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Rebecca Hansford
US and Asia securitisation markets contribute far more to financing their economies than Europe - “Now is the time to address the gap
6 Jun 2023
The Association for Financial Markets in Europe (AFME) has today published new data highlighting the contrasting fortunes of the securitisation market in Europe (EU + UK) versus the rest of world, demonstrating that Europe languishes far behind its global competitors in terms of the amount its securitisation market contributes to the financing of its economy. Over a period of 15 years, up to 2022, annual securitisation issuance in the EU+UK has experienced muted growth and in 2022, EU issuance was equal to 0.3% of EU GDP, and UK issuance equal to 0.9% of UK GDP. This contrasts with other global regions, where the product’s contribution saw significant growth over the same time period (US issuance was at 1.4% of GDP and Australian issuance at 2.8% in 2022). The securitisation market in China only opened in 2012 but by 2022, annual securitisation issuance represented 1.8% of GDP. As important EU inter-institutional negotiations are taking place this month on the capital requirements regulation and the UK kicks off its review of the securitisation framework, AFME is urging policy makers to introduce measures that enhance risk-sensitivity in the prudential framework for banks. A review of other frameworks and requirements applying to non-bank investors is also needed to achieve greater proportionality for this asset class. Speaking ahead of Global ABS, the largest annual gathering of the securitisation industry and policy makers taking place next week in Barcelona, Adam Farkas, Chief Executive of AFME, said: “Europe’s securitisation market remains depressed while other large global capital markets reap the economic rewards of this financing tool. At a time when inflation continues to rise, monetary policy is tightening and capital becomes increasingly scarce, now is the time to address this gap. The competitiveness of Europe’s financial services sector is at a key disadvantage without a vibrant securitisation market. “The EU’s financing needs are unprecedented, especially in light of recent economic shocks and the green and digital transitions. Banks can help finance economic growth through freeing up their balance sheets to facilitate lending through securitisation. Securitisation is a good bridge to channel liquidity from the capital markets to the real economy.” Speaking at the Global ABS next week, Lord Hill, former EU Commissioner for Financial Services and Capital Markets Union said: “Europe needs to have a proper discussion about risk. It is 15 years since the Great Financial Crash, yet it still seems to dominate our thinking. For me, the biggest risk we face today is lack of growth, but we pursue regulatory approaches that make growth more difficult. We need to be honest about the trade-offs involved and ask ourselves whether we have struck the right balance, particularly when our international competitors are striking that balance in a different, more growth-friendly place.” AFME has today also issued a stark warning that the disproportionate reliance on bank lending to finance growth in Europe has become ever greater, while the very market enabling banks to extend this lending is at risk. In June 2022, European (EU+UK) banks reported EUR 16.2 trillion in total outstanding loans to non-financial corporations and households (an increase of 3.5% from 2021). In comparison, outstanding volumes of EU+UK securitisation in 2022 were equal to EUR 1,109.4 billion, a decrease of 6.7% from 2021. This represents the continuation of a longer-term trend of decline in outstanding EU+UK securitisation volumes over time, with volumes falling 12.5% since 2014. This is in contrast to outstanding EU+UK bank loans, which increased 22.6% since 2014. As of June 2022, annual securitisation issuance in the EU+UK represented just 1.2% of total outstanding bank loans, whereas in the US in the same period, annual issuance was equal to 12.6% of outstanding bank loans. This large gap highlights a significant opportunity for the EU and UK to further transform existing outstanding loans on their banks’ balance sheets, via securitisation, enabling additional lending to the real economy. In order to unlock the unprecedented amount of capital required to finance the green and digital transition in the years to come, the EU and UK will need to use securitisation to their advantage, especially in order to compete with global peers. This will not happen without policy action to revive the EU and UK securitisation markets. – Ends –
AFME CEO warns on Europe’s financial integration slow-down: “we cannot afford for next major steps to take another decade”
23 May 2023
Ahead of the Association for Financial Markets in Europe (AFME) and OMFIF’s 3rd Annual European Financial Integration Conference taking place in Frankfurt this week, Adam Farkas, CEO of AFME commented on the current state of European financial integration: “Persisting national fragmentation within the EU banking system and the slow progress in completing the Banking Union means that European banks continue to lack the scale and profitability needed to be competitive globally. International banks, having scaled up their presence in the EU, are also faced with the complexity of having to operate across multiple jurisdictions, which increases their cost base. Efforts to develop the EU’s capital markets have not yet brought about sufficient change in the financing of the EU economy and capital markets remain geographically and institutionally fragmented. This results in a sub-optimal offering of financial services to European individuals and businesses. “The need to advance the integration of a single market for financial services in Europe is greater than ever. However, economic and political conditions appear to have stalled progress after the significant achievements of past years. “Market participants, national and European authorities, as well as Member States, need to agree and implement solutions in the interests of the European economy. The financing needs to transform our economy are massive and other jurisdictions have the benefit of scale and flexibility to enact rapid change. The call for strategic reflection to agree actions for the next Commission by Eurogroup President, Paschal Donohoe, last week is therefore an important next step. We need ambition to advance this important project and cannot afford for deeper integration to take another decade.” – Ends –
