Framework Contract for projects relating to Evaluation and Impact Assessment activities of Directorate General for Internal Market and Services

Transcription

1 Framework Contract for projects relating to Evaluation and Impact Assessment activities of Directorate General for Internal Market and Services Study on the Impact of the Prospectus Regime on EU Financial Markets Final Report June 2008 P O Box 159 Sevenoaks Kent TN14 5RJ United Kingdom Tel/fax: +44 (1959) Web site:

2 Contents SECTION PAGE 1. Introduction Introduction 1.2 Objectives and study outputs 1.3 Background 1.4 Outline of report structure Methodological approach Introduction 2.2 Methodological Approach Use of passports Introduction 3.2 Background 3.3 Number of prospectuses 3.4 Number of Cross-Border Offerings and Listings 3.5 Types of Issues That Benefit Most From Passports 3.6 The Functioning of the Passport Regime 3.7 Diversification of portfolios across Europe 3.8 Conclusion Markets and regulators Introduction 4.2 Regulated and alternative markets 4.3 Statistical data on markets 4.4 Other effects on small companies in Europe 4.5 The time taken to approve prospectuses 4.6 The EUR 1000 threshold 4.7 Third country issuers 4.8 Employee Share Scheme Issues 4.9 Conclusions 5 Costs Introduction 5.2 Background 5.3 Financial costs 5.4 The Costs of Preparing a Prospectus 5.5 Cost-Effectiveness of Prospectuses 5.6 Language Regime 5.7 Conclusions

3 Impact of Prospectus Regime on EU Financial Markets Contents 6 The Retail Debt Market Introduction 6.2 Background 6.3 Changes in corporate bond markets 6.4 Retail debt markets 6.5 Retail cascade 6.6 Conclusions 7 Conclusions General conclusions 7.2 Specific conclusions APPENDICES PAGE A Survey Results 69 B List of Interviews 75 C Interview checklist 77 3

4 Introduction Introduction This document sets out CSES draft final report in response to a request for services in the context of the Framework Contract for Evaluation and Impact Assessment of Internal Market DG activities. The subject of the study is a Study on the Impact of the Prospectus Regime on EU Financial Markets. In this section, we summarise the objectives of the study, and briefly the background to the work. 1.2 Objectives and study outputs The objectives of the study as set out in the terms of reference are to: complete the factual evidence provided in two reports recently received by the Commission, from the Committee of European Securities Regulators (CESR) and the European Securities Markets Expert Group (ESME) address some additional issues presented in the Terms of Reference, (these are considered further in the methodology section of this proposal); Give an overview of the impact of certain aspects of the Prospectus Directive (PD) 1 on EU financial markets. The requested outputs of the study are: quantitative evidence on the impact of the PD on raising capital in the EU. Where possible, the specific impact of the PD should be singled out from the impact of the implementation of other Directives relating to the Financial Services Action Plan (Transparency and Market Abuse); quantitative evidence on the specific impact of the PD on EU and non-eu issuers in terms of the costs of raising capital as well as potential compliance problems; quantitative evidence on the specific impact of the PD on EU investors, in terms of an effective increase in both the level of investor protection and the range of opportunities available to investors. A number of specific questions were asked in the study. These questions are set out in the introduction to each of the main sections of this report and are summarised in 1.4 below /71/EC 1

5 Introduction Background As set out in the request for services, five years after the entry into force of the PD (i.e. by end 2008), the European Commission is required to make an assessment of the application of the Directive and to present a report to the European Parliament and the Council, accompanied where appropriate by proposals for its review. The Commission Services will therefore have to draft this report in the summer of Normally, such a report might be expected to include some quantified data on the operation of the Directive in question. As indicated above, the Commission has received helpful reports from both CESR and ESME setting out their views with regard to the operation of the PD and making suggestions as to the ways in which the PD could be further developed and improved. The reports are based on the views of regulators in the EU, and on a group of practitioners in the market, and it is likely that some of the recommendations, if implemented, might facilitate the way in which the PD operates. However, in considering the recommendations of these reports, and in coming to its conclusions, the Commission would like to consider the views of CESR and ESME both in the light of quantifiable data on the operation of the PD, and in the light of the views of others who may not have been involved in the two reports but nevertheless have an interest in the way in which the market operates. Such parties may include companies and investors (to the extent that it is possible to obtain the views of investors). There is therefore a need as part of this review for further work to be undertaken, with an emphasis on obtaining quantified data. This is likely to take a number of forms, depending on the issues to be considered. Examples of the sort of data which the study should obtain are as follows: Data on the effect of the PD on market conditions had the PD reduced the spread which companies have to pay for funding, by giving them access to a wider pool of funding? The growth in less regulated markets (for example the Alternative Investment Market (AIM) in the UK) and the influence of the PD on this growth. The possible effect of the EUR 50,000 limit on bonds subject to the PD are bonds being issued to a greater extent above that limit? The ESME report included an example from the Stuttgart stock exchange but more work is necessary to see if the experience in that exchange is mirrored in other exchanges. The views of multinationals on the issue of shares to employees in Europe, where the parent company is not quoted in Europe 2

