Capital Markets Union is making progress but political momentum vital to tackle remaining obstacles The full report can be downloaded here. Press release available in French, German,Italian and Spanish. AFME, in collaboration with 9 international organisations and trade associations representing global and European capital markets stakeholders, has today published a new report tracking the progress to date of the European Commission’s flagship Capital Markets Union (CMU) project through seven Key Performance Indicators (KPIs). The reportwas authored by AFME with the support of the Climate Bonds Initiative (CBI), as well as European trade associations representing: business angels (BAE, EBAN), fund and asset management (EFAMA), crowdfunding (ECN), retail and institutional investors (European Investors), stock exchanges (FESE), venture capital and private equity (Invest Europe), and pension funds (Pensions Europe). The report entitled, ‘Capital Markets Union: Measuring progress and planning for success', is the first publication in what will be an annual series which will regularly review developments in the CMU project and identify what further work needs to be done. The report is also the first country-by-country comparison of individual EU Member State progress against the CMU’s objectives. Simon Lewis, Chief Executive of AFME, said: “Three years on from the launch of the Capital Markets Union Action Plan, and with the end of the Juncker Commission approaching, this report provides a timely opportunity to review the progress that has been made to date on achieving the CMU’s vital aims. Our findings show that the CMU will be a long-term project; it is not about hitting targets in the short-term but about ensuring that this important project is fit for purpose. With a myriad of challenges currently facing Europe’s capital markets, we must not lose sight of the importance of an effective CMU for the future of Europe.” The seven KPIs assess progress in the following CMU policy priority areas: Market Finance indicator: how easy it is for companies to enter & raise capital on public markets; Household market investment indicator: to what extent retail investment is being fostered; Loan transfer indicator: to what extent banking capacity is supporting the wider economy; Sustainable Finance indicator: to what extent long-term investments in infrastructure and sustainable investment are being made; Pre-IPO Risk Capital indicator: how well start-ups and non-listed companies are able to access finance for innovation; Cross-border finance indicator: to what extent cross-border investment is being facilitated; Market depth indicator: measuring the depth of EU capital markets. Among the report’s key findings: Europe continues to over rely on bank lendingEuropean companies continue to over rely on bank lending, with 86% of their new funding in 2017 coming from banks and only 14% from capital markets. The availability of pools of capital in Europe has shown encouraging improvements in most EU countries in recent yearsThe amount of household savings invested in capital markets instruments (i.e. equity shares, investment fund shares, bonds, insurance and pensions) has increased from 108% of GDP in 2012 to 118.2% of GDP in 2017. However, Europe still lags behind US on investing savings in capital markets.The average EU household accumulates savings at around twice the rate as the US, but the stock of household savings held in capital markets instruments represent 1.18 times the annual income (as measured by GDP), compared with 2.9 times the annual GDP in the United States. Europe is a global leader in sustainable financeOver 2% of Europe’s bonds (government, municipal, agency, corporate, securitisations, and covered bonds) issued in 2017 were labelled sustainable, up from 0% just five years ago and compared with less than 1% in the US in 2017. There is more risk capital available for European SMEs to finance their growthThe annual amount of pre-IPO risk capital investments into SMEs by venture capital and private equity funds, business angels and through equity crowdfunding has increased in Europe from €10.6bn in 2013 to €22.7bn in 2017. However, risk capital investments remain low relative to GDP and there is still a significant gap compared with the US (€132.4bn in 2017, or 0.8% of GDP vs 0.15% of GDP in the EU). European capital markets are showing an encouraging trend towards greater integrationSince the aftermath of the financial crisis after the repatriation of some market activities and funding to home countries. Our indicators show growing intra-EU activity between EU Member States in private equity, M&A transactions, debt issuance, and cross-border holdings of portfolio assets. However, intra-EU integration remains below pre-crisis levels suggesting there is more progress is needed towards a fully integrated capital market. Fewer loans are being converted into capital markets instrumentsRecent years have shown a decline in the transformation of loans into tradeable securities like covered bonds, securitisation, or loan