November 28 was a special day for the Capital Markets Union, firstly because the European Commission presented its report on the progress made towards completing it. With the current political mandate soon drawing to a close, policy makers are advocating that now is the time to do a final push to build a genuine Capital Markets Union, a genuine single market in capital.
The CMU, launched by the Juncker Commission back in November 2014, aims to unify and further integrate the capital markets in EU member states by reducing financial market fragmentation and diversifying the financing of the economy, ensuring different sources of financing especially for small and medium-sized companies.
The Commission's Action Plan for the CMU sets up a number of key measures and actions to establish the building blocks needed to achieve the overarching EU priorities such as stimulation of jobs, growth and investment, as well as strengthening the global role of Europe. The action plan is built around the following basic principles: creating more opportunities for investors, connecting financing to the real economy, fostering a stronger and more resilient financial system, deepening financial integration and increasing competition with the aim to achieve all this this by 2019.
But secondly, November 28 was also a special day to us at Nasdaq Nordic, because Nasdaq and EQT organized a joint one-day conference in Brussels on the topic of 'Nordic financial ecosystem,' as we call it.
To us, well-functioning capital markets are a balanced interplay between different interests that converge towards an end-result which is far greater than just the sum of its parts. Companies who issue equity and raise capital create positive ripple effects on the economy in the form of increased investments into research and innovation, they boost job creation and thus increase tax revenues and welfare for the societies they inhabit; and financial institutions who issue debt make buying a home affordable to the Mr. and Mrs. Perssons, Hansens and Virtannens of the Nordics.
On the investor side, a long tradition of transparency and equal access for all investor types means that the Nordic capital markets have a unique blend of both international and local investors, big and small, resulting in both institutional and retail investor trading flow, a flow that creates a mutually beneficial dynamic between short term interests and long-term holdings. Via politically mandated pension saving systems, which are very much alike across the Nordics, the Nordic pension funds rank among the biggest capital owners in Europe; and with a relatively large share of the population being affluent and well-educated, the retail investor segment is traditionally big and active in the Nordics.
This is the balance that allows long term investors to enter or exit the market at relative low cost and also lets short term investors uncover opportunities and look for good returns.
Key to retaining this balance on a local level has been a careful approach of not over-regulating and thus push the delicate interplay of mutually beneficial interests in the Nordic capital markets. A recent case in point has been the unintended consequence that the Systematic Internalisers model has created post the implementation of MiFID II. Banks provide a real and needed service when providing liquidity by matching client orders with their own book. However, what we have seen post MiFID II is that the SI practice has grown out of expected proportion and that crossing of orders is neither ad-hoc nor focused on large sizes. This should be cause for concern for policy makers as the obvious risk is that SIs are extracting flow away from lit venues, in particular regulated markets, which are forming the price. This trend is already destabilizing the financial ecosystem. Furthermore, SIs and the increased bilateral trading seems to become the new dark pools with highly selective access for investor segments and a further fragmentation of the price picture. We believe regulators need to achieve a better understanding of how different SIs operate and look into the unintended consequences of the proliferation of SIs.
This is one of the reasons we appreciated, at our seminar, the participation of such prominent speakers as Valdis Dombrovskis, Marcus Ferber and Paulina Dejmek-Hack, as well as the insightful panelists from banks, think tanks and financial industry representatives including EQT and Nasdaq.
To us, speakers and panelists confirmed the well-functioning aspects of the Nordic financial ecosystem and how the CMU should emulate the way we in the Nordics have managed to improve public market financing in particular for SMEs, which in turn has spurred on development in new technology and sustainable solutions.
We were also fortunate to have one of our listed startup companies on one of the panels: SaltX Technology is a newly listed First North company specialized in storing sustainable energy so consumers and power grids can use renewable energy when they need it. As such SaltX is emblematic of what it really is that the EU is looking to promote with its Capital Market Union; and the company is also a great ambassador for what Nasdaq has been able to co-create working with clients and market stakeholders in the past years: SME growth, tech innovation and commercial focus on sustainability themes.
This fact was highlighted in European Commission Vice President Valdis Dombrovskis's keynote address. He opened by referring to the well-functioning Nordic ecosystem by saying:
"Many Nordic companies that are large today first began their journey by listing on Nasdaq First North."
He called for "a final push to build a genuine Capital Markets Union, a genuine single market in capital" while at the same time looking "more broadly at the future of finance and of the Capital Markets Union, namely sustainable finance and Fintech." You can find Dombrovski's full speech here .
The fact that the CMU needed some careful attention was also expressed in Markus Ferber's speech. Ferber, as member of the European Parliament and 1st Vice-Chair of the ECON committee, chose to especially highlight the importance of restarting the CMU plan now that Britain is leaving the European Union.
"CMU needs a new push. We have the headline, but I don't see the content, and we need a comprehensive strategy for being Brexit-ready with the CMU."
The CMU project has made some progress since 2014. Among other things, a standardized framework for securitization has been introduced, revised prospectus requirements will make it easier and cheaper to issue securities, and capital requirements for infrastructure investment by banks and insurers will be reduced. Nevertheless, the goals of the CMU are still far from being fully realized and many of its 30-plus building blocks are still not finalized. In his keynote, Marcus Ferber urged the co-legislators to make a final push and complete and adopt these files before the European Parliament elections in May 2019.
Ugo Bassi, Director of Financial Market, FISMA, European Commission, followed up with a reassuring statement for growing early-stage companies and listed SMEs like SaltX and said:
"With the CMU we want to alleviate the burdens for SMEs and support IPOs"
Some of the local activities that have also benefitted the Nordic financial ecosystem and the environment for SMEs, have been the Swedish government's launch of the Investments Savings account, ISK back in 2012. The work Nasdaq has done for introducing the same in Denmark and Finland are also excellent examples of how participants of the national financial ecosystems have worked together to improve investor conditions in the Nordics. This industry collaboration is also the basis for the regional effort to adjust the flows of capital towards more sustainable investments.
As one forum participant mentioned after the event: "The work that begun with the Nasdaq IPO Task Force work and the Nordic efforts to promote sustainability should not be hampered by potential, inflexible EU regulation."
Closing remarks were delivered by: Paulina Dejmek-Hack, Economic adviser, Cabinet of EU President Jean Claude Juncker, EU-Commission and included the following statement:
"Nasdaq in the Nordics is a strong example of how we create good financial ecosystems in Europe. Sustainable finance is a cornerstone in the CMU."
We could not agree more. Let's make sure that EU regulators and the Commission acknowledge and recognize that in order to build strong financial ecosystems, that foster and promote sustainable and tech-driven start-ups, we need transparent, fair and orderly markets that protect and promote the different, converging interests from investors and issuers alike.