nyse euronext’s response to the european commission green...

NYSE Euronext’s Response to the Commission Green Paper – “Long-Term Financing of the European Economy”- June 2013

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NYSE Euronext’s Response to the European Commission Green

Paper on Long-term Financing of the European Economy

25th June 2013

About NYSE Euronext

NYSE Euronext is a leading global operator of financial markets, a manager of index and other referential

data and a provider of innovative trading technologies. NYSE Euronext’s regulated markets in Europe

(Amsterdam, Brussels, Lisbon, London and Paris) and exchanges in the United States provide for the

trading of cash equities, bonds, futures, options, and other Exchange-traded products. NYSE Liffe is the

name of NYSE Euronext’s European derivatives business and is the world’s second largest derivatives

business by value of trading. It comprises regulated markets in five EU Member States which operate on

the basis of the Markets in Financial Instruments Directive (“MIFID”). In addition, NYSE Euronext has

over 25 years of experience in compiling, calculating and publishing a wide range of benchmark indices

in Europe and the United States, including the CAC 40 and AEX indices.

NYSE Liffe makes available for trading a broad range of futures and options contracts, including products

based on Sterling LIBOR, Swiss Franc LIBOR and EURIBOR. In addition, NYSE Euronext’s futures exchange

in the United States, NYSE Liffe U.S., lists a futures contract based on U.S. Dollar LIBOR and has recently

launched a product based on the DTCC’s General Collateral Finance (“GCF”) Repo Index.

NYSE Euronext’s company address is as follows:

11 Wall Street 39 rue Cambon

New York 10005 75039 Paris

United States France


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Response to the Green Paper

Our response focuses on two of the sections in the consultation:

Section 3.2 – The efficiency and effectiveness of financial markets to offer long-term financing

instruments;

Section 3.4 – The ease of SMEs to access bank and non-bank financing.

Financial markets, in order to function properly and to be able to provide long-term financing for the

European economy, should be seen as ecosystems in which issuers, investors and intermediaries are

interconnected, but with different needs that must be catered for.

For a viable public listing market, companies must want to list and investors must want to invest. As in

any marketplace, supply - companies wanting to list - and demand - investors wanting to invest - must

meet at an optimal point that delivers a low cost of capital to companies, while being an attractive

investment option for investors.

In order to help issuer supply and investor demand meet, it is important to work on each pillar

simultaneously, recognising that all market participants - investors, issuers, securities exchanges,

intermediaries and advisors, as well as regulators & legislators - have distinct roles to play in this

process.

Working as a community, the goal should to increase, on a sustainable basis, the amounts of capital

raised for Europe’s companies, both on primary and secondary markets.

The comments NYSE Euronext makes in the response fall into four main categories:

Supporting ‘investor demand’:

o Creating efficient financial markets to support investor demand (questions 11 & 12),

o Developing initiatives to support investor demand in respect of SMEs (questions 26 & 29);

Supporting ‘issuer supply’ (questions 26 & 29);

Improving the overall visibility of the SME ecosystem (questions 26 & 29);

Summary of NYSE Euronext policy recommendations to enhance the EU regulatory & non-regulatory framework for SME access to capital markets’ financing (questions 28 & 29).


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3.2. The efficiency and effectiveness of financial markets to offer long-term

financing instruments

Question 11: How could capital market financing of long-term investment be improved in Europe?

One of the key overriding policy objectives should be ensuring investor confidence in the fairness and

efficiency of financial markets. In this respect, the main success factor is the quality of market liquidity,

translating through to a well-functioning price formation process, tight spreads and market depth. In

contrast, a sub-optimal level of liquidity will have a detrimental impact on the overall costs of capital for

companies accessing the market: the less liquid an instrument is, the more investors are going to ask to

be compensated in the first place, since lower levels of liquidity undermines investors’ ability to unwind

positions rapidly.

Therefore, underpinning liquidity and thereby efficiency in secondary markets’ trading is critical to

ensuring the attractiveness of a primary market listing, thus guaranteeing the most optimal conditions

for issuers’ access to capital markets.

