On 19 January 2021, the European Commission published a Communication on the European economic and financial system: fostering openness, strength and resilience . The Communication and strategy set out therein for development of the European financial markets is designed as one of the early steps of the Commission under Ursula von der Leyen’s leadership to strengthen the EU’s “open strategic autonomy and resilience”. To this end, it proposes a number of initiatives aimed at promoting the international role of the euro, strengthening the EU’s financial market infrastructures, improving the implementation and enforcement of EU’s sanctions’ regimes, and increasing the EU’s resilience to the effects of the “unlawful extra-territorial application of unilateral sanctions and other measures by third countries”. The strategy is built around 15 key actions, addressing a range of priority topics. Some of the key initiatives in the area of financial services include:
Strengthening the international role of the Euro
- Securities markets, commodities and benchmarks: The Commission intends to increase euro-denominated trade in debt securities, commodities and related financial instruments. In respect of commodities and noting that the share of natural gas contracts signed in the Euro increased significantly in 2020 in comparison to the 2018 figures, the Commission intends to “continue to discuss with the main players in key strategic sectors, including commodity, aircraft, healthcare, and critical raw materials for renewable energy.” In respect of European financial markets, the Commission noted that one of the reasons behind its July 2020 proposal to amend the MiFID II commodity derivatives regime (see our recent blog note) was to “help the development of euro-denominated energy markets and allow EU companies to manage their risks, while safeguarding the integrity of commodity markets”. In the area of benchmarks regulation, the Commission announces that in 2022 it will undertake review of the European Benchmarks Regulation, aiming to “facilitate the emergence of euro-denominated indices covering core sectors of the economy, including nascent energy markets, such as hydrogen”. Finally, in the context of the upcoming MiFID II/MiFIR review that is due to take place later in 2021 and the expected introduction of consolidated tape, the Commission intends to increase “market depth and attractiveness of euro-denominated securities both for issuers and investors”.
- Sustainable finance and ETS: The Commission wants to further promote the role of the Euro in the “green” transition. One of the initiatives planned in this context includes the upcoming proposal on EU Green Bond Standard. The Commission also supports development of “targeted trading platforms for euro-denominated sustainable financial instruments, such as for nascent energy markets like hydrogen”. In addition, in June 2021 the Commission will publish legislative proposals to meet the EU’s greenhouse gas emissions reduction target of at least 55% by 2030 (compared to 1990), including proposed expansion of the EU ETS to include emissions from maritime transport and potentially emissions from buildings, road transport or all other emissions from fossil fuels combustion.
- Digital Euro: The Commission notes the recently closed public consultation by the European Central Bank (ECB) about digital Euro and confirms that both institutions will “jointly review at technical level a broad range of policy, legal and technical questions emerging from a possible introduction of a digital euro”.
Increased resilience of European financial market infrastructure and critical service providers
- Protecting EU market infrastructure from extraterritorial application of third-country sanctions: the Commission notes that a number of European market infrastructures provides global services, what “makes them vulnerable to disruptive actions by third countries, including through the unlawful extra-territorial application of unilateral sanctions”. The Commission proposes to establish European mechanism allowing effective response to such actions, and including development of European toolbox of deterrence and counter-measures.
- Euro-clearing: the Commission notes that the vast amounts of Euro-denominated contracts is cleared by CCPs based outside of the EU – and in particular in the UK – what raises potential financial stability concerns. In this contexts, it highlights that “there is a clear expectation that Union clearing members reduce their exposures to UK CCPs that are systemically important for the Union, in particular Over-the-Counter (OTC) derivative exposures that are denominated in euro and other Union currencies”. EU market participants are generally expected to “to reduce their excessive exposures to systemic CCPs in third countries” and EU CCPs, on the other hand, to build up their clearing capabilities. To this end, the Commission plans to work with the industry (via dedicated working group) – alongside the ECB, EBA and ESMA – to assess “possible technical issues relating to the transfer of contracts denominated in euro or other EU currencies to central counterparties located in the EU with a view to facilitating such transfers”. The relevant recommendations are to be issued by mid-2021.
- Reducing reliance on non-EU financial institutions and funding in foreign currencies: the Commission is of the view that both extensive reliance of European market participants on non-EU banking and reliance of EU banks on foreign exchange swap markets can create problems in times of market disruption. In order to limit these risks and as a first step, the Commission will mandate the EBA to conduct a study in 2021 on EU dependence on non-EU financial operators and banks’ dependence on funding in foreign currencies.
- Securing the flow of capital and financial services with third countries: referring once again to “unilateral actions by third countries” that “have compromised legitimate trade and investment of EU businesses with other countries” – albeit stopping short by pointing to such third countries by name – the Commission pledges to “explore ways to ensure the uninterrupted flow of essential financial services, including payments, with EU entities or persons targeted by the extra-territorial application of third-country unilateral sanctions”.