Capital Markets Blog

Capital Markets Blog Series – Part I: Capital Market Structure and Market Participants


Capital Markets Blog Series – Part I: Capital Market Structure and Market Participants

Brexit will almost inevitably initiate a transition towards a new EU27 Capital Market, needed to finance European economic growth and development in times of political uncertainty and technological disruption. Based on the publication of our Thought Paper “The Development of European Capital Markets Post-Brexit”, this blog will focus on EU27 Capital Markets structures and participants.  Further posts will focus on the main areas and the progress of the Capital Markets Union (CMU), which we consider the most important regulatory condition for the future development of EU27 Capital Markets.[1]

Capital Markets – Overview

Capital markets fulfill an intermediation function by transforming size, maturity and risk. The intermediation function of Capital Markets leads to risks being transferred directly between market participants while intermediation by banks involves the temporary use of bank’s balance sheet, resulting in a high reliance on banks’ continued capabilities to carry, manage and hedge these risks while owned by them. In times of increasing regulatory capital requirements and low interest rates, both resulting in a reduced risk appetite of banks, this intermediation function is constrained.

On Capital Markets, securities such as shares and bonds are issued to raise medium to long-term financing on what is called the primary market, and securities, commodities, currencies as well corresponding derivatives are traded on what is called the secondary market – disregarding newly developing asset classes and tokenization of real assets. Short-term transactions within a currency take place on the money market.

On primary markets, an issuer usually engages investment banks to place its securities (e.g. bonds and shares) with investors. In secondary markets, an issuer’s bonds and shares as well as other asset classes such as e.g. derivatives and commodities are traded between market participants.

The following diagram shows a holistic overview over the Capital Market structure as well as market participants which will be referred back to throughout the following blogs:


Capital Market Participants – Roles and Responsibilities    

In primary markets, issuers (e.g. public sector entities, corporates and banks) use investment banks (so called sell-side banks) in order to support them in structuring IPOs or debt issuances. Investment banks may thus act as intermediaries in the primary market either by connecting the issuer with potential investors (matching function) or by acquiring the issuance and re-selling it to other participants (underwriting function). Furthermore, banks depend on Capital Markets to issue their own debt and equity instruments, needed to fulfill their intermediation function, especially if they cannot attract (sufficient) deposits. The ability of Capital Markets to provide financing is a critical prerequisite of financial intermediation needed to finance economic growth and innovation. Capital issuances in the primary market are usually acquired by large institutional investors including but not limited to asset managers, hedge funds, pension funds and insurance companies. These market participants hold either issued capital instruments directly or structure investment vehicles to pool capital instruments from different investors.

Generally, shares and bonds issued in primary markets are subsequently traded in secondary markets as well as other asset classes such as e.g. derivatives and commodities. In secondary markets, additional investors such as e.g., commodity houses, commodity producers and consumers come into play. As a result of this larger group of investors as well as the increase with regard to the number and complexity of products (e.g. based on restructuring and derivative products), the legal and regulatory requirements for intermediaries are higher in the secondary market than in the primary market. Intermediaries in the secondary market include investment banks’ Sales & Trading divisions, which focus on creating investment and hedging opportunities for investors who are looking at transferring risks. In order to increase market demand for primary market products, these specialized traders use techniques such as financial engineering or structuring, creating new products that allow investors to buy portions of risks and cashflows of the original assets. In addition to investment banks, the group of intermediaries generally includes e.g. trading venues, such as e.g. stock exchanges, Multilateral Trading Facility (MTF) focusing on equity transactions (no operator discretion) as well as Organised Trading Facilities (OTF) focusing on non-equity transactions. Furthermore, FMIs such as e.g. clearing houses (CCPs such as LCH, Eurex Clearing, CME or Iceclear) and Central Securities Depositories (CSDs such as Clearstream, Euroclear or DTCC in the US) play a key role on the secondary market. Besides the intermediaries mentioned above, which usually share part of the risk of the underlying transactions or support the execution of the transaction process, other relevant market players such as rating agencies have emerged in order to enhance transparency and therefore reduce the information asymmetry between issuers and investors. Statutory auditors foster reliance in financial statements and thus reduce disincentives. Law firms and advisors help transfer best market practices between market participants.  Furthermore, regulators issue legal requirements and supervisors enforce them contributing to a functioning, stable and integrated, fair and transparent financial system and prevent its misuse for fraud, money laundering and terrorist financing purposes. Shortcomings with regard to the above-mentioned functions may result in severe market disruption with respective effects on the real economy.


