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COVID-19 and the EU’s drive to reinvigorate the Capital Markets Union

14 Sep 2020

The European Commission recently announced its intention to streamline key aspects of the Capital Market Union (CMA) in response to COVID-19. The drive is in response to pressures on the European economy, both current and anticipated, caused by the pandemic.

The CMA itself is comprised of a diverse range of directives, regulations and regulatory technical standards (RTSs) that have over a number of years formed to constitute a rule book for banks and other institutions active in European capital markets. Chief among these measures, and those now focussed on by the Commission, are:

  • MiFID II
  • The Prospectus Directive
  • The Securitisation Directive

Many of the proposed amendments relating to the above legislation are not new however. The Commission has, in many instances, brought forward anticipated changes from work that was already in the pipeline from ongoing reviews by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA).

We outline the key aspects of the proposals below.


The MiFID II amendments refer to a number of requirements that were already identified (during public consultations on MiFID and MiFIR) as being overly burdensome or hindering the development of European markets.

The Commission proposed to amend the MiFID rules affecting energy derivatives markets.

There are three main parts to the proposed amendments:

  • Reducing the amount of information that needs to be provided to clients:
    • There will be a phasing-out of the requirements for paper-based documents as the default method for communication, though retail clients may request to opt back into the old rules.
    • Costs and charges disclosures - an exemption will be introduced for eligible counterparties and for professional clients to avoid firms needing to make such disclosures at the outset. In other cases, the communications may be received after transactions are entered into.
    • Requirements to provide for end of day loss reporting and other ex-post reporting requirements will be removed in respect of eligible counterparties and professional clients. The Commission’s view is that these sorts of reports tended to encourage “herd behaviour” in markets.
    • Best execution reporting will be suspended on the basis that investors never read these reports in the first place and firms tended to consolidate the data by other means such as brokerage meetings.
    • Reduction of cost-benefit analyses in suitability reporting, the Commission acknowledging that the current rules are overly burdensome for professional clients.
    • Investment firms will no longer have to perform certain types of assessments – called “product governance” – for certain types of non-complex products, since these products can be considered suitable for all types of clients, including retail clients.
  • Reducing burdens on commodity derivatives trading, comprising:
    • Amendments to position limits for most commodity derivatives with emphasis instead being placed on position management controls.
    • Introduction of a targeted hedging exemption for financial firms which are in predominantly commercial groups. The aim here being that such entities - often set up to transfer risk from other group entities prior to MiFID II - should now also benefit from position limit exemptions which were previously restricted under MiFID II. The overall aim here is to encourage liquidity.
    • Simplification of the qualitative ancillary activity test - commodity dealers who make use of an exemption to licensing on the basis that it is “ancillary to their main business” must submit complex reports annually to national competent authorities to satin the terms of the exemption. The changes considerably simplify these reports.
  • Finally, rules guiding the provision of research on small and mid-cap companies and on fixed income instruments will be partially revisited. Under the changes, asset managers will be exempt from unbundling requirements when paying for research on small and mid-cap companies and in fixed income, including rates, credit and loan research. Small and mid-cap issuers will be defined as having a market capitalisation of less than €1 billion, calculated over a 12-month period.

Reception to the proposed changes has been mixed with some welcoming the changes, particularly though active in institutional/wholesale markets, whereas others caution that the new rules mean that retail client-facing firms will face even more complex requirements with two-tracks of regulation applying to their businesses - one for retail and the other for wholesale clients.

Prospectus Directive

A prospectus is a document that companies need to disclose to their investors when they issue shares and bonds to the market in the EU. The Commission’s amendments propose creating an “EU Recovery Prospectus” – a type of short-form prospectus – for companies that have a track record in the public market. As such the length of a prospectus document may reduce significantly from hundreds of pages to approximately 30 pages in length.

A second set of targeted amendments to the Prospectus Regulation aims at facilitating fundraising by banks that play an essential role in financing the recovery of the real economy.

Securitisation Directive

The last part of the Commission’s package comprises measures amending the Securitisation Regulation and the Capital Requirements Regulation and aimed at facilitating the use of securitisation in Europe's recovery by enabling banks to expand their lending and to free their balance sheets of non-performing exposures and loans (NPLs).

Key to the changes is the creation of a specific framework for simple, transparent and standardised (EU STS) on-balance-sheet securitisation that would benefit from a prudential treatment reflecting the actual riskiness of these instruments. In addition, the Commission proposes to remove existing regulatory obstacles to the securitisation of NPLs. This can help banks offload non-performing exposures that can be expected to grow because of the coronavirus crisis. Today's changes are based on extensive work and analysis carried out by the European Banking Authority in 2019 and 2020. The Commission had already proposed a Banking Package to facilitate bank lending to households and businesses throughout the EU.

Next steps

It is now for the European Parliament and the Council to agree to these legislative texts. Once the package is adopted and has entered into force, the changes to the Prospectus Regulation and the Securitisation Framework will apply directly in the Member States. The MiFID amendments will need to be transposed into national laws before they are applicable.

Originally published by ThomsonReuters © ThomsonReuters.