Rebecca Hansford
Banks call for regulators to take a more innovative approach to DLT
17 May 2023
The Global Financial Markets Association (GFMA) together with Boston Consulting Group (BCG), Clifford Chance and Cravath, Swaine & Moore LLP, have today published a new report highlighting the potential transformative benefits of Distributed Ledger Technology (DLT) for capital markets and calling for market participants to proactively shape its future use, as well as for greater regulatory clarity from policy makers. The report, “The Impact of Distributed Ledger Technology in Global Capital Markets” evaluates the opportunities and risks of DLT and DLT-based securities and assesses the applicability of existing legal, regulatory, and risk management frameworks. To illustrate the potential of DLT in capital markets, the report examines three emerging use cases: collateral management; tokenization of assets; and sovereign and quasi-sovereign bonds. The report finds that DLT could unlock transformative cost-saving and operational efficiency benefits (for example, approximately $20 billion annually in global clearing and settlement costs) and innovation-led growth, broader market access, and new liquidity pools when operating at scale (e.g., approximately $16 trillion global market for tokenized illiquid assets by 2030). Despite the growing momentum in developing DLT use cases, the report also acknowledges that, there is still no widespread adoption in securities markets, with most DLT-based issuances to date largely experimental exercises due to the challenges identified. GFMA therefore sets out five calls to action, for industry participants and regulators, to overcome existing barriers to adoption and advance the development of DLT-based capital markets: Harmonize global regulatory and legal frameworks for clear and unambiguous definition of the key terms and risk mitigants required to support the development of a transparent, disciplined, risk-focused, and effective digital market infrastructure. Enable interoperability by building consensus on common standards and vision for DLT-based markets to guide market linkages with traditional market infrastructure. Drive faster adoption by prioritising resources in asset classes where DLT has the most upside potential to help pool and deepen liquidity, particularly for illiquid assets. Collaborate on the advancement of DLT to promote technical solutions, including around scalability, cybersecurity and regulatory compliance. Continue the development of DLT-based payment solutions, such as tokenized commercial bank money and deposits, to facilitate safe and efficient settlement processes. The GFMA has developed an approach to the classification of digital assets that reflects the principle that the treatment of digital assets should be underpinned by a clear methodology for identifying different types of digital assets’ risk. This will allow for tailored regulatory treatment, to mitigate reputational risks caused by conflating different use cases of DLT, as well as promoting legal clarity and confidence for asset managers, investors, and issuers. Adam Farkas, Chief Executive of the GFMA, said: “Distributed Ledger Technology holds promise for driving growth and innovation. This potential should not be ignored or prohibited where regulatory oversight and resiliency measures already exist. Policymaking should focus on creating a regulatory framework that supports financial stability and responsible innovation in digital asset markets while also setting out a level playing field for both new entrants and regulated financial institutions. A technology-neutral and outcomes-based approach to regulation is crucial. The goal of our latest report is to help policy makers and financial market participants to find a way forward that ensures appropriate stability and protections, while also allowing the industry and economy to harness the benefits of this new technology.” Roy Choudhury at BCG said: “Distributed ledger technology has the transformative potential to further improve efficiency across the capital markets value chain. However, there are critical barriers to large-scale adoption beyond just legal and regulatory roadblocks, including a lack of cross-industry alignment on use cases, limited operational readiness, and a need to further develop interoperable technology standards and infrastructure. Our report examines these barriers and outlines actions to unlock potentially game changing efficiency and innovation across the capital markets industry. We expect global infrastructure, operational cost, and financial resource efficiencies to deliver more than $100 billion (USD) in annual savings and freed capital when adopted at scale globally, driven by smart contract process automation, streamlined back office functions, and lower settlement and counterparty credit risk.” Simon Gleeson, Consultant at Clifford Chance said: “The introduction of distributed ledger technology across finance poses a whole new series of challenges for legal and regulatory frameworks. Legal structures must deliver clarity of ownership rights, settlement finality and robust insolvency treatment. Regulatory structures must deliver high levels of investor protection without impeding the development of new products and services. However, those apparently simple objectives require deep and sophisticated thought and analysis. This report is a significant step towards these goals.” Scott Bennett at Cravath said: “Distributed ledger technology offers significant potential to foster financial innovation. It has the capability to accelerate payments, streamline capital markets transaction settlements and enhance liquidity. However, there is significant uncertainty around how existing legal and regulatory frameworks apply to this emerging technology. This report provides industry participants and policymakers detailed analysis related to these issues and a foundation to help support effective market infrastructure.” The report also sets out the foundations of a global taxonomy for digital assets to encourage both industry participants and policymakers to work from a consistent baseline with globally harmonised definitions, particularly as frameworks for digital assets continue to emerge.