In this light, it is important to review relevant legislative and regulatory developments in Europe over

the last decade. MiFID 1 (the Markets in Financial Instruments Directive) focused almost exclusively on

lowering explicit trading costs, by encouraging further competition across Europe’s trading landscape.

While this did lead to an overall reduction in the fees charged by trading venues, it also delivered an

increasing amount of dark trading - either on regulated dark platforms or in the OTC space.

These developments raise important concerns about the implicit costs of liquidity:

- A lack of pre-trade transparency leads to a situation where all investors are not provided with

the information they need to take their investment decisions and renders the price discovery

process less efficient. This may ultimately lead to investors asking for higher returns in exchange

for the perceived inaccuracy of trading prices;

- The fact that all investors do not have the possibility to access all markets on which financial

instruments are traded, because certain pools of liquidity are reserved to certain types of

investors (such as the broker crossing networks in the equities OTC space) or because certain

financial instruments are made available only to certain investors (for example, direct retail

investment in corporate or sovereign bonds being impossible in some Member States such as

France) is highly problematic. It means that the investor base accessible to issuers is reduced,

that investors only have access to a restricted proportion of all the existing liquidity, and that the

price itself is not the result of the entire market bid and ask.


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In order to foster long-term investments and a larger access to capital markets for SMEs, NYSE Euronext

believes that regulators and policy makers should enhance the efficiency of secondary markets by:

(i) Increasing pre-trade transparency: all financial instruments should be governed by an

appropriate pre-trade transparency framework and dark trading should be limited only to

the circumstances where it is truly justified;

(ii) Requiring access to trading platforms to be non-discretionary: the basic principle of

financial markets, according to which all investors should be treated fairly, should be

respected by market participants. All investors should be granted access, on a non-

discriminatory and objective basis, to all liquidity pools.

Question 12: How can capital markets help fill the equity gap in Europe? What should change in the

way market-based intermediation operates to ensure that the financing can better flow to long-

term investments, better support the financing of long-term investment in economically-socially and

environmentally-sustainable growth and ensuring adequate protection for investors and

consumers?

NYSE Euronext believes that as a first step it is crucial to rebuild investor confidence in financial markets,

in order to increase investors’ willingness to channel investment towards the funding of companies

through these markets. To this end, it is critical to ensure investor trust both in multilateral market

structures and intermediation.

In the context of the MIFID II / MiFIR reforms, the European Commission has identified the right

objective in seeking to ensure that the existing secondary market rules are both applied properly in the

equities space (taking account of the growth of OTC reported equities trading since 2007) and extended

to non-equities, notably OTC derivatives and bonds. In assessing the current MiFID II / MiFIR proposals,

policymakers should ensure that the proposed new trading category – the Organised Trading Facility

(OTF) – does not undermine the main principle underpinning existing multilateral trading market

structure, namely the neutrality of the platform operator. The absence of the ability of a multilateral

platform operator to exercise discretion over the order matching process, or impose discrimination in

respect of access, ensures that all investors are treated equally and transparently. This is crucial to

securing investor confidence in the fairness and efficiency of financial markets, underpinning secondary

markets trading, enhancing primary markets and thereby improving the conditions for issuers to access

capital markets.

Initiatives should also be taken to rebuild trust in respect of intermediation, that is, the vital role that

banks play in bringing investors to the market. In particular, regulators should create a clear separation

between intermediation responsibilities and order execution activities. Following the implementation of


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MiFID 1, almost a third of EU equities’ trading volumes are now executed on platforms owned by

intermediaries, in the form either of user-owned multilateral trading facilities (MTFs), systematic

internalisers or broker crossing networks. While the intermediation function is an important one in

capital markets, measures should be taken to ensure that any perceived conflicts of interests that

investment firms may face in respect to the execution of client orders are properly managed.