6 Introduction Outline of report structure The structure of the draft final report is as follows 1: Introduction introduction, the terms of reference and an outline of the report structure 2: Methodological approach sets out the methodological approach to the study 3: Use of passports describes the extent of use of the passporting system introduced under the PD. This section also considers the work of regulators, and the ability of issuers to choose a home member state and the impact on third country issuers 4: Markets and regulators deals with the effect of the PD on exchanges, regulated by the PD and self regulated. 5: Costs considers the effect of the PD on the cost of raising capital including the market and administrative costs. It also considers the length and detail of prospectuses 6: The retail debt market - considers the effect of the PD on the retail debt market, in particular issues about the 50,000 limit and retail cascade 7: Conclusions sets out general and specific conclusions of the study The Appendices include a list of interviews and the results of a survey of market participants carried out under the study 3

7 Methodological Approach Introduction This section describes the methodological approach to the study. The study commenced in January 2008 and an inception report setting out the methodology and main sources of data was prepared at the end of January The fieldwork for the study took place between February and April 2008, with the draft final report submitted in May Earlier working papers addressing specific issues in the terms of reference were also submitted. These working papers have been integrated into this draft final report. 2.2 Methodological approach The main research tasks carried out as part of the study included the following: Testing and administering questionnaires Carrying out an interview programme Analysing market data Analysing any additional relevant literature identified through a further literature review We describe each of these tasks in more detail below: Interview programme An interview programme was carried out with more than 60 persons. A list of interviews is contained in appendix B. Interviews were carried out in the major EU financial markets and included issuers, banks, professional advisers, associations and other relevant stakeholders. The checklist used in our interview programme is contained in Appendix C. This checklist served as a discussion guide for interviews but the interviews were structured to allow market participants to focus on a subset of the most relevant issues or raise additional questions of particular concern to them. Analysing market data We carried out an analysis of market data using commercial databases, in particular Datastream and Thomson and information obtained directly from the main stock markets. Data gathered through these sources included for example: The movement of spreads on commercial debt issuance, and changes in the bid/offer margin Data on the issuance of securities valued above and below 50,000 4

8 Methodological Approach 2 Numbers of IPOs and where possible the use of passported prospectuses Literature analysis We carried out an extensive search of literature and available exchange, market and association websites, in addition the Commission websites such as DG ECFIN and national regulators, some of which included information on the use of prospectuses. Questionnaire To supplement the interview programme, we prepared a questionnaire to be distributed on line to market participants. The questionnaire was tested with a small number of participants and then made available for completion on line. The link to the questionnaire was sent by associations we interviewed to their members. Examples of associations distributing the questionnaire included: ICMA International Capital Markets Association LIBA London Investment Bankers Association London Stock Exchange ABBL Luxembourg banking association AFEI French investment company association SSDA Swedish securities dealers association BVI German investment and asset management association Overall, some 130 responses were received to the questionnaire of which 98 were usable. An analysis by member state and type of respondent is shown below. Full responses to the questionnaire are included in Appendix A. 5

9 Methodological Approach 2 Table Which of the following categories best describes your activities? Activity % EU Issuer Third country (non-eu) issuer Lawyer/Legal Adviser Institutional Investor Retail Investor Financial services regulator Financial Adviser Financial Intermediary Other Total Source : CSES survey Table 2.2 Which Member State are you based in? Country % UK France Germany Sweden Ireland Spain Luxembourg Netherlands Other EU/EEA Other non-eu/eea No response Total Source : CSES survey 6

10 Use of Passports Introduction This section describes the extent of use of passported prospectuses and also considers the effect of passports on investor behaviour. In particular, the section addresses information on the following questions raised in the terms of reference Has the passport system introduced by the PD actually increased the level of cross-border offerings and listings? Are investors diversifying their portfolio across Europe? Is this the effect of the new prospectus regime or is it due to other factors? 3.2 Background One of the major innovations of the regime established as a result of Directive 2003/71/EC, the Prospectus Directive, is the creation of a passport system for issuers wishing to raise capital in several EU Member States under a single prospectus approved in a single home Member State. Indeed, in the development of the current Prospectus Regulations, it became apparent that the system of mutual recognition established under Council Directives 80/390/EEC of 17 March 1980 and 89/298/EEC of 17 April 1989 needed to be upgraded, updated and grouped together into a single text. In response to such concerns, Article 18 on the Community scope for approval of prospectuses states that where an offer to the public or admission to trading on a regulated market is provided for in one or more Member States, or in a member State other than the home Member State, the prospectus approved by the home Member State and any supplements thereto shall be valid for the public offer or the admission to trading in any number of host Member States, provided that the competent authority of each host Member State is notified [ ] Competent authorities of host Member States shall not undertake any approval or administrative procedures relating to prospectuses. With this provision, it was felt that the Prospectus Directive constitutes an instrument essential to the achievement of the internal market [ ] facilitating the widest possible access to investment capital on a Community-wide basis, including for small and medium-sized enterprises (SMEs) and start-ups, by granting a single passport to the issuer. Using statistical data and qualitative and quantitative information gathered directly from market participants, this section analyses the extent to which the passporting regime has fulfilled these objectives. 7

