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The discussion during the meeting was facilitated by the Chairman of CESR. The discussion was primarily focused on two different subjects: analysis of major trends and evolutions in financial markets and the EU/US regulatory and supervisory issues. The discussion on the Himalaya Report was postponed to the next meeting of the Panel.
1. Major trends and evolutions in financial markets
The discussion on this point was divided into: wholesale, retail markets and the process of consolidation of trading and post-trading infrastructures.
Wholesale markets, primary market activities and trading of bonds and derivatives
Activities in the primary equities markets of the bigger member-states have shown sideways movements with low volatility in line with major global indices or have shown signs of (modest) improvement. In general, the number of IPO’s across the EU (with the exception of the new listings in the London Stock Exchange and the Warsaw Stock Exchange) remained at a low level.
In the primary equities markets of some smaller member-states, stock-exchange activity to a large extent depends on privatisation activities by the respective national Governments. It was also noted that the level of trading activity in the stock exchange could misrepresent the overall picture when trading is concentrated in few companies.
Trading activities in the corporate bonds markets remained strong despite the rise in interest rates. Net issue of capital was - due to substantial amounts of maturing debts - limited in 2004 and mostly in convertibles when compared with 2003. Concerns were voiced about the bonds markets effectively not being accessible for small and medium sized enterprises. In government bonds, the demand is still strong, in particular from the institutional side (insurers and pension funds). An important recent event in this market was the successful issuance of 50-years bonds in France (followed by a private issuer) which is currently under evaluation by the debt management offices of various other member-states. This would provide member-states with the opportunity to lock-in current low interest-rates. Longer-term government debt maturities seem to be in demand by the market, in particular by insurers and pension funds. It is unclear whether the appetite by (institutional) investors for this type of bonds is driven by the lengthening of the life expectation of persons or by their customers or participants in particular.
In derivatives markets, a continued surge has been perceived in the use of (OTC- and exchangetraded) derivatives by non-financial firms as part of regular balance sheet management. In this market, credit derivatives are usually offered to companies by banks as part of bank loan arrangements. Over the period under review more attention has been given to the issue of transparency and documentation linked to credit derivatives products (but not necessarily up to an adequate level from a supervisory point of view). In terms of product diversification, increased segmentation of various credit derivatives products took place (index products, equities products and interest rates products).
The members of the Panel considered hedge funds and private equity important developments to be followed more closely in the near future. The rise of these entities may to a certain extent have to do with the decreasing appetite for traditional portfolios of quoted equities by investors. Meanwhile, earnings by banks on hedge funds activities may account for 15% of earnings on investment banking activities. In response to the observation that the current environment is not in favour of regulating hedge funds, it was noted that hedge funds are nowadays more closely followed by brokers, which leads to another form of control. The enhanced role of hedge funds in companies’life could be problematic due to their short term objectives which do not necessarily correspond to those of companies. Some members valued the role of private equity firms as facilitators of the markets in the transfer of corporate control, others warned against the lack of transparency or disclosure by these entities and the possible threat to securities trading on organised markets. It was also noted that at present private equity transactions may be too high leveraged, in the light of the expected rise of interest rate. More transparency in the activity of private equity and hedge funds was advocated by the Panel.
Retail markets: investment funds; trading of shares, distribution of products
As regards asset-management it was recalled that in 2004 assets under management have grown by 11% and reached 4,2 trillion euros (that represents 35% of the total worldwide industry). It was also noted that 60% of the new business comes from cross-border investments; this shows the inflow of foreign providers of investment funds to their domestic market, offering funds varying from hedge funds, index-funds, investment-certificates funds to closed funds. In some Member States a limited number of providers cater over 80% of the market for investment funds.
More transparency of activities of portfolio managers as investors was advocated. However, it was also noted that codes of conduct have been adopted by the asset management industry. Current regulation of this sector was considered to be necessary for investor protection.
Distribution channels are still split between traditional clients and innovative ones: the use of Internet varies according to the rate of penetration across Europe.
Members of the Panel also recalled the significant role of investor education.
Finally, the members of the Panel have also expressed concerns about the costs of more stringent corporate governance regulation, illustrated by the growing number of board meetings and extra money involved to safeguard compliance with this regulation, in particular due to the Sarbanes Oxley Act. On the one hand, this type of regulation could assist authorities to restore confidence of investors (in conjunction with enhanced investor education), on the other hand it could explain intensified calls by the industry for more cost-effective solutions if de-listing in the US is considered.
Need to evaluate the general competitiveness of EU markets, in all sectors, was finally stressed by the Panel.
Regarding clearing and settlement it was noted that there is still the need for more clarity on some aspects of the definition of these activities, such as the definitions of “settlement” and “systemic”. Still uncertain is whether the CESR-ESBC Standards will be sufficient for the future or whether a Directive will be necessary; a cost benefit analysis should be conducted before adopting any proposal for new legislation.
2. The EU/US regulatory and supervisory issues
Members of the Panel took note of the recent initiatives of cooperation between CESR and the CFTC on financial and commodities derivatives markets.
Next meetings
It was agreed to hold the next meetings of the Panel in Paris on 14th June and 9th November 2005.
Members of the panel indicated themes for in-depth discussion during the next meetings: cost of Sarbanes Oxley for European companies listed on US exchanges, delisting from US exchanges and overall transatlantic competition; pros and cons of dual listing; public oversight of auditors and needs and costs of public company’s oversight board; transparency and disclosure of hedge funds; asset management companies and voting rights behaviour; horizontal regulation across sectors; investor education; a policy discussion on financial analysts; evaluation of MAD; and development of the role of the Market Participant Consultative Panel as an alert system for CESR on general malfunctioning of the Single Market.
