Are the goals of the capital markets union in jeopardy?

On 28 November 2018, the European Commission published a communication on the current status and further procedure regarding the capital markets union (CMU). The purpose of the capital markets union, an EU initiative, is to deepen and more strongly integrate the capital markets belonging to the 28 EU member states. It aims to provide new funding sources for businesses, in particular for SMEs, boost the European economy and forge ahead with integrating and stabilising the financial system. In order to achieve these goals, the European Commission published its Action Plan on Building a Capital Markets Union in September 2015, which specifies 16 legislative proposals including three for financing sustainable growth.

Back in June 2017, the EU Commission published its mid-term review on all the measures still outstanding and how it planned to proceed (see mid-term in the capital markets union). Now, just 18 months later, the Commission has announced a new interim report and its procedure for the final spurt to the finishing line.

In its communication, the Commission emphasises that since the publication of the action plan, of the 16 original legislative proposals, the European Parliament and the Council have only accepted three – the EU Prospectus Regulation, the The European Venture Capital Funds Regulation and the Securitisation Regulation. As a result, there has been little progress in adopting the proposals detailed in the action plan. In view of the up-and-coming European elections in May 2019, the Commission is calling for the European Parliament and Council to act quickly so that the proposals can be adopted by the end of the legislative period.

Key initiatives at risk of not being adopted before the European Parliament elections are as follows:

• Supervision of investment firms: in this case, revised supervisory regulations for investment firms are to be introduced and the MiFIR third country regime for securities services modified.
• Supervision of the European Supervisory Authorities (ESAs): this will mean numerous checks on the supervisory powers of the European supervisory authorities also with regard to companies from third countries.
• Aspects involved in the supervision of the European market infrastructure regulation (EMIR 2.2): in this case, the supervision of CCPs, especially equivalence ratings regarding CCPs from third countries, are to be revised.
• Taxonomy, disclosure and benchmarks of sustainable investments: this concerns the introduction of a classification system (taxonomy) that specifies which economic activity is considered environmentally sustainable for investment purposes. In terms of disclosure asset managers and institutional investors would be requested to disclose how they consider sustainability factors in their strategy and investment decision making process, in particular for their exposures to climate change-related risks. Furthermore, two new categories of sustainable benchmarks will be introduced: the “low carbon benchmark” and the “positive carbon impact benchmark”. The first benchmark portfolio comprises assets with lower CO₂ emissions compared to assets in capital-weighted benchmarks, whereas the portfolio of the second benchmark consists of assets where the CO₂ savings exceed the CO₂ footprint.

Due to the limited time available in the current legislative cycle, the Commission isn’t planning any additional legislative measures to finalise the CMU. However, it does stress that it will enforce the programme’s remaining non-legislative measures such as the sale of investment products for private investors, institutional investors, corporate finance and better use of financial technology.

It remains to be seen how many of the proposed modules for the capital markets can be implemented in time. One thing’ is for sure: a lot of progress will have to be made regarding the CMU in order to progress with banking union by the spring of 2019, as the statement following the recent Euro Summit made clear.

Critics who had already voiced their doubts about the ambitious project and its equally bold schedule back in 2015 will be feeling that they have been proved right. The project appears to be more of a long-term than a medium-term one what shall not diminish in any way the huge urgency that a harmonised and integrated capital market entails.

Your Contacts

Andrea Flunker
aflunker@deloitte.de
+49 211 8772 3823

Philipp von Websky
pvonwebsky@deloitte.de
+49 211 8772 3867

Max Sandkühler
msandkuehler@deloitte.de
+49 211 8772 3580