Europe’s Market Union Has Two Speeds

Europe’s latest attempt to build a genuine capital-markets union has produced a compromise that is more consequential than its institutional language suggests. On October 9, EU finance ministers agreed the key elements of the Market Integration and Supervision Package, or MISP. The Council position would move supervision of the most significant cross-border trading venues, central counterparties and central securities depositories to the European Securities and Markets Authority. It would also create a voluntary pan-European licence for some venue groups, simplify cross-border fund operations and widen the bloc’s distributed-ledger sandbox.

The political headline is that Europe is finally centralising oversight of market infrastructure. The economic reality is narrower. The agreed thresholds leave several important venues and post-trade operators under national supervision. Reuters reported that the compromise excludes Deutsche Börse, SIX Group, Aquis and Tradition from direct ESMA oversight, while reducing the proposed ESMA perimeter for clearing houses, securities depositories and crypto-asset service providers. The Council describes that selectivity as proportionality. Critics can reasonably describe it as another layer in a two-speed union.

The distinction matters because Europe’s problem is not a shortage of rules. It is that the same rulebook can produce different approval timelines, interpretations, costs and risk tolerances across 27 legal and supervisory systems. A firm does not obtain a single capital market merely because European legislation exists. It obtains one only when licences, settlement access, collateral, investor protections and supervisory decisions travel across borders with predictable consequences.

That leads to the central Block2Learn thesis: MISP can still improve European finance, but its success will be determined by the supervisor boundary. If economically connected venues and post-trade networks are split between ESMA and national authorities, compliance may become more consistent at the core while remaining fragmented at the edges that firms actually use. If the boundary expands with market structure and the voluntary pan-European route becomes commercially attractive, the compromise can become a bridge toward integration. The law’s first market test is therefore not how many institutions move to Paris. It is whether cross-border capital becomes measurably cheaper, faster and easier to deploy.

What the Council actually agreed

The Council’s October 9 position contains five connected changes.

First, ESMA would directly supervise the most significant cross-border trading venues and the most significant post-trading entities, including central counterparties, or CCPs, and central securities depositories, or CSDs. CCPs stand between buyers and sellers and manage default risk after a trade. CSDs record securities ownership and help complete settlement. These are not administrative utilities. They are the plumbing through which counterparty exposure, collateral and legal title move.

Second, the package creates a pan-European market operator, or PEMO, status. A venue group that does not automatically meet the threshold for direct ESMA supervision could choose a single licence and ESMA oversight to operate multiple venues across the EU. This voluntary path is important because it turns central supervision from a regulatory obligation into a business-model option.

Third, ESMA’s governance would change. A full-time executive board made up of a chair and five independent members would manage operations and take entity-specific decisions for directly supervised firms. National regulators would retain influence through a separate board of supervisors responsible for regulation, strategy, budget and supervisory convergence. ESMA-led teams would work with national experts during a two-year transition before permanent cooperation arrangements take over.

Fourth, the Council would simplify cross-border asset management. A new depositary passport could let a fund appoint a depositary in another member state, although participation would remain optional for each country. The package also aims to reduce duplicated procedures inside cross-border asset-management groups.

Fifth, MISP would expand the EU’s distributed-ledger pilot regime. The objective is to let more activity pass through controlled experiments in tokenised trading and settlement. This connects the supervision debate to the practical question explored in Block2Learn’s analysis of ECB Pontes and public settlement infrastructure: new rails are useful only when cash, securities, finality and responsibility meet in the same legal system.

None of these elements is final law. The Council must formalise its negotiating position, the European Parliament must adopt its own, and the two institutions must agree a final text. That legislative status should limit any claim that Europe has already achieved a unified supervisory system. It has agreed a political direction and a negotiating perimeter.

The scale problem is real, but supervision is only one layer

The European Commission’s MISP case starts with a dramatic comparison. In 2024, EU stock-exchange capitalisation equalled roughly 73% of EU gross domestic product, against 270% in the United States and 130% in the United Kingdom. The Commission’s integration factsheet also says Europe has more than 300 stock exchanges and that its investment funds are, on average, five times smaller than U.S. funds. The Council estimates that about €10 trillion of European household savings remain in low-yield bank deposits.

Those figures describe three related but distinct problems.

