Brussels. Europe's finance ministers agreed on Friday on joint supervision of the European capital market. The compromise is a weaker version of the EU Commission's proposal for the EU market integration package (Market Integration and Supervision Package, or MISP for short). Instead of all-encompassing market supervision, the member states are now allowing exceptions for several trading venues and a weakening of the originally planned supervisory mechanisms.
According to diplomats in charge of the process in Brussels, this was preceded by tough and delicate negotiations. On the eve of the meeting in Luxembourg, the ministers discussed further matters over dinner. This resulted in further changes to the original Commission proposal.
The agreement now in place exempts large financial centers from centralized supervision by the European Securities and Markets Authority (Esma) in Paris and also provides for a much weaker supervisory structure (governance) than the Commission had originally demanded.
Ireland's Finance Minister, Simon Harris, spoke openly of a compromise: "This romantic idea of waiting for the perfect and making the perfect the enemy of the good - that's not how the European Union works, that's not how democracy works, and that's not how 27 member states coming together to work on common issues work. It's about finding pragmatic solutions," he said after the meeting. His country currently holds the presidency of the EU, and Harris' team had to develop the proposal.
The negotiations particularly revolved around the Deutsche Börse. It received exemptions from direct Esma supervision for its national trading venues, which caused anger among other member states.
Finance Commissioner Maria Luís Albuquerque expressed disappointment on Friday: The Council had aligned the draft too closely with national interests and thus watered down the reform. Your point of criticism: In comparison to the Commission's original proposal, the text excludes four trading venue groups, three central counterparties (CCPs) and two central securities depository (CSDs) from direct Esma supervision through new thresholds - including the nationally oriented trading venues of Deutsche Börse.
As several diplomats said on the sidelines of the summit, Germany and Luxembourg had prevailed with their wishes. Luxembourg in particular had called for weaker governance than the Commission had envisaged. “Luxembourg has won,” said one diplomat. Germany, on the other hand, wanted exemptions for the Frankfurt Stock Exchange from central supervision.
Belgium wants discussion at EU summit
There was also criticism from Belgium, which abstained from voting on Friday. Finance Minister Jan Jambon warned that the exceptions and special regulations now introduced by EU ministers would lead to “fragmentation” of the EU market and additional “distortion of competition” – exactly what joint supervision was actually intended to avoid. He blamed Berlin largely for this: “I think Germany won in some cases,” said Jambon.
Prime Minister Bart De Wever now wants to discuss the issue at the EU summit in Brussels next week. Diplomats expect that De Wever could once again cause a stir - and sharpen the issue of governance.
Denmark was also reluctant to support the compromise and expressly shared the Commission and Belgium's criticism of the new exceptions. His country was hoping for a more ambitious reform in order to create tangible improvements for market participants, said Denmark's EU ambassador Carsten Grønbech-Jensen during the meeting. However, people will support the new text “in the spirit of compromise”.
The Capital Markets Union and the common supervision that comes with it are seen as the first concrete test case for reforms designed to make the EU more competitive and more attractive for start-ups. It is one of the central demands of Mario Draghi's report, in which the former President of the European Central Bank called for the full integration of European capital markets.
Reform with exceptions
A mission that was also shared by Chancellor Friedrich Merz (CDU). “We need a kind of European Stock Exchange so that successful companies like Biontech from Germany don’t have to go public on the New York Stock Exchange,” said Merz in the Bundestag a year ago. Now, however, Berlin has watered down exactly this claim with the exceptions, the diplomats complained.
The completion of the EU Capital Markets Union has been progressing slowly for a long time. The aim is to increase liquidity and mobilize more European capital for companies within the EU. However, smaller member states such as Luxembourg are skeptical about centralized European supervision: they compete for financial transactions through comparatively less strict supervisory rules and do not want to lose this competitive advantage.
And Germany also wanted exceptions to central supervision. Specifically, there are two questions: At what point is a stock exchange considered “significant”? And how much power will Esma actually have over them in the future? The Irish Presidency's compromise proposal defines “significant” across two thresholds.
First, a trading venue is considered significant if it accounts for at least five percent of the relevant EU trading volume and belongs to a group that operates stock exchanges in at least two member states. Secondly, it is sufficient if an exchange alone achieves at least 15 percent of the trading volume and has a cross-border share of at least 85 percent for stocks, ETFs and bonds. According to estimates by the EU Commission, around eight stock exchange groups would come under central supervision.
It is precisely these numbers that spark suspicion among smaller states. They suspect that the criteria are constructed in such a way that large domestic trading venues - such as the Deutsche Börse - are initially spared. The thesis: Large member states would publicly push forward the reform, but in the end they would not want to subject their own stock exchanges to European supervision. Hesse, which is directly affected as the seat of the Frankfurt Stock Exchange, fundamentally rejects centralization anyway.
Conflict over supervisory bodies
The second controversial topic: governance. The question is how much decision-making power Esma gets and how much control the national supervisory authorities such as Bafin retain. The compromise proposal provides for two committees for this purpose. A new, full-time Executive Board will manage day-to-day business and make individual decisions on directly supervised trading venues - independent of national instructions.
The existing Board of Supervisors, in which the national authorities of all member states sit, remains responsible for regulation, strategy, budget and the question of how uniformly supervision will be applied in the EU in the future. Countries with smaller, less developed financial centers fear that they will fall behind the larger capital market locations in a purely professional committee. Malta, Latvia and Sweden, for example, warned of this possible dynamic on Friday.
To ensure that the Board of Supervisors retains influence on sensitive individual cases despite the division of tasks, the compromise provides for an escalation mechanism: Member States can submit a decision by the Executive Board for discussion in advance before it takes effect. This mechanism was improved in the compromise presented by the Irish. If it is triggered by at least nine member states, they will in future have a reporting period of three working days; the Executive Board must respond within three further working days.
The ministers also agreed on a new formula for financing Esma on Friday. In the future, the national supervisory authorities will only bear 40 percent of the non-fee-financed Esma costs instead of the current 60 percent. The EU budget should cover 60 percent instead of 40 percent.
Albuquerque also criticized this with reference to the ongoing negotiations on the EU's multiannual financial framework, which are extremely difficult. In addition, the EU Commission should fundamentally review the entire contribution key and, if necessary, submit a new proposal.