MiFIR Review outcome could risk holding back EU equity markets
18 Apr 2023
As EU trilogues on the Markets in Financial Instruments Regulation (MiFIR) Review begin this week, the Association for Financial Markets in Europe (AFME) has issued a warning on the state of equity market liquidity in Europe and is calling on the negotiators to consider the impact of this important financial markets regulation on the attractiveness of Europe’s capital markets. AFME has found that European equity markets are markedly less dynamic and liquid than their US peers. From mid-2016 to end 2022, the equity turnover ratioincreased by 40% in the United States but remained completely flat in Europe over the same period. This trend in Europe’s equity turnover ratio is largely explained by the EU’s nationally fragmented equity markets which operate under a regulatory framework that limits choice and introduces even more complexity through arbitrary restrictions that deter liquidity. (The European equity market is less than half the size of the US but it has three times as many exchange groups; more than 10 times as many exchanges for listings; more than twice as many exchanges for trading; and roughly 20 times as many post-trade infrastructure providers[2].) This complexity is likely to be one of the factors motivating European high-growth companies to list outside the EU. Therefore, AFME is calling on policy makers to ensure a variety of trading mechanisms remains in place as the backbone of a healthy, vibrant market, but also that an ambitious real-time pre-trade consolidated tape is implemented to reverse the worrying trend in EU equity market turnover. Together, these measures will facilitate equity capital raising and support dynamic economic growth. Adam Farkas, Chief Executive of AFME, said: “As inter-institutional negotiations begin, AFME is urging policymakers to keep the attractiveness and liquidity of EU markets at the forefront of its considerations. “To do this, first, we need a meaningful consolidated tape. This means a real-time, pre-trade tape to help overcome the current fragmented picture of the EU’s liquidity and provide a much-needed window where all users of capital markets can have a complete view of that liquidity. This will also help reinvigorate lacklustre European markets, creating further opportunities for both investors as well as companies seeking to list in the EU. After many years where a tape of any sort has failed to materialise, we are now closer than ever to achieving this goal. It is high time that the co-legislators set aside the interests of any particular group of market participants and make policy choices to the benefit of the EU as a whole. “Second, we must ensure that sufficient choice in trading mechanisms remains to attract investment within and into Europe. Here again, the EU’s geographically fragmented equity markets and its complex regulatory framework risk holding the bloc back from making policy choices that could benefit the EU overall. It is critical the co-legislators continue to recognise the important role that banks’ systematic internalisation plays in the liquidity ecosystem. For example, AFME has found systematic internalisers provide an additional EUR 3 trillion - or 14% of total European liquidity - because they place their capital at risk to enable trading to take place which otherwise might not. This is very different to exchanges which bring buyers and sellers together, but do not facilitate trading by using their balance sheet. Both types of trading mechanisms have key roles to play in creating a vibrant market environment we commonly strive for. What is important is that we work in partnership to grow overall liquidity within the EU, and we urge policymakers to put a legal framework in place which will ensure the best possible outcomes for the users of capital markets such as investors and savers. ” – Ends – [1] Turnover ratio is a commonly used liquidity metric which is calculated as equity trading value relative to market capitalisation. Using turnover ratios as a proxy for market liquidity strips out price performance of assets across regions, and shows how quickly assets are moving hands. [2] New Financial, THE PROBLEM WITH EUROPEAN STOCK MARKETS, 2021 (see EQUITY MARKET STRUCTURE IN EUROPE on page 6)
AFME welcomes Commission proposals on Crisis Management and Deposit Insurance Framework
18 Apr 2023