11 Use of Passports Number of Prospectuses The figure below, based on data from CESR, shows the distribution of the number of prospectuses approved by Member State between July 2005 and end of June Ireland had the largest number of approvals since the Prospectus directive came into force with a total of 4,711 or 26% of the European total. This is followed by the UK with 18% of the total and Luxembourg (16%). Germany approved a total of 8% of all European prospectuses or 1,440 and Italy had 7% with the vast majority of these between July 2006 and June In comparison, France approved only 3% of all European prospectuses or 596 documents. While it is difficult to establish causal relationships due to the large number of intervening factors that are external to the Prospectus Directive and the very short timeframe during which the Directive has been in force, these figures show that the prospectus regime has been used significantly, based on the numbers of prospectuses. However, it should also be noted data on the number of prospectuses alone do not contain any information about amounts of capital actually raised. Unfortunately, CESR do not collect these figures. In this report, we do however include information on volumes of debt/equity raised in a select number of European markets. Figure 3.1 Number and Share of Prospectuses Approved by Main Market France, 596, 3% Italy, 1,242, 7% Germany, 1,440, 8% Ireland, 4,711, 26% Luxembourg, 2,979, 16% Other, 3,890, 22% UK, 3,206, 18% Source: CESR Among the more established markets, it is interesting to note quite varied performances. The table below shows the percentage change in the numbers of prospectuses approved in major European markets. 8

12 Use of Passports 3 Table 3.1 Percent Change in Prospectus Activity by Main Market Member State July 05-June 07 Ireland 63% Spain 57% Luxembourg 41% Germany 12% France 1% UK -10% Sweden -14% Netherlands -15% Total 38% Source: CSES calculations based on CESR data Whereas the overall number of prospectuses approved increased by 38%, only Ireland, Luxembourg and Spain outperformed this average among the major European markets. In comparison, approval figures increased below average in Germany (12%) stagnated in France (1%) and decreased in the UK, Sweden and the Netherlands. Notwithstanding the catching up process in new Member States and other exogenous variables which may affect the conclusiveness of these figures, this evolution may nevertheless point to a significant degree of specialisation among Member States (this is discussed in further detail in 4). In addition to the markets listed above, there has also been a major change in the number of prospectuses in Italy, due to the removal of domestic prospectus exemptions under the new regime. The situation in Italy is discussed further in 4 of this report Number of Cross-Border Offerings and Listings 3.3 has discussed changes in prospectus activity since the implementation of the Prospectus Directive by member state and in the main markets. However, as mentioned in the background to this section, the Prospectus Directive aimed to foster in particular cross-border activity in European capital markets through the creation of a passport function. It should be noted that while the Prospectus Regime facilitates cross-border offers and listings, it is not the only cause for the increase in these types of issues. As many of our fieldwork interviews found, other economic factors (e.g. globalisation, increasing European economic integration) are driving factors behind increased interest in cross-border offers and listings. 9

13 Use of Passports 3 Figure 3.2 below shows the share of prospectuses approved in the Member States that included a cross-border passport. Whereas 15% of all prospectuses approved across Europe included some cross-border activity in the first year since implementation of the Directive (i.e. 07/05-06/06), this had risen to 19% of all prospectuses in the following year. In other words, in the year to June 2007 one in every five prospectuses approved in the Member States took advantage of the ability to passport the prospectus into another Member State. The passport function of the Directive has created a working legal framework for cross-border transactions in European capital markets that goes well beyond the previous mutual recognition system. As mentioned above, however, the use of passports represents the number of times that cross-border capital markets were accessed but it does not give any indication about the volume of cross-border finance actually raised. While these data are not available through CESR, we have collected some information on cross-border finance directly from a select number of stock exchanges. Figure 3.2 Passports Sent (Percent of Approved Prospectuses) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jul 05-Jun 06 Jul 06- Jun 07 Source: CSES calculations based on CESR data While the passport function has come to be widely used in the span of only two years, the figure below indicates that there is still quite a bit of room for expansion of cross-border activity. In theory, there may be powerful incentives for issuers to passport each prospectus into every Member State so as to maximise the pool of potential investors. At the same time, there may also be good commercial reasons for issuers to limit the passport to a smaller number of Member States (e.g. depending on the type of product that is being passported, regulatory differences across Member States). Figure 3.3 indicates that the number of host Member States per passport is 10

