1. Ensure a level playing-field between markets and between EU and non-eu actors

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1 EBF_ The European Banking Federation is the voice of the European banking sector, uniting 32 national banking associations in Europe that together represent some 4,500 banks - large and small, wholesale and retail, local and international - employing about 2.5 million people. EBF members represent banks that make available loans to the European economy in excess of 20 trillion and that securely handle more than 300 million payment transactions per day. Launched in 1960, the EBF is committed to creating a single market for financial services in the European Union and to supporting policies that foster economic growth. Website: 13 May 2015 EBF response to the Commission s Green Paper on the Capital Markets Union The European Banking Federation (EBF) welcomes the opportunity to comment the Commission s Green Paper on the Capital Markets Union. European banks believe that the new Commission should focus on growth and jobs. Further progress towards more integrated European capital markets can be an important factor that brings Europe back to a sustainable growth path. Europe needs efficient and dynamic capital markets alongside a strong and stable banking sector. This makes sense from both a growth and financial stability perspective. Stronger capital markets can potentially unlock more investments for companies. Key points 1. Ensure a level playing-field between markets and between EU and non-eu actors The Commission must ensure a level-playing field for all actors in financial markets. To ensure an effective Single Market it is necessary to align regulation to ensure that it does not act to impede cross-border activity or to distort competition. Channels of funding complementary to bank intermediation will be essential to create a CMU, however these channels must be appropriately regulated. The so-called Shadow Banking activities should not benefit from less onerous or even preferential regulatory treatment, but should be subject to the principle of same risks, same rules. 2. A tailored approach is needed Proportionality must be a key principle of the Commission in developing the CMU. A one-sizefits-all approach will not take into account the different risks of distinct activities and business models within EU capital markets. The Commission must take into account the diverse cultural, economic and legal frameworks in EU jurisdictions, and disproportionate measures could lead to serious unintended consequences and further fragmentation of capital markets. Particular consideration should be given to preserve innovation and the ability of the financial services sector to provide consumers with products tailored to their specific needs. The EBF sees initiatives of product standardisation under the so called single market for retail financial European Banking Federation aisbl 56 Avenue des Arts, B-1000 Brussels Phone: Website: - EU Transparency register ID number Page 1 of 42

2 services as unnecessary and undesirable. Market solutions geared towards member states particularities and consumers specific needs should prevail over one-size-fits-all legislative initiatives. Specifically, the bond market borrowers require solutions tailored to their particular situation and needs to finance their projects. The EBF urges the Commission to consider the drawback of forcing a high degree of standardisation or harmonisation as they may overlook issuers specific funding needs 3. A systematic and detailed review of the financial markets regulatory framework and the completion of the Single rulebook First of all, a systematic and detailed review of the financial markets regulatory framework, across all different regulations and regulatory authorities should be carried out. This review, while taking into consideration the various objectives of the existing regulations, should aim at identifying instances of regulatory duplication, gaps, and conflicts. A successful approach to regulation of a capital markets union has to focus on streamlining legislative initiatives, ensuring a higher degree of harmonisation between the different national legal and regulatory frameworks and in managing substantial risks rather than trying to eliminate risk altogether. Member States must avoid gold-plating legislation, which interfers with the single market. Member States should not be competing on legislation, but creating an environment propitious for growth and investment. The starting point for the CMU is good as the EU has already created a Single Rulebook covering the essential areas of capital markets. Newly created rules on trading and investment services, asset management, OTC-derivatives and clearing as well as on central securities depositaries provide a robust framework. Now is the time to complete the Single Rulebook. This would help to remove uncertainty for investing in capital markets. The Single Rulebook must be complemented by close convergence of supervisory practices that must be effectively and consistently enforced across all Member States. This will help to create a Single Market for capital for all 28 Member States and would help to remove barriers to cross-border investment within the EU. 4. The CMU should promote market-led standards and best practices During recent years the EU has heavily relied on hard-law instruments and notably on directly applicable regulations. In the CMU project the Commission should explore full potential of market-led standardisation and best practices. The EBF notes that some local markets have taken market-led initiatives to improve market documentation (such as standard terms for noninvestment grade corporate bonds) and standardisation in order to attract more international investors. Local initiatives and EU-level harmonisation should be seen as complementary. In this respect EU Policy-makers need to avoid introduction of too intrusive measures that could have a negative impact on capital flows and investment. For instance emerging SME-bond Page 2 of 42