Specifically, banks may face conflicts of interests between, on the one hand, the intermediation role

they have regarding their clients and, on the other hand, the ownership interest they have in certain

trading platforms. Concretely, this is because banks may be incentivised to route client orders towards

venues in which they own a stake rather than to other venues, irrespective of the quality of execution

offered by these venues – and this in breach of the best execution obligation they bear towards their

clients. In addition, the fact that banks may act at the same time as client intermediaries and as

proprietary traders on the platforms they operate, or in which they own stakes, creates the risk for

further potential conflicts of interests.

Whilst banks should not be prohibited from owning stakes in trading platforms or to directly operating

platforms, we believe that investor trust would be reinforced by giving banks further incentives to

comply with their best execution requirements, and by giving investor the means to monitor them.

Concretely, investors should receive adequate information on the quality of execution service provided

by this intermediary. Europe may, in this regard, take some inspiration from the obligations in Rule 606

of the US Regulation NMS. In particular, these include provisions to require intermediaries to disclose

every month, on an automatic basis, to each investor, individual execution reports disclosing the venues

toward which they routed their orders, the potential relationship they have with these venues

(shareholding, inducements etc) and the quality of execution received for the orders they sent to these

venues.

Furthermore, in addition to initiatives to address the equity gap, we believe that regulators should also

look at debt markets. Of critical importance here is the need to ensure that all investors have access to

corporate bond markets. Numerous initiatives aimed at increasing participation in corporate bond

markets have emerged lately, with one example being the Cassiopeia Committee in France. However, in

the absence of a binding regulatory framework, these initiatives have so far had fairly limited traction

due to the reluctance of certain actors to change market practices. However, as highlighted above, it is

crucial to enhance the efficiency of bond markets, by rendering them pre-trade transparent and more

open, in order to help companies to raise debt at low rates. To this end, and in addition to the adoption

of a framework for bond trading in MiFIR with appropriate pre-trade transparency rules, NYSE Euronext

considers that it is critical to ensure that this market is further opened to the public. While today, in

certain European countries such as France, only a limited number of investors can contribute to

financing companies by buying their bonds, we believe that all investors should have the ability to

access these products on primary markets. As with equity markets, parallel initiatives to ensure the

openness of secondary markets (i.e. enabling all investors to unwind their position when they so wish)

should also be encouraged in order to render the acquisition of these products an attractive investment

for investors, thus impacting positively on the development of the primary market.


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3.4 The ease of SMEs to access bank and non-bank financing

Question 26: What further steps could be envisaged, in terms of EU regulation or other reforms, to

facilitate SME access to alternative sources of finance?

Below we make several suggestions on how to facilitate SME access to capital markets covering issues

around the improving the visibility of the SMEs and supporting investor demand as well as issuer supply.

Improving Visibility of SMEs

a) Public funding for research

Creating economies of scale is the biggest challenge to the creation of a capital market dedicated to

SMEs. Lack of investor demand is mostly rooted in the lack of investable scale in SMEs, especially in

terms of attracting large, pan-European investors. A key obstacle to the development of economies of

scale is the current lack of comprehensive research on SMEs.

NYSE Euronext considers therefore that there is a need for public authority funding and support for

research and awareness raising initiatives on SMEs. The relatively small size of SMEs makes research on

them unprofitable within the current market structure and as a result, well-performing companies are

not receiving the degree of exposure they deserve, and investors are prevented from making well-

informed investment decisions on them.

This situation could be improved through the development of public-private partnerships for research

and dissemination of market information on listed SMEs to investors. In France, NYSE Euronext is taking

part in an initiative launched by the former Minister of the Economy, Finance and Industry to promote

research in listed SMEs. As part of the project, NYSE Euronext is covering a significant part of the costs of

financial analysis of selected SMEs. Through this initiative we hope to raise the profile of SMEs, which

hitherto have not been the primary target of such financial analysis, through an increase in their visibility

and exposure vis-à-vis investors. In addition, for companies listed on our Alternext markets we have

appointed an outside investment research firm (Edison Investment Research) to publish on a quarterly

basis a research report aimed at providing investors with a snapshot of each company’s activities,

strategy and trends within the industries they operate.

