QUANT RESEARCHA Fork in the RoadA QUANTITATIVE PERSPECTIVE ON US VC Q3Q320252025PG PG 2 2Q3 2025 QUA.
2025-09-23
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A study of European M&A activitySeptember 2025European M&AOutlook 2026:Deals,Doubts and DivergencesForeword 3Market commentary 4Featured articles Germany Europes sleeping giant 6Spotlight on Poland open for business 8Fortress Europe defence sector M&A 10UK public company takeovers in 2025 and beyond 14Market researchM&A environment and expectations 16Focus on regions and sectors 24 Deal dynamics and motivations 30Foreign direct investment environment 34Regional round-up 38Financing conditions 40ESG factors in European M&A 44Conclusion 47MethodologyIn Q2 2025,Mergermarket surveyed senior executives from 182 corporates and 68 PE firms based in Europe,in the Americas and Asia-Pacific regions about their expectations for the European M&A market in the year ahead.Among the 250 executives interviewed,70%are headquartered in Europe,while the remaining 30%are equally split between the Americas and the Asia-Pacific regions.All respondents have been involved in an M&A transaction over the past two years and 84%plan to undertake an M&A transaction in the coming year.All responses are anonymous,and results are presented in aggregate.ContentsMalte Bruhns,Head of CMS Corporate/M&ALouise Wallace,Head of CMS Corporate/M&A3Welcome to the thirteenth edition of the CMS European M&A Outlook,published in partnership with Mergermarket.What a difference a year makes.As we wrote the foreword for our previous edition of this report,we saw signs of a recovery and optimism about the prospects for European M&A in 2025.While these signals proved accurate through to the end of 2024,the first six months of 2025 have been more challenging than anticipated,with uncertainty again clouding dealmakers plans.Key among the causes of that uncertainty has been,of course,a lack of visibility on trade tariffs.A provisional agreement between the US and the European Union,announced on 28 July,has offered some clarity,but not necessarily stability.Just as the price expectations gap between buyers and sellers was starting to narrow,the task of valuing a business has again become more complex.For many industries,the long-term implications of the latest trade agreement remain ambiguous,especially given the mercurial nature of the current US administration.Other barriers our survey highlights include regulatory changes and difficulties funding acquisitions in an environment where respondents expect financing conditions to worsen.Yet our respondents are far from gloomy.While there is an increase in the proportion of corporates not expecting to be involved in M&A in the next 12 months compared with last years responses,most are seeking acquisitions,some are looking to divest and private equity firms,of course,intend to be active on both sides of the ledger.Our survey also points to a broad range of reasons for buying,including transformational deals,technology acquisitions and turnaround opportunities.Many also see more interest in Europe from Middle Eastern buyers,building on similar findings from last year,with real estate,leisure and energy the leading sectors here.We may be living in unpredictable times,but Europes M&A scene remains healthy overall and we would expect to see more robust dealmaking by the time we come to pen this foreword next year.Key findings from our research include:ForewordDealmakers remain cautiously optimistic about Europes M&A prospectsHalf of respondents expect activity to increase in the next 12 months,while 29%anticipate declines.These figures represent a slight deterioration from last year,when 65%were expecting an increase and 24%a fall.Distressed and turnaround opportunities will drive both buyers and sellersWhile 42%of respondents predict that non-core divestments will drive sell-side activity(the top response),38%say distress-driven M&A will dominate a finding mirrored by respondents expectations for buy-side drivers:undervalued targets and turnaround opportunities are both cited by 31%.Financing difficulties and valuation gaps are the main obstacles to M&AOver a third of respondents(34%)believes that difficulties in arranging deal financing will be a major obstacle to M&A in the coming year,followed by buyer-seller valuation gaps(30%).Predictably,trade wars are also weighing heavily on dealmakers minds(26%,up from just 10%last year).Aidan Cowhig,Europe Venture&Acquisition Lead,AccentureMarket commentary4|European M&A Outlook 2026Aidan Cowhig,Europe Venture&Acquisition Lead in Accentures corporate development department,introduces this years M&A Outlook by examining how tech-enabled disruption is driving enterprise reinvention,and why dealmakers cannot afford to wait for market uncertainty to resolve itselfAfter a prolonged period of market disruption,dealmakers in Europe are starting to adapt to the feeling of pronounced and continuous uncertainty.They realise that there is no way around this its not going anywhere,and they must continue to find their way through.There are several positive indicators.We are starting to see more assets coming to market,particularly from private equity(PE)sponsors,who are bringing out high-quality offerings as pathfinders through this difficult landscape.Sellers are increasingly putting in the work to prepare assets carefully,reshaping businesses and