3 markets need flexibility and further EU-level regulatory action in this field is likely to be counterproductive. In general, where market-led initiatives are able to overcome or mitigate the limitations visible in the EU capital markets, these must be strongly promoted. Market-led initiatives are able to take into account the different risks, activities and business models within EU capital markets. Conversely, legislative measures must be regarded as a second best solution, because they can lead to serious unintended consequences and further fragmentation of capital markets. Some of the problems and flaws identified in the green paper are in part consequences of the changes in regulatory requirements, particularly in what regards limits to risk exposure, liquidity thresholds and risks borne by the final customer. 5. The CMU should emphasise the importance of liquidity and market-making The success of the initiative to make capital markets more efficient will also depend on whether or not markets can be made broader and deeper and on the availability of the necessary liquidity. Market-makers and intermediaries serve a crucial role in financial markets by providing liquidity to facilitate market efficiency and functioning or ensuring that both sides of the financing market are able to meet. Market-makers are critical for the financing of the economy, as was recently confirmed by the ECB. 1 The Commission needs to place market-making and the importance of providing liquidity at the forefront of the CMU. Liquid capital markets will boost the process of moving capital from slowly growing sectors to dynamic innovative industries and raising investors confidence. The adoption of the Banking Structural Reform proposal would have a significantly adverse impact on the potential CMU. The separation of trading activities out of the universal bank would render market-making more expensive for customers and decrease liquidity in markets. In this respect, it is also by taking into account the important role of intermediaries that the CMU may become a success, connecting borrowers and companies with lenders or investors. In addition, it is critical to create carefully balanced rules on equity, and non-equity transparency in MiFID II and MiFIR. One of the most important conditions for development of the European bond market is proper calibration of pre- and post-trade transparency rules. Excessive transparency requirements could have severe unintended consequences as market makers would be deterred from providing liquidity. Finally, hurdles and disincentives to providing liquidity and market-making may also arise from the planned introduction of a Financial Transaction Tax (FTT) in 11 Member States. By increasing the cost of secondary market trading - even fractionally - in participating Member States, the FTT would reduce liquidity and so make capital markets a less attractive place for EU and non-eu investors. This, in turn, would impact both primary and secondary capital markets and demotivate exchange trading and clearing. The tax s negative consequences 1 See p5 of the Opinion of the European Central Bank of 19 November 2014 on a proposal for a regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions (CON/2014/83) [Link]. Page 3 of 42

4 would be proportionate to its huge effective magnitude, taking into account the cascading effect in its application. 6. Revised rules for Securitisation The Commission needs to revitalise the market for simple, standard and transparent securitisations. This initiative must not discriminate products especially if suitable for SMEs (as for example synthetic securitisation). This should be based on a dedicated European securitisation framework addressing the inherent risks associated with securitisations, including a revision of the capital requirements for securitisations. The EBF further believes that the current BCBS framework must be revisited as it has been built on capital charges based on US structured finance loans. This means that today, the capital charge associated with securitisation is based on data not representing the EU market. We would recommend reconsidering this approach. We would also encourage the Commission to view securitisation as a tool to free up bank balance sheets, making it easier for companies especially SMEs to obtain, indirectly, financing from the capital markets. 7. Review of the Prospectus Directive The Prospectus Directive needs to be reviewed to make it easier to comply with. A revised Prospectus Directive should make it easier and cheaper for firms to access the market, while still preserving a high level of investor protection. Disclosure requirements for companies, which are seeking access to, or are already trading on, an EU regulated market must be at the same level. Overall, we support the review of the Prospectus Directive as it can be a burdensome framework repeatedly amended and adjusted over the last years. We would therefore support a review of the whole disclosure regime (prospectus directive, market abuse directive/regulation, transparency directive, etc.). The EBF supports the Commission s initiative to ease the current prospectus requirements and would highlight the need for high quality information. This need for data in a prospectus is even more important when dealing with SMEs and unregulated markets as the data may not be otherwise available to investors. Hence, we would encourage the Commission to take a stance of improving the quality and type of information in the prospectus. 8. Removal of existing tax barriers The first Giovannini Report of November 2001 identified 15 barriers associated with the clearing and settlement of cross-border securities transactions within the EU. Two of them (barriers 11 and 12) are tax barriers. The complexity and cost of obtaining the tax relief to which an investor is legally entitled often leads investors to forego the relief. Even though the financial intermediary has access to Page 4 of 42

