The package contains a number of important elements: A legislative proposal for the regulation of ESG ratings providers. This aims to enhance the integrity, transparency, responsibility, good governance, and independence of ESG rating activities, contributing to the transparency and quality of ESG ratings. It lays down conditions for the provision of ESG ratings in the EU, principles for the integrity and reliability of ESG rating activities, transparency requirements of ESG ratings’ activities, obligations relating to the independence and conflict of interests of ESG rating providers, and ESMA’s powers with regard to the supervision of ESG rating providers. The final Delegated Act for the additional environmental criteria and expansions to the EU Taxonomy including: Technical screening criteria (TSC) for economic activities making a substantial contribution to the four remaining environmental objectives (Taxo4); Targeted amendments to the delegated acts specifying the Taxonomy’s reporting requirements; and Targeted amendments and additions to the delegated acts specifying the TSC for climate change mitigation and climate change adaptation. A Communication taking stock of progress in the EU sustainable finance regulatory framework: The Communication places emphasis on the Commission’s work to enhance the usability and effectiveness of the EU Sustainable Finance framework. The Commission acknowledges implementation challenges, highlights work done and under way to seek to address these, but states that “Early analysis of reporting shows that the EU sustainable finance framework is beginning to work as intended, facilitating private finance for green and transition investments through transparency and as a comprehensive toolbox”. A Staff Working Document on the usability of the EU Taxonomy presents an overview of the recent measures and tools put forward to address key implementation issues and questions raised by stakeholders regarding the usability of the EU Taxonomy. The Commission’s stated priority is helping market participants implement the EU Taxonomy and the overall framework, and to enhance its usability. Some further FAQs were also published on the Minimum Social Safeguards and on whether Taxonomy-aligned investments qualify as ‘sustainable investment’ under the SFDR. A Recommendation on transition finance: The Recommendation emphasizes the important role of transition finance in meeting the EU’s climate and environmental goals. It provides a definition of transition finance and aims to support transition finance through recommending approaches that can utilize sustainable finance tools and disclosures including the EU Taxonomy, transition plans, EU climate benchmarks and science-based targets. It makes recommendations for issuers, financial intermediaries, Member States and the ESAs, including that the ESAs take account of the recommendation when monitoring and supervising greenwashing risks. AFME welcomes the emphasis from the European Commission on addressing usability and implementation challenges with the EU regulatory framework and the recognition of the need to ensure that this works effectively both to promote green finance but also to facilitate transition finance, which is vital to enable the EU to meet its climate and environmental objectives. We look forward to continuing to contribute to this important work. – Ends –

