Editor’s Letter - Issue 127

The inaugural ESMA conference, held in Paris in October 2017, touched on a wide range of interconnected regulatory topics. There is much to play for if regulations are to attain their aims. The fact that 10 trillion Euros are sitting in deposit accounts paying sub-zero interest rates is viewed as a lost opportunity by ESMA’s Chairman, Steven Maijoor. This is partly because, after years of various initiatives (simplified prospectuses, KIIDs and now PRIIPS), fund literature is not intelligible to the vast majority of people. Clearly, the Capital Markets Union (CMU) project has yet to give European savers the confidence to embrace a US-style culture of investing into capital markets, which are still much smaller than in the US. Hence, Europe’s 23 million SMEs are still over-reliant on bank debt. Therefore, alternative lending, both directly and via capital markets, which many hedge fund and private equity managers pursue, has a long and strong runway of further growth ahead.

High hopes that MiFID II may enhance transparency and reduce costs are weighed against fears that MiFID II could have unintended consequences including further fragmenting equity markets and threatening liquidity, which could also be hampered by the levels of capital requirements for market makers (imposed by other regulations). These are perceived as excessive if market makers are not deemed to be systemic institutions. Additional MiFID II concerns are that it raises barriers to entry as larger asset managers can more easily absorb research costs, and that it may reduce (already patchy) sell side research coverage of smaller and medium sized companies. That could also impair liquidity.