5 accurate customer information and is subject to high compliance regulation standards, obtaining tax relief to which its customers are entitled is often not practicable. Full withholding at the maximum tax rate is often the outcome and constitutes a major disincentive to crossborder investment in capital markets. National provisions requiring that taxes on securities transactions must be collected via particular local settlement systems may narrow the choice available to investors and impair cross-border activity. In this respect, the prospect of introducing a Financial Transaction Tax (FTT) at EU level or in a limited number of EU Member States (through the enhanced cooperation procedure) is a major threat for the CMU (as indicated under bullet point 5). 9. Cross-border shareholder tax transparency The issuer s ability to identify shareholders, no matter where they are located in the EU, is crucial in an increasingly cross-border environment. And while there are efficient models for identifying domestic shareholders tax obligations at national level, this is not so at EU level. Increased harmonisation of procedures and formats for the exchange of information and harmonisation of national regulatory requirements would help to promote cross-border shareholder tax transparency further. In most EU countries there are efficient models for identifying domestic shareholders. However, there is no common European model for enabling issuers to identify their owners in a cross-border environment. 10. Improvement of financial education and knowledge The Commission should support steps to improve the level of financial education in the EU, for both retail investors and SMEs. This would help investors to understand more clearly the functioning of capital markets and their role within markets, while SMEs would benefit from increased knowledge of possible funding options available within capital markets. Page 5 of 42

6 EBF position / response 1) Beyond the five priority areas identified for short-term action, what other areas should be prioritised? Restoring confidence in the capital markets Rebuilding trust in the single currency project is paramount to the Capital Markets Union project. The focus should be on mitigating lack of confidence and simultaneously changing the climate of risk aversion, (central factors common to agents in the financial system and to mechanisms and channels for financing the economy). A fundamental component of the Capital Markets Union needs to be the policies which reduce market asymmetries, namely risk mitigating measures to redirect risk appetite beyond high grade investments (e.g. companies with innovative technologies with high potential for rapid and sustainable growth). These policies would be aimed at peripheral countries and at a price consistent with their economies growth capacity. Better regulation in financial services The EBF welcomes the introduction of the new post of First Vice-President in charge of Better Regulation. The Capital Markets Union project should be based on robust principles of better enhanced regulation and we deem it appropriate to identify the improved regulation agenda as both a shorter and longer-term action. We also note that the Commission s REFITprogramme (the Commission s Regulatory Fitness and Performance programme) is an important exercise to reduce excessive administrative burden. This programme should be extended to financial services. Creation of streamlined regulatory reporting channels Recent regulatory agenda has had a constant focus on improved data and close-to-real-time reporting. This has meant several new reporting obligations towards the ECB, the national central banks, the European Supervisory Authorities (ESAs), the local regulators and trade repositories as data intermediaries in exceptional cases. Depending on the scope of these rules (such as CRR, EMIR, proposal for SFTR, ECB regulations) same data needs to be reported to several recipients with slightly different intervals and parameters. In general, high quality data is crucial to ensuring that emerging risks can be tackled as early as possible without creating systemic risk. Consistent, high quality reports are also crucial for investors when they make their investment decisions. The current system with growing and overlapping reporting obligations creates additional burdens for, and possible barriers to, capital flows. A one-stop shop approach towards at least all EU-level and national supervisors, as well as ECB, would be beneficial. Different report addressees should agree on similar data fields and the use of same standards as much as possible. Reporting channels should make use of existing IT systems and well-improved digital Page 6 of 42

7 means. The ESAs could, within their mandates, play a stronger coordinating role to avoid such unwanted consequences, to the benefit of the CMU project. Creation of a single generic EU-recognition scheme for assessing EU equivalence of third countries Some financial centres are and will be a regular customer of the ESAs when assessing EU equivalence of third countries. In the foreseeable future the ESAs could assess EU equivalence of financial legislation with more than a dozen planned and/or effective EU directives. It is in the interest of both the EU and major third countries that equivalence between a considerable number of relevant EU and foreign legislative initiatives be achieved reliably and within a reasonable period of time. This would enhance legal certainty, reliability, and trustworthiness for all involved commercial parties with cross border businesses. In turn this would build an indispensable condition for capital markets to attract capital and investments more easily into the EU area. As an immediate action a re-designed, well-structured outcome-based framework could help streamlining the complex and recurrent processes of assessing equivalence. Such a new process is already enshrined in the context of a number of existing directives and regulations but should be taken up consistently. In fact, we believe that such a predetermined structure, together with stipulated core principles for material requirements would greatly facilitate the demanding tasks of the ESAs. In particular, it would enable the ESAs to conclude their assessments in a timely, transparent and resource-efficient way, without sacrificing thoroughness or eliminating the Commission s prerogative to decree conclusively. For a third country, on the other hand, such a generic process would ensure that the contentrelated requirements are more transparent and reliable (entitlement) and the process itself more readily assessable (legal certainty). Such a general process could be easily and rapidly built (low hanging fruit) taking into account existing experience and regarding principles of mutual regulatory recognition. Likewise, an outcome-based, rather than a line-by-line approach (aimed at evaluating whether the third country regime achieves the same regulatory objectives as the corresponding piece of EU legislation for files like EMIR, AIFMD or MiFID2/R), consulting with the third country and its regulator prior and throughout the equivalence assessment process would contribute significantly to an efficient equivalence assessment. In the EU, the introduction of principlebased references to international standards (e.g. reference to IOSCO principles in the equivalence requirements of MIFIR, CSDR and drafts for a Benchmark Regulation) are valid examples indicating such a move towards a more practical, principle-based approach. Consider adjusting the current client classification in MiFID II / MiFIR Under MiFID II all kinds of private investors are classified as retail clients, independent of their investable assets base, their risk appetite and their diversification need (including Page 7 of 42