Need for action in order to realize the growth potential of EU27 Capital Markets

The different size and structure of Capital Markets often relates back to the underlying economy and market structure, including its market participants. As an example, the majority of EU27 entities are bank-financed in contrast to the US, where Capital Market funding plays a major role for market participants. On average, bank lending represents 78% of corporate debt for EU27 companies and bond markets account for 22% in 2016 (compared to 13% in 2006). This is the inverse of the US with its market-based financial system, where bank lending accounts for 26% of corporate debt in 2016 (compared to 27% in 2006). In the UK, bank lending represents just over half of corporate debt with 54% in 2016 (compared to 63% in 2006) which shows the path the UK has taken to convert from a bank-based to a market-based financial system.[2]

Currently, the EU is facing enormous challenges: Trying to tackle demographic and technological change, border protection and climate change will require significant investments which cannot be provided purely by banks as financial intermediaries. Furthermore, Brexit preparations revealed the extent to which the EU27 member states are dependent or (over-)reliant on the UK Capital Market, which effectively absorbs a large part of Capital Market transactions entered into by European market participants. In order to ensure growth and become more independent in an international context, the European Union needs a genuine, integrated and innovation-friendly Capital Market. Since Capital Markets are fragile constructs with legal, political and social determinants being the main drivers to ensure a stable development, the Capital Markets Union (CMU) introduced by the EU Commission is an important first step towards the creation of an integrated European Capital Market. The subsequent blogs will thus focus on the CMU action plan, analyzing the issues it tries to tackle as well as identifying potential gaps and remediating actions.



Please contact our PwC experts in case of any questions.

Stephan Lutz – Mail:

Ina Alexandra Steiner – Mail:

Dr. Philipp Völk – Mail:





[1] The authors thank Fabian Faas and Philipp Böhme, both PwC, for their valuable contribution to this blog series.

[2] Wright, W./Asimakopoulos, P. (2018): A decade of change in European Capital Markets, p. 10.

The tale of the Securitisation Regulation

The Regulation aims to strengthen the legislative framework for European securitization market. It is a building block of the Capital Markets Union (CMU) which contributes to the Commission’s priority objective of supporting job creation and sustainable growth.

The Securitisation Regulation (SR) formed a part of Investment Plan for Europe, also known as the Juncker Plan, named after Jean-Claude Juncker, the president of European Commission at that time. The plan was officially communicated by the Commission on November 26, 2014 and the SR intended to restart high-quality securitization markets without repeating mistakes made before the 2008 financial crisis.

Eight months under the Securitization Regulation

As of beginning of 2019, the new Securitization Regulation applies. It consists of 48 articles and brings forth several noteworthy rules, concerning mostly disclosure practices and Simple, Transparent and Standardized (STS) framework.


The STS Framework

The STS refers to a set of criteria that grant an STS label to a compliant ABS transaction. The requirements are described in articles 18 – 28 and can be broken down as follows:

BaFin and Bundesbank consult MaSanV

On 25 April 2019, BaFin, in agreement with the Deutsche Bundesbank, submitted the Mindestanforderungen an Sanierungspläne für Institute und Wertpapierfirmen (MaSanV)[1] for consultation.

The MaSanV-E will replace the MaSan after its entry into force. In addition, it will transpose into German law the EBA guidelines on the range of scenarios to be used in recovery plans (EBA/GL/2014/06) and the EBA Guidelines on the minimum list of qualitative and quantitative recovery plan indicators (EBA/GL/2015/02), and will concretise the provisions of the Delegate Regulation (EU) No. 2016/1075.

This creates the necessary requirements for the reorganisation planning of less significant institutions (LSI) as well as of institutions, which belong to an institution protection system (IPS).

As a result, the MaSanV will become the central legal norm, especially for smaller banks, alongside the German Sanierungs- und Abwicklungsgesetz (SAG).

BaFin und Bundesbank konsultieren MaSanV

Die BaFin hat am 25. April 2019 im Einvernehmen mit der Deutschen Bundesbank die Verordnung zu den Mindestanforderungen an Sanierungspläne für Institute und Wertpapierfirmen (MaSanV) zur Konsultation gestellt.

Der MaSanV-E wird nach Inkrafttreten zum einen die MaSan ersetzen. Darüber hinaus wird er die Leitlinien der EBA[1] über die bei Sanierungsplänen zugrunde zu legende Bandbreite an Szenarien (EBA/GL/2014/06) und die Leitlinien der EBA zur Mindestliste der qualitativen und quantitativen Indikatoren an Sanierungspläne (EBA/GL/2015/02) in deutsches Recht umsetzen und die Regelungen der Delegierten Verordnung (EU) Nr. 2016/1075 konkretisieren.

Dadurch werden die notwendigen Vorgaben zur Sanierungsplanung von weniger bedeutenden Instituten (LSI) sowie von Instituten, die einem institutsspezifischem Sicherungssystem (IPS) angehören, geschaffen.

Im Ergebnis wird die MaSanV vor allem für kleinere Häuser zur zentralen Rechtsnorm neben dem Sanierungs- und Abwicklungsgesetz (SAG) werden.

