Wall-Street: Why, in your opinion, SMILEs are so important to the equity markets?
Fabrice Demarigny: A study published by the European Commission, has measured the impact of the EU Directives on the Initial Public Offering (IPO) market. One of the conclusions of the study is that the decrease of activity on the IPO market is not purely cyclical. Clearly, initial and ongoing requirements for issuers have impacted the decision-making process to float a company as well as the way exchanges have structured their listing and trading facilities. Furthermore, statistics show a constant decrease in the number of listed companies on EU regulated markets.
This can be explained by the decreasing number of new entrants but, more significantly, by the fact that listed companies decide to de-list and go private.
This trend mainly affects Small and Medium-sized Issuers Listed in Europe (SMILEs) . This difficulty of SMILEs to access capital markets has become even more critical with the financial crisis. And even if Member States made efforts to have a more fluid lending, the capital markets remain the only valid alternative for SMILEs to access long term finance.
A large number of SMILEs, but also regulators, public authorities, exchanges and stakeholders shared the view that the initial and on-going listing costs outweigh the benefits . It appears therefore that the EU Directives have set requirements, applicable to all issuers irrespective of their size, representing a barrier too high for Small and Medium Companies in terms of compliance and costs.
In addition, the Market in Financial Instruments Directive (MiFID) has concentrated even more the trading and the liquidity on major listed companies of the leading indexes. On average, 93% of listed companies that are not in the largest market capitalisations benefit from less than 7% of the liquidity.
If this trend persists, the EU will end-up with regulated markets exclusively composed of “Blue Chips” included in top indexes. There is a major risk that financial and regulatory developments lead to the desertification of regulated markets.
In short, in the medium run, the Single Market would not be providing financing to tomorrow’s EU emerging economy. This can only be seen as a failure. Not acting is no longer an option.
Wall-Street: Which are the most important 5 regulations that must be imposed to these entities?
Fabrice Demarigny: 2010 is the year of the review of the Prospectus Directive, the Transparency Directive, the Market Abuse Directive and the MiFID. This coincidence provides a unique opportunity to revisit this set of directives with a “Think Small First” spirit in mind.
In the US, for similar reasons, the Securities and Exchange Commission (SEC) gives high priority to calibrating securities’ laws and rules when applied to small and mid caps. A number of filing and disclosure rules have been amended to create a specific regulatory regime for Small and Mid Caps (“Smaller Reporting Companies”).
Wall-Street: Do you think your recommendations will get EC’s approval? If yes, do you think they will be put in place by the countries and stock exchanges across the European Union?
Fabrice Demarigny: There are good reasons to believe that this would be the case. If the recommendations of the report are taken into consideration by the EU Commission, and subsequently by the European Parliament and the Council, the following should be kept in mind: the rationale of this report is fully in line with the various initiatives taken at EU level since the Lisbon Strategy (2000) in order to boost SMEs and their access to finance; the recommendations are strongly guided by the fundamental objective of protecting investors - none of them will create a systemic or market risk.
The driving principle of this report is to facilitate existing ways and means for SMILEs to access finance and to offer new legal possibilities for a public floatation.
This been said, only a determined and visible political action can successfully create a renewed environment facilitating the financing of Small and Medium-sized Companies through the EU capital markets.
Wall-Street: Unfortunately, SMILEs are victims of liquidity shortage. What can be done to stimulate trading volumes? Do you think the new platform Joint Multilateral Trading Platform will bring any success?
Fabrice Demarigny: Facilitating listings has to be done in such a way that investment on SMILEs becomes more fluid and that supply and demand efficiently meet. Indeed, SMILEs complain about the lack of liquidity in the market which makes their share price more volatile and impacts directly their market value.
The absence of IPOs and the poor liquidity makes the business case of intermediaries very fragile. A market solution is therefore necessary to revitalize trading on SMILEs and to improve their visibility across the EU. Only one thing is sure: the current market situation is not a success.
One possibility could be to create a single EU access point to trade SMILEs’ shares. Whilst keeping the listing functions and services at the level of each regulated market, these markets, active intermediaries/brokers and long term institutional investors could pool together the trading on SMILEs.
SMILEs would continue to list and be listed on the regulated market of their choice while benefiting from a common EU trading place accessible to the EU pool of liquidity. Intermediaries/brokers would be able to carry out transactions on one single place (saving membership fees).
Investors will have simple and straightforward access to all SMILEs representing the future of the EU economy.
The licensing and supervision of the joint platform could be included directly within the scope of competence of ESMA.
Wall-Street: Romanian capital market has a segment designed to small and medium enterprises trading, called Rasdaq. Both trading value and volume are low in this market, the daily trades rarely exceeding the €1 mn mark. There is a certain hesitation regarding the placement of the market within the definition of a regulated market or an ATS, which holds back the investment plans of local and overseas funds. Do you think your propositions, if approved, could bring back large investors for these SMILEs?
Fabrice Demarigny: This report will not alter the way public markets are organized but add new possibilities. The purpose of this report is not to challenge the way exchange-regulated markets or ATS are functioning. On the contrary, as a result of the recommendation of this report, companies listed or quoted on an exchange-regulated or alternative market will benefit from a proportionate prospectus regime. National legislators and/or regulators will remain free to apply to companies listed or quoted on Exchange-regulated markets other provisions applicable to SMILEs.
There is no fundamental economic reason to harmonize in EU law the way in which exchange-regulated markets or listing Multilateral Trading Facilities should function.
These markets play a crucial role as a first entry door for micro and small companies. They are very flexible and open, offering more “tailor made” solutions to young companies outside the scope of the EU directives. This flexibility should be preserved as it plays a real economic role. In addition, the investor base of exchange-regulated markets is significantly domestic.
If the SMILEs regime is adopted and becomes applicable, it will be for market operators to decide how to include this in the market strategy and service offerings.
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