Capital markets union (CMU), a flagship initiative of the new European Commission, should focus on increasing the share of capital markets financing in the EU by creating an open, efficient framework for all types and sizes of corporate issuers and investors, argues AFME in a policy paper published today. To succeed in this task, CMU should examine legislative and regulatory issues, market impediments and business practices in the EU in order to identify a limited number of high impact initiatives to boost Europe’s capital markets, the paper says. An agenda for capital markets union outlines practical measures and a set of firm targets which AFME suggests should guide the work of the Commission on CMU over the next 5 years. Commenting on the publication, Simon Lewis, Chief Executive of AFME, said: “The capital markets union initiative must focus on outcomes by growing markets, reducing costs and offering more financing options for businesses across Europe. We are proposing a set of firm, measurable 5-year targets to guide the project and we would encourage the Commission to adopt a targeted programme with a limited number of new initiatives, each designed to deliver the maximum economic impetus.” Proposed five-year goals for capital markets union AFME proposes that a central goal for CMU should be to increase the overall share of debt financing from the capital markets in Europe from 25% of the total currently to at least 35%. This should be achieved without further reducing the ability of Europe’s banks to provide credit to the real economy. We also encourage the Commission to consider setting objectives for specific product markets; for example: increasing Europe’s stock market capitalisation from around 75% of GDP currently to 100% of GDP, as the Federation of European Securities Exchanges has proposed; at least doubling European issuance volumes of securitisation and private placement by encouraging greater participation by both bank and non-bank investors; and increasing the share of capital market funding of SMEs, through both equity and debt. An action plan targeting issuance, investment and market infrastructure The AFME policy paper outlines have highlighted three complementary objectives to drive action on CMU: Developing more efficient and liquid markets for equity and debt issuance:Industry initiatives on high quality securitisation and private placement should be complemented by review of applicable regulation, especially capital requirements, as well as the Prospectus and Takeover Directives; and by review of the tax regime for SME equity. Harnessing long-term savings to promote investment: The priority reforms from an AFME perspective are to: appropriately calibrate the capital framework for institutional investors (particularly Solvency II); to achieve greater harmonisation of EU insolvency rules; to maintain an economically viable model for capital markets research; and to widen product choice for investors. Promoting open, integrated capital markets infrastructure: The priority reforms from an AFME perspective are to: achieve closer integration of clearing and settlement systems; pass a new securities law to clarify collateral ownership; remove barriers to cross-border collateral use; and ensure broad and affordable access to market data. A summary table is provided below, outlining the main measures proposed in the AFME paper and highlighting near-term priorities for CMU and long-term cross-cutting reforms. An agenda for capital markets union is available hereon the AFME website. -ENDS-

The EU’s proposal for Bank Structural Reform (BSR) is likely to trigger a significant increase in the cost of market funding for banks, according to a PwC report commissioned by the Association for Financial Markets in Europe (AFME). Market liquidity would be reduced and costs would rise for market users such as companies and pension funds with a negative impact on economic growth and job creation, Impact of Bank Structural Reforms in Europe argues. Simon Lewis, Chief executive of AFME, commented: “We call on policymakers to carefully consider the negative consequences of the proposal and its consistency with other policy objectives. BSR as currently envisaged runs directly counter to the European Commission’s goals of creating deep, liquid capital markets to support growth in Europe while maintaining a healthy banking system.” The Report shows that the cost of separating banks would be substantial, with an estimated total annual cost for all EU banks affected of €21.2 bn. By far the largest element of this would result from higher funding costs averaging around 75bp. This is due to lower credit quality of the separated entities, primarily resulting from the loss of diversification benefits that previously accrued from being part of a larger single banking group. The analysis further shows that very large European banks no longer benefit in their market funding costs from an implicit subsidy suggesting that they cease to be regarded as “too big to fail”. This clearly owes much to the substantial regulatory programme that has been developed post the financial crisis and the proactive response of banks in implementing major structural and operational changes. Based on the cost projections, and the absence of any mitigating actions, bank group-level returns could fall by 2 percentage points on average as a result of structural reforms and by 14 percentage points for standalone investment banking and trading activities. This would lead to negative returns for the separated trading entities of 7 banks out of the 18 included in the study and likely prompt market exits. This in turn would lead to a concentration amongst market makers and further impact secondary market liquidity, leading to higher cost for borrowers. In particular we estimate that: Corporates would be subject to a 25% increase (30bps) in their typical borrowing spread (currently 125 bps) on debt issued through capital markets Investors in European corporate debt would be subject to higher trading costs (12bps), lowering their returns and leading to up to €82 bn in losses on corporate bond holdings Please contact us to get a copy of Impact of Bank Structural Reforms in Europe, or go to the reports page on the AFME website, seelink. Note to editors: In January 2014, the European Commission published a proposal for a new regulation on structural reform of the EU banking sector. Two main requirements of the proposal are the potential economic separation of trading activities that meet certain metrics and the prohibition of proprietary trading. -ENDS-

