A new report published today by the Association for Financial Markets in Europe (AFME) and Protiviti outlines potential key regulatory barriers to the greater adoption of cloud services in capital markets and provides recommendations for policymakers and Cloud Service Providers (CSPs) to assist banks with their adoption. The report entitled “Building Resilience in the Cloud” finds that, while banks are increasing migration to the cloud and identifying solutions to address regulatory concerns, two solutions that are becoming increasingly proposed by policymakers - portability and multi-cloud strategies – are likely to introduce further barriers to adoption. The report presents an assessment of five scenarios, covering the failure of a CSP in a particular region through to the loss of an entire CSP globally, to highlight why these solutions may not be appropriate in all instances. The report finds that the proposed recommendations from policymakers around portability and multi-cloud strategies would present significant challenges to banks from adopting a risk-based approach, limiting the benefits of cloud services and increasing the technical complexity to support multiple CSPs.

The Association for Financial Markets in Europe (AFME) and Capco have published a new report exploring the benefits of global operating approaches in capital markets and the implications of emerging EU and global policy, which risks driving localisation. Banks use global approaches to provide operations and technology services across the various locations and markets in which they operate, bringing efficiency, resilience, regulatory, service and cost benefits. However, policymakers in the EU and globally have an increasing focus on the impact of financial markets becoming more interconnected, covering third-party providers, outsourcing, intragroup arrangements, and operational resilience. This focus could result in requirements on banks to localise operations and technology services, ultimately impacting broader policy objectives by increasing funding costs for clients and investors and reducing investment in more resilient technologies and operations. Collaboration between banks and policymakers will be essential to consider any future policy impacts on global operating approaches. A risk and principles-based approach is needed to consider the implications of more interconnected financial markets against the efficiency and benefits of how todays banks operate. The report can be accessedhere.

The “Global Guiding Principles for Developing Climate Finance Taxonomies –A Key Enabler for Transition Finance” is a follow-up to one of the recommendations in GFMA/BCG report from December 2020,Climate Finance Markets and the Real Economy, Sizing the Global Need and Defining Market Structure to Mobilize Capital. Similarly, the scope of this paper is limited to Climate Finance taxonomies and does not cover broader environmental, social, and governance (ESG) taxonomies. Climate Finance taxonomies help enable financing, providing guidelines for investors and credit institutions on how “climate-aligned” a given corporate is at the entity level, or the alignment of specific activities undertaken by an entity to science-based pathways. Taxonomies should not be used as proxy for physical, transitional, or prudential risk assessment of financial institutions. A taxonomy captures only a snapshot of a corporate’s activities; therefore, to comprehensively understand a corporate through the lens of Climate Finance, a taxonomy should be used in conjunction with forward-looking decision-relevant metrics, enabled by mandatory disclosures. The report identifies that all existing and new taxonomies should be assessed against five global principles: Climate Finance taxonomies should be broadened beyond use of proceeds structures (e.g. green bonds) to capture entity-level activities and all eligible sources of capital. Climate Finance taxonomies should be objective in nature, supported by clearly defined metrics and thresholds aligned to theParis Agreement, and science-based targets. Climate Finance taxonomies should have a consistent set of principles and definitions, but provide flexibility for regional and temporal variation to align with differences in transition pathways. Climate Finance metrics should be defined and applied to sectors using science-based targets, balancing ease of use with transparency and robustness to both assess climate impact and support third-party verification. Climate Finance taxonomies should be based on a governance process that is robust, inclusive, and transparent, and has the flexibility for continued evolution. All existing and new taxonomies should be assessed against these global principles for Climate Finance taxonomies as well as the conclusions factored into shaping future enhancements and development of new taxonomies. The five principles are by design high level and not prescriptive for applications that are based on regional or nationally defined contributions, climate targets and policies, and sector-specific transition pathways. They are designed to be foundational in the development of Climate Finance taxonomies by ensuring key features underpinning each principle are considered (see checklists within the report).

