measured in the context of the developauto-enrolment, collective bargaining as well as tax and is less developed, the Pan-European Personal Pension variety of disclosure rules applying, including on costs, it is ment of a full CMU. financial incentives, including cost-effective access for Product (“PEPP”) may provide an alternative tool for the not always clear to investors how different products

different groups, are all options for the development of retirement savings of mobile European citizens. PEPP compare to each other 11 . In general, multi-pillar pension systems where, on top of a supplementary pensions and retirement savings 6 . offers a simple, transparent and standardized product with statutory pay-as-you-go pension, workers are automati Workplace related pensions and savings opportunities fit features that enable comparability across products. In cally enrolled in capital based additional pension arrangewell with the long-term nature of retirement savings as addition, such standardized features bring economies of ments, with or without an opt-out 5 , score best. This can well as they prepare for post-retirement pension income. scale and efficiency gains to firms that provide PEPP. The be complemented by third pillar individual retirement PEPP regulation allows for the active use of digital savings, preferably capital based, as these provide better The European Commission has set up a High-Level Group solutions. This been said, the success of the PEPP is long-term returns compared to bank savings. Voluntary of Experts on Pensions 7 which is working on recommenheavily dependent on the content of the forthcoming individual pensions help to cater for personal preferences dations to make better use of occupational pensions. The implementing measures. and choice for better coverage and can complement the report of the HLGE on Pensions is expected at the end of first and second pillar. A pay-as-you-go first pillar pension this year. The European Insurance and Occupational

2 See Melbourne Mercer Global Pension Index 2018.

3 Principle 15 of the European Pillar of Social Rights: “Workers and the self-employed in retirement have the right to a pension commensurate to their contributions and ensuring an adequate income. Women and men shall have equal opportunities to acquire pension rights. Everyone in old age has the right to resources that ensure living in dignity.”

4 A legal base to develop the necessary indicators may be found in the proposal for a Council recommendation on access to social protection for workers and the self-employed, on which the EPSCO Council reached a political agreement in December last year. The European Commission and the Social Protection Committee will under para 20 of the recommendation be tasked to “develop agreed common quantitative and qualitative indicators to assess the implementation” of the recommendation.

5 In the UK the introduction of auto-enrolment with an opt-out, starting from larger companies and low premiums, going to smaller companies and 8 https://www.findyourpension.eu/en/ets/ somewhat higher premiums, has achieved results in relatively limited time, demonstrating that a well-designed scheme of workplace pensions can 9 Eurobarometer (2016), Financial Products and Services <https://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/ take-up quicker than often assumed. yearFrom/1974/yearTo/2016/surveyKy/2108>, n.446. See also the previous Eurobarometer (2012), Financial Products and Services, n.373.’

6 The 2018 Pension Adequacy report, EC, p.18 10 In January 2019, ESMA published its first annual statistical report on costs and performance of retail investment products, which contains valuable 7 https://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3589&news=1 information and suggestions for improvement.

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Incentives and robust investor protection for retail investor • Promote financial literacy: Managing both risks take a pro-active role in shaping and implementing The EIB/EIF, national promotional banks and the Cominclude: and opportunities in one’s personal finances should be ambitious ESG disclosures that will help them define mission operate several programs to create funds or other • Transparency on costs, performance and fees: a basic part of each EU 27 Member State school strategies for investing towards a sustainable economy. vehicles that should allow institutional investors to

As indicated by European Securities Markets Authority curriculum. In case it falls on commercial parties to Practical but accurate methodologies for this type of participate in markets that are either still carrying too

(“ESMA”) in its study on the performance and cost of provide this kind of efforts, the development of a disclosures still have to be further developed. Institutional much risk, entail entry to less well-known markets, or

retail investment products in the EU 11 , currently there European quality benchmark should be considered. investors should take an active role in this, and commit to involve a large group of small investments that on their

are differences in the EU regulatory frameworks clear public objectives and reporting for their own investown are difficult to assess, but taken together provide

applied to different products and due to national Citizens have more reasons to save for long-term objecment strategies. risk-return combinations. If well designed, and with a

discretions. Further cross-legislation and cross-country tives than retirement. Collective ‘workplace savings’ and focus on crowding-in private institutional investors 15 ,

consistency would also provide major benefits in terms ‘employee shareholder plans’ are financial products that This would also be the case with availability of comparable these schemes may contribute to further long-term

of data availability, especially if paired with machine allow employees to participate in and benefit from the data from companies in which investors invest. At present investments.

readability, growth of the company they work for and can produce obligations are put on investors to provide information but

• • 

  A minimum harmonized tax incentive for general long term returns. It also helps companies creating companies do not provide standardised information to c. A european procedure for repayment of with

savings in simple and transparent long-term financial employees’ incentives and stabilising their equity capital. investors. There is a real willingness of companies, superviholding taxes to investors

instruments like single shares and ETF’s. A minimum The EU should facilitate further the use of such investsors, non-financial rating agencies and audit firms to Cross-border investments suffer from inadequate

amount of yearly savings, in absolute and or relative ment vehicles for employees of cross border groups. respond to such investors need. Several uncoordinated iniwithholding tax regimes. Procedures for repayment are

terms, could be set at the EU level. Building of tiatives are taking place globally. Whilst positive, this has cumbersome, costly and sometimes unpredictable.

experience in several Members States, a possible 3. Long-term financing of not yet created reliable and comparable quality informa Mutual agreement procedures between Member States

common tax treatment could be “TEE” 12 therefore sustainable economic growth tion for which the governance of companies takes are too slow and do not necessarily lead to adequate and

amounts saved after taxes if paid into such an account responsibility. The European Commission should take fair outcomes. In practice the size of this problem is very

should not be taxed on capital gains or on withdrawal. Through the capital markets institutional investors with benefit from its leading role in sustainable finance to different from Member State to Member States. The result

Such a Simple European Tax incentive could be large scale investment capacity can contribute to sustaintrigger the process of elaborating with interested parties a is that inefficient withholding tax procedures inhibit

opened for PEPP as well, in Member States where no able economic growth by taking more long-term and set of high quality non-financial reporting standards with inward investments from institutional investors in other

other tax incentive for PEPP exists, higher-end risk investments. international reach to measure companies’ contribution Member States.

• • 

  Enhancing the investment ability of retail investors to sustainable economic and social growth.

also includes the availability of sufficient and easily a. eU role in measurable and comparable The Commission has already identified such obstacle in

digestible information about investment opportunities, Sustainable Investments b. Role of eIB and national promotional banks in the CMU Action Plan and is working on a guideline based

in formats which are accessible generically on hand Long-term investment strategies make institutional supporting long term investments on best practices, but this should be reinforced with a

held devices. The focus should be on enabling retail investors the key players in responsible investing. Large institutional investors face less liquidity restrictions European harmonized procedure with one form to be

investors to participate by actively raising knowledge, A practical EU-wide taxonomy should be completed as to invest than the public and/or banking sector. Infraused by all Member States and a maximum period in

rather than passively restricting access. The cumulasoon as possible followed by an effort to encourage structure projects are often developed in the form of which a decision on a request for repayment has to be

tive effect of the investor protection provisions of international convergence. public private partnerships (PPPs). These projects are made, after which the institutional investor concerned

several pieces of legislation creates a disincentive for developed with elements of public support by Member can resubmit its request to the European Commission,

retail investors due to excessive complexity (UCITS/ In March 2019 the European Parliament and the States, the European Union, European Investment Bank after which the Commission may mediate between the

MiFID/PRIIPS), Member States reached a political agreement on a (“EIB”)/ European Investment Fund /”EIF” or national Member State and tax payer concerned. To ensure the

• • 

  Fair advice: Retail investors would benefit from proposal for a Regulation on sustainable investment promotional banks. matter stays high in the agenda, the Commission should

access to affordable and independent advice, breaking disclosure rules. This Regulation sets out how financial be asked to periodically report about progress towards fair

conflicts of interest across the distribution chain. The market participants and financial advisors must integrate By setting up the EIAH (“European Investment Advisory and quick procedures. The Commission could also be

current dual regime of ‘independent advice’ (where environmental, social or governance (ESG) risks and Hub 13 ) and the EIPP (“European Investment Project asked to study the technical viability of withholding tax

inducements are banned) and ‘non-independent opportunities in their processes, as part of their duty to act Portal 14 ) together with the EIB, the Commission provides procedures based on blockchain technology.

advice’ (where inducements are allowed subject to in the best interest of clients. The Regulation also requires technical support to national, regional and local authoriconditions)

has so far insufficiently promoted more the disclosure of adverse impact on ESG matters, such as ties to structure such kind of projects.

independent and objective advice and should be in assets that pollute water or devastate bio-diversity, to

reviewed, ensure the sustainability of investments. They should also

13 https://eiah.eib.org 11 ESMA, 2019, Report on performance of cost of retail investment products in the EU, https://www.esma.europa.eu/sites/default/files/library/ 14 https://ec.europa.eu/eipp/desktop/en/index.html esma50-165-731-asr-performance_and_costs_of_retail_investments_products_in_the_eu.pdf 15 See for a critical analysis with a view to the risk of crowding-out, the recent special report no 03/2019: European Fund for Strategic Investments: 12 Taxed-Exempt-Exempt Action needed to make EFSI a full success, of the European Court of Auditors 20 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 21

Transformational recommendations: Chapter 2

• 1. 