14 Use of Passports 3 still relatively limited and, perhaps more surprisingly, that it has decreased since the coming into force of the passport regime. In the first year of operation of the Prospectus Directive, an average passport included 2.5 Member States compared with only 1.7 Member States in the second year of the Directive. We asked interviewees the possible reasons for this development, especially as the decrease in the average number of host Member States is concurrent with the stark increase in the popularity of passports shown in Figure 3.1. Potential explanations for this evolution could lie in the use of passports across a wider range of securities (e.g. equity, bonds, derivatives) or across a wider range of issuers (e.g. smaller issuers). Some feedback from interviews also suggests that some issuers use private placements to bypass Member States where the regulator has imposed restrictions and obligations that are additional to the minimum required under the Prospectus Regime. Unfortunately, data limitations inhibit a more thorough investigation of these questions. Figure 3.3 Average Number of Host Member States per Passport Sent Jul 05-Jun 06 Jul 06- Jun 07 Source: CSES calculations based on CESR data We now consider an analysis of passports sent, by member state. The table below breaks down some of the figures for the main European capital markets. These data show interesting variation both in the popularity of sending passports and in each Member State s popularity as a receiver of passports. In Austria 95% of all prospectuses approved by the competent authority were passported into another Member State between July 2005 and June This indicates that Austria may have benefited from Prospectus Regime both 11

15 Use of Passports 3 by attracting a larger number of issuers (77 prospectuses were approved in Austria in the second year of the PD s operation, up from 71 in the previous year) and by being able to offer issuers the ability to raise a wider pool of cross-border capital. Germany features the second highest share of passports with more than half of all prospectuses approved by the competent authority (BAFIN) using the passport to access capital markets in another Member State. This is followed by the UK and Luxembourg with around one fourth of all prospectuses passported, the Netherlands (18%) and France with about one in 10 passports. In all other Member States more than 90% of prospectuses are not used to access cross-border capital. In terms of the destination of these passports, it was suggested by some interview partners that passports are often sent into Member States with a well developed retail debt market, such as Germany or Italy. For instance, interviews with various German market participants indicate that most cross-border activity in Austria extends into the German and East European markets. However, this cannot be established definitively due to data limitations. Table 3.2 Passport Activity by Main Market Passports Sent (% of Approved Prospectuses) Passports Sent (% of Passports Received) Austria 95% 23% Germany 52% 83% UK 27% 106% Luxembourg 26% 139% Netherlands 18% 14% France 11% 29% Ireland 7% 107% Sweden 5% 7% Spain 1% 1% Italy 0% 1% Source: CSES calculations based on CESR data Secondly, Table 3.2 also shows passports sent as a share of passports received from another Member State. A figure below 100% may indicate that the Member State has a relatively attractive capital market which issuers access through a prospectus approved in another Member State. Conversely, a figure above 100% may indicate that the Member State is attractive for issuers as a point of origin for prospectuses targeting cross-border capital markets in another Member State. The UK, Luxembourg and Ireland send a larger number of passports to other Member States than they receive themselves. It should be noted that some market participants suggested that UK s attractiveness to issuers was due more to the country s high regulatory 12

16 Use of Passports 3 standards than to the provisions of the Prospectus Directive and the ability to passport. In addition, the situation in Ireland may change in the near future, as the country phases out a temporary arrangement which has kept prospectus approval procedures within the competencies of the stock exchange until As a result, some interviewees felt that Ireland had attracted a number of issuers through its lenient interpretation of prospectus approval regulations. All other Member States receive more passports than they send out. In particular, Austria where 95% of approved prospectuses are passported out receives more than 4 times more passports than it sends out. These figures could point to considerable specialisation among regulatory authorities across Europe. Figure 3.4 below shows the share of total passports sent for the main markets across Europe. The UK, Luxembourg, Germany and, to a lesser extent, Ireland send most passports. Austria also has an active market in passported prospectuses compared with France where passports are relatively less used. Figure 3.4 Share of Total Passports Sent France, 2% Austria, 4% Other, 7% UK, 28% Ireland, 11% Germany, 24% Luxembourg, 24% Source: CSES calculations based on CESR data Figure 3.5 repeats the above analysis for passports received. Clearly, there is a much wider dispersion of passports received across Member States than there is for the share of passports issued in the previous figure. Again, this indicates that the passporting system has, at least partially, succeeded in opening capital markets to a wider range of European countries. 13