8 geographically). These provisions (MiFID Annex II) have been adopted with the aim of securing maximum certainty for all private clients. Yet, practical experience shows in our view that whenever entirely different sorts of clients and client needs are subsumed undifferentiated this easily leads to inappropriate regulation for all parties and with undesirable consequences and barriers for capital markets: smaller retail clients need more accessible investment information and have enhanced consumer protection requirements while largely experienced wealthier retail clients with suitable assets, requiring diversification and with interests in capital markets investments (including across borders) and corresponding risk appetite, may demand more complex products. The current MiFID II categorisation of customers, coupled with the distinction between complex and non-complex financial instruments restricts all retail clients from investing in certain securitised and structured products. This can limit the investment opportunities of wealthier private customers. The existing customer classification should therefore be amended by splitting retail clients into two distinct categories: a) ordinary retail clients; and b) highly sophisticated, often high net worth individual clients (or group of individual clients). This highly sophisticated, high net worth individual clients should be defined as private clients disposing of a considerable amount of investable assets of at least 2 to 3 million euros (excluding owner-occupied real estate and pension). Individual clients should be treated as professional investors and thus be allowed to invest as well into riskier and more complex products. Consequently, third country firms should be allowed to deal with such investors on a cross-border basis as stipulated in the Articles 46 and 47 of MiFIR for professional clients. This relief could also contribute to achieve the declared goal of widening the investor base for SMEs within the EU, as thereby assets under management with banks in a third country would become more readily available for investments in the EU (see also response to question 22). 2) What further steps around the availability and standardisation of SME credit information could support a deeper market in SME and start-up finance and a wider investor base? The European Banking Federation supports the aim of the European Commission of improving the availability and standardisation of SME data. Notwithstanding, the EBF considers that any initiative undertaken in this context must take into account the following aspects: a) Ensure customer data security and client confidentiality Any proposal aiming at improving credit data availability must have robust measures to ensure customer data security and legitimate client confidentiality. As best practice evolves, the Commission should review whether amendments are required to the EU Data Protection legislation. All best practices, ranging from centralised i.e. credit registers in various variations to decentralised e.g. Standard Business Reporting, must comply with the principles of integrity and responsibility. The borrowing company must remain in control of the dissemination of its Page 8 of 42

9 own information. The confidentiality of the data forwarded to regulated users must remain protected by professional confidentiality. In the event that this confidentiality is jeopardised by obligations to disseminate or share this information, the latter s quality and comprehensiveness will be affected, putting at risk the ultimate objective of this measure. b) Any initiative should aim at providing information at a reasonable cost Achieving the single market will ultimately require the definition of a minimum core of accounting data, which are comparable and accessible at a reasonable cost. This is a very sensitive issue as it is not clear where the information should come from. On the one hand, if SMEs themselves are to produce this data, it may represent a significant cost to many of them. On the other hand, financial institutions cannot be asked to act as a data warehouse for their customers. Moreover, financial institutions would find it difficult to provide information on their customers without violating their customers privacy or confidentiality requirements. Importantly, it should not be mandatory for an SME to provide information and only those wishing to access capital markets (and therefore are of sufficient scale) should share information to reach more investors. c) It is extremely important to avoid red tape as it puts off the majority of companies Best practices are evolving and differ from each other. Especially in the case of decentralised initiatives for gathering and exchanging information from SMEs, excessive regulation should be avoided. In addition, the harmonisation of local legislation on data protection has to be taken into account as sometimes it is difficult to distinguish between SMEs and household figures. d) Equity research promotion instead of limitation The EBF recommends actions specifically designed to increase the quality and quantity of independent financial analysis on listed SMEs. In this regard, MiFID 2 provisions on investment research should be taken into account. Such provisions may be counterproductive because financial research will be regarded as non-monetary benefits and thus will be limited. As a result, the level of information on SMEs will likely decrease and the investment, rendered less attractive. The feasibility of disclosing standardised financial ratios throughout Europe, including a definition of median ratios for each business sector, for instance, could also be considered as an interesting benchmark for investors. 3) What support can be given to ELTIFs to encourage their take up? ELTIF funds have raised some concerns due to the way they have been designed. The outcome of the ELTIF negotiation was not optimal. Although the EBF acknowledges that the time horizon of ELTIF is not synchronised with most retail investors time horizon, there is need to provide more flexibility in order to boost this form of investment. Page 9 of 42