sharpening their value propositions before going to market.This reflects the macroeconomic reality valuations are moderating,the cost of capital remains elevated,and holding periods are lengthening.Another significant factor in the current market is the backlog of transactions that dealmakers want to close.PE firms need to pursue timely exits to return capital to their investors.That need will drive some of the momentum behind new transactions.After a period of quite flat levels of activity,we have reached the point where businesses are learning to transact when the right assets are coming to market despite the uncertainty,rather than waiting for it to resolve.Geographically,we are currently seeing acquisition activity pick up across a broad range of markets.The UK,in particular,continues to benefit from its maturity and the availability of targets.Germany is also surprising on the upside.Despite the headlines focusing on challenges in the automotive sector,the wider economy remains robust.There is significant depth in the German economy,and the underlying assets remain attractive.That is always the key question when examining any market.Elsewhere in Europe,it would be unwise to overlook France and Italy.These are talent-rich markets with strong workforces and skill bases that remain attractive,especially for organisations like ours that operate a talent-led business.We are looking foremost for assets that can bring us the right talent,and which also open the door to growing economies.That is not just in terms of geographies,but also expanding markets such as defence,in addition to scaling hot areas of our own core business around cybersecurity,data analytics and AI.Making peace with market uncertaintyMarket commentary5Lots of segments of the market are ripe for reinvention by new technologies.In TMT,we are currently seeing evolving business models and strategic consolidation.Companies with clear plans to navigate this new landscape will lead the way,especially on generative AI.The companies who are putting in the effort to experiment with AI have a head start and can claim a clear competitive advantage.Those who hesitate risk falling behind and being unable to make up the lost ground.For investors,AI literacy will become a marker of quality in potential acquisition targets.It is not just about whether a company has adopted the technology,but whether it understands how to use it effectively to drive value.That said,AI is not a cure-all.It is one tool among many,and it will challenge existing business models in ways we cannot yet fully predict.The rate of adoption may be faster than previous tech cycles,and dealmakers may need to adjust their strategies to account for this.Generative AI will become pervasive in the overall value story,not as a bolt-on,but as a fundamental part of how businesses operate and compete.At Accenture,we have been an early mover on this.We want to be the lead partner for enterprise reinvention,which we think is going to come to define dealmaking in the near future.We believe that technology disruption is only going to accelerate,and it is with us for the short,medium and long term.Beyond this initial wave of excitement,business will have to address a general technology and skills deficit.It will vary by industry but overcoming that talent deficit will be essential for companies to really unlock productivity gains and reap the pervasive potential of new technologies.At the same time,the other major macroeconomic trends from the energy transition and sustainability obligations to competitive forces and defence obligations are not going away.All dealmakers will have to get used to steering through a much broader range of possible outcomes.How they navigate those outcomes amid protracted market uncertainty will be the real test of skill over the next 12-18 months.Patrick Lhr,CMS Germany6|European M&A Outlook 2026Featured articleGermany Europes sleeping giantPatrick Lhr,Partner at CMS Germany,addresses the findings of our most recent M&A survey and reiterates the resilience and growth opportunities at the heart of Europes largest economyRespondents to our survey were downbeat about the German deal markets prospects for 2025.What factors are giving rise to this gloomy attitude,and is this near-term pessimism deserved?Patrick Lhr:The cautious sentiment around Germanys M&A prospects reflects broader macroeconomic and structural challenges.Persistent geopolitical conflicts and recession fears are dampening corporate and investor confidence,slowing deal momentum.Valuation gaps,a drop in high-quality deal flow and subdued consumer sentiment are also weighing on the outlook.However,this short-term pessimism may underestimate the resilience of the German market,which offers numerous investment opportunities.German companies are adapting their business models in response to ongoing trends in digitalisation,AI and sustainability.These strategic imperatives point towards long-term dynamism.In addition,considerable investment is needed in the areas of healthcare,housing,e-mobility and energy supply.Moreover,the dispute over tariffs with the US has been mitigated,monetary policy in the eurozone has recently been eased,and Germanys new federal government has set out plans for substantial investment in the countrys defence capabilities and infrastructure and is working on stimulating economic growth.The German government is also