17 Use of Passports 3 Figure 3.5 Share of Passports Received Ireland; 5% Sw eden; 6% Belgium; 8% Other; 24% Luxembourg; 9% Austria; 10% Germany; 14% Netherlands; 11% UK; 13% Source: CSES calculations based on CESR data In order to establish a trend line, figures show the evolution of prospectuses approved, passports sent and passports received over time since the introduction of the Prospectus Directive and for each of the four main European markets. The number of prospectuses approved has increased significantly in Ireland and Luxembourg but it has stagnated in the UK and Germany. Ireland in particular has seen a large increase in prospectus activity since As pointed out above, this may be due in part to transitional arrangements which have kept prospectus approval within the remit of the Irish stock market. In Luxembourg, the increase in prospectus approvals has been more gradual, though, like Ireland, Luxembourg now approves a larger number of prospectuses than the UK. 14

18 Use of Passports 3 Figure Number of Prospectuses Approved by Main Market Over Time IRELAND LUXEMBOURG UK GERMANY Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Source: CSES calculations based on CESR data Note: UK quarterly data from Q2/06, annual for the first year In terms of cross-border finance, Figure 3.7 shows that the number of passports sent has increased in all main markets with the largest changes in the UK and Luxembourg. Given that it is the largest market in terms of prospectus approvals, Ireland sends a comparatively low number of passports. In Germany, the initial increase in passports sent in 2005 seems to have stabilised in 2006 though more recent data indicates that a further increase may materialise. 15

19 Use of Passports 3 Figure Number of Passports Sent by Main Market Over Time UK LUXEMBOURG GERMANY IRELAND Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Source: CSES calculations based on CESR data Figure 3.8 shows the evolution of passports received in the main markets. The comparison with the previous figure indicates that there has been a substantial amount of specialisation in the main European markets, with Ireland and Luxembourg sending out about twice as many passports than they receive while the difference between passports received and sent is much lower in the two larger countries (UK and Germany). In other words, the Prospectus Directive seems to have facilitated further specialisation in smaller financial centres such as Ireland, which focuses on prospectus approval for domestic issues and Luxembourg which has further focused on cross-border transactions. 16

20 Use of Passports 3 Figure Number of Passports Received by Main Market Over Time GERMANY UK LUXEMBOURG IRELAND 20 0 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Source: CSES calculations based on CESR data 3.5 Types of Issues That Benefit Most From Passports There was a consensus among market participants interviewed as part of the fieldwork that the current passporting regime works reasonably well for debt issues, especially as part of larger programmes using a Base Prospectus, but less well for equity. This may indicate that the Prospectus Directive captures a significant share of the retail debt market. At retail level, debt products also benefit from marketing through individual bank branches across Europe, which may be better informed about debt products than about equity products. On the equity side, passporting is used primarily for capital increases by companies that are already listed on several exchanges or that already have retail investors or employee shareholders in several EU countries. As an example, Société Générale launched a capital increase in 8 European countries (UK, Germany, Belgium, Spain, Italy, Luxembourg, Romania and Czech Republic) through a prospectus passported from France in February However, passports are used less often for IPOs, especially smaller ones. IPOs are often relatively smaller, national based issues. Accordingly, many take place on exchange regulated markets or do not exceed the threshold of 100 investors required for a public offer in accordance with the Prospectus Directive. Where passports are used for IPOs, this is often done as a marketing exercise to facilitate media coverage across borders (e.g. in Germany and Austria). 17

21 Use of Passports 3 More generally, market participants pointed out several supply and demand side factors that explain the low take-up of passporting on the equity side: On the supply side, there is little incentive for issuers to target crossborder equity retail markets. Instead a process of delisting has taken place across Europe, with companies focussing on the most liquid market (e.g. their home market) to list their shares; Equity finance can be raised through a private placement where a prospectus is not required. Unlike for debt where most of the activity is concentrated in a few Member States, there already are well-developed equity markets in most Member States thus reducing the incentive for cross-border passports; On the demand side, retail investors also have little interest in crossborder deals because it is more difficult for them to obtain information on foreign companies, transaction costs for cross-border investments remain much higher than for companies that are listed on the home market and equity markets are more active, with more frequent trades than debt markets The case of the Northern European markets illustrates the extent of retail investor preference for domestic companies. In the Nordic market (i.e. Sweden and Finland and to a lesser extent Denmark and Norway) arguably the most integrated cross-border market in Europe (despite covering four different currency areas), less than 10% of direct shareholders hold securities of companies outside their home country. According to many market participants, cross-border mergers between listed companies and/or banks have a much larger impact on the equity portfolios of individual shareholders than regulatory change. 3.6 The Functioning of the Passport Regime As part of our survey questionnaire, we asked market participants specifically about their perceptions of the passporting function of the Prospectus Regulations. Table 3.3 summarises the responses that we received to the following question: The Prospectus Directive is meant to facilitate cross-border offerings and listings. In your experience, what has been the impact of the Directive on the following aspects of EU financial markets, as compared to the previous system of mutual recognition? 18

