Deep look. CMU is a great idea, let’s just jump these big hurdles

Delivering the envisioned capital markets union will depend on the EU’s ability to nurture Europe’s weaker domestic capital markets as well as securing agreement on harmonised procedures. A fresh report by ex-ECB president Mario Draghi spotlights the continent’s fragmented clearing and settlement environment as one of the main blockers. So, what’s the action to take?

It is easy to see why the EU’s Capital Markets Union initiative has so many advocates. Providing issuers with more financing options could enable better cross-border investment policies, offer more opportunities for pension funds to make long-term investments and simplify capital market funding for companies, boosting economic growth.

The EU has been working to reduce or eliminate barriers to the flow of capital between member states since 1999, explains Erik Veerman, senior advisor market infrastructures at ABN AMRO.

“Since its inception in 2015, the CMU action plans and the update of 2020 focused on three areas – access for SMEs and mid-sized enterprises to capital markets, stronger retail investments, and creating a single market,” says Veerman.

“Next steps are centralising financial and ESG data of companies, standardising procedures for reclaiming dividend tax, establishing a consolidated tape to provide real-time market information (price and volume), and making it easier for SMEs and mid-sized enterprises to raise capital,” he adds.

The European Parliament and Council will be hoping that the proposed Listing Act addresses the last of these issues – the ease of funding.

Rule rationalisation

Several initiatives are contributing to reducing market fragmentation, including the push towards a single clearing house for multiple asset classes, suggests Anthony Attia, Euronext’s global head of derivatives and post-trade.

“Other steps include promoting securitisation through a European platform and implementing identical rules across capital markets,” he says. “However, further efforts are needed, such as improving supervisory convergence and addressing fiscal distortions that favour debt over equity investments.”

A report this month by former ECB president Mario Draghi (The Future of European Competitiveness) acknowledges that a number of ‘fault lines’ remain on the road to the capital markets union, particularly a post-trade environment for clearing and settlement that is far less unified than in the US.

The US is often cited as a template for Europe. However, US capital markets benefit from strong, harmonised supervision through the Securities and Exchange Commission whereas in Europe, supervision is still partly nationally organised with bodies such as ESMA and the ECB overseeing different areas.

The post-trade landscape in the US is also simpler, featuring as it does a single central securities depository and central counterparty.

In response to Draghi’s report, the Association for Financial Markets in Europe (AFME) stated that reforming the post-trade environment should be an area of priority and that its fragmentation along national lines creates complexity and costs for investors and issuers.

The association believes post-trade competition and efficiency can be boosted by improving and expanding T2S functionalities as well as transforming directives into regulations. It makes specific reference to the Shareholder Rights Directive and Settlement Finality Directive as well as CSDR.

According to Peter Tomlinson, director, head of post-trade at AFME, national procedures for determining the insolvency of financial sector counterparties should be harmonised to safeguard the viability of payment, clearing and settlement systems.

“We also suggest extending the scope of application of the protections offered by the settlement finality directive and to upgrade it to cope with technological innovation such as increasing adoption of distributed ledger technology, smart contracts and asset tokenisation,” he says.

Supporting competitiveness

The European Central Securitites Depositories Association (ECSDA) believes authorities should reconsider whether all measures – such as CSDR fail penalties – are supportive of the global competitiveness of European CSDs and markets.

The association believes CSDR has made a positive contribution to competition and more is expected with the refit, although it also states that further improvement of conditions to support market driven competition in issuance, custody and other central securities depository services is necessary.

Some of the measures put forward in the refit (such as simplification of passporting rules) should promote increased competition. But Tomlinson refers to barriers outside the scope of CSDR, such as national level divergences in issuance processes and requirements, corporate law, and processes for the attribution of corporate action entitlements.

The CSDR refit mandates the setting up of colleges of supervisors for CSDs whose activities are considered to be of substantial importance for the functioning of the securities markets and the protection of investors, although these groups are unlikely to be in place before 2026.

Philipp Eckhardt, head of division at the Centre for European Policy Network, acknowledges that countries with smaller financial markets are concerned they will miss out on the major benefits of a capital markets union and that it would lead to more concentration of competencies at EU level, for example by giving ESMA a greater role in supervising central counterparties.

