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I’m really happy to be able join the FIA’s annual conference.
Of course I’d rather be in Florida.
I’m looking forward to getting back to a world where you can meet in person and do business. That’s hugely important and something to look forward to.
Today I want to focus on the EU’s agenda to strengthen our capital markets.
We are working hard on integration. We want to develop a deep and efficient single market for capital.
But I do not need to remind you that we have been through a fragmenting event this year, namely Brexit. That requires a readjustment by the European Union.
But we remain an open financial market. Strengthening the EU’s single market will enable us to better participate at a global level, as an open jurisdiction that is attractive for outside investors and one that allows EU companies to be competitive beyond its borders.
Capital Markets Union
To strengthen the EU’s capital markets, we need to address fragmentation. At the moment we have 27 national capital markets that are neither fully developed nor fully integrated.
If you are a company in Bulgaria looking for equity funding, you probably won’t be able to get that investment from Madrid, for example. And that impacts whether investors in New York want to invest in the EU.
Fragmentation means that cross-border investment is more difficult. It also reduces the attractiveness of EU financial markets for global investors. It also gets in the way of economies of scale and reduces competition among participants.
And that’s why our project for a Capital Markets Union is a top priority here in the Commission. The CMU is about working towards the completion of the EU’s single market for capital – also because of the wider benefits that this could bring.
Well-functioning, well-integrated capital markets could contribute to the post-pandemic recovery. In the EU we saw how well-developed capital markets helped the US recover after the 2008 financial crisis.
Only deep and integrated capital markets can provide the scale of financial support needed to power the transition towards a greener and more digital Europe.
In September, the Commission published a new Action Plan for the CMU. This includes a comprehensive set of actions around three core objectives.
First, we want to help European companies access more diverse sources of non-bank funding, including across borders.
Second, we want to make the EU an even safer and more attractive place for savings and long-term investments. A small investor base inhibits the capacity of EU capital markets to offer the funding that EU companies need, especially in smaller Member States.
And third, we need to remove obstacles to the integration of national capital markets into a genuine single market. These obstacles include withholding tax and insolvency laws. They are deep-rooted and will take time to tackle. But I am determined to act on them.
An area we will reflect on in the coming months is supervision and the functioning of the EU single rulebook for financial services. Following the departure of the United Kingdom, Europe’s capital markets have a multi-centre architecture. Several financial hubs fulfill specialised or regional financing needs. If we want to match the performance of other highly efficient centres, we need to make sure that EU hubs cover the necessary product range, have enough liquidity, are well connected to each other and are integrated.
And such EU financial centres need to operate and compete on an equal footing.
This will require greater supervisory convergence. Financial regulatory harmonisation has made considerable progress since the last financial crisis. However, even harmonised legislation can lead to diverging supervisory practices by national regulators.
We need to bring the vision of a single rulebook for financial services closer to reality. This year, we’ll gather the input of stakeholders and report on issues of supervisory convergence in a comprehensive manner, without any preconceived idea of what the outcome should be.
MiFID II Market structures
We are also getting started with the comprehensive review of European trading infrastructure legislation, MiFID. We’ll look at the operation of infrastructure for trading in shares, bonds and derivatives.
Transparent and liquid marketplaces are the pillars of strong and efficient European capital markets.
We’ll assess whether transparent regulated exchanges and more opaque alternative venues operate on a level playing field and whether transparency requirements need to be strengthened.
A key plank of our review of trading infrastructure is the introduction of a consolidated tape. This debate is not new, but it remains an important component of efficient markets.
A consolidated tape would collect and aggregate key trading data in equity and corporate bonds from venues across the EU. It could contribute to the further integration of EU capital markets, by enhancing competition among trading venues and providing investors with much better information at EU level.
When setting the conditions for a consolidated tape, we’ll take a fresh look at trading data and its quality. We will also pay attention to the US experience in the area of consolidation.
In this review of MIFID, we will also assess whether the current mandatory “open access” provisions for exchanged-traded derivatives, which were postponed last on account of Covid-19, should be maintained, modified or abandoned altogether.
While we are working on integration at home, we are dealing with Brexit, this major fragmenting event.
There was a regime change on 1 January 2021.
It happened because the United Kingdom chose to leave the European Union – a decision we fully respect.
But the choice has consequences. The UK wanted to be outside the European Union; that means losing the benefits of EU membership.
The choice to “take back control” has consequences.
The City of London is now outside the European Union, and no longer accountable to EU supervisors and EU regulators.
UK-authorised firms can no longer provide services across the EU based on their UK authorisation.
The good news is that our companies were prepared and markets have adjusted well to this new situation.
Memorandum of Understanding
We should of course strive for good cooperation with the United Kingdom.
I envisage a flexible non-binding framework similar to what we have with the United States, which works very well: a voluntary structure for regulatory cooperation, to talk about international developments, and to discuss how to move forward with equivalence determinations, with full respect for the autonomy of both sides.
The purpose will not be to restore market access rights that the United Kingdom has lost because of Brexit, nor will it constrain the European Union’s unilateral equivalence or regulatory process.
Through cooperation and trust, we can build a stable and balanced relationship with our UK neighbours and friends.
Once the regulatory cooperation framework is in place, we’ll resume the assessment of equivalence with the UK authorities. We will do so progressively, on a case by case basis, taking into account the UK’s regulatory intentions.
