The European Commission took today a major step towards the development of a Capital Markets Union by promoting alternative sources of financing and removing barriers to cross-border investments.
While the Capital Markets Union will benefit all Member States, it will particularly strengthen the Economic and Monetary Union by promoting private risk-sharing. Building on progress already achieved since the launch of the Capital Markets Union in 2015, today’s proposals will boost the cross-border market for investment funds, promote the EU market for covered bonds as a source of long-term finance and ensure greater certainty for investors in the context of cross-border transactions of securities and claims. The Capital Markets Union is one of the priorities of the Juncker Commission to strengthen Europe’s economy and stimulate investments to create jobs. It aims to mobilise and channel capital to all businesses in the EU, particularly small and medium enterprises that need resources to expand and thrive.
Concretely, the Commission proposed today common rules – consisting of a Directive and a Regulation – for covered bonds.
With EUR 2.1 trillion in outstanding amounts, covered bonds are currently among the largest debt markets in the EU. European banks are global leaders in this market, which represent an important source of long-term financing in many EU Member States.
Covered bonds are financial instruments backed by a segregated group of loans. They are considered beneficial not only because they fund cost-effective lending, but also because they are particularly safe. However, the EU market is currently fragmented along national lines with differences across Member States.
The proposed rules aim to enhance the use of covered bonds as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed. They will also give investors a wider and safer range of investment opportunities.
At the same time, the proposal seeks to reduce borrowing costs for the economy at large. The Commission estimates that the potential overall annual savings for EU borrowers would be between EUR 1.5 billion and EUR 1.9 billion.
The Commission is also promoting the cross-border distribution of investment funds.
Investment funds are an important tool to channel private savings into the economy and increase funding possibilities for companies. The EU investment funds market amounts to a total of EUR 14.3 trillion. However, this market has not yet achieved its full potential. Just over a third (37%) of investment funds and around 3% of alternative investment funds are registered for sale in more than three Member States. This is also due to regulatory barriers that currently hinder the cross-border distribution of investment funds.
Today’s proposal aims to remove these barriers for all kinds of investment funds making cross-border distribution simpler, quicker and cheaper. Increased competition will give investors more choice and better value, while safeguarding a high level of investor protection.
The Commission also provided clarity with regards to the law applicable to cross-border transactions in claims and securities.
The assignment of a claim refers to a situation where a creditor transfers the right to claim a debt to another person in exchange of a payment. This system is used by companies to obtain liquidity and access credit. At the moment, there is no legal certainty as to which national law applies when determining who owns a claim after it has been assigned in a cross-border case. The new rules proposed today clarify according to which law such disputes are resolved: as a general rule, the law of the country where creditors have their habitual residence would apply, regardless of which Member State’s courts or authorities examine the case. This proposal will promote cross-border investment, access to cheaper credit and prevent systemic risks.
The Commission has also adopted a Communication to clarify which country’s law applies when determining who owns a security in a cross-border transaction. Enhanced legal certainty will promote cross-border investment, access to cheaper credit and market integration.
Compliments of the European Commission