The first is allocation. European households hold a large share of wealth in deposits rather than securities. That limits participation in long-term corporate growth and leaves more business financing on bank balance sheets.

The second is scale. A technology company that can access one deep pool of equity and credit generally has a lower financing hurdle than a company negotiating fragmented pools with different listing, distribution and investor rules. Smaller funds and venues can also struggle to spread fixed technology and compliance costs.

The third is market plumbing. Even when an investor and issuer are willing to transact, the chain can cross trading venues, CCPs, CSDs, custodians, depositaries and national legal systems. Each additional interface can add reconciliation work, collateral requirements, operational risk and legal uncertainty.

Centralising supervision attacks the third problem most directly. It can reduce inconsistent interpretations, duplicated information requests and regulatory arbitrage. It cannot by itself persuade households to accept market risk, harmonise insolvency law, change tax incentives, create pension capital or produce more high-growth issuers. A single supervisor is neither a savings product nor a venture-capital market.

That is why the political claim that supervision will “unlock” European savings should be treated as a causal chain, not an immediate outcome. Better supervision can lower infrastructure friction. Lower friction can improve cross-border distribution and scale. Greater scale can reduce some costs and deepen liquidity. Only then might more investors and issuers find the market attractive. Every link can fail independently.

The supervisor boundary creates a two-speed market

The Council says direct ESMA oversight will apply to the most significant cross-border entities. That sounds intuitive, but threshold design can change behaviour before a supervisor opens a file.

If the threshold captures an entire economic network, direct oversight can improve consistency. A venue group that lists securities in several countries, clears through a cross-border CCP and settles through connected CSDs may face one lead authority for the most material risks. The regulator can compare exposures across entities, impose consistent data standards and respond to incidents without first negotiating national mandates.

If the threshold splits the network, firms may still face a supervisory relay. The exchange could remain national while its clearing house becomes European. One CSD link could sit under ESMA while another important connection remains national. A multi-country venue group could be judged locally until it voluntarily chooses PEMO status. The legal rulebook is common, but the sequence of decisions is not.

Reuters reported that Germany’s opposition produced criteria that keep Deutsche Börse under German oversight. The same criteria reportedly exclude SIX Group, Aquis and Tradition. The proposed ESMA perimeter for CCPs fell from nine to six, while the number of CSDs fell from 15 to 13. Only an estimated 10 to 15 of roughly 360 EU crypto-asset service providers would move immediately to ESMA, rather than all providers under the Commission’s original proposal.

These exclusions do not automatically invalidate the package. National supervisors have deep knowledge of local markets and institutions. Moving every venue at once could overwhelm ESMA, create transition errors and replace familiar accountability with a distant bottleneck. The Commission’s own impact assessment rejected the most aggressive centralisation option after finding that its incremental benefits might not justify the costs and possible competition or financial-stability consequences.

But exemptions create a second risk: the largest politically protected markets can remain outside the uniform regime while less powerful cross-border operators absorb the transition cost. That would invert the package’s purpose. Europe would centralise supervision where agreement is easiest rather than where network effects are greatest.

The two-year review of trading-venue criteria is therefore one of the most important clauses in the Council position. If it becomes a genuine evidence test, the perimeter can adjust as venues consolidate, volumes migrate and business models change. If it becomes another political renegotiation, thresholds could harden into regulatory borders.

Clearing and settlement are where fragmentation becomes expensive

Trading gets public attention because prices move on screens. Post-trade infrastructure determines whether the trade becomes a legally final asset transfer.

A CCP reduces bilateral counterparty risk by becoming buyer to every seller and seller to every buyer. It collects margin, manages collateral and maintains a default waterfall. This concentration can make markets safer in normal conditions, but it also concentrates information and operational importance. During stress, inconsistent decisions about margin, eligible collateral or default management can transmit liquidity pressure across markets.

A CSD records securities and supports settlement. When securities are issued under one national legal system, held through another and traded elsewhere, the CSD network must reconcile ownership, timing and legal finality. Friction can require extra accounts, local agents, prefunding or duplicated reconciliations. Small differences become material at scale.

The Commission’s impact-assessment summary identifies those costs directly. It says varied national rules and non-aligned supervisory practices reduce liquidity, increase costs for investors, restrict access to cross-border investor bases and raise companies’ cost of capital. Its preferred option combines harmonisation with ESMA oversight of the most significant infrastructures rather than direct supervision of every entity.