Following the European Commission’s publication of its proposed Crisis Management and Deposit Insurance Framework (CMDI) review today, Sahir Akbar, Head of Resolution Regulation at AFME said: “Today’s targeted proposals are another step along the journey to completing the Banking Union. They will improve the resolution framework so that any possible bank failures are effectively managed, irrespective of size, model and location. “In particular, we note the proposals for more harmonisation through amendments to the Public Interest Assessment (PIA) and Least Cost Test (LCT). This will increase predictability and credibility, ensuring a coherent application of rules across Member States. We therefore consider this essential for ensuring a level playing field. "Nevertheless, we note that the proposal broadens the framework to enable wider use of the Deposit Guarantee Scheme (DGS). Here we would caution thatsuch fundsshould not be usedin a way that createsmoral hazard. It is also important that internal loss-absorbing capacity remains the first line of defence. Furthermore, in keeping with the ‘polluter-pays’ model, the wider use of DGS compounds the need for contributions to the scheme to be proportionate with the risk a bank poses to the fund. “Other elements of the proposals, such as changing the creditor hierarchy, will need to be considered carefully to ensure they do not give rise to any unintended consequences, and to ensure that any reforms to the resolution framework do not prejudice the extensive progress made so far. “At AFME we have always supported the development of effective recovery and resolution framework in Europe and look forward to actively engaging with the European Commission and the co-legislators on these latest proposals.” AFME believes that the co-legislators should focus, in particular, on the following elements in the upcoming negotiations: Enhancing the credibility, predictability and consistency of the CMDI framework, further enhancing financial stability, without adversely impacting the progress made to date on resolution. Not increasing contributions to mutualized funds, but better aligning contributions with the risk that an individual institution poses to the fund. Minimizing risk to taxpayers and moral hazard by ensuring a consistent, harmonized and careful approach across EU member states to the use of common or mutualized funds to absorb losses, subject to the Least Cost Test, supporting market discipline and avoiding competitive distortions. Being consistent in the tools and application of the framework at EU level in order to ensure that all banks regardless of their size or country of origin can fail in an orderly manner, have a plan in place to provide for this and have the resources to support it. Supporting strong cross-border cooperation and minimize fragmentation both within the EU and with third countries. - ENDS -
AFME announces establishment of T+1 industry taskforce
2 Mar 2023
The Association for Financial Markets in Europe (AFME), as a leading voice on the debate surrounding a move to a one-day settlement cycle (T+1) in Europe, has today announced it is setting up a new industry taskforce. The Association is issuing a call for interest for participation from a broad and diverse group of industry associations representing stakeholders who will be impacted by a shortening of the securities settlement cycle in Europe. The task force will assess two key questions. Firstly, whether Europe should follow the US and other jurisdictions in moving to shorter settlement cycles, based on a robust cost-benefit analysis. Secondly, if so, how and when the potential move should happen. Further consideration will be required to identify the changes to the current post trade operating environment that would be necessary to facilitate T+1, and to agree on actions required to deliver those changes, including an appropriate timeframe. Adam Farkas, CEO of AFME, said: “With the US having announced its intention to move to T+1 settlement by May 2024, the discussion on whether Europe should follow suit has become more pressing. Addressing this important topic will require a collaborative approach, and therefore all impacted stakeholders are encouraged to join the industry taskforce.” Pete Tomlinson, Director of Post Trade at AFME, said: “AFME is convening this industry task force to ensure all aspects of T+1 adoption in Europe are considered, including direct economic costs and savings to the industry, as well as less tangible factors such as global alignment and market attractiveness. It is important that such a move is carefully considered. A rushed approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.” Tanguy van de Werve, Secretary General of EFAMA said: “An Industry Task Force on T+1 settlement is a logical and necessary step for Europe, both in terms of managing the impacts of the US move to T+1, and in considering a European timetable for a possible similar move . Given the high degree of exposure to one another’s markets, the shortened settlement cycle will invariably require changes to existing processes for European firms and US investors exposed to European securities. It is important that we leverage on these shorter-term priorities to build an industry view on the need for, and potential roadmap to, a shortened settlement cycle in Europe.” - ENDS -

Rebecca Hansford

Head of Communications and Marketing

[email protected]