10 ELTIFs should be opened to pension and investment funds. Retail investors would have access to this type of instruments via pension or investment funds. So, savings would enter capital markets via ELTIFs for pension funds. To encourage the institutional investors to invest further in these instruments we suggest: a preferential capital treatment for exposures to the ELTIFs, for instance, reducing the capital load or reviewing stable funding liquidity requirements of such asset classes; the creation of fiscal incentives for ELTIF s; fiscal incentives are crucial for the success of ELTIFs, namely to attract retail investment; investors are only willing to immobilise their investment for a long period of time if they expect that they will have major returns or tax incentives that compensate for such a restriction. 4) Is any action by the EU needed to support the development of private placement markets other than supporting market-led efforts to agree common standards? Some Member States have had a strong market for private placements for many years. Standards have long since emerged, even if such standards have not been published in text form. Private placement investors are mainly institutional investors and banks with local business areas which use this as a means of diversifying their regional risks. The existing standards are geared primarily to their needs and also reflect national legislation (especially insolvency, collateral, company and tax law, but obviously also investors supervisory law). Thus, standardisation at EU level would not represent an added value per se. However the reasons why certain Member States have not yet seen the emergence of a private placement market is something that should be closely examined on a case-by-case basis. Reasons may include: a lack of investors, the availability of alternative sources of funding, or little interest by borrowers. The EBF does not believe the absence of a European standard to be the reason. In addition, private placements suppose a certain minimum placement size that may admittedly be adjusted downwards in line with market maturity. However, they cannot be seen as substitute for small-sized bank loans. Ultimately, private placements are generally not the most attractive type of corporate finance; their interest rates are usually higher than those for bank loans. For certain companies, they may still make sense for strategic reasons (i.e. diversification of funding, preparation for using regulated capital markets). The standardised documentation developed as an industry initiative and referred to on page 11 of the green paper has only been available since the beginning of It has been used in only very few issuances to date and is extremely extensive (around 100 pages). This makes placements more expensive. What is more, the documentation fails to provide legal certainty, an issue of capital importance to investors. The EBF would therefore urge the Commission to refrain from giving this market standard preferential treatment or promoting EU-wide standardisation. Increasing transaction costs by introducing additional transparency Page 10 of 42

11 requirements or by extending the scope of the market initiative would make it more difficult for SMEs to access this funding tool. We believe this point needs to be taken into account and careful consideration required before drafting regulatory reform on a segment which already functions efficiently, especially in the area of SME/corporate funding. 5) What further measures could help to increase access to funding and channelling of funds to those who need them? a) Focus on equity Smaller sized companies often lack a sufficient capital base in Europe. The results of various empirical studies point us towards Capital Markets Union. It is commonly agreed that financial systems based on equity rather than debt financing are more stable. A deleverage process through an increase in equity would contribute to decreasing companies risk, what would grant them access to finance in better conditions. Capital Markets Union should therefore focus more on equity financing instruments for companies. b) Granting of subordinated loans A higher risk appetite to grant subordinated loans (e.g. channelled through development banks) would also provide leverage to generate additional short and long-term credit lines. Centralised risk-mutualisation mechanisms (such as the EFSI) are necessary to unlock fragmented markets. The EFSI tries to address this, but there is some scepticism owing to (i) the governance of the EFSI and the project selection procedures; and (ii) the risk-mutualisation mechanism. Regarding the latter, it appears that currently under the EFSI only first-loss piece guarantees are envisaged. If the guarantee cap covers only the expected loss or if the guarantee is conditional - with the effect that there is incomplete adherence to the Basel criteria for risk mitigation - banks may not benefit from capital relief. In this case the guarantees will fail to interest many, if not most, banks. c) Introduction of definitions The Commission should take into account the current level of disparity between the different EU sectorial legislation, which complicates the picture for funding providers. For example, there are no cross-legislative definitions of small and medium-enterprises in EU legislation. In this regard, the Commission should consider developing a set of definitions which can be used throughout new EU legislation and phased into existing EU legislation. The categorisation process should be simple, enabling a firm to be easily identified by agreed descriptors. This categorisation may then be used by banks and finance providers to help determine the appropriate level of customer protection and finance options. d) Greater independence of external ratings Furthermore, the European Commission must ensure a greater independence of external ratings. The problems created by the overdependence are related to (i) ratings volatility, due to methodology changes, sovereign ceilings, counterparty caps and triggers; (ii) lack of Page 11 of 42