portfolio transactions. Issuance of securitised products in Europe remains subdued, although 2018 year-to-date placed issuance volumes are encouraging. Market depth in Central and Eastern European (CEE) has improved slightlyCentral and Eastern European (CEE) capital markets are converging with those of the rest of Europe, but at a slow pace. EU 28 Country performance A comparison of the 28 EU Member States and their individual performance against each indicator was conducted. Among the key findings: The UK and Ireland lead the EU countries in terms of providing new funding for non-financial corporations (NFCs) with over 25% of total new funding raised from markets. Meanwhile, Slovenia, Slovakia, Malta, Cyprus, and Bulgaria had no NFC bond or equity issuance in 2017. Denmark has improved the most among all EU countries in the last five years in terms of the accumulation of household savings in capital markets instruments, due to greater pension coverage and higher savings rates. Germany, Luxembourg and Austria meanwhile have comparably higher savings rates than the rest of the EU, but households invest savings in conservative non-capital markets instruments such as cash and bank deposits. Spain, Italy, Ireland, Greece, and Portugal (high-NPL countries) are in the top seven EU nations in the loan transfer index in 2017, suggesting an encouraging trend towards using market instruments to dispose distressed assets. The Netherlands, France and Sweden are the leading EU nations in sustainable finance with over 3% of bonds issued in 2017 classified as sustainable. Lithuania had the highest indicator value in 2017 of almost 10%, but this reflects a single bond. Estonia, Denmark and the UK lead by availability of risk capital for SMEs. Estonia has a prominent amount of business angel investment, while Denmark and the UK have more diversified sources of risk capital from private equity and venture capital. Luxembourg, the UK, and Belgium rank as the most interconnected capital markets with the rest of the EU. Luxembourg’s lead is due to its fund and bond issues held within the EU, and a prominent share of their total private equity activity invested in companies in other EU countries. The UK and Luxembourg are the most globally interconnected European capital markets. The UK has a particularly prominent role in intermediating global flows of FX and derivatives trading, cross-border holdings of equity shares, and facilitating public equity raising by non-EU companies. The Czech Republic is the deepest capital market in CEE. In 2017, the Czech Republic was the second-most active primary market for equity and bonds in CEE after Poland; it had the highest recovery rate for business insolvency; and was among the top 3 CEE countries with the largest accumulation of savings in market instruments (as % GDP). Page 42 of the report shows a table ranking all 28 Member States in order of progress against each indicator. – Ends –

Clickhereto download the full report. Click here to download the press release in French. The Association for Financial Markets in Europe (AFME)and PwC have today published a new report on current trends in technology and innovation and their impact on the investment bank of the future. The report, entitled ‘Technology and Innovation in Europe’s Capital Markets’ examines the key trends which are expected to impact the industry over the next five years, providing a vision for the future and identifying the implications for the industry and for future policymaking. James Kemp, a Managing Director at AFME, said: “At a time when the industry continues to experience economic pressures, a new regulatory framework and ever-increasing client expectations, our latest report shows that new technologies and innovation will be a significant force in reshaping the industry.” “While 95% of our survey respondents identified the opportunity for cost reduction as the most important driver for the adoption of technology, only 28% felt that the current investment allocated to this strategic change was sufficient.” “Policymakers and regulators have a key role to play in promoting innovation and supporting the adoption of new technologies, whilst ensuring that future regulatory frameworks maintain a level playing field and ensure financial stability.” Isabelle Jenkins, Partner at PwC, said “Our report shows that new technologies will drive changes across investment bank functions, their workforce, and industry partnerships. Success will depend on the ability of investment banks to achieve long-term benefits from new technologies by prioritising investment, looking to collaborate where possible, identifying and developing the skills needed, and building a culture for innovation.” The report was developed through a survey of representative banks on AFME’s Technology and Operations Committee and supported by additional research from PwC. Among the key findings from the report are: Technology is one of the most powerful levers banks have to address potential disruption, tackle existing industry challenges and to deliver future opportunities. There