  Launch an adequacy-test for multi-pillar retirement savings. deVeLoP MASSIVeLY eqUITY MARkeTS

Member States should set medium to long-term targets for achieving adequate pensions. These targets should be made public and progress towards these targets should be measured regularly against a common European methodology that can be used as an indicator in the European Semester.

• 2. 

  Strengthen measures to enable and incentivise savers to turn into investors. Assisting private individuals and households in transforming from passive savers into more active investors should become a topic of highest priority for the Union. Investor protection, fair treatment and cost transparency rules should be consistently applied and

enforced and consumers should have access to fair advice. The EU should further encourage collective ‘workplace savings’ and ‘employee shareholder plans’. Consider establishing a minimum harmonized tax incentive for general savings in simple and transparent long-term financial instruments like single shares and ETFs.

• 3. 

  Increase measurable and comparable Sustainable Investments. Institutional investors and other financial market participants should take an active role in implementing the new EU Regulation on sustainable investment disclosures and commit to public reporting on clear objectives for their investment strategies. The European Commission, together with other interested parties, should utilise its leading role in sustainable finance to trigger the process of creating a set of high quality non-financial

reporting standards with international reach to measure companies’ contribution to Schaltschrank für Licht- und Verdunkelungstechnik für Büroräume, Verbindungskabel,

sustainable economic and social growth for which the governance of companies take KfW-Bildarchiv/-, Germany, December 2004

responsibility.

• 4. 

  develop a straightforward eU procedure for repayment of withholding

taxes to investors. Why

The EU should establish a European harmonized procedure with one form to be used by

all Member States and a maximum period in which a decision on a request for repayment Value creation financing in a more intangible economy businesses. Evidence shows that the EU should build a must be made, after which the institutional investor concerned can resubmit its request to highlights the need for corresponding high levels of deep and liquid capacity for both private and public equity the European Commission, which may then mediate between the Member State and tax capital. In the EU, additional market-based financing is markets, even more after Brexit. To be competitive, the payer concerned. needed to provide long-term growth capital to companies EU Equity Market ecosystem should be more flexible and and notably for the financing of start-up and to scale-up responsive to support companies through different growth

phases.

 22 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 23

To mainly develop Equity Markets in the EU, the Next exits. The EU is missing larger late-stage funds able to acquiring young, Venture Capital backed companies. investors but not the two combined.

CMU Group recommends to: (i) Accelerate the developfinance scale-ups growth in rounds above €30M 1 . Liquidity to absorb IPOs from technology companies ment of EU Venture Capital and Private Equity markets (ii) Most of these companies are currently financed by US increases the likelihood of IPOs. ELTIF has the potential of becoming a “UCITs like”- suc Simplify SMEs and Mid-Caps access to the public markets; Venture Capital. cess for qualified investors to access to illiquid assets. The (iii) Strengthen equity holding by institutional investors; Creating larger Venture Capital funds would indirectly following measures would improve its capacity to serve as and (iv) Revitalise the EU Equity Market ecosystem to allow • Accelerate private investments by directing improve the liquidity of the market, since larger funds an efficient vehicle to invest in the real economy: simpler cross border investments and access to the EU public funding towards large funds, and local enable firms to scale-up more and demonstrate their • Promote ELTIF merits more widely to asset pool of liquidity. fund of funds targeting midsize institutional potential ahead of an IPO. In general, more publicity managers and institutional investors,

investors. about successful exits would also help to raise awareness • Favour cross-border retail investing by simplifying

• 1. 

  Accelerate the development of eU The EIF and NPIs public investments supporting about potential options for exits. IPOs are supported by the notification and marketing registration and Venture Capital and Private equity Venture Capital favors the emergence of large the assessments made by financial analysts. However, clarifying how ELTIF fits with the Markets in markets pan-European funds. Without neglecting local there is often a lack of coverage of young Venture Capital Financial Instruments Directive (MiFID) II

  ecosystems and the general development of the backed companies (pre- and post IPO). This lack of applicable rules to semi-professional investors a) Strengthen the EU’s Venture Capital marketplace Venture Capital companies, NPIs should support expertise makes these companies’ shares more volatile. (for example by lowering the €500K threshold to

  emerging late-stage Private Equity funds. For mid-size Conditions to enable young enterprises to have a success €100K), The availability of venture capital is a critical factor for investors, fund of funds could be an easier diversified ful IPO should be further analyzed. Regional differences in • Supervisors should clarify further the guidance on technological competitiveness, future growth and entry mode. NPIs and EIF could play a role in the a highly fragmented EU stock market landscape exist. A real assets, attractive employment opportunities. Venture capitalists emergence of a diversified offer for new investors, corresponding benchmarking study could be commis• Review the cross-border tax treatment of ELTIF to typically take an active role in the start-ups and scale-ups allocating part of their investments. sioned on this topic. avoiding double taxation 2 . they invest in, and provide important help and coaching to

founding entrepreneurs, sometimes also opening new • Increase transparency and reduce fragmenb) Boost ELTIF, EuVECA and EuSEF to develop pan 2. Significantly simplify access to the markets to them and regularly raising ambitions. Venture tation within the european VC markets. European “UCITS like” vehicles for private assets public markets for SMes and Mid-Caps

capital thrives in ecosystems that open talent pools like Attracting investors towards the Venture Capital asset research institutions and universities and enable talented class requires a reliable basis for investment decisions EU Undertakings for Collective investment in Transferable Of the listed firms across the EU, only 20% are large people to become successful entrepreneurs. Despite based on the transparency of performance and risks. Securities (“UCITS”) is a well-recognized international blue-chip companies associated with exchanges and positive development since 2012 the EU is lagging far In addition, fragmentation along national lines limits standard for liquid funds. For illiquid funds, the EU labels major indexes. In fact, in numbers, most of the listed behind the strong US Venture Capital market. the ability of EU Venture Capital funds to utilize econo European Long-Term Investment Funds (“ELTIF”), companies belong to the Mid- or Small-Cap segments.

mies of scale. A harmonization based on transparency European Venture Capital Funds (EuVECA) and European These non-blue-chip companies account for only some Measures to accelerate the development of eU’s national best practice should be pursued. Social Entrepreneurship Funds (EuSEF) lack similar 10% of the trading volumes and are those who struggle Venture Capital include: recognition, both inside and outside the EU. These labeled with the current public markets regulatory framework.

• • 

  Tax obstacles. vehicles were also created for small asset managers to Capital markets policy efforts should therefore be primarily • Increase the availability of funding for The European Commission has published a best avoid complying with the full set of Alternative Investment focused on supporting the companies below the Large

Venture Capital investments and develop practice report on various national tax incentives as Fund Managers Directive (“AIFMD”) rules and benefit from Cap segment, at the IPO stage as well as during their listed larger late-stage Venture Capital funds above part of CMU. These findings should be pursued further a European passport. Under Solvency 2 such labeled life.

€1bn. and, if necessary, extended to other areas (e.g. Venture funds benefit from a favorable capital treatment (22% vs

Analysis shows that the insufficient size of the EUs’ Capital investment schemes). 49% for Private Equity funds). The following measures will favour IPos of SMes Venture Capital market is not only a symptom but also and Mid-Caps: a cause. Additional capital could trigger positive and For a self-sustaining Venture Capital and Private Equity The success of the EuVECA varies across Member States self-reinforcing effects. More Venture Capital leads to markets, a high-quality potential deal flow and viable exit and is further developing thanks to the 2017 legislative • The definition of a new category of larger funds and correspondingly enables larger routes are needed. Successful exits are usually accommodification extending its use to larger asset managers experienced High net Worth (“HnW”) financing rounds. In addition to further professionaliplished via trade sale or Initial Public Offering (“IPO”). and allowing Mid-Caps as eligible assets. This said, despite investors with tailor made investor protection rules. zation, this also makes the asset class increasingly Trade sale is currently the most widely used exit channel, its merits, the Venture Capital and Private Equity industry Experienced HNW investors could be defined as those attractive for institutional investors with higher while IPOs are less frequent. Both channels need to be still make a limited use of this label. The use of ELTIFs is that have sufficient experience and financial means to minimum required investment amounts sizes. At the strengthened. Regarding trade sales, strategic industrial progressively starting to be used with various ELTIFs understand the risks of a more proportionate investor same time, more capital can lead to more successful investors should be encouraged to be even more open for launched with private debt, infrastructure or even private protection, equity assets. Those ELTIFs target retail or institutional

1 In France, the “Tibi Report” sets the ambition of reaching 10 funds above €1bn in the next 3 years: https://minefi.hosting.augure.com/Augure_Minefi/r/ContenuEnLigne/Download?id=40C3DA75-8DAB-4300-86D1- C7ED87BD9045&filename=1351%20-%20Rapport%20Tibi%20-%20FR.pdf 2 Due to inconsistencies of the AIFMD with the Base Erosion and Profit Shifting (BEPS).