Similar initiatives should be developed at the EU level to complement and reinforce the efforts of

Exchanges and in so doing, promote better analysis and research on listed SMEs and mid-caps. In its

2011 Action Plan, the Commission recognised the need to focus on ways to attract a broader range of

investment interest in SMEs via the establishment of an independent institute to promote analyses and


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research on listed SMEs. We suggest that the Commission would begin by providing funding for an EU-

wide information website on SMEs. Initially, the objective of the website would be to attract potential

investors and research institutions by identifying all SMEs listed on European markets. The website

would give companies the opportunity to ‘spread the word’ about their activities and could also be used

to direct users towards additional research that has been carried out on a specific company.

Complementary to this initiative and as an important element of the information to be provided on such

a website, the Commission could then explore the potential for public-private partnerships as described

above to instigate high-quality research on listed companies.

Summary of measures to improve visibility:

A key obstacle to the development of economies of scale and investable scale in the SME

ecosystem is the current lack of comprehensive research on SMEs.

The Commission should consider providing funding for an EU-wide information website on

SMEs and assess whether further public-private initiatives could be developed to incentivise

research on SMEs.

Supporting Investor Demand

Financing through capital markets entails a complex chain of different forms of finance that can meet

the needs of SMEs as they grow and evolve from one phase to another. For any of these forms of

finance to work well, they must be supported by appropriate policy and regulatory measures, bearing in

mind that the weakest link of the chain determines the outcome. Currently, the SME market is much

smaller than it could be, primarily because investor demand is too small and, as a result, resources

should be dedicated to creating incentives for investors. Accordingly, NYSE Euronext considers that the

following public policy measures should be considered with a view to increasing investor demand in

SMEs.

a) Tax incentives for SME investment

Investment in SMEs would benefit greatly from the introduction of fiscal incentives. Members States in

general do not provide enough incentives for investing in SMEs. Where tax incentive schemes do exist,

the differences between them create an un-level playing field across the EU. Although we recognise the

limited role the EU institutions have in respect of taxation matters, the importance of addressing this

problem cannot be overstated. The objective should be to remove clear disincentives and offer SMEs

and investors alike the same opportunities across the EU. In its 2011 Action Plan, the Commission

committed to undertaking an examination of the tax obstacles to cross-border venture capital

investment in 2012 with a view to presenting solutions in the course of 2013. NYSE Euronext strongly

calls upon policy-makers to study the options for providing specific EU harmonisation in this area, as


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well as to explore further tax and similar incentives for retail investors that promote investments in

listed SMEs (at IPO and when listed).

In this context, it would be useful if the Commission would carry out an analysis on the range of fiscal

incentives in place across the Member States and measures which could be taken to promote their

development on the basis of a level playing field. In France, for example, investors in equity savings

schemes in France are exempted from capital gains tax in certain defined situations. Moreover,

investors also benefit from tax incentives to participate in funds targeted specifically at SMEs. The

‘Fonds Commun de placement dans l’innovation’ (FCPI) is a French UCITS which is subject to the

requirement of investing 60% of the funds in non-listed innovative SMEs as well as SMEs listed on NYSE

Alternext. Up to 18% of the investment made by a private investor in an FCPI is tax deductible and

similar arrangements apply to private investment in the ‘Fonds d’investissement de proximité’ targeting

local SMEs.

b) Public investment in SME IPOs and in ‘funds of listed SMEs’

The Commission proposed, in its 2011 Action Plan, using public funds to invest in early stage growth

companies via venture capital funds. This is a welcome development as this type of financing plays a

fundamental role in the early stages of a company’s life. However, the Commission should ensure that

this funding focuses on start-ups which would not otherwise have attracted venture capital interest and

which are also too small to consider listing on a RM or MTF. This is because it is important to ensure that

support for venture capital funds is targeted to those companies that need it the most and does not

distort the incentives to raise private capital through public listings.