are four core technologies - Data & Analytics, Cloud Computing, Artificial Intelligence (AI) and Distributed Ledger Technology (DLT) – which have the potential to transform banks and the industry; A clear data management strategy is an immediate priority as it is the enabler for the four core technologies identified. However, across industry, there are varying levels in the maturity of how data is currently being managed and the approaches to realise its future value; Significant implementation of Distributed Ledger Technology (DLT) remains a longer-term priority based on the current complexity of bringing large-scale enterprise and industry solutions to market, as well as integration with legacy systems, and considerations for data privacy and cybersecurity; 90% of survey respondents believed the impact of new technologies on the workforce will lead to business and IT skills merging and future roles becoming more relationship focused. Competition for future skills will be high, requiring banks to both invest in re-skilling the existing workforce and driving cultural change to attract new talent; New technologies will shape investment banks to be increasingly automated, data-led, open and agile and connected into a wider pool of technology and service providers; Banks, policymakers and regulators must keep pace with new technologies to balance the potential risks and cybersecurity concerns they may introduce. Any future regulatory frameworks should be applied with a proportionate and principles-based approach, but at the same time ensure a level-playing field that creates an open, competitive and sustainable market for technology and innovation. – Ends –

Commenting on the UK Government’s paper outlining preparations for the financial services industry in the event of a no-deal Brexit scenario, Simon Lewis, Chief Executive, said: “The consequences of a no-deal Brexit scenario could mean prolonged disruption to the smooth functioning of Europe’s capital markets, which would affect investors, borrowers and savers across Europe and beyond. The financial services industry is keen to see both negotiating parties agree on a deal which locks in an agreement on a transition period and the future trading relationship in order to minimise the risks to financial stability.” – Ends –

The Association for Financial Markets in Europe’s (AFME) Equity Capital Markets Division and the European Association for Independent Research Providers (Euro IRP) have today published guidance for unconnected analysts (i.e. those not employed by the underwriting syndicate) seeking to access information about prospective issuers under the UK Financial Conduct Authority’s (FCA) new rules governing initial public offerings (IPOs), which came into force on 1 July 2018. The AFME/Euro IRP guidance sets out a process by which syndicate banks can facilitate access for unconnected analysts to prospective issuers and contains guidelines which those unconnected analysts gaining access to companies undertaking an IPO are expected to sign. Under the new rules (as set out in FCA policy statement PS 17/23) relating to the UK IPO process, unconnected analysts must now be provided with access to company information and to the management team of the share issuer (if such access has been provided to connected analysts) before connected analysts (i.e. those employed by or connected to the underwriting bank syndicate) publish their own research. In line with the FCA’s aim, the AFME/Euro IRP guidance therefore seeks to ensure that assistance is given to market participants following the introduction of the new rules. Andrew Brooke, Director of AFME’s Equity Capital Markets Division, said: “This guidance should provide potential investors, prospective issuers, banks and analysts with clarity regarding the process by which research on prospective issuers is made available in UK IPO transactions. This will help to facilitate the efficient and coordinated execution of UK IPOs.” Chris Deavin, Chairman of Euro IRP, said “These are important FCA reforms to the UK IPO process, which ensure for the first time, independent IPO research can be produced without barriers, and provide essential quality analysis at the right time to potential investors. This guidance defines the clear practical steps by which this will happen and should help market participants work in a UK IPO process that serves both investors and issuers.” Benefits of the AFME/Euro IRP guidance: Private companies, unconnected analysts and investors all stand to benefit from the clarity provided by the guidance. It should help provide clear and coordinated implementation of the new rules regarding unconnected analysts’ access to prospective issuers. Private companies will benefit from better prepared and well-executed IPOs. Investors/market participants will be provided with information about prospective issuers/IPOs from more sources and at an earlier point in the process. Unconnected analysts will have clarity on how to access private companies/prospective issuers. The full guidance can be found here.