 24 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 25

• • 

  A revision of the SMEs definition adopted ous, possibly interconnected, and liquid SME GMs within b) Encouraging SMEs and Mid-Caps to list on into more procyclicality. This includes considering a under MiFID to qualify an SME Growth Markets (“SME the EU will favour SMEs shares trading and give intermedi regulated markets 22% equity holding category defined in accordance GM”) by raising the threshold from 200 million euros aries opportunities to offer simple and geographically with long-term liabilities or other long-term investto 500 million euros, in line with other EU legislative diversified investment products such as ETFs and equity To encourage SMEs and Mid-Caps to list on regulated ment strategies (5-years) measured at portfolio level. measures (Growth Prospectus, ELTIF). Such category mutual funds. market, like the US Jobs Act, some rules could be alleviof

SMEs and Mid-Caps (“SMEs and Mid-Caps”) could ated for the first five years after listing. The EU applicable • Accounting rules: also be granted special access to segments of regu Proposed measures include: rules to companies admitted to trading on a regulated An unintended impact of IFRS 9 could be an equity lated markets, market (i.e. Transparency Directive, Shareholders Rights investment decrease due to Profit & Loss (“P&L”) • Simpler process for launching an SME GM Directive, Takeover Bids Directive, Accounting Directives volatility notably for Property & Causality Insurers and

• • 

  To enable intermediaries and financial without the need to set-up a separate entity when and the Prospectus Regulation) should be screened to Life Insurers (for some of their liabilities). To favour analysts to continue to produce research on created by a market operator already running a identify the provisions for which such temporary allevialong-term investment whilst preserving transparency SMes and Mid-Caps the research unbundling regulated market, tion should apply. and the need for a global standard, based on the introduced with MiFID II could be exempted for such recent European Financial Reporting Advisory Group

category of companies, • Simplify Market Abuse and Prospectus 3. Strengthen incentives for institutional (“EFRAG”) review, the Next CMU Group recommends applicable rules. The basic assumption is that due investors to hold more equity the International Accounting Standards Board

• • 

  Channel EU funds to the IPO phase through to their size or age, companies listed on an SME GM (“IASB”), as a practical way forward, to reintroduce a private and/or public funding. should not apply the same rules than senior, Large Additional institutional investors equity investments fair value through “Other Comprehensive Income” for EU structural, EIB or national public funds could be Caps listed on the top regulated market segment. would favour a deeper and liquid EU capital market, equities with a recycling to P&L of realized capital

used to support listing of SMEs and Mid-Caps, notably Currently, Market Abuse and Prospectus apply to all especially for SMEs and Mid-Caps. Given the size and the gains/losses, combined with a robust ruled-based

through the creation of a ‘Cross Over IPO Fund’. Closer companies irrespective of their size and listing/trading long-term characteristics of institutional investors, they impairment model. IASB should also include in the

and visible cooperation between public and private venue, with only minor simplifications introduced for are well suited to manage the risk which relating to SME definition of equities direct holdings, ETFs and Equity

funding can lead to anchor investors showing willingan SME GM. This approach does not consider the investments. Mutual Funds.

ness to invest. The Horizon Europe i program 3 and the disproportionate burdens for smaller companies

activities by the European Innovation Council 4 are different from large and established ones. The Next Accordingly, to remove disincentives to institutional Lastly, the EU should avoid imposing requirements to

supporting many companies across Europe. Many CMU group believes that further proportionality can be investors equity holding, the Next CMU Group recomlisted companies exclusively. For Instance, ESG objectives

companies supported by this program have already led introduced whilst maintaining a high level of investor mends rebalancing the following regulatory provisions: should have a broader scope, irrespective of whether the

to IPOs. This can develop further to support innovative protection by making: company is public or private. If not, such measures risk

companies on the IPO route. • An adapted Solvency 2 framework: being interpreted as raising the public markets entry

• • 

  The Market Abuse Regulation (“MAR”) Pensions funds and insurers are the two main financbarrier.

More specifically, the Next CMU Group recommends regime simpler, especially to prevent diverging ing sources for long term investments, including equity

simplifying access to both the newly created concept of interpretations across markets and borders. For financing, for both Digital and Sustainable transition. 4. Measures to facilitate cross border SME Growth Markets (“SME GM”) and the regulated example, certain MAR provisions can be waived to Solvency 2 that has provided a stronger risk based investments and access to the eU pool markets. Next CMU Group also recommend that SME GM avoid companies listed on a SME GM being overbureconomic framework for insurers will be reviewed in of liquidity

status could be granted to a special segment of a regudened by insider lists and some internal dealing 2020. It is a fact that since Solvency 2 is applicable, lated market. disclosures requirements, insurers have reduced their equity portfolios. The Next Facilitating EU wide market access to both investors and

CMU Group recommends that within the context of companies will increase long term investment opportunia) Further develop SME Growth Markets and create • Prospectuses easily digestible for investors and such review specific attention is paid to the Solvency 2 ties and geographical diversification for retail investors. It

more cross-border capital flows cost-efficient to produce for companies. procyclicality unintended effect that pushes insurers to will make EU’s capital markets more fluid and the pool of It means that the content of the prospectus for SME sell risky assets at crisis time, making equity the liquidity larger. Facilitating measures include:

Today, only a few Members States have developed SME GM companies should be radically reviewed and made adjustment factor, and to other disincentives to invest

GM with many SMEs shares listed benefiting from proportionate. in the real economy. In a context of low interest rates, • Open language regimes to a wider use sufficient liquidity. To complement loan financing and the neutralizing Insurers disincentives to invest in equity of english. private capital financing available for SMEs, and to provide should be part of a balanced revision of Solvency 2 Costs for providing a prospectus in lesser used lanan important exit route for Private Equity, developing SME capital requirements not leading to an increase or guages can be disproportionate, which disincentives GM should become a priority. Developing more numerdecrease of the overall capital charge nor translating new and smaller issuers to enter the public markets

3 https://ec.europa.eu/info/horizon-europe-next-research-and-innovation-framework-programme_en

4 https://ec.europa.eu/commission/news/european-innovation-council-2019-mar-18_en 26 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 27

and reduces investor choice. Member States and/or 5. Further build eU’s equity Market Transformational recommendations:

National Competent Authorities (“NCA’s”) should ecosystem

consider accepting a prospectus written in English 5 .

To develop an efficient equity capital market and support 5. Accelerate private investments by directing public funding towards Venture

• • 

  Central information point. Large-Caps as well as SMEs and Mid-caps businesses, EU’s Capital and Private equity funds, and local fund of funds targeting midsize

Accelerate the European Electronic Access Point regulatory framework should favour its capital markets institutional investors.

(“EEAP”) project under the Transparency Directive. To The EU should increase the funding of Venture Capital and favour the emergence of large ecosystem.

reach the same US EDGAR system benefits in the EU, late-stage Private Equity funds. It should also boost ELTIF, EuVECA and EuSEF to develop

the EEAP activities and funding should be stepped up. pan European “UCITS like” vehicles for private assets. A well-functioning Equity Market ecosystem must have: (i)

Additional IT investments are needed to ensure a variety of investors with diverse investment strategies

efficient access to company reporting across the EU (Business angels, Venture Capital, Private Equity, institu 6. Introduce the definition of a new category of experienced High net Worth and favour pan European investor interest. Such tional, local and international as well as retail investors), (ii) (“HnW”) investors with tailor made investor protection rules. EU-wide facilities should be expanded to information HNW investors could be defined as those that have sufficient experience and financial efficient market professionals (Investment banks, brokers,

disclosed by SMEs companies listed on SME GM. means to understand the risk attached to a more proportionate investor protection asset managers, advisors, financial analysts), and (iii) regime. The EU Commission should carry an impact assessment of the cumulative

specialised and complementary venues for listing and

• • 

  Shareholders rights. dis-incentivizing effect of investor protection provisions of several pieces of legislation trading able to provide multiple capital raising options for

Exercising Shareholders rights across borders can be (UCITS, MiFID, PRIIPs) on investors access to markets and suggest appropriate measures. companies and exit opportunities for investors.

made easier by using blockchain solutions. 7. Significantly simplify access to the public markets for SMes and Mid-Caps.