At the same time, those same companies should not be neglected as they move through the growth

cycle towards listing on RMs or MTFs. NYSE Euronext believes that serious consideration should be given

to channelling public funds into both SME IPOs (initial public offers) and ‘funds of listed SMEs’ to

develop the economies of scale required for attracting large, institutional investors and investment in

the secondary market for SME equity. Joint public/private initiatives to develop such co-investment

mechanisms would ensure that companies are supported as they move through their growth cycle, by

facilitating their access to funding on capital markets and developing the economies of scale necessary

to foster the interest of larger institutional investors. A recent example of this approach is the creation

in France of the “Nova funds” to support listed SMEs and mid-caps. The “Caisse des Dépôts” (a

government investment agency) and 11 large institutional investors (insurance companies) have raised

160m Euros of funds for investment in French SMEs and mid-caps in the industrial and service sectors

and which are listed on NYSE Euronext and Alternext. 40% of the capital raised will support primary

listings with a further 30% dedicated to secondary market offerings.

NYSE Euronext believes that developing public-private initiatives on a pan-European level to support

investment in both SME IPOs and in funds of listed SMEs will enhance the economies of scale required

for attracting large, institutional investors and investment in the secondary market for SME equity.


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c) Public funds to invest in SME IPOs as an ‘anchor fund’

Setting up a public fund to invest in IPOs as an ‘anchor fund’ would build the necessary critical mass to

attract other investors. Today access to capital via IPOs for SMEs is handicapped because large investors

– mainly investment and pension funds – avoid investing in SMEs because of their lack of size and

limited liquidity. In dedicating public funds to SME IPOs (potentially through public-private

partnerships), these could act as domestic ‘anchor investors’, incentivising other domestic and foreign

funds to join in the IPO.

d) Public investment in ‘funds of listed SMEs’ to increase economies of scale and liquidity

Alongside investing in SME IPOs public funds, NYSE Euronext also considers that public funds should be

channelled into “funds of listed SMEs”. This would involve bundling a number of SMEs into a single

instrument which would be large enough to attract the interest of institutional investors. Backed up by a

liquidity provider, this SME equity instrument would have the adequate size and liquidity to attract

broader and deeper investor interest.

The ‘fund of listed SMEs’ would be traded on capital markets, and as such would be accessible to larger

investors such as private funds, institutional investors and UCITS. Moreover, its creation would facilitate

the introduction of requirements for a certain proportion of UCITS funds to be invested in SMEs. While

individual SMEs are too small to attract investment from these sources, the creation of ‘funds of listed

SMEs’, backed up by public investment, would create the necessary economies of scale and liquidity to

justify a requirement for UCITS portfolios to invest up to 10% of their funds in them. Room should also

be left for private asset management institutions to either participate in the fund (leading to a mix of

public-private participation) or create their own funds, with the possibility of leveraging off fiscal

incentives.

Summary of measures to support investor demand:

Investment in SMEs benefits greatly from the introduction and development of fiscal and

similar incentives. However, where they exist today the differences between them create an

un-level playing field across the EU.

While the Commission has committed to undertaking an examination of the tax obstacles to

cross-border venture capital investment in 2012 with a view to identifying possible areas of

EU harmonisation, NYSE Euronext strongly calls upon policy-makers to extend this work to tax

and similar incentives for retail investors that promote investments in listed SMEs.

Similarly, building on the Commission’s proposals in its 2011 Action Plan to use public funds

to invest in early stage growth companies via venture capital funds, NYSE Euronext considers

that public funds should also be used to encourage SMEs listing on capital markets as the

companies develop. Public-private financing initiatives should be designed to support both


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SME IPOs and investment in ‘funds of listed SMEs’ thereby increasing the economies of scale

and liquidity of the SME ecosystem.

