What does the final report of the EU’s capital markets union mean for stock exchanges?

In the midst of the COVID19 fall out, and coinciding with countries gradually opening their economies to an uncertain future, on June 10th 2020 the European Commission published the long-awaited High Level Forum (HLF) report on the EU Capital Markets Union* (Report). European economic recovery in many ways depends on reviewing its capital markets, and Europe has yet to crack the code on how to make public equity financing a more attractive proposition for non financials and SMEs.

Pent-up demand has left investors sitting on piles of dry powder, eagerly looking for investment opportunities and fresh IPOs. Untapped investment resources are even greater among retail and individual investors, with the latter group still awaiting exposure to equity investing at the level enjoyed by US peers. Corporates entered the year already highly leveraged, and the pandemic has certainly not helped. Going forward, debt won’t suffice and equity investors and capital markets will have to play a significantly stronger role.

There is a sense of responsibility and urgency among economies and policy makers to rapidly remove the obstacles hampering access to public capital markets. On the supply side this implies making going public and staying public more efficient, cost effective, and transparent. On the demand side it means finding solutions which bring capital markets closer to retail and individual investors. The common denominator of both of these challenges is that the solutions also lie in technology and digitalisation.

As for the supply side, however devastating the COVID19 effects on the economy may be, the inability to do things in the traditional way has become a huge tailwind for digitalisation in capital markets. Even the most basic form of digitalisation, things such as e-roadshows and video conferencing have made headlines on the back of efficiencies they have brought to the capital raising process.

This is but a small-scale proof of concept for what technology can do. Industry has been focusing on tech and innovations on the trading side, leaving the non-trading, administrative, and regulatory processes somewhat ignored. This is starting to change, and we at ScribeStar, who have been propagating use of digital means to facilitate equity and debt issuances, are happy to see this happening and thankful to our clients who have been early adopters of this vision.

The key moment is only just on the horizon. The HLF Report sets out seventeen recommendations for moving the EU capital markets forward, and it is wonderfully clear and precise on what capital markets need to do in terms of technology and digitalisation.

First, HLF calls for an EU-wide digital access platform for companies public financial and non-financial information, as well as other financial product or activity-relevant public information. This in the first instance applies to all information of companies with securities listed on EU Regulated Markets, including their periodic ongoing information disclosures pursuant to securities markets legislation. To deliver on this request, all the national authorities and their reporting mechanisms will have to be aligned and tech-enabled to facilitate digital reception and handling of reports and submissions, as well as structured data collection and processing. The European Securities and Markets Authority (ESMA) will be tasked to develop technical standards for data fields and formats, where it will most likely look to the approach used in the European Single Electronic Format with XBRL for annual financial reports or the Prospectus Register.

Second, HLWG calls upon ESMA to coordinate and drive this implementation with national authorities in order to ensure that the public information collected at national level is accompanied by the correct data fields and in case of structured information, that information submitted by companies complies with the applicable format requirements.

“…it is wonderfully clear and precise on what capital markets need to do in terms of technology and digitalisation.”

ScribeStar fully supports these proposals. We would also emphasise that in order to achieve this objective, stock exchanges and regulators will have to become receptive to solutions like those offered by ScribeStar and allow a rethinking of their listing and ongoing compliance processes. Ultimately, stock exchanges and regulators alike will have to enable prospective issuers and listed companies to use digital means to access capital markets and fulfil their ongoing obligations.

ScribeStar has been successfully working with issuers for the past four years, and most recently with stock exchanges to implement its proprietary digital capital markets platform, wherein complex market documents and processes can be done in exactly such a digital environment, thus enabling the use of structured data and fulfilling the preconditions for AI deployment, big data applications, and data reuse.

ScribeStar is of the opinion that those stock exchanges that start early with digital adoption will be the ones reaping the benefits, and also taking over the share of the ICO and STO future market. Our experience is that this sort of change is not easy and requires time. We advocate an evolutionary, rather than a revolutionary approach. Exchanges should ease themselves into this process, and so should the regulators and key market participants, on a collaborative journey.

Success will eventually be measured by the increase in the number of listings, which will be a consequence of the cost and time savings of going public and staying public, as well of the overall efficiency and transparency of the processes. Digitalisation and technology have the power to deliver on these objectives.

ScribeStar looks forward to the developments on the CMU front and invites those who believe in digital capital markets to reach out and learn about our vision and our work.

“…stock exchanges that start early with digital adoption will be the ones reaping the benefits…”

Written by Damir Cimer – July 2020.