That architecture is defensible if the EU treats CCPs and CSDs as networks instead of lists. A smaller institution can be systemically important because it connects otherwise separate markets, concentrates a specific asset class or becomes critical during a default. Simple size thresholds may miss that function. Geographic reach, substitution capacity, collateral flows and dependency mapping matter alongside volume.

The lesson resembles Block2Learn’s analysis of the atomic-settlement paradox. Faster or technologically cleaner settlement can reduce one form of counterparty exposure while increasing liquidity fragmentation elsewhere. In the same way, one European supervisor can reduce interpretive fragmentation for selected firms while creating a sharper boundary between selected and unselected networks.

PEMO status is the package’s market-based experiment

The pan-European market-operator framework may reveal more about commercial incentives than the mandatory perimeter does.

A venue group outside automatic ESMA supervision could choose PEMO status, obtain one licence and operate multiple EU venues under direct ESMA oversight. The benefit is straightforward: a single authorisation and supervisory relationship could be cheaper than maintaining parallel national structures. It could also make expansion into smaller markets easier.

The cost is less obvious but equally important. Voluntary ESMA supervision may bring more demanding data, governance, resilience and group-level expectations. A venue with a strong domestic franchise may prefer its existing regulator, especially if national rules or relationships provide flexibility. Choosing PEMO status could also signal an expansion strategy that invites competitive and political scrutiny.

This creates three possible outcomes.

1. PEMO becomes a scale premium. Cross-border venue groups opt in because one licence lowers expansion costs. Competitors follow, liquidity pools consolidate and ESMA acquires practical expertise.
2. PEMO becomes a niche passport. A handful of challengers use it, but national incumbents remain outside. Europe gains a new legal route without changing the main market structure.
3. PEMO becomes a regulatory burden. Few firms opt in because the cost of ESMA supervision exceeds the benefit of passporting. That would reveal that formal access is not the binding constraint.

The adoption rate alone will not settle the question. Regulators should compare time to market, compliance spending, membership growth, trading volume, issuer access and incident outcomes between PEMO groups and nationally supervised peers. Voluntary status creates a natural experiment. Europe should use it.

The depositary passport shows how compromise can dilute scale

The Council’s proposed depositary passport would let a fund appoint a depositary in another member state. Depositaries safeguard assets, oversee cash flows and verify that fund operations comply with legal obligations. Allowing cross-border appointment could increase competition and reduce the need to duplicate local arrangements.

However, the regime would be optional for member states. That preserves national control but weakens the very network effect the passport is supposed to create. If large fund domiciles participate and others do not, managers still need different operating models across the union. Providers may gain scale in some corridors while maintaining local capacity in others.

This is the broader pattern of MISP. Europe is introducing common pathways without always making them universal. That can be politically necessary and operationally prudent. It also means firms must value the package route-by-route rather than assume the entire EU suddenly behaves as one jurisdiction.

For investors, the effect will appear indirectly. More competition among depositaries could reduce fund operating costs, but those savings may not pass through. Cross-border concentration could also create dependency on fewer providers. A lower headline fee is not an unqualified gain if service continuity or resolution planning becomes weaker.

The right question is not whether a passport exists. It is whether the total cost of owning and distributing a fund falls after including compliance, custody, settlement, reporting and operational resilience.

Crypto supervision becomes selective at the moment distribution scales

The Commission originally proposed direct ESMA supervision for all crypto-asset service providers under MiCA. The Council would limit immediate transfer to the most significant cross-border providers. Reuters says only around 10 to 15 of roughly 360 providers may qualify.

That change is a strong example of proportionality colliding with regulatory arbitrage. Supervising every small provider at EU level could consume resources that add little systemic protection. Yet digital services can become cross-border faster than traditional venues. A firm may serve users across many countries through one app even when its legal entities, licences and operational functions remain national.

A selective perimeter could therefore create two classes of MiCA firm: large platforms with direct ESMA oversight and smaller or locally structured firms supervised nationally. If standards diverge, activity may migrate toward the lighter route until size forces a transfer. Firms may also reorganise legal entities or product distribution to remain below thresholds.