• • 

  Securities holdings regimes. A revision of the SMEs definition adopted under MiFID to qualify an SME Growth Markets

Differences in the setup of account structures and (“SME GM”) by raising the threshold from 200 million euros to 500 million euros, in line securities holdings regimes continue to create barriers with other EU legislative measures (Growth Prospectus, ELTIF). Such a category of SMEs for cross-border investments. A more EU harmonised and Mid-Caps could also be granted special access to segments of Regulated Markets. To structure should be introduced, such as: (i) impleenable intermediaries and financial analysts to produce research on SMEs and Mid-Caps menting the book-entry principle across EU, (ii) specify the research unbundling introduced with MiFID II could be exempted for such category of the role and responsibilities of account providers and companies. Create a regulated market segment devoted to SME and Mid-Caps benefiting (iii) introduce a consistent regulatory framework on from an alleviated regulatory regime, 5 years after IPO. In addition, EU funds can be

the segregation of client securities accounts. channelled to the IPO phase through private and/or public funding: EU structural, EIB or national public funds could be used to support listing of SMEs and Mid-Caps, notably

through the creation of a ‘Cross Over IPO Fund’.

• 8. 

  Strengthen incentives for institutional investors to hold more equity by adapting the Solvency 2 regime and refining the IFRS 9 accounting standard.

• 9. 

  Accelerate and set a calendar for the implementation of a european electronic Access Point and extend it to companies listed on SMes Growth

Markets.

5 An example is the language regime applicable in the Netherlands : https://www.afm.nl/en/professionals/veelgestelde-vragen/aanbieding notering-effecten-algemeen/taal-prospectus 28 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 29

Chapter 3

InCReASe FInAnCIAL FLoW FLUIdITY BeTWeen eU FInAnCIAL MARkeT PLACeS

Why

The full potential of cross-border integration of EU capital overstrain the Member States concerned. In addition, markets is far from being realized, although considerable existing barriers to financial flows between Member States progress has been made since the CMU project started. should be identified and addressed. As a priority, the With Brexit approaching and the ongoing digitalization of remaining barriers in the post-trade infrastructure area financial markets, the need to fully facilitated cross-border identified by the European Post Trade Forum should be capital markets activities is heightened. dismantled with a focus on harmonizing withholding tax

collection procedures and removing legal uncertainties in

Strengthening and deepening the single market for capital securities laws.

promises significant benefits. In addition to considerably

enhancing the macroeconomic and financial resilience of Fintech, on the other hand, will reshape the structures the EMU and reducing the need for fiscal risk sharing and processes of the global financial system. Digital measures, a true single capital market would constitute a financial products, e.g. crypto-assets, and business level playing field of considerable size. More competition models tend to be cross-border in nature. For a competiamong financial firms, higher liquidity and reduced tive capital market, it is therefore essential to avoid compliance costs would lead to a more efficient allocation fragmentation along national borders at an early stage to of capital. In other words, capital market integration fully reap the benefits of new technologies and innovative ultimately improves the financing of the real economy financial companies. At the same time, risks to financial and strengthens Europe’s growth potential. stability and consumer protection in the fields of data

protection, data security and cyber security should also be

Irrespective of the precise shape of future relations addressed at the EU level.

following the Brexit, non-automatic access from London will result in a significant shift of financial services activities to the EU 27 that will be spread across several financial centers. Due to preexisting fragmentation and lower efficiency of EU’s capital markets, this will be associated with rising financing costs for the real economy. Negative effects on financial stability could also be feared. To be efficient and attractive to global business, a regulatory and supervisory race to the bottom between Member States should be avoided and a more uniform approach could be set in motion. As local financial centers expand in volume and scope, increasing requirements on supervisory capaci

Klimaanlage an der Fassade eines Wohnhauses, KfW-Bildarchiv / photothek.net, Tunisia, ties and potential costs for crisis management could

December 2012

 30 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 31

Transformational recommendations regulated markets have been rejected or discouraged by of rules aiming at integrated, harmonized and safe 2. Avoid supervisory competition

to encrease financial flow fluidity EU competition law. markets for securities settlement. As CSDs are in the through a strong and coherent eU The creation of pan-European banks with a significant process of implementing such rules to get their CSDR between EU financial market supervisory framework investment banking business seems to be discouraged by license, clarifying the impact of several provisions will

centers national ring fencing of capital and liquidity measures that be of assistance. The focus of the European Commis So far, the expected benefits from the recent significant

overweigh the benefits 1 . In addition, since the financial sion should be to support the implementation process EU regulatory harmonization are not fully materializing. For a genuine EU capital market to be understood and crisis, banks have significantly reduced cross-border by providing interpretations that allow more flexibility Divergent supervisory practices by national supervisors are operated as a single deep and liquid market, the Next activities. Furthermore, there is an erosion of the market in CSDs service efficiency and innovation. Specifically: still a fragmentation factor that creates breaches to the CMU Group has identified at least 3 major ways to share of EU investment banks on their own market 2 . A level playing field and unhealthy supervisory competition enhance fluidity between EU financial centers: (1) true single capital market would allow cross-border large - CSDs need an affordable access to non-domestic between National Competent Authorities (“NCAs”). This Favoring pan-European and Regiona consolidation and competitive market players to emerge thanks to higher currencies which requires adjusting the unduly increases costs, damages genuine EU capital market platforms; (2) Avoiding fragmenting supervisory competiliquidity and reduced costs. restrictive rules regarding CSDs settling of transefficiency and, very often, happens at the detriment of EU tion; (3) reinforcing effectiveness of (national) insolvency actions in non-Euro currencies using commercial wide investor protection. regimes; and (4) Promoting EU wide Digital Finance and Full for-profit and competition rational as well as the EU bank money,

FinTech. trading and post trading legislation have segmented and - The CSD Regulation should not reduce the ability Accordingly, the Next CMU Group recommends that for a unbundled the trading chain components resulting into of CSDs to offer collateral management, securities materialization of a true EU capital market, the supervi

• 1. 

  Favor pan-european and regional significant market infrastructures fragmentation and lending and borrowing services to market particision of the various components of the EU capital markets consolidation and platforms higher costs for regulation and compliance. This framepants. These are key elements of a globally should be organized in accordance with their respective

  work does not necessarily improve market efficiency or competitive financial market integration and are level of integration. To do so, the Next CMU Group Consolidation of market infrastructures and intermediarreduce costs. On the contrary, the current abundance of compatible with the current low risk profile of recommends that every time a securities markets ies contributes to the integration, efficiency and competiequity trading venues heavily challenges price formation CSDs, Directive or Regulation is reviewed, the European Comtiveness of EU financial markets. Cross-border mergers veracity. Efficiency and cost reduction is prevented by - The forthcoming review of the functioning of mission and the co-legislators conduct: and acquisitions in the financial sector are therefore worth clearing and/or securities depositaries multiplicity. CSDR should focus on the way it supports issuer supporting to create more pan-European provision of opportunities to list across borders facilitating more • a measurement of market integration and financial services or facilities platforms. Such consolidab) Pan-European platforms (Central Securities Depositories efficient cross-border post-trade services. supervisory efficiency objectively made through tion should be driven by market forces and not induced and Consolidated Tape) Practically, it is still too cumbersome and costly for rigorous pre-agreed criteria (level of cross-border nor refrained by regulation. Financial market regulation issuers to list and for investors to manage invest - activity, standardization of products and/or services, should provide an adequate legal framework for market Pan-European platforms are facilities that compensate ment in another Member State. International market concentration, reach of supervisory decisions, players to interact on a level-playing field and to conduct market fragmentation and should preferably be led by CSDs are a unique European piece of financial global competitiveness, etc.). market consolidation in accordance with market efmarket participants or, should that not be the case, by market integration, which the EU should leverage They should consider the degree of integration of the ficiency criteria. public bodies. They should reduce complexity and costs to to achieve market integration and global relevance activity governed by such EU law and the balance

  efficiently support market integration. In the current EU for EU financial markets. between the powers and the responsibilities regarding a) Critical mass EU market players capital market framework, Central Securities Depositories the distribution of competences. The Next CMU

  (“CSDs”) and a single Consolidated Tape are two immedi• EC should establish a single Consolidated Group recommends allocating the supervisory The number of mergers or acquisitions that would allow ate examples where further progress can be achieved. Tape facility. function at one of the following four levels: the emergence of highly competitive capital market Achieving a Consolidated Tape would make all players with critical mass is far below the opportunities • Central Securities Depositories flexible European market data easily accessible both for 1) De facto NCAs: if it appears that markets are still that a genuine Banking Union should create and what the functioning. professional and retail investors and increase trust for very local, economies of scale permit. In recent decades, mergers of CSD Regulation constitutes a very comprehensive set cross-border investments. The European Commission

  should specify criteria for a single Consolidated Tape 2) NCAs and with nonbinding convergence facilitated

  covering all execution venues in a delegated act based by ESMA: if there is a meaningful cross-border

  on MiFID II. Enhancing the quality of market data is activity, a need to keep a level playing field and an

  needed to make such a tape useful. Such a facility EU wide investor protection risk,

