We hear from Dr. Alexandra Hachmeister, Chief Regulatory Officer, Head of Group Regulatory Strategy, Deutsche Börse AG following the recent WFE Working Committee.
Alexandra gives the view of a Financial Market Infrastructure (FMI) operator in the European Union (EU) on the regulation of financial markets.
What have been the main drivers for European financial markets regulation?
Our industry is highly impacted by regulation. In the last decade, EU financial markets legislation went through three phases with different focus:
I) Until the financial crisis, the focus was on transparency, competition and level playing field. The main objective was to create a single market for financial services.
II) After the crisis, the focus (not only of the EU) shifted to financial market stability and the implementation of the G20 principles. The EU was and remains very committed to implementing the G20 agenda covering the complete value chain of FMIs. This acknowledges the central position of FMI operators such as Deutsche Börse in ensuring financial stability and integrity.
III) Since 2015, following the transposition of the majority of the G20 measures into EU law, the focus shifted towards creating growth and jobs. This was a fundamental paradigm shift in EU policymaking, best illustrated by the Capital Markets Union (CMU), which sets economic incentives instead of imposing bans to enable financial markets to work efficiently and competitively.
Looking ahead - how is the focus of political EU decision-making changing with Brexit?
Currently, we still have an overlap of phases II and III, with some of the post-crisis regulation being still in process of implementation (such as MiFID II/MiFIR or CSDR) or already being reviewed (such as EMIR) while implementing the CMU. This process is heavily affected by the highly political dynamic and the unprecedented uncertainty around Brexit. With the largest financial centre leaving the Single Market, EU regulation and supervision has to adjust:
1. The project to introduce a Capital Markets Union to strengthen the competitiveness of the EU capital market and to reduce its fragmentation along national borders is now more important than ever. A true EU capital market will be more attractive for non-EU investors and issuers and creates a more attractive environment for our industry, allocating resources in the EU efficiently and ensuring fair, stable and open markets for market participants.
2. Brexit has obviously increased the urgency for EU regulators and market participants to discuss how to guarantee efficient supervision, not only within the EU but also as regards systemically important infrastructures outside the EU. Thus, besides stringent implementation of the G20 goals as well as international standards, ensuring financial markets stability and a level playing field remains the key priority for EU legislators.
3. In particular, the question arises whether market participants are prepared for the consequences of Brexit. One of the biggest challenges for UK market participants will be the loss of the EU passport for conducting business with clients in the EU and the fact that there is no appropriate substitute for it. Third country regimes within EU financial regulation were designed to provide access for non-EU firms to the EU markets, but they do not cover the entire suite of financial services and underlying equivalence decisions can be withdrawn.
It is in Deutsche Börse’s primary interest to ensure that our clients, who currently use the UK as financial hub, maintain access to our infrastructure – while supporting clients who seek to relocate their business to the EU, we are committed to maintaining our UK market access post-Brexit. This is why Deutsche Börse has set up a Brexit Transition Team, a Brexit Readiness Team and dedicated projects that support our customers in getting prepared in these challenging times.
Against this background, how do you see the role of financial market infrastructures?
FMIs are uniquely positioned since they have taken a central role in the past to ensure financial stability and will do so in the future. Our systems have worked smoothly, even during the financial crisis, i.e. exchange-traded markets functioned well during the crisis compared to OTC markets.
Regulators have therefore put exchanges and regulated infrastructures into the centre of financial markets regulation, making us part of the solution. Why? Because FMIs are neutral, highly trusted, transparent and regulated. This is why we are perfectly suited to ensure regulatory compliance and efficiency of financial markets alike.
In light of the complex environment FMIs are operating in, it is vital to make a continuous effort to explain the functioning and benefits of FMIs to policymakers and the broader society. The great work done in this area by WFE is very much appreciated.