SRB Brexit-Positionspapier zur Abwicklungsvorbereitung

Das Single Resolution Board (SRB) hat in einem Positionspapier[1] darauf hingewiesen, dass wesentliche regulatorische Vorgaben (wie z.B. an die MREL Quote, Fortführungskonzepte, Personalausstattung) ungeachtet des Brexits von Bankinstituten in der EU27 eingehalten werden müssen. Mit dem Brexit wird die europäische Bank Recovery and Resolution Directive (BRRD)[2] ihre Bindungswirkung für in Großbritannien ansässige Institute verlieren. Daher formuliert das SRB seine regulatorischen Erwartungen an Banken, die a) ihre Geschäfte, in eines der EU27 Länder verlagern (incoming banks), oder b) ihren Hauptsitz in der EU27 haben und ihre Aktivitäten in Großbritannien oder einem Drittland auf- bzw. ausbauen (outgoing banks).

SRB Brexit position paper to ensure resolvability

The Single Resolution Board (SRB) pointed out in a position paper[1]  that banks have to be compliant with essential regulatory requirements (e.g. for MREL, continuity concepts, staffing) irrespective of the upcoming Brexit. After Brexit the European Bank Recovery and Resolution Directive (BRRD) will lose its binding effect for institutions domiciled in Great Britain.[2]  The SRB therefore formulates its regulatory expectations for banks that a) relocate their operations to one of the EU27 countries (incoming banks) or b) have their head office in the EU27 and establish or expand their activities in Great Britain or a third country (outgoing banks).

Handels- und steuerbilanzielle Fragen bei der Portierung von Zinsderivate-Portfolien zwischen zentralen Kontrahenten

Im Zuge des Brexit entfällt das “Passporting” von Finanzdienstleistungen, und die regulatorische Anerkennung von Finanzdienstleistern im Vereinigten Königreich in der EU bedarf einer Genehmigung im Einzelfall. Die somit zu erwartende Verlagerung von Finanzgeschäften in die EU betrifft auch das Clearing von in Euro denominierten Zinsderivaten (sog. “Euro-Clearing”). Der nachfolgende Beitrag beschreibt mögliche Übertragungswege für bestehende Zinsderivate zu einem zentralen Kontrahenten in der EU und diskutiert die handels- und steuerbilanziellen Folgen.

Commercial and tax balance sheet issues in the porting of interest-rate derivative portfolios between central counterparties

In the course of Brexit, passporting of financial services will no longer apply and the regulatory recognition of financial service providers in the UK require approval on a case-by-case basis in the EU. The clearing of interest rate derivatives denominated in Euros (so-called Euro Clearing) is a market with a nominal volume of approximately 100 trillion Euro in open contracts, which is currently predominantly settled at the London Clearing House (LCH). In the event of a hard Brexit, the European Securities and Markets Authority (ESMA) decided on 18th February 2019 to recognize the LCH as a third party CCP for a limited period of 12 months. A to be expected transfer of financial transactions to the EU, also affects Euro Clearing. The following article by Dr. Christian Altvater, Head of the Group Tax Department of Deutsche Börse Group, and Judith Gehrer, Partner at PwC, describes possible transfer channels for existing interest rate derivatives to a central counterparty in the EU and discusses the consequences for the commercial and tax balance sheets.

Den Artikel von Dr. Christian Altvater und Judith Gehrer (PwC) erschienen in RdF 2019, 65-72 der dfv Mediengruppe finden Sie in deutscher Sprache (in german language) hier.

Die Veröffentlichung erfolgt mit freundlicher Genehmigung der dfv Mediengruppe.

Die Entwicklung der europäischen Kapitalmärkte nach dem Brexit

Es scheint kein Weg mehr daran vorbeizuführen: Das vereinigte Königreich wird die Europäische Union offiziell am 29. März 2019 verlassen, auch wenn es (hoffentlich) zu einer Übergangsperiode kommt, die den Marktteilnehmern die dringend benötigte Zeit gibt, sich auf diese noch nie dagewesene Situation einzustellen.

Der Brexit wird die europäischen Kapitalmärkte auf Jahre hinaus beeinflussen. Marktteilnehmer sollten daher die wesentlichen Bestimmungsfaktoren der Kapitalmarktentwicklung nach dem Brexit kennen, wenn sie strategische Entscheidungen treffen.

Zum Start unseres Kapitalmarktblogs stellen wir Ihnen unseren neuen Beitrag zur Zukunft der europäischen Kapitalmärkte vor.

The Development of European Capital Markets Post-Brexit

There seems to be no getting around it: The United Kingdom will officially leave the EU on the 29th of March 2019, even if there (hopefully) is a transition period to smooth the process and give all market participants the desperately needed time to adapt to this unprecedented situation.

Brexit will change European capital markets for years to come. Market participants should know the determinants of Brexit and their impact on Post-Brexit capital market development when taking strategic decisions.

Launching our capital markets blog, we present our new article on the future of European capital markets.

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