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EU financial market regulation – Balancing financial stability and competitiveness is decisive for sustainable growth

18 Jul 2018

EU financial market regulation – Balancing financial stability and competitiveness is decisive for sustainable growth

In order to stabilise the financial markets, in the past years the EU has been very dedicated in implementing the G20 objectives. It has placed regulated trading venues, clearing houses / Central Counter Parties (CCPs) and transaction registers at the core of its regulations. Essential milestones are the reporting obligation through trade repositories (EMIR, since 2013), the securitisation and the clearing of OTC trades (EMIR and CRD IV, since 2016) by CCPs as well as the trading obligation for liquid derivatives (MiFIR, since 2018). The EU has consistently implemented global standards within its financial policy.1)

Many of these measures are already fully applicable, some are readily implemented and others are in the process of undergoing a fine-tuning. Time is needed to fully implement all measures – but we can already observe fundamental adaptions of behaviour in many areas (more securitised derivatives transactions, more CCP clearing, etc.). Both, stress tests conducted by the EU supervisors2), and practical tests such as the Brexit vote which took by surprise the financial markets, show that the EU markets are more stable than ten years ago.

It becomes especially clear how successful EU financial market regulation has been in the past years, when looking at the recent Brexit developments. Currently, the rules in place allow market participants to offer their services in all 28 EU Member States with a single registration in one Member State. Brexit will change this rule fundamentally because the United Kingdom will leave the EU’s single market after its withdrawal.

Brexit puts a new emphasis on the relations to third countries

EU institutions such as the European Central Bank, the European Securities and Markets Authority, the European Commission, and the European Parliament are all opting for the same focus3): The current third country regime, based upon openness towards global markets, has to be adapted to the new reality with the United Kingdom is leaving the EU. Critical and systemic non-EU-infrastructures will have to be supervised by an EU supervisory authority. Due to the uncertainty regarding the outcome of the Brexit negotiations, regulators and supervisors are calling for rapid measures, especially in the EMIR review, to ensure a reliable framework for a possible hard Brexit.

Therefore, it is indispensable that rules regarding market access for companies from third countries are developed, which take the importance of the United Kingdom for the EU capital markets into account. Currently the EU and United Kingdom financial markets are strongly interlinked and the British financial market acts as a financial hub for the EU.

The access to the EU financial market for British companies (and vice versa) will be possible via the obtaining of a corresponding licence in the EU27 through a (to be newly founded, if necessary) subsidiary (which is then authorised for passporting) or via a third country regime.

EU third country rules of the financial market regulation (especially EMIR, but also MiFID II) have been designed to allow access to the EU financial markets to third country companies. However, these rules are no substitute for the single market, as they do not cover the entire range of financial services and because the underlying equivalence decisions can be revoked.

Capital Market Union more important than ever

After the United Kingdom´s withdrawal, ensuring the international competitiveness of the EU and the financial market stability will become the overarching principle of all financial market regulation. Brexit should not harm either the financial market stability or the competitiveness of the EU.

With this perspective on the horizon, the EU project to develop a Capital Markets Union becomes all the more important after Brexit. The Capital Market Union is an essential component for the development of a competitive and attractive EU capital market, as well as one of the most important catalysts for growth and employment.

By Dr. Torsten Schaper, Executive Director Regulatory Analysis, Deutsche Börse AG and Dafina Gasi, Regulatory Operations, Deutsche Börse AG
The article was first published in the Regulation Newsletter of Börsenzeitung on 10 July 2018.

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