12 transparency in rating agencies mechanisms; and (iii) inconsistency with regulatory risk evaluations. Regulatory action in respect of standardisation may have unintended consequences if the mandated standard terms do not fit investor preferences at a particular point in time. Any type of standardisation should focus on transparency and disclosure rather than on economic terms (e.g. term, coupon types etc.). Finally, in order to improve the environment for regulated firms to provide market liquidity, the EBF encourages the Commission to take into account: greater recognition in the regulatory capital regime (including the leverage ratio regime) of market liquidity when determining solvency treatment for traded credit products; a more flexible credit mitigation regime and; a more flexible implementation of exiting credit mitigation rules. 6) Should measures be taken to promote greater liquidity in corporate bond markets, such as standardisation? If so, which measures are needed and can these be achieved by the market, or is regulatory action required? Market depth and liquidity are key components of well-functioning capital markets, key to investors propensity to invest. Hence, incentives and measures that foster and help issuers to reach critical market dimensions could be helpful. On that note, we would suggest that, instead of binding EU-level instruments, the Commission should consider using best practices or market driven initiatives to drive an increase of liquidity in this market. The primary reason for this, being, that today there are already well-functioning markets and local practices that have withstood the financial crisis and should be respected and further encouraged to grow. Market making is a legitimate commercial business for banks, and shall not be banned or ringfenced on account of structural bank reform initiatives at EU or national level. Hence, banks shall not be penalised for holding inventories of (corporate) bonds (credit and market risk, RWA). As part of the liquidity discussion, the EBF highlights the importance of MiFID II and MiFIR in SME financing. In our view development of new bond markets for smaller issuers is at the heart of the CMU. At the same time we are concerned, that wrongly calibrated pre- and post-trade transparency requirements could negatively affect market makers ability to provide liquidity in these emerging markets. Consequently, the Commission should have this under constant scrutiny in order to avoid any unintended consequences. In this context, it should be borne in mind that Article 9, in conjunction with Article 18, of MiFIR provides for comprehensive changes to market structures that will also apply to corporate bond trading. The concrete impact of the new provisions will depend particularly on whether bonds are correctly classified as liquid or non-liquid. Were non-liquid bonds to be wrongly classified Page 12 of 42

13 as liquid, systematic internalisers in such bonds would be exposed to unacceptable risks that could not be covered. This would, in turn, create the risk of the market drying up. It will therefore be crucial to formulate the details of Article 9(5) of MiFIR so that they ensure correct classification of each and every bond. The approach presented by ESMA on page 104 of the consultation paper 2014/1570 fails to meet this objective. The calculations made by ESMA for corporate bonds show very clearly that the parameters and selected thresholds fail to deliver satisfactory results: a success rate in correctly classifying liquid corporate bonds (issued by non-financials) of 48.62% and 42.86% for senior corporate bonds and subordinated corporate bonds respectively is unacceptable. Conversely, this means that 51.38% and 57.14% respectively of corporate bonds are classified as liquid although they are not (false positives). We believe that the parameters on which classification is based urgently need to be calibrated to ensure a success rate of at least 95%. Otherwise, there will be a high risk of dramatic decrease in liquidity. 7) Is any action by the EU needed to facilitate the development of standardised, transparent and accountable ESG (Environment, Social and Governance) investment, including green bonds, other than supporting the development of guidelines by the market? The EBF considers that public incentives (for instance, fiscal treatment, regulatory aspects, etc.) shall be foreseen in order to promote and develop ESG investment. The market for ESG investment is relatively new and needs more support in order to deliver long-term benefits to stakeholders. Regulators should be mindful of not stifling the embryonic growth of green bonds by swathes of regulation. The EBF would support the use of the EU Green Bond principles in this area. 8) Is there value in developing a common EU level accounting standard for small and mediumsized companies listed on MTFs? Should such a standard become a feature of SME Growth Markets? If so, under which conditions? The EBF strongly supports efforts to reduce the administrative burden of smaller and mediumsize listed companies. Although we agree that full application of IFRS standards to SME listed companies is very burdensome, we consider that it is important to have high quality accounting standards for smaller listed companies to ensure reliability, transparency and comparability of information. This said, the EBF is not supportive of a mandatory form of EU level accounting standards for SME Growth Market companies being implemented. We find that it is more important to develop accounting directives in order to reduce the administrative burden for SME listed companies. The IASB has for many years been pursuing the IFRSs for SMEs project. This standard is applied in a large number of countries across the globe. Since one objective of Capital Markets Union is to increase and diversify sources of funding not only in the EU but all over the world, the EU should not isolate itself from this development. Consideration should be given to whether the adoption of IFRSs for SMEs in the EU would be a suitable instrument for a common accounting standard for small and medium-sized companies seeking funding in SME growth markets directly via the market. Page 13 of 42