Following the publication of the UK Government’s White Paper on the future relationship between the United Kingdom and the European Union, Simon Lewis, Chief Executive of AFME, said: "We welcome today’s publication of the White Paper providing further clarity and detail on the UK government’s position. We hope that this will form the basis for negotiations to progress, recognising the importance of minimising fragmentation, maintaining financial stability and close supervisory cooperation. “It is now crucial that the progress is made as quickly as possible. Businesses require certainty of a transition period and direction on the future trading relationship to minimise disruption to clients." – Ends –

Following the UK government’s announcement yesterday on its proposed approach to Brexit, Simon Lewis, Chief Executive of AFME, said: “We welcome yesterday’s announcement and look forward to seeing the detail in the White Paper, including in relation to services. Businesses continue to face considerable uncertainty about the framework that will apply less than 8 months away. It is now vital for the negotiations to make progress to provide certainty of a transition period and direction on the future trading relationship. Banks are continuing to implement their contingency plans to minimise disruption to clients, but It is crucial that the concerns voiced by the industry around contractual continuity, access to market infrastructure and transfers of data are addressed, to ensure an orderly withdrawal process whatever the outcome of the negotiations.” Ends

Following the European Council meeting today and discussions on the Banking Union, Simon Lewis, Chief Executive of AFME, said:“As a strong supporter of Banking Union, AFME welcomes the good progress made towards completing this important project. We are encouraged by the European Council agreement today to create a common backstop to the Single Resolution Fund and the commitment to further work in support of political negotiations on the European Deposit Insurance Scheme.”AFME feels a great deal has already been achieved towards the reduction of risk which is a prerequisite for the completion of Banking Union. And by the end of this year we hope to see the Risk Reduction package finalised and progress made on the proposals for a European Deposit Insurance Scheme. It is important that this package helps remove the significant impediments to the efficient internal capital, MREL and liquidity allocation within cross-border banks in order to counteract the trend towards market fragmentation and brittle markets in the Union.In addition, AFME hopes to see good progress made on the NPL action plan, as well as the Commission’s Directive on a preventive restructuring framework, second chance and insolvency procedures. We also encourage further consideration of the framework for the provision of liquidity to firms in resolution. Taken together, the effective implementation of all the above measures should help deliver lower risk and well-functioning capital markets which need to go hand in hand with risk-sharing measures in Europe, if we are to achieve a fully-fledged Banking Union.– Ends –

AFME, ICMA, ISDA, SIFMA and SIFMA AMGPublish Global Benchmark Report Download report here. 25 June 2018 – The Association of Financial Markets in Europe (AFME), International Capital Market Association (ICMA), International Swaps and Derivatives Association, Inc. (ISDA), and the Securities Industry and Financial Markets Association (SIFMA) and its asset management group (SIFMA AMG) have published a new report that assesses the issues involved with benchmark reform, and makes recommendations on steps firms can take to prepare for the transition from interbank offered rates (IBORs) to alternative risk-free rates (RFRs). The report, which was based on a survey of 150 banks, end users, infrastructures and law firms in 24 countries, shows that: There is a gap between high levels of awareness of benchmark reform and concrete steps being taken to transition from the IBORs to alternative RFRs. Several key issues are identified as being important for a successful and orderly transition, including the need for market participants to develop new cash products and liquidity in derivatives and futures referencing the RFRs. Corporate and financial end users believe a forward-looking term structure for the RFRs is necessary. There is an appetite for regular, globally coordinated information from the RFR public-/private-sector working groups, as well as further clarity on the preferred end state for each IBOR. “This is a timely report. In Europe, there are €1.2 trillion of outstanding securitizations, many of which are linked to an IBOR and will revert to a fixed rate if this IBOR ceases to exist before the maturity of the bond, causing significant changes to future cash flows. To avoid this and ensure that the transition to new risk-free rates is smooth and minimizes disruption for market participants, we need to ensure we are actively engaged with authorities, trade associations and our members to raise awareness and work towards solutions,” said Simon Lewis, AFME Chief Executive. “This comprehensive global benchmark survey is an