The issue is not unique to crypto. It is the same boundary problem as the physical market infrastructure, only with faster customer acquisition and lower switching costs. Block2Learn’s examination of Binance’s MiCA distribution moat showed how regulatory reach can become a commercial advantage. MISP may intensify that effect: the ability to operate under credible cross-border supervision could help the largest firms win institutional distribution, while smaller firms compete on narrower national licences or specialised services.

Supervisory outcomes should therefore be compared across the boundary. Authorisation times, complaints, custody incidents, outsourcing concentration and cross-border enforcement should not become materially different because one provider falls just below an ESMA threshold.

Technology does not erase the need for legal finality

MISP would broaden the DLT pilot regime to let more trading and settlement activity use tokenised infrastructure. The change matters because the original pilot has attracted limited participation. Higher activity thresholds and greater flexibility could make experiments commercially relevant rather than merely demonstrative.

But tokenisation makes supervisory consistency more important, not less. A tokenised security can trade continuously while the legal rights, cash settlement and recovery process remain tied to jurisdiction. If one national authority interprets custody, settlement finality or market access differently from another, a shared ledger can expose the divergence faster without resolving it.

ESMA’s July authorisation of EuroCTP as the consolidated tape provider for shares and ETFs offers a useful contrast. A consolidated tape tries to create a common view of prices and trades across fragmented venues. MISP tries to create a more common view of supervision across fragmented institutions. Both require reliable data definitions, participation and governance. Neither automatically consolidates liquidity.

The DLT pilot should therefore be judged by more than transaction volume. The harder metrics are whether tokenised instruments can move between platforms, whether central-bank or commercial-bank money settles against them safely, whether insolvency treatment is clear and whether investors can enforce the same claim across borders. Otherwise Europe could digitise the fragments it already has.

What changes for issuers, investors and infrastructure owners

MISP is not yet a reason to reprice every European exchange or asset manager. It is a framework for changing fixed costs and competitive position over several years.

For issuers, the potential gain is a broader investor base and lower intermediation cost. A company that can list, clear, settle and distribute securities across member states with fewer duplicated steps should face less friction. The gain will be largest for mid-sized firms for which fixed compliance costs are meaningful. It will be smallest where tax, insolvency, accounting or investor-demand barriers dominate.

For asset managers, a simpler passport and cross-border depositary option could improve operating leverage. Larger groups may consolidate functions and products. Smaller managers could reach new markets more cheaply, but they may also face stronger competition from firms that can finally deploy scale across borders.

For exchanges and post-trade operators, supervisory status becomes part of strategy. Direct ESMA oversight may reduce the cost of cross-border growth while raising transition spending and central scrutiny. National status may preserve familiar oversight but become less attractive if investors, issuers or partners prefer the credibility of a common regime.

For investors, benefits should arrive through narrower spreads, lower fund costs, better product access and stronger comparability. Those outcomes are possible, not guaranteed. Market intermediaries can keep efficiency gains as margin. Consolidation can also reduce competition. The Commission’s objective of lower capital costs should be tested against observable fees and execution quality rather than inferred from institutional change.

For governments, the package redistributes influence. National regulators surrender some entity-level authority while retaining a role in rulemaking and convergence. Smaller member states may gain from access to a stronger European supervisor, but they may fear that market activity and expertise concentrate in established hubs. That political tension explains many of the thresholds and exemptions.

The same tension appears in European banking, where legal integration has often advanced faster than commercial integration. Block2Learn’s analysis of BPCE’s stake in Sabadell showed that cooperation can cross borders even when full consolidation remains difficult. MISP may produce the capital-markets version: shared platforms, stakes and service agreements grow before Europe develops one genuinely unified market.

Three scenarios for the European market union

1. The compromise becomes a bridge

In the constructive scenario, the first ESMA perimeter covers the most connected risks, the two-year transition works and PEMO status attracts meaningful venue groups. Data standards improve, fund passporting becomes easier and the depositary option expands. The Commission’s review then adjusts thresholds using evidence rather than politics.

Compliance costs fall first for infrastructure owners, then for intermediaries and finally for issuers and investors. Cross-border listings and fund distribution grow. National regulators become specialised partners instead of competing centres of interpretation. The package does not create U.S.-style capital depth overnight, but it builds the institutional base for it.