working with its European partners to find solutions to the ongoing geopolitical conflicts.Finally,there is a substantial backlog of exits of private equity funds and deals in connection with succession planning.Against this backdrop,there are many reasons to feel cautiously optimistic that the German M&A market will soon gain more momentum.Two key obstacles to M&A seem to be weighing on dealmakers Germanys perceived administrative and compliance burden,and its competitive bidding environment.How should dealmakers approach these hurdles,and how can valuation gaps in Germany be bridged?PL:These hurdles are not insurmountable in fact,they can serve as filters that reward well-prepared investors.To navigate regulatory complexity,dealmakers should invest early in local expertise to streamline due diligence and regulatory processes.Being proactive on this front can differentiate bidders and accelerate deal timelines.In terms of competitive bidding and valuation gaps particularly within the Mittelstand building trust and offering strategic,long-term value often outweighs price alone.Sellers in Germany,especially family-owned businesses,value continuity,cultural fit and growth vision.Dealmakers can bridge valuation gaps by structuring deals creatively,using earn-outs,minority investments or staged acquisitions to align expectations while reducing upfront risk.Ultimately,those who approach the German market with patience,understanding and a solutions-oriented mindset will be best positioned to unlock high-quality opportunities.Dealmakers expect cash reserves to be a key source of capital to finance M&A in Europe in 2025.German dealmakers in particular suggest credit funds will play a larger role in M&A financing over the next 12 months.How significant is non-bank lending to German M&A?EU regulators have recently announced that 7Featured articlethey are planning stress tests for non-banks.Is this something to be concerned about?PL:Non-bank lending,particularly from credit funds,is becoming increasingly significant in German M&A,especially as traditional financing channels remain constrained.With interest rates still elevated and banks taking a more conservative stance,dealmakers are turning to alternative lenders for greater flexibility,speed and tailored financing solutions.These trends are especially evident in Germanys mid-market and private equity-driven deals.The growing role of credit funds is a positive development,offering buyers access to capital that might otherwise be difficult to secure.However,the planned EU regulatory stress tests for non-banks do reflect a broader concern about systemic stability.That said,increased regulatory oversight should not be seen as a major deterrent.On the contrary,it signals that the non-bank sector is maturing and becoming more integrated into the financial system.For dealmakers,this may even enhance confidence in alternative lenders long-term reliability.In short,while due diligence on financing partners remains essential,the rise of non-bank lending in Germany should be viewed as an enabler of M&A activity,not a risk.Germany maintains a strong reputation for generating high-calibre M&A in the industrials&chemicals space and in other asset-heavy industries.But which other sectors are likely to become bright spots for dealmaking over the next 12 months beyond these traditional fortes?PL:While Germanys industrials&chemicals sector remain a pillar of its M&A landscape,several other industries are emerging as bright spots for dealmaking.Technology and digital infrastructure are gaining momentum,driven by Germanys push towards digital transformation,including AI solutions,and the overall modernisation of its Mittelstand.Cybersecurity,enterprise software and automation solutions are attracting increasing investor interest.Healthcare and life sciences also present strong potential,especially in areas such as medtech and biotech,where Germanys research ecosystem and ageing population create long-term growth drivers.Furthermore,the energy transition is opening new avenues in renewables,energy storage,clean tech and e-mobility.Finally,Germany plans to increase its military spend as well as investments in its infrastructure,which may create further opportunities in these sectors as well.On multiple fronts,Germanys evolving economic priorities are creating fertile ground for M&A in future-focused sectors.According to Mergermarket,eight of the 20 largest deals announced in H1 2025 targeting German assets were led by bidders from North America.How will inbound M&A shape the German market through the rest of 2025?And for German dealmakers themselves,what role is outbound M&A playing in their deal strategies?PL:Inbound M&A will continue to play an important role in shaping the German market.Lower valuations compared to the US,high-quality assets,engineering excellence and a reputation for innovation make German companies attractive platforms for strategic international buyers seeking long-term value and access to the EU market.At the same time,outbound M&A remains a key lever for German dealmakers who are increasingly looking abroad to diversify,scale and access innovation.Whether targeting growth markets in North America and Asia or acquiring emerging technologies,outbound strategies are helping German firms stay competitive in a rapidly evolving global landscape.Increasing political conflict could lead to