22 Use of Passports 3 Table 3.3 Effect of passporting on the following aspects of EU capital markets Number of Cross-border Issues Use of Passports Options % % Increased Substantially Increased Somewhat No Impact Decreased Don't Know/No response Total Source: CSES survey The results indicate that a majority of market participants clearly associate the Prospectus Directive with an increase in the number of cross-border transactions, with 61.7% of respondents having detected at least some increase compared with only 25.9% who saw either no impact or a decrease in cross-border issues. Reponses on the use of passports were even clearer, with more than three quarters of respondents detecting an increase against less than 10% who had noticed no (or a negative) impact. Interestingly, it appears from these findings that some issuers request a passport initially without necessarily raising cross-border capital. This is also confirmed by some of our interviews with legal advisers who indicated that larger issuers (e.g. banks, larger IPOs) may request a passport for marketing purposes or just in case this might be needed. While the passporting system on the whole was seen as beneficial by most market participants, several interviewees also pointed out difficulties with some aspects of the regime, where marginal adjustments to the current Regulation may be advisable. First and foremost, most market participants were concerned that competent authorities in the different Member State had sometimes adopted different interpretations of the Prospectus Regulations or added additional requirements. Interviewees conveyed the message that harmonisation of requirements across Member States could be improved significantly through clarification of the Directive. More specifically, several interviewees pointed to differences in the interpretation of language requirements (e.g. translation checks by the receiving authority), requirements to publish an advertisement/notice in a local newspaper (e.g. in Belgium and Germany), or more significantly perhaps, differences in the definition of a public offer across Member States (discussed further in the on the retail debt market). As our interview fieldwork has found, these differences have resulted in issuers accessing cross-border markets selectively rather than through pan-european issues and this may explain, in part, the low number of countries targeted with the average passport. 19

23 Use of Passports 3 At the same time, market participants also suggested that increased regulatory competition as part of the passport regime may have fostered an increase in specialisation in individual Member States (e.g. certificates in Germany, MTN programmes in Luxembourg) which could impede harmonisation of requirements. Second, most market participants pointed to legal areas outside the scope of the Prospectus Directive as major impediments for the use of passports. For instance, differences in corporate law, consumer protection legislation, tax and legal liability regimes were cited by a large number of market participants as the most significant obstacles to integration of European capital markets. One interviewee gave the example of Air Berlin, a German airline, which incorporated in the UK with the intent of passporting back into Germany. However, this was complicated by differences in legal provisions (concerning the number of shareholders) in the two Member States. Similarly, differences in corporate law would make it impractical for a UK-based company to list in Germany, which again may undermine the impact of the Prospectus Regulations. The Prospectus Directive may have introduced some competition between regulators, which is generally seen as very positive by all interviewees. However, there was the impression among some participants in the larger Member States that this arrangement favours regulators in the smaller Member States (e.g. Luxembourg or Ireland), which do not have to address the concerns of domestic retail investors to the same extent and can therefore be more flexible and more reliant on cross-border transactions. For instance, the French AMF s statutes explicitly state its mission to protect the savings of individual investors. This makes it more difficult for the regulator to respond to competition from other regulatory authorities without such a mandate. In addition, several market participants pointed out that the EUR 1,000 threshold for non-equity issuers was based on a compromise between Member States, aimed at stifling regulatory competition, and that this threshold did not make any sense. Ideally, interviewees expressed the desire to reduce this threshold to zero but, at the same time, there was a realisation that this might not be welcomed by all Member States. Finally, it was pointed out that it remained unclear to what extent the Prospectus Regime had contributed to regulatory competition compared with other market developments (e.g. the creation of Euronext). A few interviewees pointed out that the Prospectus Directive may have contributed to the creation of an uneven playing field between different financial products. For instance, UCITS or non-ucits funds that do not fall under the Prospectus Regime and therefore do not benefit from the same flexibility in terms of cross-border passports, may be at a disadvantage compared with securities that are covered by the Prospectus Regime. Further, there is some evidence that this may have encouraged participants to repackage their products in order for them to benefit from the 20