1 Mario Draghi: “Similarly, while the free movement of liquidity across borders is made possible by cross-border waivers, the practical application of should be non-profit, fall under the responsibility of

these waivers is hampered by the remaining national prerogatives in the regulatory framework which allow national authorities to apply large ESMA and may as a first step cover equity post-trade

exposure limits on intragroup lending and ring-fence liquidity. For example, the requirement to comply with the liquidity coverage ratio at individual data.

level locks up liquidity in cross-border subsidiaries of G-SIBs of up to €130bn. Some of this liquidity could potentially be freely allocated if impediments, such as large exposure limits on intragroup lending, were removed and euro area waivers granted.[16] The effects may be significant, given the importance of intra group lending in the euro area, which in 2017 accounted for 70% of cross-border lending. “ https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180918.en.html

2 https://bruegel.org/2016/03/the-united-states-dominates-global-investment-banking-does-it-matter-for-europe/ 32 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 33

• 3) 

  NCAs with compulsory coordination convergence vency/restructuring regimes is characterized by significant 4. Promote cross-border digital Finance interpretations. A pan–European Innovation Facility by ESMA: if the market or service at stake is diversity. So far, EU Institution efforts to harmonize and Fintech brings a harmonised interpretation of EUs’ regulatory

significantly integrated, if supervisory arbitrage national regimes have failed to reduce such diversity and framework and will allow Start-Ups to consider local

causes fragmentation and efficiency losses and, if to avoid forum shopping, with the UK emerging as the The Next CMU Group believes that reduction of fragmenbusiness while also planning actions on an EU scale. supervisory fragmentation happens at the “market leader” for corporate restructuring in the EU. tation and progress towards an integrated EU capital Start-Ups could prepare to offer their products or detriment of investor protection, market will be realized through new competitive technoloprovide services to clients from different EU Member

• 4) 

  Direct supervision by ESMA: if the market at stake The recast “European Insolvency Regulation” (EIR) of gies being implemented on EU market. While technologi States. The pan European Innovation Facility should is highly integrated (standardized product, 2017 has not substantially reduced the diversity of cal innovation in finance is not new, both consumers be a combination of a European Sandbox and a

concentration on few market players, high national regimes as the harmonization was focused concern and company’s investment in new technologies European Innovation Hub, connections with global market). mainly on pre-insolvency proceedings and maintained the have substantially increased in recent years. This forms widely differing national views and policies on core the basis of the financial sector contribution to the wider • A European Sandbox piloted by ESMA

• • 

  a reassessment of the Regulatory and insolvency matters such as the ranking of claims. It is Digital Single Market. to test innovations during a limited time and within a

Supervisory balance with the objective of reducing premature to evaluate but even the recent “European limited scope of potential clients from different EU

over-reliance on prescriptive and detailed rules that Restructuring Directive” (ERD) passed in 2019 is not Foster innovation, financial technology and digitalization Member States. It should coordinate NCAs Sandboxes

would be compensated by more consistent and foreseen to foster actual harmonization as it contains should therefore be a key priority for the next institutional and efficiently liaise with Start-Ups and FinTechs that

rigorous supervision and enforcement. This objective more the 70 regulatory options for the Member States cycle. A straight-forward Digital Finance Action Plan can test their services in a limited number of Member

could also be obtained by a more principle based and do not change the persistent diversity of the instituaiming at a competitive, secure, innovative and fair EU States simultaneously. If the testing is successful,

approach in the level 1 legislation, by a reduction of tional environment at national level (courts, insolvency digital financial market is of utmost importance. The FinTechs should be able to obtain a license in specified

national transposition options and by more extensive professionals, etc.). European Commission’s FinTech Action Plan in 2018 was EU Member States. The European Sandbox in

use of Regulations (MiFID), an important first step to enable innovative business coordination with the Innovation Hub Program should

Depending on national implementation, considerable and models to scale up and support the benefits of new analyse if an innovative business model is already

• • 

  an evaluation of the global competitiveness transformational progress should be possible. Member technologies while addressing possible risks especially covered by EU legislation, or how the legislation needs

based on a comparative analysis of the market at States can significantly improve investment climates by those related to data protection and cyber security. to be interpreted and accordingly give guidance to

stake. A better use of the hierarchy of norms would creating modern insolvency regimes and ensuring that NCAs Innovation Hub facilities,

allow the Union to more promptly react to market these also work in practice. The Next CMU Group recommends further rapid and changes and to more quickly keep the Single Market ambitious action in the following areas: • Provide for a competitive, fair and secure

attractive and competitive in response to rapid Although there is widespread agreement about the impordigital Financial Market ecosystem:

regulatory changes that might occur in third countries. tance of making progress on insolvency regimes, insol• Crypto-Assets and Distributed Ledger The EU legislation needs to be screened for digital vency law remains an area where Member States in Technology (“dLT”): readiness,

More specifically, in view of the characteristics of equity general are quite attached to national specificities. The ESMA Advice on initial coin offerings and crypto-assets markets in the EU 27 and the need to massively develop Next CMU Group therefore recommends several steps: clarified the general existing EU rules applicable to • Big Data and Artificial Intelligence (“AI”): Equity Markets and maximize fluidity between EU crypto-assets that qualify as financial instruments, The EU should foster AI to keep pace with the global financial centers, the Next CMU Group recommends that • Continue the step by step harmonization efforts as however a clear and common EU framework for competition. EU legislation and implementation also for the licensing and supervision of EU-significant equity defined by the European Commission and make the crypto-assets and tokenization process is needed if the needs to be screened with respect to AI-specifics. The trading and execution venues (Regulated markets, MTFs, best use of Commissions help to Member States in EU wants to stay ahead in this area. Gaps and issues in support of an EU-wide Financial Data Warehouse and Systematic Internalisers, etc.) and post trading venues (for modernizing insolvency regimes 3 , EU capital market regulation concerning crypto-assets the European Cloud Initiative need to be enhanced, instance CCPs), ESMA is given a direct competence or at • As an additional step towards a Banking Union, pursue and DLT as identified by the ESAs should be addressed least compulsory coordination powers. the harmonization of insolvency regimes applicable to and explained, • Ensuring consumers’ and investors’ trust in

credit institutions, digital Finance is a key success factor. While

• 3. 

  Reinforce effectiveness of (national) • In parallel, complement the Statute for European • Pan-European Innovation Facility: strengthening the European capital market’s competi Insolvency regimes Company with a specific chapter on insolvency, which a European Forum of Innovation Facilitators (“EFIF”) tiveness by encouraging cross-border digitalization, a

  could serve as a benchmark, was established in April 2019 by the European high level of protection for consumers and investors in To create a single investment market, corporate insol• Create a core group of Member States ready to Commission and the ESAs 5 , which is a first step to financial products and services should be ensured. vency/restructuring regimes are economically important accelerate harmonization. build a pan-European Innovation Facility that allows to Digital financial service providers can easily access the because they affect optimal allocation of resources. The test business models and technology across the EU EU wide capital market and operate cross-border current EU legal landscape with respect to corporate insoland provide project specific legislative and regulatory risking supervisory competition negatively impacts

3 The Commission has helped both Greece and Cyprus modernize their insolvency laws and has created the Structural Reform Support Service 4 https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf within its General Secretariat, to help Member States, on demand, with structural reforms. 5 https://europa.eu/rapid/midday-express-02-04-2019.htm

 34 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 35

investors’ interest. A Single Market in retail financial • If by nature FinTech solutions easily result in cross Transformational recommendations:

services needs adequate levels of investor protection border provision of services applicable rules should be through consistent and rigorous harmonized enforcethe same in all Member States, the supervisory

ment across Member States. Special emphasis must function should be allocated to ESMA, or to NCA’s 10. Allow the emergence of competitive pan-european and regional market be placed on data protection, data privacy and cyber under compulsory coordination by ESMA. players with critical mass, by supporting cross-border mergers and security. The EU financial architecture needs to be acquisitions in the financial sector.

harnessed to deal with the resulting risks, Supporting cross-border mergers by rebalancing liquidity, capital restrictions and legal constraints without endangering the overall EU financial stability.

• 11. 

  Review the Central Securities depositaries (“CSd”) Regulation. Such revision should aim at facilitating more efficient cross border post trading services for issuers and investors. CSD Regulation should not reduce the ability of CSDs to offer collateral management, securities lending and borrowing services to market participants. Furthermore, the efficiency of CSDs should be improved by widening the scope of instruments they are allowed to use.

• 12. 

  establish a single market data Consolidated Tape. The European Commission should specify criteria for a single Consolidated Tape covering all execution venues in a delegated act based on MiFID II. The consolidated tape should be non-profit, fall under the responsibility of ESMA and may as a first step cover equity post-trade data.

• 13. 

  Avoid supervisory competition through a strong and coherent eU supervisory framework, which progressively allocates the supervision function at different layers with respect to the level of market integration, every time a Directive or Regulation is reviewed. Start by providing ESMA with direct or compulsory indirect supervision function on EU-significant equity trading and post trading venues.

• 14. 