The Association for Financial Markets in Europe has today published a new report identifying the key challenges relating to compliance with investor due-diligence requirements under Article 5 of the Securitisation Regulation in the EU and UK and suggesting potential strategies to overcome such challenges. The report finds that, under Article 5, investors are likely to interpret ambiguous provisions conservatively and in doing so will assume disproportionately high costs to the business. In addition, the report says that the regulation substantially reduces agility and flexibility in the investment process, thereby materially reducing investment opportunities for new investors, regardless of the credit risk, which in turn, impacts liquidity in the secondary markets and results in a less efficient market for all. These factors have the unintended effect of creating such high barriers to entry, even for seasoned credit investors, that it becomes challenging to build a business case to participate in the ABS market. Shaun Baddeley, Managing Director of Securitisation at AFME, said: “Revival of the securitisation markets relies upon targeted changes to various elements of the Securitisation Regulation and corresponding prudential frameworks. One crucial element with potentially material impact relates to regulatory obligations imposed on investors relating to due diligence. AFME has frequently referred to the lack of risk sensitivity embedded within specific areas of legislation. Article 5 that covers Investor Due Diligence is a good example of this.” Janet Oram, Head of ABS at USS IM said: “The ABS market has made a huge effort to adopt the requirements of the securitisation regulations over the past few years. However, during this time it has become apparent that implementation has not been consistent between institutions due to differing interpretations of rules which is detrimental to the aim of a well-functioning market. Volumes have largely stagnated despite this being an important source of funding for the real economy and, as the world moves toward net zero, a perfect mechanism to finance some of that transition.” Marcus Mackenzie, partner at Freshfields said: “While it is recognised that institutional investor due-diligence requirements play a central role in the modern securitisation market, the many uncertainties and different interpretations surrounding these undermine their very purpose of bolstering market confidence.” Joana Fragata, senior associate at Freshfields added: “Given that investor due-diligence requirements have been designed to allow institutional investors to properly assess the risks arising from all types of securitisations, having requirements that are flexible and driven by the actual needs of investors is vital for the proper functioning of the market and for unlocking the full potential of securitisation as a funding source for investment in the real economy.” To produce the report, AFME convened a working group composed of several non-bank investor covering different sectors of the market. AFME believes that the feedback gathered from the working group strongly suggests that there is a compelling case for reform in the interpretation of Article 5 of the Securitisation Regulation. This is also in line with industry feedback to the European Commission in September 2021, in response to the Commission’s targeted consultation on the functioning of the securitisation framework, which confirmed that the Securitisation Regulation did not result in the widening of the investor base, given the significant barriers to entry. Therefore, reform will be key to unlocking the benefits of investor due-diligence and presents a renewed opportunity to attract investors back to securitisation and promote the growth of the sector. The findings of this report precedes a second report that will follow later this summer, which will propose some guidance and clarifications in the form of Q&As, which could be used as a starting point by the relevant competent authorities in order to provide better clarity to market participants in the interpretation of such requirements. Ideally, this should be done by the relevant competent authorities via public guidance to create maximum transparency on the supervision of compliance. – Ends –

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 –

Responding to the European Commission’s Retail Investment Strategy, published today, Jacqueline Mills, Managing Director of Advocacy at the Association for Financial Markets (AFME), said: “AFME supports initiatives which encourage further retail participation in European capital markets. Retail participation plays a key role in advancing the Capital Markets Union.We are also supportive of the key CMU goal to make the European Union a more attractive place for individuals to save and invest long-term. “It is important that policy proposals are carefully considered so that they support retail investors, as well as the broader wholesale capital markets, which provide the supply of equities, bonds and other asset classes that are marketed to retail. It is also important that future regulation be proportionate and keep the EU competitive with other global capital markets.” – Ends –

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 –

Commenting on the European Commission’s adoption of a draft Memorandum of Understanding between the EU and UK, Adam Farkas, Chief Executive of the Association for Financial Markets in Europe (AFME) said: “AFME strongly welcomes that the European Commission has today adopted a draft MoU establishing a framework for structured regulatory cooperation between the EU and the UK. The MoU should put in place a joint EU-UK Financial Regulatory Forum to ensure structured cooperation on regulatory initiatives and priorities. This should include transparency and dialogue in the equivalence process as envisaged in the Joint Declaration accompanying the Trade and Cooperation Agreement. We hope that the MoU will now be ratified by the Council, and that the MoU will serve as a basis for a cooperative, stable, and trustful long-term relationship between the EU and the UK in the area of financial services.” – Ends –

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.

Following the publication today of the FCA’s proposed rule changes to improve the UK framework for listing of commercial companies’ equity shares, Gary Simmons, Managing Director of Equity Capital Markets at the Association for Financial Markets in Europe (AFME) said: “These are welcome proposals which will go a long way towards increasing the attractiveness of the UK as a venue for company listings. “In particular, we welcome the intention behind the proposed single listing segment, which builds upon the FCA’s proposed disclosure-based approach to financial information, and will replace the more prescriptive rules requiring, for example, a three-year revenue track record.This change will provide more flexibility for companies to tailor their disclosure to their own particular company or circumstances and to provide investors with more relevant information on which to make their investment decisions. “Implemented properly, we believe that these changes will help to make the listing process simpler and more flexible and also provide greater transparency between issuers and investors.”

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)

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 -