corporations deciding to strengthen or reduce their presence in certain markets for strategic reasons,in order to reduce their vulnerability.This could also impact inbound or outbound M&A activity in or from Germany.Together,inbound and outbound deal flows reflect Germanys deep integration into global M&A trends.This dual dynamic enhances cross-border connectivity,fosters strategic partnerships,and positions Germany as both a prime destination and an active global player in the dealmaking arena.Ryszard Manteuffel,CMS PolandMateusz Stpie,CMS PolandSawomir Czerwiski,CMS Poland8|European M&A Outlook 2026Featured articleSpotlight on Poland open for businessRyszard Manteuffel,Mateusz Stpie and Sawomir Czerwiski,Partners at CMS Poland,discuss the upbeat mood among Polish dealmakers,how the market is transforming and why prospects for M&A in the country look strong Excluding the occasional,anomalous megadeal,the Polish M&A space has been quite subdued over the last few quarters.Nevertheless,the overall mood among dealmakers in the country is positive.Despite a dip in activity,this prevailing sentiment is driven primarily by the perception that todays market conditions are advantageous for buyers.This has led to transaction processes taking significantly longer.Sellers are holding out for valuations reminiscent of the post-pandemic period,and buyers think valuations should better reflect the current economic landscape,characterised by higher interest rates,macroeconomic volatility and geopolitical unpredictability.However,conditions are poised to improve over the coming months.Dealmakers can expect financing conditions to continue easing through the rest of 2025 and into early 2026.Inflation appears to be under control,and key economic indicators for Poland remain favourable.This environment should support improved access to capital and potentially more conducive terms for transactions.In the familyFamily offices are emerging as increasingly influential players in Poland.While these entities are relatively novel in the Polish context,their presence in M&A financing is growing.Poland has experienced a significant increase in private wealth over the past three decades,leading to the professionalisation of wealth management among high-net-worth individuals and business families.The legal introduction of the Polish family foundation in mid-2023 further facilitated this shift,offering a more structured vehicle for long-term capital deployment,succession planning and asset protection.Family offices often have greater investment flexibility,longer time horizons and a higher risk tolerance than traditional institutional investors.In the current environment,characterised by higher interest rates,tighter bank lending and selective private equity(PE)activity,family capital is stepping in to fill gaps,particularly in mid-market transactions and succession-driven deals.This segment is expected to grow rapidly as more business owners look to diversify and reinvest wealth,and as the ecosystem around family wealth management continues to mature.We are already seeing increased collaboration between family offices and PE funds,as well as direct investments into promising Polish SMEs.A financial services surgeWe have also seen a wave of activity in the countrys financial services sector,with four of the seven biggest deals announced in H1 relating to assets in this area.The Polish financial sector has demonstrated remarkable resilience since the global financial crisis,and M&A in the industry has gone from strength to strength.9Featured articleHigher interest rates have allowed Polish banks to generate substantial income from their lending activities,bolstering their financial performance.Moreover,the influx of people into Poland following 2022 has led to a housing market boom.This surge in demand has positively impacted banks,which have seen increased activity in mortgage lending and related services.Polish banks have strategically focused on stable and predictable revenue streams.This approach has helped them maintain a steady financial performance and has contributed to the overall positive effects for M&A seen in the sector.By prioritising stability,banks have been able to navigate economic fluctuations more effectively.Wealth of opportunityBeyond the financial sector,we see a number of areas with strong potential for dealmaking going forward.For instance,Poland,which has historically relied on coal heating assets,is seeing a significant shift towards alternative energy sources.This transition is driven by both environmental concerns and the need for sustainable energy solutions.Investments in renewable energy,such as wind,solar and biomass,are expected to increase,spurring M&A opportunities in this sector.As in other parts of Europe,defence spending in Poland already very high by regional standards is also set to increase,driving the development of dual-purpose infrastructure that serves both civilian and military needs,such as transportation networks,communication systems and logistics hubs.This will create many opportunities for companies specialising in construction,engineering and technology integration.This sector is poised for consolidation and strategic partnerships.Besides these emerging trends,Poland retains a strong industrial base,with a diverse range of manufacturing and production capabilities.The industrial sector is expected to see a wave of