Despite previous reforms under the Capital Markets Union, significant fragmentation in European financial markets persists. This fragmentation stems from national rules and supervisory practices that have created barriers, complexity and costs for entities involved cross-border trading, clearing, settlement, and asset management. The European authorities have recognised that this fragmentation limits the ability of businesses and investors to access financing efficiently and hinders the EU’s competitiveness globally.

As such, this package aims to put in place the structures needed to create a fully integrated, efficient and scaled European capital market, which can support investment in, and ensure the achievement of, European priorities such as the green and digital transitions, defence and security, and European competitiveness and economic resilience.

Objectives

The Commission’s primary objective with the package is to integrate EU capital markets. Within this overarching goal, the Commission has the following aims:

• Enable further market integration and scale effects: The proposal will remove barriers impeding cross-border trading, post-trading and asset management activities, thereby facilitating market integration and scale.
• Enable integrated supervision: The proposal will grant ESMA new direct supervisory powers over key market infrastructures and crypto-asset service providers (CASPs), with the intention of making supervision more effective and efficient. Enhanced supervisory convergence tools will be used to achieve harmonised supervision where national competencies remain.
• Facilitate innovation: The proposal will encourage the use of distributed ledger technology (DLT) in trading and settlement, reflecting the EU’s commitment to technological neutrality and innovation.
• Simplify the regulatory framework: Simplification will be pursued in several ways: including by moving certain provisions from directives to regulations; narrowing the scope for nationally imposed ‘gold-plating’ measures; refining Level 2 empowerments; and streamlining overlapping, costly and inefficient supervisory arrangements.

Legislative proposals

The package consists of three legislative proposals:

1. A Master Regulation which amends multiple, existing regulations; the European Securities and Markets Authority Regulation (ESMA Regulation), the European Markets Infrastructure Regulation (EMIR), the Markets in Financial Instruments Regulation (MiFIR), the Central Securities Depository Regulation (CSDR), the Distributed Ledger Technology Pilot Regulation (DLTPR), the Markets in Crypto-Assets Regulation (MiCA), the Cross-Border Distribution of Funds Regulation (CBDR), the Central Counterparties Recovery and Resolution Regulation (CCPRRR), the Securities Financing Transactions Regulation (SFTR), the Credit Ratings Agencies Regulation (CRAR), the Benchmark Regulation (BMR), the Securitisation Regulation, the European Green Bond Regulation (EuGB Regulation) and the Environmental, Social and Governance (ESG) Rating Regulation (ESG Ratings Regulation).
2. A Master Directive which amends the Undertakings for Collective Investment in Transferable Securities Directive (UCITS), the Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID).
3. A new Settlement Finality Regulation (SFR), which repeals and replaces the Settlement Finality Directive and amends the Financial Collateral Directive (FCD).

Key elements of the package

Supervision

• ESMA will gain direct supervisory authority over key market infrastructures and service providers, and CASPs. Key market infrastructures and service providers include “significant” central counterparties (CCPs), “significant” central securities depositories (CSDs), “significant” trading venues, and a new category of pan-European market operators (PEMOs). PEMO status will allow for the operation of several trading venues in multiple Member States through a single legal entity on the basis of a single licence. This represents a major shift for CCPs, CSDs and trading venues from national supervision to EU-level oversight. ESMA’s powers will include the registration, authorisation, recognition, ongoing supervision, investigation and enforcement in respect of these entities.

Significant entities

• Under EMIR as amended, a CCP will be a significant CCP where it is authorised under EMIR and certain thresholds relating to open interest, OTC derivatives, margin requirements and default fund contributions are exceeded, or due to group composition. A “less significant CCP” is simply a CCP authorised under EMIR that is not a significant CCP. Under MiFIR as amended, a trading venue will be significant where the trading venue is important for the economy of the Union and has a significant cross-border dimension, or where the ratio between the trading volume in any class of financial instrument on that venue and the total trading volume in that financial instrument in the Union is equal to or exceeds 50%. Under CSDR as amended, a CSD will be significant where it is authorised under CSDR and either (i) operates a settlement system that settles more than 5% of the settlement instructions by value settled annually in the Union and is of substantial importance for the functioning of the securities markets and the protection of investors in at least three host Member States, (ii) belongs to the same group as another CSD that is established in the territory of another Member State, or the same group as a CSD, a CCP or a trading venue for which ESMA is the competent authority, or (iii) operates a securities settlement system governed by the law of a different Member State than the Member State where the CSD is established, where such system has been designated in accordance with the new SFR. A “less significant CSD” is simply a CSD authorised under CSDR that is not a significant CSD.
• For significant trading venues, CCPs and CSDs, significance will be assessed at least every 12 months, and supervision can be transitioned between ESMA and national competent authorities if a supervised entity’s’ status changes. Member States will also have the option to appoint ESMA as the competent authority for less significant CCPs and CSDs if they choose to do so.

CASPs

• As mentioned above, ESMA will gain direct supervisory authority over the majority of CASPs. The exceptions are firms supervised in respect of crypto-asset activities by their competent authorities where the provision of crypto-asset services is not their main activity, and credit institutions which provide crypto-asset services, as they are already subject to centralised supervision. The proposal also introduces transitional provisions to ensure the smooth transition of supervision from national competent authorities to ESMA, including in respect of entities whose application for a CASP authorisation is currently being assessed.