A new report published today by Oxera and commissioned by the Association for Financial Markets in Europe (AFME), provides evidence that the majority of equity trading in Europe (83%) takes place on venues[i]. A much smaller share (17%) takes place off-venue on alternative trading mechanisms known as systematic internalisers[ii] (SIs) and over the counter (OTC). This in-depth analysis counters claims that SIs and OTC transactions are disproportionately dominating the European equities landscape. These misperceptions have been based on raw trading data compiled by ESMA from national authorities and is not granular enough to distinguish between different trading modalities. As such, it does not provide an accurate picture of the equities trading landscape in the EU. Adam Farkas, Chief Executive of AFME, said: “This latest analysis from Oxera highlights how existing raw equity trading data reported to ESMA can inaccurately represent the trading landscape and to influence policymaking with the risk of perpetuating the dominance of exchanges in equity trading. This is cause for concern because an overly concentrated trading landscape hampers competition, investor choice and keeps costs of trading high. Ensuring sufficient diversity of trading is to the benefit of individuals’ pensions and savings, whether it is via their direct participation in markets, or via the institutional investors which represent them. A lack of competition in trading on the EU’s secondary markets may also be holding back the growth of primary markets which are underdeveloped compared to the size of the EU economy.” “AFME is therefore calling for improvements to regulatory data definitions and collection processes to be prioritised in the upcoming MiFIR Review so that policymakers have an accurate picture of EU market developments and can compare them internationally. The Review should not privilege any particular trading mechanism - otherwise we risk running counter to its objectives of improving market liquidity and investor outcomes.” Reinder Van Dijk, Partner at Oxera, said “When considering the European equity trading and liquidity landscape, policymakers and market practitioners may have different questions depending on their perspectives of interest. A significant volume of OTC and SI reported transactions are technical in nature. While technical trades may be relevant from a supervisory and/or post-trading perspective, it is not informative to include them in an analysis of the trading and liquidity landscape. Oxera’s analysis of the trading and liquidity landscape in this report applies filters to the full universe of reported equity transactions to distinguish true economic trading activity from the reporting of technical transactions. Although Oxera’s report provides more clarity, further work is required to obtain a precise view of the equity trading and liquidity landscape in Europe.” – Ends – [i] Trading venues are Regulated Markets and Multilateral Trading Facilities (MTFs). Trading mechanisms that take place under the rules of a trading venue can be broken down into the categories: lit order book, auctions, dark venues, and off-book on-exchange. [ii] Systemic Internalisers are investment firms using their balance sheets to trade with clients at their own risk. By doing so, they play an important role allowing trading to still take place when other market participants are unable or unwilling to trade. Their trades are made visible to the rest of the market after execution to avoid market prices moving before the trade takes place, which would otherwise amplify the risk they take.

The Association for Financial Markets in Europe (AFME) has launcheda report highlighting the need for financial institutions to have access to consistent non-financial reporting from corporates to be able to support the transition to a low-carbon economy. TheEuropean ESG Disclosure Landscape for Banks and Capital Marketsreport, written in partnership with Latham & Watkins, maps the complex ESG reporting landscape for financial institutions. It calls on policymakers and regulators to build a coherent framework to support sustainable finance by: prioritising the availability of high-quality data from non-financial corporates; providing clarity, avoiding inconsistencies and duplication between reporting requirements for financial institutions, and; taking into account the global nature of financial institutions.

AFME is pleased to present its views and recommendations on key priority areas in the sixth Capital Requirements Directive and the third Capital Requirements Regulation (CRD6/CRR3). The legislative proposal is expected to be published by the European Commission in mid-2021 and will come at an important juncture when policymakers are dealing with the fallout from the Covid-19 crisis and the need to ensure a strong and sustained economic recovery. This makes it even more important that the impact of CRR3 is correctly assessed and carefully calibrated, so that it is designed and implemented in a way that does not, unintentionally, constrain banks’ ability to support the economy. At the same time CRR3 needs to be considered in the context of EU’s urgent priorities to complete the Banking Union, reduce fragmentation of financial markets and develop and deepen Europe’s capital markets through the establishment of a genuine Capital Markets Union. In this publication, drafted in cooperation with ISDA, we present our recommendations for a CRR3 that is faithful to the overarching objectives contained in Basel III but which at the same time reflects the priorities outlined above.