The Association for Financial Markets in Europe (AFME) and the International Capital Market Association (ICMA) have welcomed the G20 Infrastructure and Investment recommendations made this weekend at the Antalya summit. Simon Lewis, Chief Executive of AFME, said: “The G20’s recommendations encourage infrastructure investment from governments to stimulate growth. By 2030 the gap in infrastructure spending is forecast to reach up to $20 trillion. To help bridge this gap, it will be vital to increase the role that capital markets can play in infrastructure financing.” Martin Scheck, Chief Executive of ICMA, said: “Unlocking funds for infrastructure projects relies on initiatives that help to break down barriers to investment. As such, the G20 recommendations are to be welcomed as we hope they will go some way towards addressing the market inefficiencies and legislative and regulatory disincentives which currently pose challenges to infrastructure projects.” AFME and ICMA – both representing a variety of capital market participants – are committed to supporting the expansion of capital markets financing for all types of infrastructure projects. To this end, the two trade associations published the AFME-ICMA Guide to Infrastructure Financing in June 2015. The Guide is a reference source for market participants in infrastructure financing. Addressing public authorities, project sponsors, project companies and issuers, it sets out the relative merits of bank and bond markets and describes transaction processes while taking account of planning and procurement issues and key considerations, and also sets out key considerations for investors in project bonds. The AFME-ICMA Guide can be downloaded from the associations’ websites.

Commenting on the entry into force of the Single Supervisory Mechanism (SSM) today, Simon Lewis, Chief executive of the Association for Financial Markets in Europe (AFME), said: “AFME and its Members welcome today’s start of the Single Supervisory Mechanism (SSM). This marks an important moment in what has been a remarkable phase in the development of Europe’s bank supervisory architecture. “As a central component of Banking Union, the SSM should make a major contribution to the further integration of Europe’s financial markets, to securing the stability of the Eurozone, and to fostering economic growth. The SSM has the potential to enhance the quality and consistency of cross-border supervision in Europe. “It is important that the establishment of the SSM contributes to more integrated financial markets across Europe as a whole, and not just in the Banking Union area. To this end, it is essential that the European Banking Authority (EBA) continues strongly with its work to achieve convergence of the practices of the ECB and national supervisors – including through the development of a European Supervisory Handbook.” -ENDS-

Commenting on AFME’s response to the FCA and PRA consultation paper on “Strengthening accountability in banking: a new regulatory framework for individuals”, Simon Lewis, Chief executive of the Association for Financial Markets in Europe (AFME), said: "AFME supports measures designed to improve culture and ethics in the financial markets, including the new FCA/PRA proposals to strengthen bankers' individual responsibilities. "We do think, however, that the proposals relating to foreign banks' UK branches; responsibility of nonexecutive directors; certification by firms of individuals, including those outside the UK; and conduct rules for non client-facing individuals need to be carefully thought through. "We would urge the regulators to continue to work together, and with banks, to establish clearer rules, so as to enable all staff to undergo the appropriate training and be clear as to their responsibilities. All of this will take time, and the current planned implementation programme is extremely challenging." -ENDS-

Commenting on the consultation published by the Fair and Effective Markets Review, Simon Lewis, Chief executive of the Association for Financial Markets in Europe (AFME), said: "We welcome the consultation document published today by the Fair and Effective Markets Review. The questions around structure and conduct raised in the paper are far-reaching and challenging for the global fixed income, currency and commodity markets, but highly relevant and we and our members look forward to engaging with the Review in the months ahead to help ensure that there are effective market solutions to the issues identified”. -ENDS-