“There seems to be agreement that revitalising the securitisation sector should be a priority and there will be intensified efforts to incentivise retail investors, potentially by establishing a European savings product,” he says. “There appears to be momentum at EU level for progress, but I do not see political agreement in areas such as insolvency or tax laws any time soon.”

Veerman acknowledges that discussions around more harmonised supervision are progressing more slowly than expected and that targeted harmonisation of insolvency procedures among EU member states remains legally complex. In addition, securitisation has not yet recovered to the levels seen in the US following the financial crisis of 2008.

“The recent statement by the Eurogroup to actively monitor CMU progress based on clear KPIs is a step in the right direction and the requirement to finance the ESG transition to net zero and address demographic changes and the need for pensions could serve as significant accelerators,” he says.

Market concentration

It is easy to argue that there are too many CSDs in Europe. In addition, there is a large concentration of activity in the top five, who account for more than 80% of the assets under custody.

“However, for most European countries’ capital markets it is very useful to have a national CSD because they are operating in the local language with local practices,” says Ilse Peeters, head of government relationships & public affairs at Euroclear. She suggests that custody and settlement requirements are key reasons why there is still a lot of fragmentation in the CSD space.

“Since we carry an enormous amount of assets it is vital that these assets are protected and that is accomplished through national securities laws as well as regulations around withholding tax,” she explains. “Asset protection laws are still national and without harmonisation there will continue to be fragmentation.”

On the question of whether more efficient market supervision (such as having a single supervisory body for all European CSDs) would be a helpful development, Veerman refers to a call by Christine Lagarde to transform ESMA into a European equivalent of the SEC.

“This initiative would be an important step to a true level playing field for financial institutions, ensuring harmonised and consistent supervision while reducing compliance burdens for post-trade market infrastructures like CSDs,” he adds.

AFME’s Tomlinson says single supervision for EU trading and post-trading infrastructures (and possibly conduct supervision) would be an enabling factor to apply the single capital market rulebook in a consistent manner – but only if supervisory authorities’ frameworks are adapted, for example by streamlining governance structures and improving the effectiveness of forbearance powers.

According to Jesús Benito, head of domestic custody & trade repository operations at SIX Group, CSDs have shown a strong commitment to integrating national capital markets over the last 20 years by cooperating with the Eurosystem to establish and manage the T2S technical platform and promoting standardisation that has led to the dismantling of most, if not all, Giovannini barriers.

“Having national competent authorities that are close to their respective markets and understand their specific features and needs offers significant advantages if differences in corporate, insolvency and tax laws persist,” he says.

Euronext’s Attia cautions that although centralising supervision could streamline regulatory processes, it would have to be carefully implemented to avoid creating new layers of bureaucracy and to ensure that it addresses the needs of all European markets.

A balance to strike

The EU should empower private sector financial market infrastructures to drive natural integration and consolidation via fair and efficient cross-border competition, in line with the core principles of the single market.

That is the view of Sam Riley, CEO of Clearstream Securities Services, who says Europe must strike the right balance between centralisation and local enforcement while ensuring this topic does not delay progress in other important areas which drive harmonisation.

“As we can see from successfully developed capital markets in certain member states, central supervision is not necessarily a silver bullet,” he adds.

Any discussion of how to deliver capital markets union has to acknowledge that many measures are still imposed at national rather than EU level – for example, tax incentives for investing in certain products.

According to Euroclear’s Ilse Peeters, a unified capital market cannot be delivered solely from the top-down, where common rules are imposed across the single market.

“The best strategy might be to boost national capital markets and ensure that stock exchanges get more IPOs,” she says, noting that even Germany doesn’t have a particularly strong capital market as it is a very bank-financed economy. “So if all these countries started looking at what they can do to beef up capital market formation that would already be a win for the whole of Europe.”

Interested in Europe’s FMI integration? Don’t miss the top-level panel from September’s PostTrade 360° Nordic 2025, “Unifying the EU’s market for financial market infrastructures – the when, who, and how”. Click here to read the write-up – and even watch the full-session video! Other sessions, too, pointed to the fragmentation and harmonisation challenges, for example this stock exchange leaders’ panel and this Nordic CSD leaders’ panel.