Targeted consultation on integration of EU capital Markets

Norges Bank Investment Management (NBIM) is the investment management division of the Norwegian Central Bank and responsible for investing the Norwegian Government Pension Fund Global. At the end of 2024, the Fund held 285 billion Euro in securities issued by EU member states and European corporates, making it the largest single owned investor in EU Markets. We maintain an investment allocation to EU markets that is greater than the relative size of these markets in an international context.  

As a long-term investor with this significant exposure across all European markets, we have a strong interest in well-functioning capital markets that facilitate efficient capital allocation and promote economic growth, and we share the concern that European markets over time have fallen behind in terms of business dynamism and the provision of new investment opportunities to institutional investors. We commend and support the sense of urgency by which the Commission aims to address fundamental issues of market integration and capital market growth.

The Savings and Investments Union (SIU) encapsulates the objectives to create better financial opportunities for EU citizens, while enhancing the financial system's capability to connect high household savings with productive investments. European capital markets can become more dynamic, efficient, and better positioned to facilitate future economic growth with policies that enhance the supply of productive investment opportunities and increase the demand for high-yielding investments. The dual approach can create a virtuous cycle for European capital markets and the broader European economy.

The recent report on the future of European competitiveness (The Draghi report) identifies three main fault lines that continue to impede the development of an integrated European capital market:

“First, the EU lacks a single security market regulator and a single rulebook for all aspects of trading, and there is still high variation in supervisory practices and the interpretation of regulations. Second, the post-trade environment for clearing and settlement in Europe is far less unified than in the US. Third, despite the recent progress made on withholding tax, tax and insolvency regimes across Member States remain substantially unaligned.”

The targeted consultation on integration of EU capital markets addresses these issues and raises further questions important to European capital market integration. We take this opportunity to synthesise our main comments to the consultation.

The diverse national legal structures such as securities law, corporate law and insolvency regimes, are a key obstacle to integration of capital market infrastructure. Further integration of European capital markets may be challenging when infrastructure is regionally segmented. In order, to achieve a more integrated capital market the Commission and Member States will need to address the fundamental structures that sustain this segmentation.

The current fragmentation of tax regimes also underpins national financial market infrastructures and limits cross-border investment. Harmonising and streamlining the rules for local management of withholding tax across EU members states is important. The FASTER directive represents a positive step, but ambitions could be higher with a more aggressive timeline for implementation. We experience that hurdles remain due to lack of standardisation and digitalisation of processes across the union.

There is a potential to make the debt securities issuance process more streamlined and harmonized. The European Central Bank EDDI initiative to establish a standardised pan-European debt issuance process should be followed up on. NBIM participated in the Debt Issuance Market Contact Group (DIMCG) which provided extensive advice to the ECB in December 2021. The implementation of the technical recommendations should serve to facilitate growth of the European debt securities market more efficiently.

The targeted consultation paper emphasises mechanisms to aggregate equity trading liquidity to create a European liquidity pool. We argue that market forces will lead to further market integration if the fundamental impediment of regional segmentation is diminished. Further integration should be a consequence of increased competition, innovation and transparency in trading markets and not a result of additional regulatory intervention in the trading system. We believe a sufficiently fast, deep and attributed consolidated tape will have a meaningful impact as a coordinating mechanism integrating fragmented market liquidity.

It is important that regulation of trading markets does not stifle innovation. Currently, ‘open-access’ multilateral trading venues faces regulatory restrictions in competition with bilateral trading mechanisms, which is opposed to the goal of facilitating an integrated European liquidity pool. Regulation also maintains arbitrary constraints on best execution for investors through so called volume caps.

The EU regulatory regime for financial markets can create rigidities due to the length of the regulatory process and finally arrive at overly prescriptive requirements. Better and simpler regulation is key to facilitate capital market evolution.

Capital markets supervision should be unified at a European level. Unified supervision would ensure consistent interpretation and application of regulation, reduce operational complexity and legal uncertainty, and avoid any perception of ‘regulatory arbitrage.’ Importantly, within the framework for supervisory integration to be adopted at a European level, capital market supervision, should further facilitate market-based solutions for growth based on competition, innovation and transparency in capital markets.

We value the opportunity to contribute our perspective to this important consultation and look forward to continuing engaging on policy initiatives supporting the growth and integration of European capital markets.

Yours sincerely,

Malin Norberg
Chief Investment Officer Market Strategies                                            

Emil Framnes                                       
Global Head of Equity Trading and Transition

Vegard Vik
Lead, Market Structure and Strategy