24 Use of Passports 3 Prospectus regulations and circumvent restrictions imposed by other regulations, for instance on the marketing side. 3.7 Diversification of portfolios across Europe Finally, as part of our interview programme we asked whether the PD had helped in the diversification of portfolios across Europe. To the extent that the PD allows issuers to tap a wider market, such an impact might be expected. Our survey asked whether respondents considered that portfolios had been diversified because of the PD: Table 3.4 Diversification of portfolios Statement The Prospectus Regime has increased portfolio diversification within the EU The Prospectus Regime has increased access to crossborder capital within the EU Fully Agree Agree DK /No Disagree Somewhat response % % % % Source : CSES survey 17% of respondents either fully or partially agreed that the PD had increased portfolio diversification, compared with 34% who disagreed with this point. There seems to be a general view that portfolio diversification has not been increased significantly by the PD. In contracts, a slight majority, 34% to 31%, think the PD has increased access to cross border capital. Our interview programme supports this view. Interviewees made the point that individual investors increasingly invest in mutual funds or in exchange traded funds. And where they invest in large apparently domestic companies, in practice they are often investing in global companies. Almost all large companies have multinational interests. Interviewees considered that, whilst the PD may have helped facilitate portfolio development, other factors are more significant. Data on share ownership is available from a number of sources but a recent authoritative survey 2 published in 2007 has been carried out by FESE (the European Federation of Stock Exchanges). The survey found that the proportion of non resident investors of listed shares of European markets 2 FESE, Share Ownership in Europe, February

25 Use of Passports 3 during the period 1999 to 2005 slightly increased, and in 2005 stood at 33%. The survey provides a detailed analysis of share ownership, but of course the survey fieldwork largely predates the introduction of the PD. 3.8 Conclusion Generally, the quantitative analysis presented in this section and contributions from market participants suggest that the current passporting system constitutes a significant improvement over the previous system which relied on mutual recognition. Whereas prospectus approval and the sending of passports is concentrated in a few Member States with wellestablished markets and long-standing expertise in particular financial products, the system has succeeded in opening European capital markets to a wider range of Member States. However, there are several areas where the passporting regime could be improved. While passports are not used as often as they might be (especially for equity securities), the benefits of the current regime are substantial in those cases where passports are used. In cases where passports are not used, this is often due to business considerations which are influenced by factors outside the scope of the current directive (e.g. market developments, other areas of corporate/tax law). At the same time, significant regulatory differences remain across Member States, both in the interpretation of the European Prospectus regulations and in transposition of its requirements into national law, which has impeded the development of a true pan-european capital market. In the view of some market participants, one of the most significant benefits of the passporting regime introduced by the Prospectus Regulations is that it has introduced an element of regulatory competition. This and other effects of the PD on markets and regulators are discussed further in 4. However, on portfolio diversification, whilst the PD may have helped facilitate portfolio development, other factors were thought to be more significant. 22

26 Markets and Regulators Introduction This section describes the effect of the Directive on markets and on regulators. In particular, the section addresses information on the following questions raised in the terms of reference Is the PD (together with Transparency, IAS regulation and MiFiD) the cause of the apparent boom of alternative market versus regulated market? What are the effects of the new regime on small companies? How long does it take (on average in the EU and in the main markets) to obtain the approval of a prospectus after filing with competent authority? How has the PD impacted third country issuers? How has this affected the number of third country issuers (and the value of the capital raised in EU)? Point 3.2 of the ESME report suggests that the EUR 1,000 threshold is causing practical problems to issuers of non-equity securities. We need evidence whether this is perceived as a real problem for market operators. We consider each of these questions in turn. 4.2 Regulated and alternative markets Background The Prospectus Directive applies to regulated markets in the EU. Article 1.1 of the Directive states that The purpose of this Directive is to harmonise requirements for the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market situated or operating within a Member State. A regulated market is defined by Article 1(13) of Directive 93/22/EEC. In summary this Directive required regulated markets to fulfill certain regulatory, reporting and transparency criteria, and in particular to appear on a list of regulated markets drawn up by each Member State. Markets not appearing on this list may be exchange regulated markets or other alternative markets. For convenience, in this section we have referred to regulated markets or exchange regulated markets as appropriate. 23

27 Markets and Regulators 4 Changes in the status of markets On the introduction of the Prospectus Directive, a number of previously regulated markets changed their status to become exchange regulated markets. For example, the London Alternative Investment market ( AIM ) states that From 12 October 2004, AIM ceased to be classed as a regulated market under EU Law and became an exchange regulated market. This change was driven by changes in EU Law (under the Prospectus Directive and Transparency Directive) which affect AIM s regulatory environment. AIM s change of status enabled us to preserve the existing admissions process and regulatory structure as far as possible, allowing AIM to continue to offer the flexibility that smaller growing companies need, while also retaining the high standards of regulation that have characterised and supported AIM s development. 3 AIM is owned by the London Stock Exchange and the main London market is of course a regulated market. Whilst AIM has principally attracted equity listings, the London Stock Exchange has also launched an exchange regulated debt market, PDM (Professional Debt Market). This is a smaller market than AIM and competes with other debt based exchange regulated markets. In Ireland the exchange regulated market is owned by the main market. IEX, like AIM, is mainly an equity market. The most successful debt based exchange regulated market is EuroMTF in Luxembourg. The EuroMTF website states explicitly that the EuroMTF market was launched in July 2005 to satisfy the needs of those issuers that are not interested in a European passport or in need of more flexibility in relation to the preparation of financial information. Further the Rules and Regulations provide the Luxembourg Stock Exchange with some flexibility so that, in limited and appropriate circumstances, some requirements can be adapted to accommodate an issuer s particular situation. This pattern of markets points to increasing competition between markets or groups of markets to provide liquid trading platforms in particular niches, debt or equity. The competitive environment is not limited to Europe and in the US there is a similar degree of competition. For example, the market capitalisation of the American NASDAQ is now a quarter of the New York Stock Exchange. Companies listed on the NYSE are also traded on NASDAQ effectively the two exchanges compete for the same business. And NASDAQ has recently opened an exchange in Sweden designed to provide a trading platform for European equities, in competition with other European 3 AIM website 24