  Reassess the regulatory and supervisory balance. Reduce overreliance on prescriptive and detailed rules and compensate that by more consistent and rigorous supervision and enforcement. This could also be obtained by a more principle based approach in the level 1 legislation and by a reduction of national transposition options and more extensive use of Regulations (MiFID).

• 15. 

  Reinforce effectiveness of insolvency regimes across the eU. Continue the harmonization efforts as defined by the European Commission. Pursue the harmonization of insolvency regimes applicable to credit institutions and in parallel, complement the Statute for European Company with a specific chapter on Insolvency.

• 16. 

  elaborate an ambitious eU wide digital Finance Action Plan. Such an Action Plan should capture the inherent cross-border dimension of digital finance which calls for establishing a European Sandbox and strengthening an Innovation Hub Program, for screening of EU legislation for digital readiness and for ensuring consumer and investor trust with respect to data protection and cyber security. The aim should be a competi

Klimaanlage an der Fassade eines Wohnhauses, KfW-Bildarchiv / photothek.net, Tunisia, Kindergarten, KfW-Bildarchiv/-, Germany, tive, secure, fair and innovative European digital single financial market, with ESMA granted

December 2012 August 2005 with a compulsory convergence role in this area.

 36 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 37

Chapter 4

deVeLoP deBT, CRedIT And FoRex FInAnCInG

TooLS In A MAnneR THAT InCReASeS THe

InTeRnATIonAL FUndInG CURRenCY RoLe

oF THe eURo

Why

A stronger use of the euro as an international funding (iv) The shock absorption of the monetary union would currency brings many advantages for citizens, companies improve. On the one hand, through the low impact of and Member States. These include not only lower costs for exchange rate fluctuations on domestic inflation, on financing and in international trade, but above all more the other hand through the greater stability of a autonomy for monetary policy and international paydeeper and internationally diversified market.

ments. The latter has gained in importance against the

background of the shifting global order and the growing Recent events and the challenges to multilateralism have application of unilateral sanctions, which encompass the rightly added a geopolitical dimension to the debate on loss of access to the international financial system. A the international role of the euro 2 . The use of unilateral, higher share of the euro in the international bond, credit extra-territorial sanctions shows that a higher weight of and foreign exchange markets would also contribute the Euro in the international financial system is a necessity towards greater depth and liquidity of the EU capital to ensure unhindered access to international payments markets and thus decisively support the development of and financing for EU companies, banks and consumers. the EU capital markets. Furthermore, a stronger role for the euro would contribute

to a more balanced international financial system and

The economic benefits of greater international use of the give weight to EU interests across the world.

euro are largely undisputed 1 : The euro already plays a pivotal role as an international

(i) Internationally active companies gain from lower currency. By all commonly used measures – foreign

transaction costs and exchange rate risks if they can exchange reserves, international debt, international loans,

trade in their domestic currency, foreign exchange turnover, global payment currency, and

global trade invoicing – the euro is the second-most

(ii) Economies whose currencies are used significantly important currency in the world. However, the gap

for reserve purposes enjoy the “exorbitant privilege”. between the use of the US dollar and the euro is still very

Increasing demand from foreign official investors large, especially regarding their use as foreign exchange

reduces financing costs for EU households, companies reserve and as funding currency, be it loans or other debt

and governments, instruments.

(iii) As an issuer of an international currency, the ECB is According to an index calculated by the European Central

less exposed to the repercussions of interest rate Bank (“ECB”), the international role of the euro decreases,

decisions by other central banks and can act autonoas a trend, since around 2006 3 . The most important

mously in terms of monetary policy, factor driving this development seems to have been the

1 See ECB, The international role of the euro, June 2019, pp. 38-44. 2 See Coeuré, The euro’s global role in a changing world: a monetary policy perspective, February 2019. 3 ECB, The international role of the Euro, June 2019, p.5.

 38 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 39

Transformational recommendations financial market indicators such as interest rate

financial and the euro crisis. Also, the growing importance efficient EU capital markets and the global significance of to develop Debt, Credit and Forex

expectations, term premiums or inflation expectations. It also serves as benchmark yield to calculate risk

of China and its renminbi is said to play a role. Since 2017 the euro are two sides of a coin. Deeper and highly financing tools in a manner that premiums for other assets and therefore for its very

a slight rise in the importance of the euro as international integrated EU capital markets strengthen the internacurrency

can be observed. tional attractiveness of the euro. At the same time, the increases the international funding

own pricing.

growing use of the euro by international investors and currency role of the euro To be such an asset, the market for the asset should be

Two main drivers can be identified to explain the euro’s issuers in turn has a positive effect on the liquidity and

loss of importance. First, the receding stability in the euro depth of EU capital market. A virtuous circle might ensue For a genuine EU capital market to be understood and

broad (different characteristics such as different maturizone

and second, the ebbing depth and liquidity of the and, for the specifics of our report, successful implemenoperated as a single deep and liquid market, the Next

ties) and deep (high volumes). There are no bottlenecks

euro area financial markets. Regarding the stability of tation of the previous priorities as described in this report CMU Group has identified at least 3 major ways to

and market players can buy and sell at any time. Price

euro-zone assets, international investors, including central will contribute substantially. enhance fluidity between EU financial centers: (1)

formation proceeds frictionless and there is no market

banks, who search for safe assets as stores of value had to Favoring pan-European consolidation and platforms; (2)

distortion, so that the market, the asset and its price

face a dramatic decline in high-quality euro-zone The following recommendations complement the Avoiding fragmenting supervisory competition; (3)

accurately reflect all information. Moreover, a reference

sovereign bonds when the financial and, later, the euro European Commission’s previous initiatives with a focus reinforce effectiveness of (national) insolvency regimes;

asset market is characterized by the absence of market

crisis hit the currency block. In addition, the crises also on measures to raise the profile of the euro and EU capital and (4) Promoting EU wide Digital Finance and FinTech.

barriers and limits. Crucially, the issuer of the asset should enjoy the greatest possible trust, which is expressed in a

strongly aggravated the fragmentation of the euro area’s markets as a reference, sustainable, inclusive, open and

financial market, reducing its depth and liquidity. efficient brand 5 . 1 Create the conditions to further

high credit rating and a near zero default risk, respectively.

establish the euro as a reference asset

Acknowledging the high potential of a global use of the currency

It is clear at first glance that none of the euro area capital markets meet most of these criteria. Eurozone markets

euro, the European Commission formulated a comprehensive

package at the end of 2018 to strengthen again Increasing the supply of reference assets would help the

are divided into national markets. The deepest is the one

the global significance of the euro 4 . This includes measeuro to boost its international use. Despite this unchalfor

German government bonds that is – roughly ten times

ures to complete the Economic and monetary Union lenged diagnosis, there is currently no simple solution for

smaller than the US government bond market – too small

(“EMU”), to foster a deep EU financial sector and initiathe establishment of a common reference asset for the

for a global reference asset market. German government

tives relating to international financial and key strategic euro zone. As a result, the euro zone lacks a benchmark

bonds are currently yielding completely below the

yield curve. At least in the long-term, efforts to achieve a zero-line suggesting a general shortage of this asset. sectors. common reference asset should not be abandoned. In the Consequently, euro area capital markets are not able to The Next CMU Group support these efforts as ultimately,

meantime, sound economic policies and risk reduction offer a Eurozone-wide low-risk asset across the euro area should strengthen international confidence in the euro. that can be used as a common yield curve that works as a

benchmark. Both aspects would be essential for financial

A truly risk-free asset will not be found as each asset integration and the EU capital markets.

represents a risk – even sometimes very small. However,

there are certain criteria that indicate that an asset is Considerations about a common reference asset should considered as a reference. These are: continue to strengthen the international role of the euro.

• a) 

  Market participants (such as insurance companies, 2 Sovereign Green Bonds as a flagship

pension funds or central banks) use these assets as product for eU capital markets

their preferred asset class and value-preserving liquidity

storage, Europe already holds the top position as the largest

market for Green Bonds 6 . This helps further strengthening

• b) 

  Closely related, a reference asset is used to meet the euro as a financing currency for sustainable projects.

supervisory requirements about capital buffers, Sovereign Green Bond issuers are in a prominent position

liquidity ratios and Net Stable Funding Ration (NSFR), to increase supply by offering highly liquid benchmark size

investment opportunities and contribute to a further

• c) 

  The yield of a reference asset is a source of development and diversification of the Green Bond

information for market participants on various market on a EU but also on an international scale.

4 European Commission (Communication), Towards a stronger international role of the euro, December 2018

5 Without prejudice to other EU national currencies and their role for non-euro EU capital markets. 6 Climate Bonds Initiative, Green Bonds, The state of the market, 2018.