Supporting Issuer Supply

By helping SMEs go public, exchanges play a vital role in assisting them diversifying their sources of

funding and consolidating their capital more easily. On the issuer supply side of the SME ecosystem,

NYSE Euronext offers enhanced visibility towards the financial community through dedicated

commercial, marketing and communication services (Internet, extranet, events, ceremonies,

conferences, etc.). Public policy intervention could usefully complement these initiatives through public

funding of an EU-wide information website promoting listings to and of SMEs and events to bring

together both the supply and demand sides of the SME ecosystem at the national and European level.

a) Public funding for an EU-wide information website promoting different sources of

financing available for SMEs

Regulatory measures to enhance issuer supply could encompass the provision of tools that inform SMEs

of the different sources of financing that are available to them. A potentially promising path would be

for the Commission to create or provide funding for an EU-wide information website. This website

would provide information on the full range of financing options available for SMEs, from venture

capital and bank financing to listings on public markets. Such a website could serve as a ‘one stop’

source for all relevant information for SMEs looking for funding opportunities, informing them what is

available and helping them decide what is the right option for their particular circumstances and stage

of growth.

Moreover, EU legislators could use the site as a portal to provide information to SMEs on legislation of

relevance to their businesses e.g. Prospectus Directive, Transparency Directive, Market Abuse Directive

and MiFID. EU legislators and Member State authorities could also use the site to provide information

on tax incentives and other supported financing options (e.g. funds for investments in SMEs, etc.).

The website could also include guidelines for companies interested in carrying out analysis and research,

while banks, venture capital firms and stock exchanges could provide links directing interested

companies to their home pages where they will find more detailed information and specific

requirements for the funding options they provide.

b) Measures that promote visibility and interaction: helping supply and demand meet

Public authorities should facilitate and promote more information sharing on SMEs by organising events

that bring together both the supply side and demand side of the SME ecosystem. Business events can

promote action and interest among investors and SMEs alike, allowing the latter to acquire more


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information on how to raise funds and the former to gain more information on companies worth

investing in across Europe. It is particularly important to root such initiatives in a regional and local

context given the strong ties SMEs usually have with their local communities. This will help them

construct an image that better appeals to their local investor community.

Accordingly, public authorities should consider collaborating with exchanges to organise training and

information workshops for listed companies, listing candidates and investors alike. Information sessions

where specialists as well as major banking and brokerage networks are invited to meet and get to know

the companies before deciding to invest, have proven to be highly effective: NYSE Euronext has directly

organized or sponsored over 190 events of this kind in the past 20 months. Our flagship event held in

November 2011 in Paris was attended by representatives from the entire investment community,

including over 150 issuers and 320 investors.

Summary of measures to support issuer supply:

Policymakers should create or provide funding for an EU-wide information website for SMEs

interested in listing or interested in initiating research prior to listing.

Public authorities should also look at the potential to collaborate with exchanges in the

organisation of training and information workshops for listed companies, listing candidates

and investors alike in order to promote the merits of exchange listing.

Question 28: Would there be merit in creating a fully separate and distinct approach for SME

markets? How and by whom could a market be developed for SMEs, including for securitised

products specifically designed for SMEs’ financing needs?

As a general point, we believe it is critical to ensure that the framework for SME markets provides

sufficient flexibility to allow market operators to respond to market demands, while at the same time

providing for appropriate levels of supervision from the competent authority to ensure common pan-

European standards

In the MiFID II proposals issued in October 2011, the Commission proposed the creation of European

label for SME markets – an ‘SME Growth Market’ to improve the visibility and investor reach for SMEs.

While the Commission’s aims are laudable, we are concerned by aspects of the proposals which we

consider will actually undermine liquidity and investor confidence in SME markets as well increase SME

issuers’ reservations around listing on them. In testing the likely effectiveness of the proposals, the key

criteria should be their impact on the SME ecosystem and whether they will materially increase investor

demand and issuer supply: NYSE Euronext is concerned that proposals allowing the shares of companies


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listed on SME Growth Markets to be traded on other SME Growth Markets without the consent of the

issuer (MiFID II Article 35(7)) would have a significant impact on both investor and issuer confidence,

undermining the creation of the label.

a) Investor concerns: risk of fragmented liquidity

Investor confidence depends, inter alia, on the efficiency and quality of the price formation process.