2. Europe gets a stable two-speed system

In the middle scenario, ESMA supervises a credible core while large national venues remain outside. PEMO attracts challengers but few incumbents. Fund and depositary reforms improve selected corridors. The market functions better, but firms continue to maintain parallel national processes.

This outcome is not failure. It can reduce risk and cost at the core. Yet the marginal euro of European savings may still remain domestic because tax, product, distribution and cultural barriers persist. Europe gains supervisory capacity without fully gaining scale.

3. Threshold arbitrage replaces national fragmentation

In the adverse scenario, firms manage legal structures and activity to stay outside direct ESMA oversight. National authorities compete for licences, while ESMA bears the cost of supervising a politically selected set of institutions. The boundary does not follow network risk, and the review process fails to update it.

Cross-border operators face both ESMA and national coordination rather than one accountable regime. Consolidation increases without enough competition. Technology pilots create incompatible tokenised islands. Europe replaces 27 visible fragments with a smaller number of harder-to-map supervisory seams.

The evidence that should decide whether MISP works

The package will generate many institutional milestones. The useful scorecard is economic.

Cross-border activity: Track the share of listings, fund sales, venue memberships and post-trade links that cross member-state borders. Growth should be adjusted for overall market conditions.

Total cost: Compare authorisation time, compliance staffing, depositary fees, clearing charges, settlement costs and issuer expenses before and after implementation. A lower count of forms is not enough if total spending rises.

Liquidity quality: Measure spreads, depth, turnover and settlement fails across venues inside and outside direct ESMA supervision. Integration should improve execution, not merely move volume.

Risk consistency: Compare margin practices, operational incidents, cyber recovery, complaints and enforcement outcomes across the supervisory boundary. Divergent outcomes may show that the perimeter is distorting competition.

Voluntary adoption: Monitor PEMO applications and the reasons firms choose or reject the status. Low adoption would be evidence about the commercial value of the regime, not a public-relations problem to explain away.

Capital formation: Measure whether European growth companies raise more equity and long-term debt at lower all-in costs. This is the ultimate objective, but it should not be attributed to MISP without controlling for rates, growth and market cycles.

Household participation: Watch whether investment products become cheaper, simpler and more widely held. The €10 trillion deposit figure is not a pool policymakers can simply redirect. Households need suitable products, risk capacity, trust and liquidity.

Learning Path: follow the plumbing, not the slogan

MISP is easiest to understand as a sequence of market functions.

Start with the difference between trading, clearing and settlement. A trade agrees price and quantity. A CCP manages the resulting counterparty exposure. A CSD records and settles the securities transfer. A custodian or depositary safeguards assets and monitors obligations. Supervisory fragmentation can enter at every step.

Then examine how legal and operational boundaries interact. The atomic-settlement paradox explains why faster settlement can move liquidity risk. The ECB Pontes analysis shows why tokenised markets still need public money and legal finality. The BPCE-Sabadell case demonstrates how cross-border cooperation can advance before full institutional union.

Finally, test every integration claim with four questions: Which entity is licensed? Which supervisor makes the final decision? Where does settlement become legally final? Who provides liquidity when the normal chain breaks? If those answers change at a border, the market is not yet fully unified.

Europe has agreed on a direction, not a single market

The Council compromise is meaningful because it acknowledges a basic fact: capital markets cannot operate as one economic system while their most important infrastructure is supervised as a collection of domestic exceptions. Moving selected trading venues, CCPs and CSDs to ESMA can improve consistency. A full-time executive board and mixed transition teams can make decisions more accountable. PEMO status can let firms choose the scale benefits of a European licence.

The same compromise also preserves enough national control to keep fragmentation alive. Important operators remain outside direct oversight. Depositary passporting is optional. Crypto supervision is selective. Final rules still depend on Parliament and trilogue negotiations.

That is not a reason to dismiss MISP. It is a reason to judge it precisely. The package should not be scored by the number of pages harmonised or institutions reassigned. It should be scored by whether an issuer can reach investors across Europe at a lower cost, whether an investor receives the same protection across borders, and whether a market shock can be managed without supervisory handoffs delaying action.

Europe’s market union now has two speeds. The optimistic case is that the faster lane proves its value and expands. The risk is that the boundary becomes permanent, protecting national incumbents while cross-border challengers bear the cost of integration. In either case, the market outcome will be decided where supervision changes hands.