This response proposes key changes to the UK Listing Regime that we believe will promote a competitive market while retaining high standards of governance, transparency and shareholder protection. Michael Cole-Fontayn, AFME Chairman, said: “The UK Listing Regime Review is proposing to offer a fresh, compelling power of choice to prospective issuers and their advisors from around the world. Its proposals will provide more clarity and flexibility to the markets while still maintaining high standards of governance and transparency. We believe these changes will be crucial in encouraging business to access equity markets in order to raise capital and fund growth.“

AFME has published today a position paper highlighting the risk of mandatory buy-ins to Europe’s economic recovery from the Covid-19 crisis, and calling for this measure to be removed from the upcoming Central Securities Depositories Regulation (CSDR). According to the paper, the mandatory buy-in rules will negatively impact the market by: Increasing costs for issuers and investors Reducing investor appetite, in particular for SME securities Removing liquidity from European markets AFME believes this is a disproportionate measure to address the small percentage of trades that fail. The trade association is calling for a more pragmatic, discretionary approach to the buy-in regime.

This paper highlights priorities for the future EU-UK relationship in financial services following the conclusion of the EU-UK Trade and Cooperation Agreement (TCA) and the end of the transition period.

A report by the Association for Financial Markets in Europe (AFME) and PwC reveals that an equity shortfall of up to €600bn threatens Europe’s economic recovery despite the significant public support measures and private capital made available across Europe to support economies during the pandemic. AFME calls on the European Commission and members states to introduce measures to bolster Europe’s equity and hybrid markets and expand funding avenues for businesses, further enabling Europe’s economic recovery In a report published today (19th) in partnership with PwC, AFME warns that Europe needs to bridge a gap of€450-600bn[1]in equity needed to prevent widespread business defaults and job losses as COVID-19 state support measures are gradually reduced. The reportRecapitalising EU businesses post COVID-19reveals that despite the support provided by governments and the private sector since the start of the pandemic, 10% of European companies have cash reserves to only last six months. The pan-European trade association is calling on authorities to explore and develop further short-term measures to support Europe’s equity and hybrid markets and accelerate the Capital Markets Union to help fund the recovery. Unless urgent action is taken, a spike in insolvencies could start as early as this month and threaten the EU’s recovery prospects, AFME warns. The report presents insights from interviews with businesses and private sector investors from across the continent to propose solutions to Europe’s emerging funding gap. The findings reveal that many mid-size and SME corporates do not wish to give up control of their business but are willing to pay a premium not to dilute their voting rights, as well as are willing to distribute a share of profits to investors. Hybrid instruments are ideally suited to address these needs. In order to bolster capital markets to support businesses in the recovery phase, AFME is outlining the following recommendations: Proposing a new EU-wide hybrid instrument designed specifically for the corporate sector. This could be in the form of a new preferred shared instrument, which is state-aid compliant, to build scale and liquidity, and which ideally could be developed to comply with social investment objectives to attract maximum investor interest. Scaling up existing EU-wide recovery support schemes such as the EIF European Guarantee Fund tailored to the needs of SMEs, particularly the smallest companies. Replicating existing member state best practices on hybrid instruments, as well as raising awareness of the range of capital markets instruments available to mid-caps and SMEs who may be unaware such options exist Exploring further use of innovative instruments, such as dual class shares to address the control concerns of companies as well as debt for equity swaps to reduce leverage. Recalibrating state aid rules for a systemic crisis. Accelerating equity investment measures under the Capital Markets Union project.