Fragmentation in the liquidity of SME stock, coupled with a lack of market research and consolidated

market data, would produce price discrepancies across the venues on which the SME stock was traded

and result in a loss of investor confidence in the price formation process. This is because investors would

not have a complete overview of the market (i.e. of all the buyers and sellers) and volumes in SME

trading would not be large enough to allow brokers to create arbitrage trading. Fragmentation has

already occurred in large blue chip company stocks as a result of MiFID but, unlike blue chips, SME

markets are characterized by a strong ‘home bias’ of investors, where the proximity of the investor to

the issuer is key. Furthermore, liquidity fragmentation in SMEs may increase the risk of market

manipulation in the absence of efficient supervisory oversight from the home regulator. Therefore, the

emergence of SME Growth Markets which allow the trading of financial instruments on other platforms,

without the consent of the issuer, is even more problematic.

In addition the lack of harmonised requirements for initial and on-going admission to trading as well as

on-going periodic financial reporting for the SME Growth Market itself (they are left to establish

‘appropriate criteria’) is another important reason why trading interlinkages between SME Growth

Markets should not be allowed. This is because if they were to be allowed, an investor could be faced

with a range of issuers on one platform all subject to varying reporting requirements depending on the

location of their primary listing. This is a suboptimal position from the point of view of investor

confidence in the SME issuer and would therefore impact negatively on the quality of the entire SME

segment of the capital market.

b) Issuer concerns: lack of visibility over where stock is traded

The second key consequence of the provision would be that SME issuers would lose control over where

their stock is traded. Small issuers on our main Euronext markets have repeatedly expressed concerns

about their stock being fragmented across venues, as a result of MiFID. This fragmentation feeds the

negative impact on liquidity described above and would impact negatively on issuer supply. Therefore,

NYSE Euronext considers that the trading of SME stock on other SME Growth Markets should only occur

with the explicit consent of the SME issuer.


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Summary on MiFID II SME related points:

The provision in MiFID II Article 35(7) allowing the shares of companies listed on SME Growth

Markets to be traded on other SME Growth Markets without the consent of the issuer will

lead to a fragmentation in the liquidity of SME stock which, coupled with a lack of market

research and consolidated market data, will produce price discrepancies across the venues on

which the SME stock was traded and result in a loss of investor confidence in the price

formation process. This will be compounded by the strong ‘home bias’ of investors in SMEs,

where the proximity of the investor to the issuer is key. Accordingly, NYSE Euronext is of the

opinion that the trading of SME stock on other SME Growth Markets should only occur with

the explicit consent of the SME issuer.

Question 29: Would an EU regulatory framework help or hinder the development of this alternative

non-bank sources of finance for SMEs? What reforms could help support their continued growth?

NYSE Euronext considers that the primary reforms that should be undertaken to support SME access to

capital market’s financing revolve around non-regulatory measures, principally fiscal and funding

oriented. The measures discussed in the earlier section are reproduced below for ease of reference.

Summary of measures to improve visibility:

A key obstacle to the development of economies of scale and investable scale in the SME

ecosystem is the current lack of comprehensive research on SMEs.

The Commission should consider providing funding for an EU-wide information website on

SMEs and assess whether further public-private initiatives could be developed to incentivise

research on SMEs.

Summary of measures to support investor demand:

Investment in SMEs benefits greatly from the introduction and development of fiscal and

similar incentives. However, where they exist today the differences between them create an

un-level playing field across the EU.

While the Commission has committed to undertaking an examination of the tax obstacles to

cross-border venture capital investment in 2012 with a view to identifying possible areas of


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EU harmonisation, NYSE Euronext strongly calls upon policy-makers to extend this work to tax

and similar incentives for retail investors that promote investments in listed SMEs.

Similarly, building on the Commission’s proposals in its 2011 Action Plan to use public funds

to invest in early stage growth companies via venture capital funds, NYSE Euronext considers

that public funds should also be used to encourage SMEs listing on capital markets as the

companies develop. Public-private financing initiatives should be designed to support both

SME IPOs and investment in ‘funds of listed SMEs’ thereby increasing the economies of scale

and liquidity of the SME ecosystem.

Summary of measures to support issuer supply:

Policymakers should create or provide funding for an EU-wide information website for SMEs

interested in listing or interested in initiating research prior to listing.

