IFRS optionalities for alternative calculation methodologies or definitions,

e.g. classification problems, such as pension interest in income statement as interest or operating expense or calculation of debt at amortised cost or fair value

Artificial Yes Action needed

5. Alternative performance measures Artificial Yes Action needed

6. Off-balance sheet items Structural No Action needed

7. Voting share disclosure threshold Artificial Yes Action needed

8. Domestic business registries Artificial Yes Action needed

9. Credit risk scoring and national credit

bureaus Artificial Yes Action needed

10. Rules on related-party transactions

(definitions) Artificial Yes Action needed

11. Compensation disclosure (methodology) Artificial Yes Action needed

Note: This is not an exhaustive list of artificial and structural barriers to cross-border financial transactions.

Two out of 11 selected barriers may require immediate action at EU level.62 _These

barriers can be a potential obstacle for cross-border price discovery (risk evaluation) and thus further capital markets integration (see Table 6). Remaining barriers, in the area of accounting and other important company and individual data, require an EU intervention that takes into account the differences of local corporate governance systems, as long as the flexibility provided by regulatory competition does not complicate the ability to identify and price costs ex ante.

Outstanding barriers

4.5.2

Financial instrument information

The second set of information that is necessary for a financial transaction to take place includes market information about the financial instrument that is part of the sale/purchase or lending/borrowing operation.63 _{Information can be organised in two}

groups: pre-contractual and ongoing (ex post)information.

Definition

Pre-contractual information has received a lot of attention in post-crisis financial reforms, both for primary issuance and secondary market activity. For what concerns primary issuance, the revision of the prospectus directive and the obligation to issue the

Pre- contractual information

62 _{This is by no means an exhaustive list.}

Key Information Document (KID) (per EU Regulation n. 1286/2014), when issuing new UCITS units or other packaged retail and insurance-based investment products (PRIIPs),64

should make pre-contractual disclosure more readable to retail investors. The KID does not necessarily address an issue that affects capital markets integration, as the problems regarding retail investors’ ability to process financial information exist irrespective of whether the transaction is domestic or cross-border. Nonetheless, it may become an issue to be tackled by CMU if the implementation creates barriers to data comparability between UCITS issued in different countries or UCITS and non-UCITS PRIIPs (for instance). Different KIDs for different types of PRIIPs may worsen comparability among PRIIPs. In addition, KID requirements could be extended to all types of retail investment products (especially long-term ones) offered by pension funds, insurance companies and banks, in order to level up different disclosure requirements that are applied by domestic authorities (often rather opaquely).

In relation to the prospectus, which describes the issuance and the characteristics of the newly issued financial instruments, lowering listing costs by reducing disclosure for SMEs might reduce the typically high costs of issuance and push SMEs to issue more. For instance, the implementation of the Jobs Act, which reduced IPO burdens for Emerging Growth Companies (ECGs),may have triggered more IPOs, as roughly 83% of total IPOs in 2014 were ECGs (E&Y, 2015). Nonetheless, while disclosure requirements should ensure that the data disclosed in the revised prospectus are fully comparable across markets, this is not necessarily a barrier to cross-border dealing and an integration problem for CMU, but rather a structural problem classifiable under investment policies, which does not necessarily involve cross-border capital markets activities.

In addition, pre-contractual information includes secondary market information. For financial instruments other than equity, there is no formal obligation to disclose the prices at which individual transactions are executed in a venue or bilaterally. MiFID II will extend the pre-trade transparency requirement to these instruments, thus creating a harmonised European regime, which ultimately may create better conditions for pan- European trading platforms.

For equities, market prices are already available and should be in theory easy-to- compare information. However, market fragmentation and different data formats make the aggregation of information across trading venues expensive, especially if this data cannot be immediately used to execute orders cross-border. The limited cross-border brokerage activity is mainly driven by the high costs of market infrastructure for cross- border trades. In effect, due to the legal and infrastructural environment surrounding primary issuance, listing of financial instruments is still primarily a ‘national thing’. As a result, fragmentation of issuance and trading of financial instruments along national borders in Europe increases the costs of getting a license for the use of the data because every platform charges a monopolistic rent as the only venue where most of the quotes are generated and prices are discovered by a diversified trading flow (combining both

Market data and fragmenta-

tion

64 _{PRIIPs can be categorised in investment funds, insurance-based investment products, retail structured} securities and structured term deposits, as defined by a Memo of the European Commission available at http://europa.eu/rapid/press-release_MEMO-14-299_en.htm?locale=en.

informed and uniformed investors, such as retail flows). Moreover, on top of the classic issue of the monopolistic rent, national fragmentation inhibits market liquidity because it increases the informational rent of informed investors, who have access to multiple exchanges, and prevents investors from benefitting from the positive network effects (market externalities) brought about by each additional market participant in a ‘thicker market’ (Pagano, 1989; Foucault, Pagano & Roell, 2013).

This situation will hardly be overcome if there is no common framework for the cross- border listing of financial instruments and a more integrated financial infrastructure (see also section 4.6.1). In addition, information is often disclosed with different data formats, which increases the costs of reconciling information in cross-border trading and impairing pricing at market microstructural level (O’Hara & Yang, 2013; Cespa & Foucault, 2013). Search costs to collect multiple quotes from multiple venues simultaneously are fairly high. MiFID II should overcome the formats issue via the direct licensing requirements for data providers (including trading venues), but the consolidation of the financial infrastructure depends on multiple factors, including competition policies. Meanwhile, more thinking should go behind the possibility for ESMA to become the listing authority of the European blue chips, using the network of national supervisors and ensuring that its binding supervision ensures greater convergence of practices. More should be done as well to identify and remove the bias in national laws towards the nationality of the regulated market where listing of the security takes place, which should be extended to any member state of the European Union where the venue has received the EU passport. This also means that depository services should accessible on a cross- border basis. The direct supervision of ESMA over international central securities depositories, the harmonisation of some key areas of securities laws (see following sections) may provide fertile ground for greater consolidation among European securities markets and more choice for investors.

Linking up trading venues by frictionless information flows can reconcile fragmentation with liquidity and create positive market externalities. Greater venue consolidation may also reduce costs due to market fragmentation, which are impeding the development of a truly consolidated pre-trade European Best and Bid Offer (EBBO). The combined effect of market fragmentation (due to national bias in primary listing) and data formats (due to market practices) make it overly expensive to reconcile information on most liquid European shares, which are spread across dozens of trading venues. Offering consolidated (pre-trade) data solutions at a price that is affordable for everyone (in particular, for retail and small professional investors) is thus limited and so is the possibility of real-time cross-border execution on the basis of this information. The MiFID II proposal for a consolidated tape (post-trade transparency) may hardly see the light, as commercial interest in this solution, for both data providers and investors, is very limited. Post-trade consolidated (not actionable) data solutions have limited commercial value, as they can only be used for sophisticated post-trade analysis and the top of the book data can already be retrieved for free from the venue 15 minutes after the trade is executed. To facilitate the creation of an EBBO, supervisors could give more attention to

Table 7. Selected examples of outstanding cross-border barriers

Cross-border barrier Nature Cost predictability Outcome