Europe’s capital markets debate has become stuck in a familiar loop. Almost every discussion about competitiveness eventually arrives at a similar conclusion: Europe remains too fragmented. Firms continue to navigate multiple exchanges, clearing structures, settlement systems and national legal frameworks, all of which add layers of cost and operational complexity across the region.
This diagnosis is not wrong. Cross-border activity in Europe is still more cumbersome and more expensive than it should be. Settlement practices still vary considerably across the region, while differences in legal and regulatory frameworks continue to complicate cross-border activity. Market participants are often dealing with inconsistent approaches to areas such as taxation, collateral management and shareholder rights depending on where activity takes place. But there is a tendency to assume that because fragmentation is the problem, consolidation must automatically be the answer. That is where the discussion becomes less convincing.
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Brexit compounds European fragmentation challenge
Comparisons with the United States often sit in the background of these debates, sometimes explicitly and sometimes by implication. The attraction is obvious when the US combines enormous liquidity with a highly integrated market structure operating under one legal and political system. Europe does not and it never has. The UK’s departure from the European Union has added another layer of complexity, reinforcing the need for market participants to operate across multiple financial centres rather than around a single dominant hub. There is no realistic scenario in which Europe evolves into a financial market organised around a single rulebook, single market structure and single infrastructure model in the same way. And although that does not prevent deeper integration, it changes what integration looks like in practice.
European markets have historically progressed through coordination between systems rather than replacement of systems. In many parts of the market, interoperability already does much of the heavy lifting. Fixed income markets, ETF structures and large parts of the cross-border settlement environment function through interconnected infrastructures that allow participants to operate across jurisdictions without requiring complete institutional uniformity underneath. That distinction matters because the debate around post-trade infrastructure increasingly risks becoming too infrastructure-centric. Market plumbing matters enormously but Europe’s capital markets will not deepen simply because settlement architecture becomes more streamlined.
Broader issue is participation
Europe continues to hold vast amounts of household wealth in cash deposits while equity ownership remains comparatively shallow. Pension participation differs dramatically across member states. Many growth companies still view US markets as offering deeper liquidity, broader analyst coverage and more attractive valuations. Those issues have a direct bearing on market depth and capital formation in a way that infrastructure reform alone simply cannot solve. There is also sometimes an assumption in Brussels policy discussions that if enough operational friction is removed, liquidity will naturally follow. Markets rarely work that neatly and demand really has to exist in the first place.
None of this means the infrastructure question is secondary. In fact, Europe’s post-trade landscape still carries the legacy of nationally organised financial systems built for an earlier era. Domestic exchanges, CCPs and CSDs all evolved around national markets rather than genuinely pan-European ones. Unfortunately, the result is duplicated infrastructure, operational inefficiency and avoidable complexity in cross-border investment activity.
Harmonisation – a political and operational challenge
Yet much of the remaining fragmentation now sits beneath the infrastructure layer itself. Differences in securities law, insolvency processes, taxation frameworks and corporate actions continue to create barriers that no amount of technology modernisation can fully remove on their own. Many of those differences reflect national policy priorities and long-established domestic market structures, making harmonisation as much a political challenge as an operational one. That is one reason why the recent work of the ECB’s AMI-SeCo group has been important. It reflects a growing recognition that many of the obstacles to integration are structural and legal rather than purely operational.
The harder problems are often embedded in national frameworks developed over decades rather than the settlement systems sitting on top of them. This also explains why the current discussion around CSD hubs deserves a more measured treatment than it sometimes receives.
The case for hub models
Hub models can absolutely improve efficiency. They can simplify access to settlement services, reduce duplication and support greater economies of scale across the single market. In areas where cross-border flows are already strong, hub-based arrangements may well become increasingly dominant over time.
But infrastructure models work best when they emerge in response to actual market behaviour rather than regulatory idealism. Europe’s capital markets are too uneven, too specialised and too varied by asset class for a single prescribed architecture to fit naturally across the board. There is also a tendency to understate the strategic advantages that come with diversity of infrastructure. Financial markets are entering a period where operational resilience, cybersecurity and geopolitical exposure are becoming as important as efficiency metrics. Concentrating critical market functions into a smaller number of infrastructures may reduce duplication but it also increases dependency.
Competition between infrastructures has often been treated as a source of fragmentation in Europe. In reality, it has also been one of the drivers of innovation. Settlement optimisation, collateral mobility, cross-border servicing models and post-trade technology development have all benefited from competitive pressure between providers operating across the region. That becomes even more relevant as distributed ledger technologies begin moving from experimentation towards practical market adoption.
There is still a habit of discussing DLT as though it will eventually produce a single dominant infrastructure model. The market is moving in the opposite direction. What is emerging instead is a more layered environment in which traditional infrastructures, T2S-linked systems, tokenised assets and DLT-based settlement networks coexist alongside one another.
The next phase of market structure evolution
Different markets are moving at different speeds and different asset classes are adopting different approaches. Some infrastructures are experimenting with tokenised collateral mobility; others are focusing on digital bond issuance or wholesale settlement environments. There is no obvious reason to assume these developments will naturally converge into one common operating model across Europe. If anything, the next phase of market structure evolution is likely to place even greater importance on interoperability between systems, technologies and settlement assets.
That has implications for policymakers. Regulatory frameworks need enough flexibility to accommodate changing infrastructure models without locking markets prematurely into rigid structures that may look outdated within a few years. Legal harmonisation across member states remains essential, particularly in areas that continue to create friction in cross-border investment activity. But there is a difference between enabling integration and prescribing uniformity.
The market will determine infrastructure progress
Much of Europe’s market infrastructure progress over the past two decades has been market-led. T2S itself succeeded because it addressed genuine economic demand across the settlement ecosystem. The same principle is likely to apply to the next generation of infrastructure development. Commercial incentives, user demand and operational practicality will determine which models scale successfully over time.
The wider objective is straightforward enough. Europe needs deeper pools of capital, more active investment participation and stronger financing routes for companies looking to grow within the region. More integrated infrastructure can support those ambitions. It cannot substitute for them.
And while Europe’s market structure will continue to look different from that of the United States, that difference should not automatically be interpreted as weakness. European integration has rarely followed a single institutional blueprint. It has always required countries with different legal systems, market structures and national priorities to find practical ways of working together. Today’s post-Brexit landscape means capital and market infrastructure are spread across multiple financial centres, which makes that principle even more important. Capital markets are unlikely to prove any different.
Nicolas Micheli, UK Country Lead, Projective Group