But I do need to be clear on two points: first, there cannot be equivalence with wide regulatory divergence.
Second, we will grant equivalence only when it’s in the EU’s interest – just as the UK has made its own equivalence decisions in their own interest.
And we will not have a narrow view of our interest, thinking only in terms of costs and market fragmentation. We need to look at the big picture and see how to develop our ‘open strategic autonomy’ – making the best of openness and global cooperation while defending our own interests and values.
Open Strategic Autonomy
Indeed, we should not be naïve. Brexit has led to fragmentation and has laid bare some of the vulnerabilities in our financial system linked to the dependence on third-country market infrastructures.
The EU needs to reinforce its capacity to deal with new risks and responsibilities that follow from the UK’s exit from the EU. Our objective is not to move or steal business away from London but rather to build our own infrastructures. That’s an important nuance.
It’s particularly true in the field of clearing and derivatives. Most EU-denominated swaps are still cleared by two private companies based in London. The volumes could be described as eye-watering.
The UK’s withdrawal has increased the risk of a sudden termination of clearing for EU clearing members.
We acted on that financial stability risk, adopting a temporary equivalence decision for the UK in September last year. This equivalence decision for UK CCPs will expire in June 2022.
However, this time-limited decision is not a free pass or a waiting area for EU market participants.
Rather, it should be used by market participants to reduce their excessive derivative exposures to UK-based CCPs, and by EU CCPs to build up their clearing capability.
Exposures will be more balanced as a result. It is a matter of financial stability for the EU.
Before the transition period ended, we strengthened the role of ESMA for third-country CCPs and we worked with ESMA and the ECB in implementing the relevant legislation – EMIR 2.2, which you are probably all familiar with.
ESMA is currently re-assessing, in cooperation with the ECB, the systemic importance of two UK CCPs. ESMA will also decide whether to advise the Commission not to recognise these CCPs for some or all of the services they offer and that these CCPs should relocate to the EU.
In parallel, in January, we set up a working group with the ECB and other EU supervisory authorities to better identify the opportunities and challenges for transferring derivatives denominated in euros or any other EU currency from the UK to the EU.
The recommendations of this working group are expected by the middle of this year and will feed into the Commission’s reflections on the way forward.
While a voluntary scaling back of the industry’s exposure to UK CCPs is the preferred option, we will consider very carefully any recommendation that ESMA may make about systemically important UK CCPs in the future.
We are re-balancing our relationship with the UK, which reflects that the City of London is now outside of our regulatory and supervisory sphere.
That should not be misinterpreted – or indeed misrepresented.
The EU is and will remain open for business in financial services.
We want our capital markets to be integrated with other international markets.
Equivalence with third countries
We use equivalence as the main tool to manage our interactions with third countries in financial services.
Currently the EU has over 300 equivalence decisions for nearly 40 countries.
We will continue to operate a very comprehensive equivalence system and work with jurisdictions on their respective frameworks.
Good cooperation with US regulators has also allowed us to recently take a second equivalence decision for CCPs supervised by the SEC – in addition to those supervised by the CFTC which are covered by an earlier decision.
We are interested in the increased use of deference as a cross-border tool by our partners – each with its own specific approach and legal framework, but all of them aim to ensure that cross-border activity takes place in a well regulated and supervised environment, where risks are managed.
Commitment to multilateralism
The EU has remained open to the rest of the world and continues to advocate for multilateralism and rules-based global economic governance.
Multilateral cooperation is particularly important in two other themes of your conference: sustainable finance and digital finance.
We need to accelerate the green transition to meet the objectives of the Paris Agreement.
Tackling the climate and biodiversity emergencies will require enormous investments at global level, as well as coordinated action to address financial stability risks.
As regulatory cooperation is vital, I welcome very much that the working group on sustainable finance under the G20 has been relaunched.
The EU works with countries representing over half the world’s population, GDP and emissions in the context of the International Platform on Sustainable Finance. There we will discuss issues including disclosure and taxonomies.
In the sustainable finance area, the EU will sometimes move further and faster to meet the level of ambition of the EU Green Deal – which sets us the goal of climate neutrality by 2050.
For instance, we are currently implementing the EU Taxonomy - a framework that will give a clear indication what is a sustainable investment and also reduce the risks of greenwashing.
In April, we will propose strengthening the EU’s corporate sustainability reporting rules.
Our objective is to respond to the growing information needs of investors in the EU.
But we remain committed to work hand in hand with global partners for convergence to ensure better quality and more comparable information from companies.
Delivering a global financial system fit for the digital age also requires that the main economies work together to set international standards.
Fintech markets are highly interconnected.
Our proposed regulation on markets in crypto-assets (MiCA) establishes dedicated rules for potentially systemic propositions, such as the emerging category of so-called ‘stablecoins’.
Our framework makes extensive use of the international principles established in the Financial Stability Board.
In closing, I want to highlight the positive record of regulatory cooperation in financial services with the United States.
The relationship between EU and US is unique, built on shared history, shared values and shared interests.
Our Joint EU-US Financial Regulatory Forum has allowed officials from both sides to solve problems and discuss common regulatory challenges.
We are pleased that US is reengaging with international partners at multilateral level.
I’m particularly looking forward to closer ties with the US Administration in the Financial Stability Board to promote international financial stability issues, foster a level playing field and strengthen the global financial system.
I am sure that we will be able to count on your support in advancing this ambitious and cooperative agenda.