important step forward in raising the level of awareness in international financial markets about the transition to risk-free rates. It provides a helpful assessment of the challenges faced by market participants as they deal with this fundamental change to market structure,” said Martin Scheck, ICMA Chief Executive. “The transition from the IBORs to alternative RFRs will have an impact across financial markets – from derivatives to bonds to mortgages. It’s vital that firms commit resources and begin their transition planning initiatives. Our report sets out a number of steps that institutions can take to prepare. Given the scale of the task, this implementation checklist should be adopted now,” said Scott O’Malia, ISDA’s Chief Executive. “We need to prepare the market to transition away from reliance on LIBOR, and to ensure that both the cash and derivatives markets remain liquid and resilient when there is a move to new reference rates. By laying the foundation now, through efforts such as the Transition Roadmap published earlier this year and the survey that is the basis for today’s report, along with participation with the Alternative Reference Rates Committee (ARRC), we are working to raise awareness, identify exposures and prepare for a smooth transition,” said Kenneth E. Bentsen, Jr., SIFMA president and CEO. “SIFMA and SIFMA AMG agree it is crucial to try to strive for consistency across geographical regions, product segments and market participants to both avoid fragmentation in global markets and permit the most effective risk management. Benchmark Transition Awareness and Preparation Awareness of benchmark transition issues is relatively high, with 87% of respondents concerned about their exposure to the IBORs. Most survey participants expect to adopt RFRs, with 78% stating they intend to trade them within the next four years. However, preparations are at an early stage. While more than half of survey respondents (53%) have commenced internal discussions on the transition to alternative RFRs, a much smaller proportion is at the stage of allocating budget (11%) or developing a preliminary project plan (12%). Nearly a quarter of all survey participants have not yet initiated a program to support transition. Some segments of the market – notably corporates – are further behind, with just 30% having started internal discussions within their firms. Key Transition Issues Survey participants identified a number of key elements for achieving a successful transition to RFRs. These include widescale market adoption of the alternative RFRs (cited by 72% of respondents), and the need for market participants to develop liquidity in over-the-counter derivatives and futures referencing the RFRs (64%). Recent progress has been made in this area, with the launch of new futures contracts referenced to the reformed UK Sterling Overnight Index Average and the US Secured Overnight Financing Rate (SOFR). Survey respondents also highlighted valuation and risk management issues (72%). These would primarily apply if market participants opt to amend legacy IBOR transactions to reference alternative RFRs while the relevant IBORs continue to exist. The absence of forward-looking term fixings was cited as another key issue. The IBORs are currently available in multiple tenors – one, three, six and 12 months – but the RFRs are only available on an overnight basis. Term structures are considered important for certain types of products like floating rate notes, which are traded on the basis of known interest payments at the next interest payment date. Approximately 86% of survey participants believe a forward-looking term structure is required, with corporates and financial end users having the strongest views on the subject. The ARRC in the US has committed to creating a forward-looking term rate based on derivatives linked to SOFR, while the Working Group on Sterling Risk-Free Reference Rates is expected to launch a consultation on the issue shortly. Other public-/private-sector RFR working groups are also looking at this topic. Communication and Timelines The various RFR public-/private-sector working groups are recognized as a key source of information on benchmark transition. However, firms expressed a preference for regular, globally coordinated information and more clarity about the desired end state. The need for sufficient time to plan and implement transition was also highlighted, with respondents particularly concerned about compressed timelines in the European Union. Transition Checklist Alongside the survey results, the report includes a checklist of steps that firms can take to prepare for the transition to alternative RFRs. This includes: Mobilising a formal IBOR transition program and allocating budget and staffing; Assessing exposure and the anticipated roll-off of IBOR exposures; Understanding the impact of a permanent cessation of an IBOR, reviewing fallback provisions within existing contracts and making amendments where necessary; Communicating with clients and counterparties early; Defining a transition roadmap for the organization. Background Working groups have been set up in several jurisdictions, including the UK (the Working Group on Sterling