14 The EBF also believes there is value in creating standard business reporting (SBR) to help SMEs consider the choices available to them and to reduce barriers of entry for challenger banks. Nonetheless, a good balance must be sought, as both language and reporting templates should be simple (to allow SMEs to use them) but not excessively so (to allow banks to have all the data they need). The Commission should learn from countries where Standard Business Reporting (SBR) is established. In the Netherlands, Belgium or Australia for instance, SBR has simplified, harmonised and digitised a common set of financial statements to be used for tax filings, reporting to business registers and statistics offices and credit applications with banks and other lenders. Nonetheless, the EBF acknowledges that, as there is no fiscal harmonisation at an EU-level, it would be very challenging to establish a SBR for companies in the EU. Lastly, the EBF considers that it is important to harmonise EU regulation for auditors, since currently audit firms are regulated on a national and often divergent basis. 9) Are there barriers to the development of appropriately regulated crowdfunding or peer to peer platforms including on a cross border basis? If so, how should they be addressed? Financial crowdfunding (crowd-lending and equity crowdfunding) can play a significant role as a complement to traditional sources of financing, mainly for companies in the early stages of development and also for high-risk projects. Yet, financial crowdfunding platforms, and particularly peer-to-peer platforms, operating with products akin to financial ones, tend to carry out their activity with greater informality and lighter regulation, thereby increasing potential solvency risks. This exacerbates problems of information asymmetry between funding suppliers and those requesting it. Consequently, the EBF believes that there must be a compulsory and specific regulatory framework laying down a minimum set of disclosure information, risk factors, data transparency, use of proceeds, and harmonisation of required information. All this, in order to protect and correctly inform the individual investor. It is also important to note that crowdfunding platforms provide services that are very similar to regulated MiFID investment services. Some crowdfunding platforms have already applied MiFID licence and operate with a European passport. Possible new regulatory treatment of crowdfunding platforms should duly take into account the level-playing field. Identical or comparable activities require similar regulatory treatment. The Commission should carefully analyse different types of crowdfunding. Donation, reward, equity and lending-based, require differentiated treatment. 10) What policy measures could incentivise institutional investors to raise and invest larger amounts and in a broader range of assets, in particular long-term projects, SMEs and innovative and high growth start-ups? Page 14 of 42

15 Currently, exceptional demand from central banks combined with the structural demand for bonds caused by the changes in the financial sector regulation (i.e. Basel III and Solvency II), is leading to the trend of holding safer assets, regardless of the cost (negative yields). In order to motivate institutional investment it is important to: overhaul the regulatory framework that is currently in place, either by creating regulatory incentives for investors to fund longer-term/riskier projects (for example risk mutualisation mechanisms such as the one provided by the EFSI) or by reviewing capital charges and liquidity requirements; promote market making specialised entities, to allow investors to exit before maturity and not being penalised for doing so. Direct lending to businesses is likely to be challenging for institutional investors that typically are not equipped with the resources or expertise to perform the due diligence process that lending to businesses / originating infrastructure transactions requires, irrespective of a strong demand for investment in infrastructure, particularly. What is more, the costs associated with capital markets activity can be prohibitive to borrowers that do not benefit from scale (e.g. complying with Prospectus Directive requirements in terms of disclosure) and at the same time they are unable to enjoy the optionality embedded in bank products that better fits their business profiles. Financial incentives could be introduced to reduce the costs of providing finance to these important sectors. In addition, tax incentives to invest in such areas via funds for retail and institutional investors could also be introduced. For example, the US has specific tax incentives in place for lending to SMEs. 11) What steps could be taken to reduce the costs to fund managers of setting up and marketing funds across the EU? What barriers are there to funds benefiting from economies of scale? The EBF believes there should be less administrative burden when a passport has been granted. Currently, the passporting right is not fully respected (i.e. local regulator still require additional elements). The EBF recommends the Commission to consider adjusting the scope of AIFMD to make it possible to market alternative investment funds for retail clients across Europe. 12) Should work on the tailored treatment of infrastructure investments target certain clearly identifiable sub-classes of assets? If so, which of these should the Commission prioritise in future reviews of the prudential rules such as CRDIV/CRR and Solvency II? The EBF does not have a position on this issue. 13) Would the introduction of a standardised product, or removing the existing obstacles to cross-border access, strengthen the single market in pension provision? Page 15 of 42

