Concluding Remarks by Spyros Capralos FESE President
Good afternoon ladies and gentlemen,
As President of FESE, the Federation that represents European Exchanges, I am delighted to be here and share with you my thoughts on the difficulties that European smaller issuers are experiencing and on how to address these drawbacks.
Smaller companies can be divided into two groups, both of which are important for economic growth and employment:
On the one hand we have emerging, high-growth, companies some of which may fail, but some of which will become significant larger companies.
On the other, smaller companies with a more stable outlook.
For all European countries, but especially for the economy of smaller countries, these companies are a significant resource to employment, growth, fiscal income and social and health insurance systems.
European governments have been recognising their importance for a long time and there are several national ad-hoc initiatives to promote them.
Smaller companies have two ways of raising capital:
by going public; that is, raising capital by getting listed on-exchange, either on the main market or on a specialised market segment, or raising capital through banks' loans or private equity and venture capital funds.
Each type of funding has its own advantages and plays a specific role.
As President of FESE, I represent operators of public markets which serve companies of all sizes, including smaller ones.
So I will talk about public capital.
The public market model offers unique advantages. Let me outline the most important ones:
- Public capital offers wide access to investors through clear and transparent rules,
- All investors can participate, access is not restricted,
- All investors receive the same information concurrently,
- The reporting and the criteria for the issuers are harmonised and assist the selection process for investors,
- There is a level playing field for both the issuers and the potential investors,
- The trading model is transparent and non-discretionary,
- Exchanges often engage in roadshows to promote their issuers,
- Exchanges include issuers in transparent benchmark or tradable indices based on sector or geography for increasing investor awareness.
In the past years there were several de-listings of companies from Regulated Markets because they could not bear the costs imposed by EU regulation such as Transparency, Prospectus, Official Listing and Market Abuse directives.
MiFID's cherry picking - which I will address in a few minutes - has made these problems even worse.
Not surprisingly, the number of new listings on our junior markets went down.
One important European market had 56 new listings in 2007, 17 in 2008 and only 8 in 2009.
The trend, you will agree, is clear.
Figures concerning turnover and number of trades also show this decline.
The need for action evident.
Let's put things in perspective:
Regulated Markets' disclosure requirements are too expensive for the very small firms.
That is why we have created special market segments with a lighter regulatory regime and continuous assistance with regard to the ongoing disclosure requirements.
However, we must not forget that costs for all listed companies are high.
Therefore, companies that grow in a protected environment, such as that of the junior market, risk ending up on the main markets and being unable to bear the higher costs.
Let's not forget that FSAP directives already recognise smaller companies; there are exemptions foreseen in the prospectus and in the transparency directives; in addition, we have the dedicated market segment possibility.
With the intention to further reduce the administrative burden of existing regulation on EU companies by 25% by the end of 2012, the European Commission launched in 2007 an ambitious action plan.
The Prospectus Directive, as it is being discussed by the Parliament these days, provides a simplified framework for initial disclosure and, significantly, strikes the right balance between reduced burdens for issuers and investor protection.
It is also fair to mention the Packaged Retail Investment Products and the Key Investor Document initiatives.
However, the problem is more general and it is not limited to smaller companies only.
Let me be frank with you: I do not believe that creating a "Regulated Market light" version is the right way forward.
If we focused our attention on the main markets only, we would practically discard the alternative market segment possibility instead of trying to make it more attractive. Even during the crisis, we had a steady flow of companies moving up from junior to main markets.
This shows that the growth market model is working as intended and deserves to be protected.
Creating country specific thresholds to determine whether a company is an SME or not, might not be the best solution for a number of reasons.
A company recognised as an SME will have lighter obligations and therefore reduced costs to access capital.As a consequence, companies of the same size will have different obligations in different Member States and therefore bear different costs to access capital.
A French or German company of a certain size will be an SME, whereas a company of the same size in Austria or Greece will not be an SME.
The Austrian or Greek company will have more disclosure obligations than the French or the German one and will be at a disadvantage in accessing capital.
This will eventually encourage incorporation in larger Member States.
Moreover, investors will receive different level of information for companies of the same size depending on where the company is incorporated. This will not favour an EU regime for SMEs and most probably not create the confidence needed among investors.
We can think of other arrangements for this issue - for instance introducing a qualitative element in the definition of smaller company which would allow the Competent Authority and the Regulated Market of the jurisdiction concerned to decide that certain companies should be considered as "normal" companies and not SMEs due to their economic and social importance in the country.
This would work in a way similar to the additional "liquid shares" option under MIFID.
This point is very important if we want a level playing field in accessing capital for companies in Europe.
However, it is not all about rules.
Reducing the regulatory burdens for issuers is only part of the solution.
We need to consider the environment of investment as well.
MiFID has led to some new commercial activity and creativity and it has pushed exchanges to deliver much cheaper services.
Its impact on the quality of European secondary markets, though, is more mixed.
In terms of financing the economy, large issuers have benefited from the MiFID regime as their stocks are now accessible to a larger pool of investors thanks to the proliferation of execution venues and to the passporting regime.
Smaller stocks though were excluded.
It is not a secret that Exchanges' trading revenue typically comes from the most liquid shares (the so-called blue chips).
Generally, 80% of revenues come from 20% of trading of the overall stock of listed companies.
Exchanges are exposed to competition from MTFs which basically try to capture liquidity in the most liquid and valuable shares - this is called "cherry picking".
These new markets are run for the most liquid shares.
The effect of the pan-European MTFs is to de-couple blue chips trading from the rest.
The competition is very strong and not necessarily based on prices alone - in this new environment exchanges need to be more commercial.
We need to understand that if cherry picking continues, it will eventually become a wide loss, for Regulated Markets to operate dedicated market segments for smaller companies.
I strongly invite public authorities to address the cherry picking problem faced by Regulated Markets when listing illiquid stocks.
Midcaps which are relatively illiquid and have low volumes may not always be interesting from an economical perspective.The fast development of technology has reinforced this tendency:
High frequency trading firms focus on blue-chips, hence contributing significantly to driving interest away from smaller, less liquid, stocks.
One of the problems we face when assessing our MTFs for smaller issuers is their lack of appeal on an international basis.
As I mentioned before, there is liquidity for blue chips and competition is harsh in that segment but, for smaller companies, the interest is limited and rarely visible across national borders.
There is a possible cause: As analysts only cover blue chips and they very hardly write about smaller issuers, most midcaps are covered nationally, not by sector.
We need to make these markets interesting, competitive and cross-border.
To conclude, I want to leave you with a number of questions on which we need to gather practical answers:
- How can we encourage firms to follow and analyse midcaps?
- How can we create a pan-European midcap asset class?
- What structure do we need that would help position midcaps as a different and separate asset class type?
- Why are junior markets not making a bigger difference?
- Do smaller companies have enough resources or should the state do more to help them find investors, do road shows?
Debates like the one we had today are important to keep the focus on developing good, innovative and competitive solutions for the benefit of the smaller companies, the local economy and the single European Market.