28 Markets and Regulators 4 markets. A pan-european market for bluechip companies will also be launched later in Finally, the launch of AIM-Italy, operating along the same lines as in the UK and owned by the London Stock exchange at the end of this year should bring with it significant changes in Italy where the existing exchange regulated market has not been very successful to date. However, some interviewees noted that the Prospectus Directive constitutes only a small part of the overall regulatory burden associated with offers and listings on regulated markets, which includes MIFID and the Transparency Directive. While this is difficult to say with any certainty, the impression among some interviewees was that these latter Directives may have had a greater impact on the relative attractiveness of exchange regulated markets. For instance, in our survey of market participants one in four (25.5%) stated that the Prospectus Regime had increased the use of exchange-regulated markets vis-à-vis regulated markets. This compared with nearly one third (32.7%) who thought there had been no impact at all and another one third (32.7%) who did not know what the effect of the Prospectus Regime might have been. Our interviews with markets also suggested that companies may be attracted to exchange regulated markets by listing rules which allow different forms of accounting to be accepted. For example, it may be possible to use generally accepted accounting principles (GAAP) from countries outside the EU, rather than IAS regulations. The markets we interviewed wished to point out that the different status of exchange regulated markets did not mean that regulation was necessarily less effective. They pointed to rules on corporate governance and to the provision of information to investors. They considered that the rules set out in the PD, and the advantages of passporting that came with those rules, were not necessarily appropriate to all companies and in particular smaller companies. 4.3 Statistical data on markets We now consider statistical data on the performance of European markets. Where appropriate we compare exchange regulated and regulated markets. We show statistical data on market capitalization, the value of trading, the amounts of new money raised and the numbers of companies quoted including transfers between markets. Market capitalisation The market capitalization of European regulated markets in total, for the markets shown below, at 31 st December 2007 was EUR billion. 25

29 Markets and Regulators 4 Exchange Table 4.1 Market capitalization of selected regulated markets Market value, billion % of Total 31 Dec Dec Dec Jun Dec Dec Dec Dec 2003 Athens Exchange Borsa Italiana Bratislava Stock Exchange Bucharest Stock Exchange Budapest Stock Exchange Bulgarian Stock Exchange Cyprus Stock Exchange Deutsche Börse 1,440 1,242 1, Euronext 2,888 2,812 2,295 1,910 1,796 1, Irish Stock Exchange Ljubljana Stock Exchange London Stock Exchange ,635 2,877 2,593 2,284 2,072 1, Luxembourg Stock Exchange Malta Stock Exchange OMX Nordic Exchange Oslo Børs Prague Stock Exchange Spanish Exchanges (BME) SWX Swiss Exchange Warsaw Stock Exchange Wiener Börse Total 11,752 11,421 9,602 8,317 7,635 6, Source : FESE 26

30 Markets and Regulators 4 We also show below the capitalization of selected exchange regulated markets. For those markets, the total capitalization at 31 st December 2007 was 152 billion. 4 Table 4.3 Market capitalization of selected exchange regulated markets, December 2007 Exchange New Market Listed Companies End of Month Deutsche Börse Entry Standard 112 n/a Euronext Euronext Irish Stock Exchange IEX London Stock Exchange AIM OMX Nordic Exchange First North Oslo Børs Oslo Axess Warsaw Stock Exchange NewConnect Wiener Börse Dritter Markt (MTF) Source : FESE Market Cap end of month 000 m Because of changes in market structures, it is less relevant to provide a run of information since 2003, with the exception of information for AIM which is shown later. Whilst many exchange regulated markets have been successful, in terms of capitalization they are still dwarfed by the regulated markets. The capitalization of the alternative markets shown above represents only 1.3% of the regulated markets. Value of trading We also show the value of trading, both for equities and for bonds, by markets in Europe. The annual value of trading is shown, although data for 2005 is also split into six month periods For equities, turnover is concentrated on a few main markets and many markets have relatively small turnover. The pattern of turnover has remained relatively fixed throughout the period, although volumes have increased. 4 It was not possible from the data available to obtain a separate capitalization for the Deutshe Bourse entry standard 27