16 The EBF does not think that the introduction of a standardised product would strengthen the single market in pension provision. Instead, this product may create a distortion and would have an adverse effect in countries where a healthy competition exists in this market. However, removing obstacles to cross-border access could indeed have a positive impact. Be that as it may, the introduction of a standardised product seems only realistic for 3rd pillar pensions. The obstacles to achieving a single market in the 2nd pillar are too big, considering the enormous differences in labour and pension laws across EU countries. This suggests that the potential benefits linked to the achievement of a single pensions market would be rather limited, given 3rd pillar pensions are far less common than 2nd pillar ones. Furthermore, a standardised product would still be hindered by the unresolved challenges posed by the lack of harmonisation from a tax perspective of pension products across the European Union. The complexity of such a product and its administration costs could be even higher than those of the existing products on a national level, since it would require the administration, reporting and handling of taxation requirements on a per country basis, thus potentially offsetting the greater efficiency and efficacy usually attributed to a pension s single market. It is also unclear whether distribution costs would be lower, since a standardised product would be primarily sold (at least in certain countries) through national distributors at the existing rates. This, combined with the aforementioned increase in administration costs could possibly mean higher, and not lower, costs that would then be either partially or totally - passed on to the consumer. For pan-european online platforms the challenge would be to deal, at the same time, with higher administration expenses to tackle national complexity and significant marketing costs, especially in those countries where the provider is not widely recognised and/or does not have brick and/or click operations. Finally, it should be taken into account that when it comes to pension savings the main challenge is to save more in order to deal with the increasing longevity and to provide adequate and sufficient income for future pensioners. This is a very demanding task that is unlikely to be solved through the potential merits of a single pension s market even if (and in spite of the obstacles that make it a challenging objective) it actually delivers its full potential. 14) Would changes to the EuVECA and EuSEF Regulations make it easier for larger EU fund managers to run these types of funds? What other changes if any should be made to increase the number of these types of fund? For the time being the EuVECA and EuSEF regimes have generated very little enthusiasm among our members. The EBF is rather sceptical whether further changes would generate significant effects. 15) How can the EU further develop private equity and venture capital as an alternative source of finance for the economy? In particular, what measures could boost the scale of venture capital funds and enhance the exit opportunities for venture capital investors? Page 16 of 42

17 The development of public and private initiatives has proved successful in some countries already (for example, the Italian Fondo Italiano d Investimento ). Particularly interesting is the use of funds-of-funds, which co-invest in private equity and private debt funds dedicated to small and medium-sized companies and venture capital funds. The impact of this type of initiative is twofold. First, it increases the size of the funds raised, increasing the amount of capital available for VC and PE investments. Second, it reduces the risk for other private investors in these funds, by accepting lower returns than other private investors in the fund. By doing this, it reduces the risk of other investors, without altering, however, the normal and efficient investment process that VC and PE funds should have (e.g. invest in those companies with the highest upside potential). Private equity and venture capital need to be unlinked from hedge funds. As many people tend to link private equity and venture capital, they have been subject to considerable regulation, detrimental to an industry whose intention is to invest money in the real economy. The European Commission should aim at creating the right institutional factors for the emergence of a richer pan-european venture capital industry. Several objectives should be pursued in that respect: bring the industry to efficiency levels equal to more advanced ecosystems (such as in the United States or Israel); create a pan-european industry as opposed to an industry structured around national clusters; this, beyond obvious network efficiencies, will eventually boost pan-european start-up champions and will create a richer innovation industry spanning across the EU, as opposed to the current ecosystem that is increasingly polarised around a few hubs (London, Berlin). This could be instrumented through a number of diverse measures For all funds (institutional and corporates): facilitate establishment of funds by first-time fund managers through public support programmes, co-investment schemes by the EIF or other European bodies, tax incentives on managers committed capital, etc.; facilitate angel investing by providing a favourable tax treatment for individuals investing small amounts in early-stage companies such as the programmes already provided in certain countries (e.g. Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) programmes existing in the United Kingdom); reduce national clusters by facilitating cross-border funds; this could be achieved by further unifying fund establishment requirements in terms of registration (unique European registration), marketing (truly passport-able fund marketing requirements across the EU) and the homogenisation of tax regimes. For corporate funds Facilitate Corporate Venture Capital (CVC) operating under the same rules as institutional Venture Capital (VC) to make them competitive with the rest of the industry. Page 17 of 42