The economic slowdown caused by Covid-19 has a severe impact on the viability, growth and funding for enterprises, and SMEs in particular. In this regard, the European Commission’s increasing focus on improving capital market funding for companies is a step in the right direction. As the economic consequences of the crisis materialize, banks’ balance sheets will be overwhelmed with non-performing loans and they will not be able to finance our economy alone. Increased access to equity financing will be key, as more financing through equity markets helps achieve higher levels of growth and increases private risk-sharing – thereby providing for an additional route of relief for the pressure on public finances. 

Remove barriers 

In order for EU capital markets to support the economy emerge quickly and stronger from the crisis, remaining shortcomings must finally be addressed. This includes the creation of an all-encompassing ecosystem for raising capital for companies, especially for SMEs, by removing barriers to capital markets, e.g. fiscal disincentives to equity financing (taxation, insolvency law), but also by putting the right incentives into place, e.g. creating a private public fund for IPOs as proposed by the European Commission. Further on, promoting the availability of SME research and facilitating the diversification of the investor base, including encouraging the participation of retail investors in capital markets is important,  as well as further tailoring SME Growth Markets to the needs of SMEs. 

However, in order to fully unlock the potential of the CMU, the European Commission should also focus on improving the EU equity market structure and overcoming its fragmentation, which ultimately harms market liquidity. Lit markets have once again acted as safe-haven throughout the Covid-19 crisis. The increase in lit trading observed in times of market turmoil shows the need for fair and transparent markets. The subsequent reversal of this trend raises serious questions regarding the quality of the price formation offered by alternative venues and the importance of addressing the fundamental flaws of the current equity market structure. 

Market structure to be scrutinised 

Consequently, the current political reflections on a simplified market structure and a well-calibrated transparency regime under MiFID II/MiFIR should be an integral part of completing the CMU to fully support operational, well-functioning and stable financial markets. Importantly, the rapidly approaching end of UK’s transition period requires immediate action which cannot wait until the end of 2021. Contrary to what is being discussed by the European Commission, EU capital markets will not benefit from a consolidated tape. Without improving transparency in the first place, such a tape would constitute another data aggregation without any clear regulatory use case at additional cost for market participants. A cost-benefit analysis and viable alternatives such as a Tape of Record should be considered taking current market structures into account. 

Another important aspect that should be considered for a thriving CMU and the recovery from the impacts of Covid-19 is the importance of preserving well-functioning, competitive and liquid EU markets, such as euro exchange traded derivatives and avoid fragmenting them via open access requests, which no other major jurisdiction has decided to inflict upon itself. 

Finally, we welcome the recent proposal of the European Commission to review the position limits regime for certain commodity derivatives as this reform will help new euro markets grow and further strengthen the role of the euro and the CMU.