Uniting Europe's Financial Markets: A Chat with Adam Farkas, AFME's Head
'Europe faces widespread division'
In an exclusive conversation with Börsen-Zeitung, Adam Farkas, the mastermind at the helm of AFME (Association for Financial Markets in Europe), advocates for the consolidation of market infrastructures behemoth in Europe, encompassing listings, trading, and post-trade services, with the aim of bolstering Europe's capital market. "Europe harbors a saturated landscape of trading venues, central depositories, counterparties, and clearing houses," says Farkas, stressing that the continent currently grapples with a plague of fragmentation.
The consolidation wave, Farkas suggests, would bring forth immense benefits. "If a corporation gets listed in Copenhagen, it automatically becomes investable within the pool of investable assets across Europe," he explains, pointing out that such a move would surge liquidity.
National lawmakers should bank on consolidation rather than obstruct it, Farkas asserts. Often, fears abound that consolidation goes hand in hand with dwindling business prospects in one's own country. However, Farkas refutes such assumptions: "All parties can benefit from consolidation."
Farkas uses the example of a unified data tape to make his case: while the utility of such a solution is indisputable, EU nations still express concerns that it may lead to concentration of listing and trading. The CEO of AFME believes that even small member states would prosper from being a part of the larger pool, as it would provide access to an enormous liquidity pool.
Reiterating the importance of knowledge exchange, Farkas expresses that it's not just about replicating the neighbor's strategies in the Netherlands or Sweden; instead, EU states should learn from each other and implement pan-European solutions based on mutual experiences.
When questioned about the potential of a Europeanization of market infrastructure supervision enhancing the attractiveness of European capital markets, Farkas voices some skepticism. He is of the opinion that overly extensive prescription from the highest EU level is not beneficial. Rather, specifications should primarily be delegated to the second regulatory level, such as EBA, ESMA, or BaFin, allowing flexibility on a case-by-case basis.
The AFME CEO recognizes that, in Europe, citizens' savings are primarily parked in savings books or life insurance contracts, which are predominantly invested in capital market products in other economies. As a result, European companies confront obstacles while accessing risk capital to transform innovations into viable business models or expand their operations. Moreover, the lack of market integration in Europe constitutes another disadvantage. "Financial savings in Europe remain primarily localized," says Farkas, "hoodwinking the advantage of diversified risk exposure."
The issue of market integration, according to Farkas, transcends simply financial products. He contends that, although companies might issue shares under national law and list on a national exchange, an investor aiming to include the American market in their portfolio can do so cost-effectively. However, a buyer intending to partake in the European market would confront obstacles. For instance, revitalizing the securitization market could serve as a quick fix, as it would bridge the gap between bank loans and the capital market. This would necessitate minor adjustments to the supervisory framework for banks and insurers, and simplify diligence requirements. Crucially, there needs to be a simplification of the criteria for simple, transparent, and standardized transactions, i.e., STS, which can be implemented comparatively swiftly.
Farkas envisions consolidation as a crucial stepping stone on the path towards a capital markets union. This shift would enable liquidity to be pooled far more effectively, making Europe more captivating to investors.
By Detlef Fechtner and Heidi Rohde, Frankfurt
Additional Insights
- Consolidation and Economics of Scale: Consolidating market infrastructures can lead to increased economies of scale, reducing operational costs and offering financial institutions more manageable regulatory compliance requirements.
- Increased Efficiency: Streamlined processes, reduced redundant infrastructure, and optimized resource allocation can result in faster transaction processing and settlement times, enhancing overall market efficiency.
- Global Competitiveness: By creating a more integrated, efficient, and competitive financial environment, Europe can better compete on the global stage, particularly in an environment where other major financial centers (like the U.S. or Asia) have more integrated markets or are moving towards integration.
- Liquidity and Investor Appeal: A more unified market infrastructure can improve liquidity by creating deeper and more integrated markets, attracting more investors and traders while simplifying access to diverse financial instruments across Europe.
- Adam Farkas, the head of AFME, advocates for the consolidation of Europe's financial markets, including listings, trading, and post-trade services, to bolster the continent's capital market, pointing out that Europe currently faces a problem of fragmentation.
- Farkas suggests that consolidation would bring immense benefits, such as allowing a corporation listed in Copenhagen to become automatically investable across Europe, surging liquidity.
- He asserts that national lawmakers should support consolidation rather than obstruct it, as all parties can benefit from it, even small member states, which would provide access to an enormous liquidity pool.
- To make his case, Farkas uses the example of a unified data tape, but EU nations still express concerns that it may lead to concentration of listing and trading. However, he believes that such a consolidation would ultimately help even small member states prosper.