Risk-Free Reference Rates), US (the ARRC), Europe (the Working Group on Euro Risk-Free Rates), Switzerland (the National Working Group on Swiss Franc Reference Rates) and Japan (the Japanese Study Group on Risk Free Reference Rates), to bring together representatives from both the public and private sectors to determine the most appropriate RFRs in the relevant currencies. This is in response to concerns that liquidity in the transactions underpinning certain of the IBORs has decreased to the extent that these rates are no longer sustainable across all relevant tenors. The selected alternative RFRs are reformed SONIA for sterling, SARON for Swiss franc, SOFR for US dollar and TONA for yen. In July 2017, the chief executive of the UK’s Financial Conduct Authority (FCA), Andrew Bailey, announced that the FCA would no longer compel or persuade banks to provide submissions for LIBOR post-2021. On February 1, 2018, ISDA, AFME, ICMA, SIFMA and SIFMA AMG jointly launched a benchmark transition roadmap that aggregates and summarizes existing information published by regulators and various public-/private-sector RFR working groups in order to provide a single point of reference on the work conducted up until publication to select alternative RFRs and plan for transition. - Ends -

Europe’s capital markets join forces with academics on banking regulation & supervision FRANKFURT AM MAIN - The Association for Financial Markets in Europe (AFME) has become the newest supporting member of the European Banking Institute (EBI), joining the 28 academic members from all over Europe, as well as representatives of EU institutions such as the ECB, SRB and EBA and other European banking associations, in order to help develop international academic research on European banking regulation and supervision.Jacqueline Mills, Managing Director, Head of the AFME Frankfurt Office, said: “AFME is delighted to join the EBI, which is a valuable forum for academics, regulatory and supervisory authorities and market participants to debate current issues affecting the industry. AFME is highly supportive of European research in the area of prudential regulation and supervision, particularly in view of the complex regulatory and supervisory environment most market participants are currently facing.”Mills continued: “We hope that AFME’s focus on the particular challenges for global banks can bring a new perspective to the work of the EBI’s academic members. AFME’s participation will also help highlight the link between banking regulation and the development of capital markets, a topic we hope will be increasingly addressed by the European academic community.”Dr Thomas Gstaedtner, President of the Supervisory Board of the EBI, said: “AFME’s participation in the European Banking Institute (EBI) is a clear signal of the need for further academic research in the area of wholesale financial markets.”Gstaedtner also said: “In my role as President of the Supervisory Board of the EBI, I warmly welcome AFME’s decision to support EBI’s activities on a broad range of regulatory and capital markets issues. The EBI is a platform where key market players such as AFME can interact with academics, regulators and supervisors to discuss high quality academic work. The regulatory environment is in constant evolution, in particular in light of Brexit, therefore, the European banking and financial industry requires more dialogue.”Enrico Leone, Chancellor of the European Banking Institute, said “the EBI is extremely pleased to welcome AFME as a Supporting Member. AFME’s participation will further enrich our academic research, in particular on capital markets. Our academic and supporting members are looking forward to working with them.”Leone also said: “The enthusiastic support our academic joint venture is receiving from supervisors and the industry shows there is a clear need for research in the field of banking regulation and supervision to mirror the supranational/European dimension at which it is developed.”– Ends –

Commenting on the European Commission’s proposals for Sovereign Bond-Backed Securities (SBBS), announced today, Victoria Webster, Director of Fixed Income at AFME, said:“AFME supports continuing discussion regarding the creation of a European “safe asset”. At the same time, we believe that a number of essential criteria to successfully develop a market for SBBS have not yet been met. In order for such instruments to be workable, more analysis by a variety of market participants is needed.“We therefore encourage EU legislators to consider further consultations with Debt Management Offices, Primary Dealers and investors before deciding to progress this initiative further.”In particular, some elements that would need to be taken into account are(i) demand, as investors can already build portfolios replicating what would be the underlying portfolios of SBBS, with the ability to shift risk more easily than if they were holding tranches of SBBS, and(ii) its structure, as the fixed blend of national bonds and the high contagion risks between the bloc’s countries without risk-sharing measures are likely, therefore trust in SBBS will be lowest when they are most needed in times of crisis.– Ends –