What do we mean by primary markets?

On the primary market, new financial instruments are issued, while on the secondary market, securities already in circulation are exchanged.  Concretely, when a company issues a new share or bond in order to raise capital, these are placed with investors via the primary market. For instance, among primary market operations are IPOs (Initial Public Offering), through which companies list themselves on the market to involve a wider audience of shareholders.

Once the placement of the securities on the primary market is concluded, these can be subsequently traded on the secondary market until they reach maturity. To learn more about secondary markets and the EBF’s work on this topic, click HERE.

Primary markets In the EU

Making it easier for companies to enter and raise capital on public markets is a key element of the European Commission’s Capital Markets Union (CMU).

According to Eurostat, the number of listings in the EU-28 declined by 12%, from 7,392 in 2010 to 6,538 in 2018, while GDP grew by 24% over the same period (Figure 1). Some 8,000−17,000 large companies in 14 EU Member States are eligible to list but are not seeking to do so.

Figure 1: Listings and GDP

Note: Number of listed companies in the EU-28 and GDP for the period 2010 to 2018 Source: Oxera analysis of stock exchange data; Eurostat

Even though regulation is not the primary driver of the decline in listings, there is room for future modernization and streamlining of the listing rules. The regulatory costs associated with listing are particularly relevant for smaller issuers, for which alternative private funding options may be more readily available.

Integrated, efficient and resilient corporate bond markets are seen as a vital and core pillar of a successful CMU. Accordingly, the Commission has undertaken several initiatives as part of the newly published Action Plan, including measures to further facilitate the use of market funding and to help make companies more visible to cross-border investors, better integrate national capital markets and facilitate their access to market funding.

What is the role of banks in primary markets?

Banks play a key role in advising companies on their IPOs and providing underwriting services, by acting as a broker between the issuing company and the investing community to help the issuing company sell its initial allocation of shares.

This is especially relevant in the context of a post-Covid-19 economic recovery, where banks have an important role to play to support companies accessing primary markets to raise the capital they need to continue to grow and innovate.

Withing the EBF, the Primary Markets Working Group (PMWG) is responsible for all topics related to Primary securities markets and securities listing. Its aim is to assist its members to coordinate views on relevant legislation and to achieve a better environment for listing financial market participants through best practice and regulation.

The group is currently chaired by Mr David Sabatini. David is Head of the Capital Market Department at the Italian Banking Association (ABI) and manages the team in charge of dealing with operational and regulatory issues regarding bank’s activities in the financial markets: i.e. investment services, equity and debt capital markets, asset management and clearing and settlement.

What is the PMWG working on?

Capital Markets Union

The PMWG is working alongside the Steering Committee for Financing Growth of the EBF in support of the Capital Markets Union reform project to create truly integrated capital markets in Europe. Members of the PMWG focus on issues concerning issuance and underwriting of new securities, market financing of companies, IPOs, recapitalization, equity culture and green and social bonds.

Among the most notable dossiers are:

  • European Single Access Point (ESAP) for accessible and comparable company data.

The EBF supports a simple, relevant, reliable, decision-useful and user-friendly ESAP to facilitate reporting for market participants. ESAP should facilitate the bank’s reporting obligation under the EU legislation (e.g. NFRD, Taxonomy Regulation, SFDR) but also facilitate the risk management and steering lending and investment portfolios towards the net;

  • Listing Rules

Simplification of the listing rules is necessary to reduce the costs for SMEs as well as the time-to-market involved.  Members are also at work to support the establishment of a legal/regulatory framework favourable to IPOs;

  • Prospectus Regulation

A security prospectus is an essential regulatory requirement for companies to access capital. As part of its capital markets union action plan, in June 2017 the EU adopted a Regulation (EU) 2017/1129 to improve the prospectus regime by making it easier, cheaper, more flexible and investor-friendly.

In the context of Covid-19, the EBF welcomed the introduction of a new “EU Recovery Prospectus” – a type of short-form prospectus – to facilitate the raising of capital in public markets.