The European Fund and Asset Management Association (EFAMA) responded to the European Commission’s non-bank financial intermediation (NBFI) consultation, and stressed that Europe needs more “holistic and rigorous analyses to determine where financial stability risks lie in the system before developing new macroprudential policies for capital markets”.
Tanguy van de Werve, EFAMA director general, said in a statement: “Whether it is the growing pension gap or the environmental transition, Europe faces many unprecedented challenges. Asset management is part of the solution. We channel monies in a vast array of asset classes, from equities to fixed income to infrastructure, that will require additional investments in the coming years. However, for this to succeed, macroprudential authorities must accept that capital markets are different from, and inherently more volatile than, the banking market and avoid applying bank-like regulation to our industry. Their policies need to be fit for purpose and not redundant.”
Among EFAMA’s recommendations is the expansion of collateral options as a key to strengthening EU capital markets as current rules constrain market participants to a narrow set of high-quality liquid assets, such as government bonds.
“While this approach ensures security, it can exacerbate liquidity crunches during periods of market stress. Allowing a broader array of assets, such as high-grade corporate bonds or other reliable securities, would reduce systemic pressure and improve market functioning without compromising stability,” EFAMA wrote.
Jo Burnham, margin expert at OpenGamma, said in emailed commentary: “The current limitations on acceptable collateral can create unnecessary bottlenecks, especially during times of market stress. This is why many financial institutions are already taking proactive steps to ensure their margining frameworks and collateral management practices are robust enough to meet variation margin requirements.”
Other recommendations included the creation of a consolidated tape for fixed income and equity securities to enhance market transparency and easing constraints on dealer balance sheets during periods of market stress.
Neil Ryan, consultant at FINBOURNE, said in emailed commentary: “A consolidated tape for fixed income has huge potential for European financial markets, but it needs to be implemented thoughtfully. A blanket approach across all asset classes could stifle innovation and burden users with costs that outweigh the benefits. We need a system that recognizes the distinct characteristics of different markets and is flexible enough to adapt to their needs. Equally important is the quality of the data — without high-quality, accurate information, the entire system risks becoming unreliable and less effective.”