Supervisory infrastructure and governance

• The proposal expands ESMA’s mandate to refer to its new enforcement powers, and to include a new competence of: “supporting market integration in the Union and innovation in the financial sector”.
• To ensure effective and consistent supervision across sectors, the ESMA Regulation will be amended to consolidate ESMA’s procedural powers (as currently set out in sectoral legislation) into a single, cross-sectoral framework and to streamline ESMA’s investigative, enforcement and sanctioning powers. This will allow for a more harmonised implementation and the creation of a true “single rule book” for significant market infrastructures and CASPs.
• Where ESMA does not gain direct supervisory oversight, supervisory convergence will be key to achieve the goal of an integrated and efficient capital market. In this regard, the proposal envisages that ESMA will establish practical arrangements for cooperation with national authorities and have the use of new and enhanced supervisory convergence powers and tools.
• Finally, the ESMA Regulation will be amended to update ESMA’s governance and funding arrangements in light of its expanded mandate, and there will be a new Executive Board which will have primary responsibility for decisions relating to the direct supervision of financial market participants.
• It should be noted that the level of support for centralising supervision at EU level varied significantly among stakeholders during the Commission’s consultations on the proposed package, and we are likely to see those divisions continue in the negotiations to come.

Trading

• The rules relating to the operation of trading venues will be moved from MiFID II into MiFIR and enhanced, to allow for a more harmonised implementation and the creation of a true “single rule book” for trading venues.
• In addition, the amendments and clarifications introduced by the proposal aim to offer operators of trading venues active in multiple Member States ways to manage their operations more efficiently in the Union. For example, certain intragroup arrangements are taken out of the realm of outsourcing, passporting opportunities are enhanced and the optional PEMO status offers a way to streamline corporate structure and licensing arrangements.

Post-trading

• The proposal will amend the CSDR to enhance passporting opportunities for CSDs. It also introduces the concept of CSD hubs. CSDs providing services in several Member States and those processing a high value of settlement instructions relative to all settlement in the EU will act as CSD hubs. Hubs will be required to establish reciprocal links with other hubs, and CSDs that are not hubs will be required to establish reciprocal links with a hub. The intention is to facilitate access to all financial instruments issued in EU CSDs, deepening market integration. In addition, CSDs that settle in a T2S-supported currency will be required to connect to the platform and offer participants the option to settle in T2S, again bolstering the interconnectedness of European financial markets.
• ESMA will also be granted the right to arbitrate requests for access to a CCP and requests for access to a trading venue and to approve requests for interoperability arrangements, with the intention of promoting competition and market integration. AFME has flagged that the open access provisions are a step in the right direction, however they do fall short of mandating full interoperability.
• Finally, the CSDR will also be amended and modernised in order to allow for the provision of CSD services using DLT. Settlement of the cash leg of a securities transaction with certain e-money tokens authorised under MiCA will be permitted under specific conditions.

Innovation

• The DLT Pilot Regime is a statutory regulatory sandbox aimed at the development of DLT in connection with the issuance, trading and settlement of securities.
• The amendments introduced by the Master Regulation aim to make the regime more flexible and proportionate, and to help it to scale up. For example, the amendments: (i) introduce additional flexibility as regards the type of financial instruments that are eligible and the scale of activity that can be carried out in these instruments; (ii) introduce a simplified regime for operators of smaller DLT infrastructures; and (iii) expand the scope of entities which can operate a DLT trading venue and a DLT trading and settlement system.

Other infrastructural changes

• Other regulations affected by the Master Regulation include the SFTR, the CBDR, the CCPRRR, the CRAR, the BMR, the Securitisation Regulation, the EuGB Regulation and the ESG Ratings Regulation. As regards the CBDR, the proposed changed are aimed at removing barriers to the cross-border operations of investment funds, and harmonising and coordinating the supervision of investment funds across national competent authorities. For more information see our separate briefing on the asset management and investment fund implications of the market integration package. As regards the rest of the regulations, the amendments update the supervisory and enforcement framework applicable to trade repositories, credit rating agencies, benchmark administrators, securitisation repositories, external reviewers for European Green Bonds and ESG ratings providers by aligning their procedural regimes with the new supervisory framework established under the ESMA Regulation.

The Master Directive – amending existing directives

• As mentioned above, the Master Directive amends AIFMD, the UCITS Directive and MiFID II. For more information see our separate briefing on the asset management and investment fund implications of the market integration package.
• As regards the amendments to MiFID II and as highlighted above, the provisions applicable to the authorisation of regulated markets and the operation of all trading venues will be transferred to MiFIR to ensure more harmonised implementation. Other provisions that have been made redundant due to the proposed amendments to MiFIR, CSDR and EMIR will be deleted.

Settlement Finality Regulation (SFR)

• The SFR will repeal the Settlement Finality Directive, converting its provisions into a directly applicable regulation instead; the SFR. This will ensure consistent application across Member States, promote legal certainty and contribute to the efficiency and integration of the EU financial markets. The amendments will also ensure technological neutrality to support the implementation of innovative technologies such as DLT. The SFR will also amend the FCD to ensure technological neutrality and remove uncertainty as regards the use of DLT and tokenised forms of cash or securities

Next steps

• The proposal will now proceed through the ordinary legislative procedure, requiring approval by the European Parliament and the Council. Negotiations are expected to take several months, with adoption likely in late 2026.
• The Commission has been clear that the components of the market integration package are interconnected and together form a cohesive set of reforms essential for establishing a genuine single market. As such, maintaining the unity of the package is crucial to delivering the intended benefits. At a European level, the package is also interlinked with other initiatives included in the SIU strategy, and will rely on their successful implementation for full effectiveness. At a national level, Member State buy in will be essential for the reforms to succeed in practice, as their cooperation will be necessary to ensure alignment between national approaches and EU rules, and in supporting more coordinated supervision across the Union. In light of this, it will be interesting to monitor whether the integrity of the package is maintained as it moves through the legislative process.
• Firms should monitor developments closely, as these changes will significantly reshape the supervisory framework and the landscape for cross-border trading, post-trading and asset management in the European financial markets.