Public authorities should also look at the potential to collaborate with exchanges in the

organisation of training and information workshops for listed companies, listing candidates

and investors alike in order to promote the merits of exchange listing.

Turning to the EU regulatory agenda, it is critical that legislative proposals are benchmarked against

their impact on liquidity and investor confidence in issuers, notably SMEs. In testing the likely

effectiveness of the proposals, the key criteria should be their impact on the SME ecosystem and

whether they will materially increase investor demand and issuer supply. Our response to Section 3.2

outlined our concerns in respect of the current review of the MIFID framework.

Alongside the potential negative impact in the MIFID proposals, we have even greater concerns that the

proposed Financial Transaction Tax (FTT) will severely impact on the ability of SMEs to raise capital on

public markets. Despite the Commission’s exemption of primary listing markets, in practice the negative

impact on liquidity which the FTT would deliver in the secondary markets would, in turn, severely affect

the primary listing environment. As currently proposed, the FTT represents the single most significant

threat to the ongoing viability of the capital markets’ ecosystem for issuers - particularly SMEs - to raise

finance.

If the proposals are to be introduced in some form across the participating Member States, we would

strongly urge the adoption of the following two provisions in respect of SMEs:

Providing an exemption for trading in SME securities below a market cap threshold: this

approach has been taken in both the French and Italian FTTs. The French tax applies only to

issuers with a market capitalization over €1bn, while in Italy the figure has been set at €500m.


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More recently, the UK has announced a similar exemption from its stamp duty. If a EU-11 tax is

implemented, such exemptions need to be accommodated;

Exemptions for market makers to ensure liquidity provision: SMEs do not benefit from the

same liquidity assets / tools as the large cap issuers (i.e. no derivatives, CFDs, algorithmic

trading) and usually have limited free floats. As a result, and without a market making

exemption, liquidity providers would find it difficult to maintain current tight spreads and

monitor risks given the additional volatility. Moreover, liquidity providers representing

significant amounts of trading on an SME stock (between 20% and 50%) will find it particularly

difficult to attract SME investors. Similarly, newly developed tools to attract liquidity on

corporate bonds would be severely hit by the measures.

In addition, we note that there have been several recent cases of unintended consequences in EU

legislative proposals for the overall capital markets’ ecosystem. We provided details on two cases in

particular in our recent submission to the European Parliament’s Public Consultation on ‘Enhancing the

Coherence of EU Financial Services Legislation’. They concern the current proposals on amending the

Market Abuse Regime and introducing the Regulation on Packaged Retail Investment Products (PRIPs):

o The Commission proposals in the review of the Market Abuse Regime to remove

‘accepted market practices’ with the aim of achieving a Single rulebook for financial

markets, would have had the unintended consequence of rendering the operation of

liquidity contracts on our markets impossible. This would have had a significant impact on

the ability of SMEs to raise capital on Europe’s financial markets. Fortunately, these

proposals were revised in the co-legislative process;

o Under the current drafts being debated in the European Parliament, the proposed new

framework for Packaged retail Investment Products (PRIPs) would see the Key

Information Document (KID) requirement extended to listed shares. This would deliver an

obligation on issuers to produce both this document and the existing Prospectus summary

required by the Prospectus Directive. Requiring both documents at the same time would

create duplication and would constitute an unjustified burden for issuers because they

would essentially have the same purpose and would do nothing at all to encourage

issuers, particularly SMEs, to access capital markets.

Overall, NYSE Euronext considers that the focus should be on the non-regulatory elements outlined

above and that where new legislative measures are proposed, they should be assessed against their

overall contribution to enhancing the ecosystem.


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Contact Information

If the Commission would like to discuss any of the points made in this response it should contact the

following:

Mr Robin Jezek

Director of European Government Affairs & Public Advocacy

NYSE Euronext

Tel: +32 (2) 509 1385

Email: [email protected]

Palais de la Bourse

Place de la Bourse

1000 Brussels

Belgium

mailto:[email protected]

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