 40 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 41

However, individual, sporadic market appearances are not determined impulses about the domestic economy and To revive the EU securitisation market in Europe, strength 4 Promote cross-border digital Finance sufficient to meet this requirement. Rather, the major society. en the international role of the euro and contribute and Fintech

sovereign issuers should commit themselves to implefurther to SME financing, the EU Commission, supervisors

menting a comprehensive issuance program for Green 3 Revitalise securitization markets to and Member States should: Instant payments are quickly emerging as the new

Bonds that consistently covers the maturity range foster inclusive growth normal 13 . The EU has already taken significant steps to

between 2 and 30 years. a) Provide implementation certainty for the securitiaddress this development. In November 2018, the ECB Since the financial crisis, securitizations have dramatically zation industry including on capital relief. The ESAs launched TARGET Instant Payment Settlement (“TIPS”)

By issuing sovereign Green Bonds, Member States can reduced in importance. However, in recent years it has and the European Commission should finalize all RTS which allows to settle payments individually with central demonstrate their commitment to reach the Paris recovered somewhat from its lows in 2013/14 11 . In and other regulatory documents and intensify Q&As, bank money in less than 10 seconds 14 . The SEPA Instant Agreement’s 2°C goal 7 and the objectives of the EU 2015, the European Commission proposed a framework Credit Transfer (“SCT Inst”) creates the conditions for a

Roadmap 2050 8 . In addition, they positively contribute to for Simple, Transparent and Standardised securitizations b) Simplify and streamline regulatory requirements widespread used pan-European solution for retail instant the 2030 Agenda for Sustainable Development 9 . Climate (“STS”), which possibly contributed to the above-menfor disclosure, STS criteria, STS verification and by payments. There are, however, risks that the payment mitigation and adaptation underpin meeting the UN tioned slight rebound of the securitization market. This providing simple and risk sensitive parameters for market will become fragmented 15 , which would also

Sustainable Development Goals (“SDGs”). Fighting said, the STS standard didn’t meet the expectations for assessment of Significant Risk Transfer. Realigning the damage the international role of the euro in the long run.

climate change is reliant on approaching SDGs with a the following reasons: treatment of cash and synthetic securitizations could

climate lens, especially Clean Water & Sanitation (SDG6), also be considered at the next review of the STS Currently, solutions for instant payments at the point of Affordable and Clean Energy (SDG7) Industry Innovation a) A noticeable deleveraging environment in both the framework, interaction are regional or national and lack interoper&

Infrastructure (SDG9), Sustainable Cities (SDG11) corporate and banking sectors. After the so-called ability. The Next CMU Group therefore recommends the Climate Action (SDG13) and Life on Land (SDG15). Euro crisis, which was perceived by many observers as c) When reviewed, the STS Regulation should be EU and the Member States to promote and support efforts Hence, Green Bonds can serve as a bridge to achieving a debt crisis, both companies and businesses as well as calibrated in such a way that it realigns the regulatory to find a true pan-European solution.

SDGs. banks reduced their debt. This has reduced the capital and liquidity treatment with those of covered securitization scope for banks, bonds and loans, as well as the disclosure and due

By defining common EU Sovereign Green Bond Standard diligence requirements for covered bonds and STS referring the EU taxonomy –currently in slow developb) Unfavourable regulatory treatment: As the securitization. ment under the “EU Action Plan Financing Sustainable financial crisis was mainly caused by the securitisation

Growth” 10 – the sovereign issuers would advance the and banking markets, supervisors have made great harmonization of Green products on the capital markets. efforts to minimise the risks posed by the banking

sector. This has led to a high capital buffer require Sovereign Green Bond issuers should in a more harmoment, not least for securitization investors, nized manner commit to be transparent within Member

States budgets and report on environmental beneficial or c) Lower refinancing costs for competing assetsustainable activities. The development of common backed financial instruments, notably covered practices has a crucial impact on effectively fulfilling these bonds 12 , commitments. Sovereign issuers are best-suited to serve as role models for other market participants. By demond) A low interest rates and competitive spread strating best practice, e.g. about impact reporting, environment. sovereign Green Bond issuers can create important momentum to increase data quality and availability, harmonize the respective processes and methodologies and could serve as a driver for corporate Green Bond issuers. On a wider scale, this transparency on sustainable activities can be the origin for a committed international cooperation within and beyond the EU as well as for

Seniorenpaar mit Stöcken beim Spaziergang, KfW-Bildarchiv / photothek.net, Germany,

7 European Commission, International action on climate change, Paris Agreement. April 2012

8 European Commission (press release), The Commission calls for a climate neutral Europe by 2050, November 2018.

9 UN, Transforming our world: the 2030 Agenda for Sustainable Development.

10 European Commission (Communication), Action Plan: Financing Sustainable Growth, March 2018. 13 See Swift, The transformation of the European payment landscape, pp. 18,; Hartmann, M. et al., Are instant payments becoming the new normal? 11 The European securitization market recorded an issue volume of EUR 258 billion in 2018, around EUR 60 billion more than in 2013 and 2014. A comparative study, August 2019. 12 For example, since mid-2014, the outstanding amount of mortgage covered bonds in Germany has shown a much more dynamic upward trend 14 ECB (press release), ECB goes live with pan-European instant payments, November 2018.

than the securitization market in the same period. 15 Lautenschläger, S. (speech), Transformation of the retail and wholesale payments landscape in Europe, June 2019.

 42 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 43

Transformational recommendations:

• 17. 

  Create the conditions to establish the euro as a reference asset currency. Member States, Institutions and market participants should create the conditions to develop a common market for reference assets for the euro area that truly meet the criteria for reference assets. The euro area lacks a euro area-wide benchmark yield curve.

• 18. 

  establishing Sovereign Green Bonds as a flagship product for eU’s capital markets. The issuance of Green Bonds by Member States has a significant signalling effect to the capital market and should become an integral part of their funding strategy. Member States with significant activity on the debt market should have issued a Green Bond and agreed common standards for budgeting and reporting requirements by 2021.

• 19. 

  Revitalising securitization markets. A deep and well-functioning securitisation market that can recover strongly from the lows of 2013/14 is an essential element of a dynamic capital market and for euro area lending, including for SMEs. Where possible the regulatory and supervisory framework for STS Regulation should be accelerated and when reviewed, a key task will be to ensure that regulation is neutral between securitization and similar instruments like covered bonds. In view of such a revision the revitalisation of the securitizations market should be closely monitored.

• 20. 

  ensure an efficient and competitive pan-european payment market. Europe already has a highly efficient and secure payment infrastructure. Digital innovations and global trends have moved the demand for retail instant payment services into focus. To avoid fragmentation of the payment market, pan-European solutions should be decisively supported. Instant payments as a new payment infrastructure within the Single Euro Payments Area (SEPA) can play a major role.

  Offshore-Wind-Park, KfW-Bildarchiv / Charlie Fawell, Great Britain, February 2008

 44 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 45

ConCLUSIon

Within this report the next CMU Group proposes a shift of priorities.

From a first phase of the CMU that focused on revitalizing EUs capital market ecosystem, it recommends that the new phase gives priority to responses to citizens’ needs and to the investment in the real, digital and sustainable EU economy. People, Sustainability and Digitalization are the three priorities of the new European Commission.

Should political leaders of the three Institutions wish to widely signal such new orientation they could even consider changing the name of the CMU. This would make the purpose of such Union clearer for citizens and for the real, Digital and Sustainable economy. The Next CMU Group proposes the following new name: Savings and Sustainable Investment Union.

The four Absolute Priorities and twenty Transformational Recommendations detailed in this report, by the Next CMU Group all point in that direction and set the ambition of building an integrated, competitive, deep and liquid EU capital market, to maintain the EU as one of the top two financial centers of the world.

The progressive achievement of additional EU legislative efforts will not, on its own, bring a sufficiently efficient and rapid response to the current pressing urgency and will not create an impactful difference. Reaching such ambition may require further EU legislation but perhaps even more, a revised regulatory and supervisory balance, action by the ECB and central banks, legal and tax changes at national level, and consistent private sector initiatives.

Effective implementation and tangible results are the key success factors. To regularly evaluate if the EU achieves its agreed key objectives in the priority areas, the Next CMU Group suggests that the European Commission formulates: • Concrete Key Performance Indicators (“KPIs”) measuring the EUs’ capital market efficiency over several years, such as: overall pensions targets, retail participation in the equity market, Venture Capital funding level, number of late-stage Private Equity funds, number of IPOs by SME and Mid-Cap, equity holding by Institutional investors, number of FinTech emerging, use of the Euro in global markets, issuances of Sovereign Green Bonds. • Heatmaps to follow the implementation and real functioning of specific capital market features at EU level and in the Member State, such as: funding and tax incentives, standards implementation, structural evolution of the market (M&A), functioning of specific EU platforms.

The European Commission could even consider proposing to establish a Monitoring Steering Committee of inter institutional nature in charge of setting the concrete key performance indicators and expected outcomes and to periodically monitor progress and report.