Commenting on the results of the EU-wide stress test and asset quality review, Simon Lewis, Chief executive of the Association for Financial Markets in Europe (AFME), said: "AFME welcomes the release of the results of the EU-wide stress test and asset quality review. The results of these tests – the most stringent so far - clearly demonstrate the overall robustness of the European banking sector and provide welcome improvements in transparency on risk exposures. “AFME strongly supports the objectives of these exercises as key elements in ensuring the future resilience of the financial industry in Europe. They bring clarity and comparability to the strength of European banks, encouraging where necessary the repair of balance sheets and, ultimately, bolstering confidence in the European banking system. “Today’s announcement also marks a major milestone in the successful implementation of the Single Supervisory Mechanism and Banking Union more generally, which will play a significant role in promoting financial soundness, strengthening the internal market, fostering economic growth and securing the stability of the Eurozone.” -ENDS-

AFME and its members note the publication today of the EBA’s report on the use of allowances as part of banks’ compensation arrangements. We agree with the EBA that appropriate remuneration policies are an important tool for aligning employee incentives with the risk strategy and profile of institutions. However, given that CRDIV offers little guidance, we are unclear how the EBA has derived the detailed characteristics it suggests be applied for classifying allowances into the variable or fixed parts of remuneration. In our view this requires a great deal more discussion, analysis and consultation. We will therefore be actively engaging in the forthcoming consultation process that will take place before the EBA issues final Guidelines. Overall, we do not want a counterproductive outcome where the rules both prevent banks from competing for talent in global markets, and force them to increase base salary. This would be in nobody’s interest. It would undermine the ability of banks to use remuneration to guide staff behaviour and reduce banks’ ability to respond to any downturn in business, potentially threatening financial stability. ‐ENDS‐

Commenting on the adoption by the European Commission of a Delegated Act containing implementing rules for Solvency II today, Sidika Ulker, Director, Capital Markets at the Association for Financial Markets in Europe (AFME), said: “There is much to welcome in the proposed Solvency II Delegated Act. To start with, this is the first official recognition by both the European Commission and EIOPA that high quality securitisation should receive a more favourable regulatory treatment. In addition, the Delegated Act deliberately seeks consistency with related regulations such as the definition of High Quality Liquid Assets for bank investors. Consistency is key in this context. “While these are positive steps, unfortunately key provisions of the Delegated Act mean that insurance companies will remain disincentivised to invest in high quality securitisation, which helps fund the real economy, for the following reasons: The charges for type 1 securitisations (AAA-rated), despite having been substantially reduced, remain too high: securitisation spreads will not be sufficient to make investments attractive once the capital charges are applied. The classification of all non-senior tranches as Type 2 securitisations creates severe cliff effects between the capital charge treatment of senior and non-senior securitisations. For example, the senior tranche of a 5-year AAA-rated RMBS would receive a capital charge of 10.5% and the non-senior would receive a charge of 67%. This distortion is even more marked for securitisations which require greater credit enhancement, such as SME securitisations. The concept of look-through, which aims to cap the capital charges for Type 1 to be no greater than 3% (the charge of underlying loans), will not be effective for mortgages. Direct investment in pools of mortgage loans will continue to receive significantly lower capital charge treatment, creating adverse investment incentives. For example, a 5 year AAA-rated RMBS will receive a capital charge of 10.5%; however, direct investment in a whole loan pool comprised of the same mortgages will receive a capital charge of just 0-3%. “Further, we believe, as the ECB and Bank of England have recognised, that if a securitisation is high quality, the whole transaction (not just the senior tranche) should be treated as such. We very much hope that the European Commission will review the treatment of securitisation at the first possible opportunity in order that Solvency II may truly achieve the broader objective of reviving the high quality securitisation market to help support growth in Europe.” -ENDS-

Commenting on the unveiling of the details of the European Central Bank’s Asset-Backed Securities (ABS) purchase programme today, Richard Hopkin, Head of Fixed Income at the Association for Financial Markets in Europe (AFME), said: “AFME appreciates the continuing support of the ECB for the European securitisation market in the form of today's announcement of more details of the ABS Purchase Programme ("ABSPP"). However, while the programme is very welcome, as President Draghi himself has acknowledged, in isolation it will not be sufficient to restore the European securitisation market. “We believe that public sector investment, including in mezzanine tranches, will not be required if sufficient private sector demand can be generated. For that to happen, key regulations on capital charges, such as Solvency II and the Basel 269 RWA proposals, will need to be well-calibrated to encourage, not dissuade, private sector investors to participate - at both senior and mezzanine levels of risk - complementing and supporting the ABSPP. ” -ENDS-