 46 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 47

nexT CMU Annex

HIGH-LeVeL GRoUP CoMPoSITIon

• • 

  Fabrice DEMARIGNY (Chair), Partner at Mazars, Chair of the Board of the Institutions, authorities and organisations met or • Supervisors

European Capital Markets Institute (ECMI) from whom a contribution was received o ACPR (French Prudential Supervision and Resolution Authority)

• • 

  Corien WORTMANN-KOOL (Co-Chair), Chair of the Board of ABP Pension fund International organisations o AFM (Netherlands Authority for the Financial • International Monetary Fund Markets) + Capital Markets committee

• • 

  Joachim NAGEL (Co-Chair), Executive Board Member of KfW • Organisation for Economic Cooperation and o AMF (French Financial Markets regulator) Development o CNMV (Spanish securities supervisor)

• • 

  David VEGARA, o CONSOB (Italian Securities Regulator)

Chief Risk Officer and Executive Board Member of Banco Sabadell EU bodies o Finansinspektionen (Swedish Financial • Economic and Financial Committee Supervisory Authority)

• • 

  Lauri ROSENDAHL, President of Nasdaq Nordics and Nasdaq Stockholm and • European Banking Authority o KNF (Polish Financial Supervision Committee)

Senior Vice President of European Cash Equity and Equity Derivatives within • European Central Bank o UK Financial Conduct Authority Global Transaction and Market Services • European Commission • European Insurance and Occupational • Other public institutions

• • 

  Marcello BIANCHI, Deputy Director General of Assonime Pensions Authority o City of London Corporation

  • • 

    European Investment Bank o ICO (Instituto de Crédito Oficial) • Artur GRANICKI, Partner at Wardyński & Partners • European Securities and Markets Authority

  • • 

    Finnish Presidency and the ECOFIN Interested parties • Some members of the European Parliament • ABI (Italian Banking Association)

The work of the next CMU High-Level Group is supported by: • ABN AMRO Clearing Bank

• • 

  Johan BARNARD (Coordinator) National authorities • AEB (Spanish Banking Association) • Laurent CLAMAGIRAND (Senior Advisor) • Ministries • AEGON • Elina YRGARD o Dutch Ministry of Finance • AFEP (French Association of Private Companies) • Romana RIES o Finnish Ministry of Finance • AFG (French Asset Management Association) • Amine ATTIOUI o French Ministry for the Economy and Finance • AFME (Association for Financial Markets in Europe) o French Ministry of European Affairs • AIFI (Italian Private Equity, Venture Capital and o German Federal Ministry of Finance Private Debt Association) o Italian Ministry of Finance • Alecta o Polish Ministry of Finance • Allianz Deutschland AG o Spanish Ministry of Finance • Alternative Credit Council o Spanish Ministry of Justice • AIMA o Swedish Ministry of Finance • AMAFI (French Financial Markets Association) • Amundi • Central banks • ANIA (Italian Insurance Companies Association) o Banco de España • Asociación Española de Banca, AEB o Bank of France (Spanish Banking Association) o De Nederlandsche Bank • Ardian o Deutsche Bundesbank • Assirevi (Italian Association of Audit firms) o National Bank of Poland • Assogestioni (Italian Association of o Riksbanken (Swedish Central Bank) Asset Management) • Assosim (Italian Brokers Dealers Association)

 48 SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON SaviNGS aNd SUSTaiNabLe iNveSTMeNT UNiON 49

• • 

  Aviva • ESBG (European Savings and Retail Banking Group) • NVP Think tanks, nGos and Universities

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  AXA • Eumedion (Dutch Private Equity and Venture Capital Association) • Better Finance

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  Bank of America Merrill Lynch • Euronext • Optiver • Bruegel

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  Bank of China • European Banking Federation (+ Markets4Europe) • Ostrum • CEPS

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  Bank of New York Mellon • European Institute of Financial Regulation • Paris Europlace • New Financial

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  Banque Publique d’Investissement • EuropeanIssuers • Pensions Europe • Frankfurt School of Finance and Management

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  Better Finance • FBF (French Banking Federation) • PFR Ventures • Johann Wolfgang Goethe-University

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  Blackrock • FeBAF • PGGM

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  BNP Paribas (Italian Banking, Insurance and Finance Federation) • PKO BP Bank Written contributions received can be found at

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  Bolsas y Mercados Españoles • FESE • PKO BP Dom Maklerski http://nextcmu.eu

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  Bond Spot MTF • FFA (French Insurance Federation) • Prague Stock Exchange

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  Borsa Italiana • Finance Finland • PSIK (Polish VC and PE funds Association)

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  Börse Stuttgart • Financière de l’échiquier • Rada Banków Depozytaruszy

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  BOS Dom Maklerski • France Invest (French PE and VC Association) (Council of Depositary Banks in Poland)

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  BPCE • GDV (German Insurance Association) • Rzecznik Finansowy RP

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  BPFI (Banking & Payments Federation Ireland) • Goldman Sachs • Santander Bank Polska

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  Bundesverband deutscher Banken e.V. • Holland FinTech • Schroders

• • 

  BVI (German Investment Funds Association) • HSBC • SEG (Polish Association of Listed Companies)

• • 

  C*boe • HVG Law • Slaughter & May

• • 

  Caisse des dépôts et consignations • IDM (Polish Association of Brokerage Houses) • SME Sweden

• • 

  Cevian Capital • IGTE • Société Générale

• • 

  CFA Society Poland (Chamber of commerce of Pension Funds in Poland) • StartupDelta

• • 

  Chicago Board Options Exchange Europe • InsuranceEurope • Stern and Co

• • 

  Citi Bank Handlowy Dom Maklerski • IntercontinentalExchange • Stowarzyszenie Inwestorów Indywidualnych

• • 

  Citigroup Global Markets • International Capital Market Association (Association of individual investors in Poland)

• • 

  Confederación Española de Cajas de Ahorro (CECA) • International Regulatory Strategy Group • Stratticus

• • 

  Confindustria (Italian General Confederation of • International Securities Lending Association • SVCA

Italian Industry) • International Swaps and Derivatives Association (Swedish Private Equity & Venture Capital Association) • Copernicus Securities • INVERCO • Svenska Fondhandlareföreningen

• • 

  Covéa • Invesco (Swedish Securities Dealers Association)

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  Crédit Agricole • Invest Europe • Svenskt Näringsliv

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  Crédit Suisse • IZFA (Polish Investment Companies Association) (Swedish Confederation of Enterprises)

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  Deutsches Aktieninstitut • Johann Wolfgang Goethe-University Frankfurt • TMS Brokers

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  Deutsche Bank • JPMorgan • Unicredit

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  Deutsche Börse • JSternCo • Unión Nacional de Cooperativas de Crédito

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  De Brauw • KDPW (Central Securities Depository of Poland) (Cooperatives Association)

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  DSGV (Deutscher Sparkassen- und Giroverband) • LCH group • VEB (Dutch Investors Association)

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  DUFAS (Dutch Fund and Asset Management • Long term Investment Task Force • Verbond van Verzekeraars Association) • Meridiam (Dutch Association of Insurers)

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  DZ Bank AG • Michael Ström Dom Maklerski • VNO-NCW – The confederation of Netherlands

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  EFAMA • Mouvement des entreprises de France Industry and Employers

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  EFS Roundtable • Nasdaq • Warsaw Stock Exchange

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  Emisores Españoles • Natixis • Związek Banków Polskich (Polish Banking Association)

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  EPTA (European Principal Traders Association) • NatWest

(Piebe Teeboom) • Noble Securites Dom Maklerski • Erste Group • NVB (Dutch Banking Association)

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ACknoWLedGeMenTS

The Chair, the Co-Chairs and the Members of the next CMU Group express their warm gratitude to:

Wopke Hoekstra, Bruno Le Maire and Olaf Scholz for initiating this independent strategic thinking and for launching the Next CMU Group, the officials of their Ministries for very kindly and efficiently responding to our various requests, and the Dutch, French and German Embassies in the United Kingdom for organizing a very informative set of meetings in London,

Mika Lintilä, Vice Prime Minister and Minister of Finance of Finland and Chair of the ECOFIN Council during the Finnish Presidency for inviting us to present our work to the informal ECOFIN,

The European Commission DG FISMA key officials for the extremely valuable meetings we had with them,

The central banks as well as the banking, insurance and securities markets supervisors that significantly contributed to our approach,

The OECD and IMF officials for their contribution to the global perspective of our work,

The numerous market players and their representative associations, both at EU and national level, that contributed to our work by responding to our questionnaire, by sending contributions or by responding to our questions,

The Think Tanks and academics that were kind enough to bring robust evidence and far reaching ideas to our attention,

Johan Barnard, Laurent Clamagirand, Romana Ries, Elina Yrgård and Amine Attioui for their remarkable commitment in advising us, finalizing the report and organizing our work,

Mazars, ABP Pensioenfonds, KfW, Banco Sabadell, Nasdaq, Assonime and Wardynski & Partners for accepting that we could be distracted from our professional duties to carry this work and for accordingly showing their commitment to EU integration.

Montagestraße für Pkw, KfW-Bildarchiv/-, Germany, December 1999