consolidation as companies seek to enhance efficiency,scale operations and expand their market reach.Digitalisation,too,is a priority.The integration of advanced technologies,such as automation,AI and the Internet of Things,will further boost the industrial sectors growth.Companies that innovate and adopt these technologies will be well-positioned for success.Open for businessPolands reputation as a destination for international investment is also evolving six of the 10 biggest M&A deals announced in the country in H1 featured cross-border bidders.Poland has long been recognised as a standout destination for international investment in Central&Eastern Europe,often referred to as a“green island”due to its relative economic stability and consistent growth,even during periods of regional or global uncertainty.Since the collapse of the Soviet Union,Poland has experienced steady economic development,underpinned by a robust legal framework,a skilled workforce and a strategic location within the European Union.These factors have contributed to Polands reputation as a reliable and attractive market for foreign investors.While US investment has played a significant role in Polands economic rise,most foreign direct investment has historically come from Western European countries,particularly Germany,France and the UK.Nevertheless,US investors remain active and influential,especially in sectors such as finance,technology and manufacturing.Looking ahead,there are strong indications that US investment in Poland will continue to grow.Recent examples include notable transactions in the banking sector,such as the acquisition of two Polish banks by Cerberus,a US-based PE fund.These deals underscore the ongoing interest of US investors in Polish assets and the countrys openness to cross-border transactions.Overall,the mood among Polish dealmakers remains upbeat.With financing conditions continuing to ease and a diverse group of sectors poised for consolidation,in addition to major tech-enabled growth,Poland remains a stable,attractive and willing hub for M&A.Wadek Rzycki,CMS Poland10|European M&A Outlook 2026Featured articleFortress Europe defence sector M&AWadek Rzycki,Partner at CMS Poland,and Corrin Miller,Associate at CMS UK,examine the evolution of Europes defence sector and the intricacies of conducting M&A in the sectorEuropes defence sector spanning traditional industries such as aerospace,naval engineering,armoured vehicles and munitions,as well as emerging arenas like space defence,autonomous systems and AI has long been characterised by its strategic importance and complex regulatory frameworks.Shifting geopolitical alignments,driven by Russias full-scale invasion of Ukraine in 2022 and widening Middle East tensions,have sharpened the focus on military preparedness,prompting Western governments to channel funds into advanced weaponry,cybersecurity and cross-border security co-operation.At the 2025 NATO Summit in The Hague,allies committed to raise defence spending to 5%of GDP by 2035,with at least 3.5%for core military expenditure and up to 1.5%for broader defence-related investments such as infrastructure and cybersecurity.Germany is set to be a leading spender,with plans to boost its defence budget from around 2.4%of GDP in 2025 to 3.5%by 2029,its most ambitious rearmament effort since reunification.Nine transactions targeting European defence-sector assets were announced in H1 2025,with disclosed values totalling around EUR 650m(transaction values were not disclosed for all deals).While this figure is broadly in line with the same period last year(11 deals,EUR 691m)and represents a marked increase from H2 2024(EUR 257m across eight deals),the raw numbers show a disconnect between market hype and real transaction activity.Despite the major political commitments to boost defence spending,M&A volumes remain flat year-on-year.This reflects four main constraints in the European market.First is the issue of procurement lag.Though defence budgets have increased since 2022,contractors are only now moving through multi-year procurement cycles,delaying acquisition demand.Related to this is the second matter of asset scarcity and,in turn,high valuations,particularly for prime targets tied to AI,precision systems and advanced materials.Regulatory hurdles are the third key constraint,with stricter FDI screening and fragmented export controls slowing cross-border M&A and extending approval times.Lastly is the question of integration risk,given how sensitive technology transfers,IP ring-fencing and classified work segregation can raise costs and complexity in dealmaking.If procurement bottlenecks ease in H2 2025,deal volumes could rise modestly in 2026,led by targeted acquisitions in high-tech subsectors and regionally strategic industries.Any such increase,however,is likely to be gradual,constrained by regulatory complexity,asset scarcity and integration risks.Geographic hotspotsOf the defence M&A deals announced in Europe in H1 2025,a sizeable share involved Nordic targets.Specifically,three of the nine H1 deal targets were based in Finland,Sweden and Norway.We expect the Nordics to continue to be particularly active in defence dealmaking over the coming year.With Finland having joined NATO in 2023,closely followed by Sweden in 2024(ending more than 200 years of military non-alignment),these countries are committed to increased defence spending Corrin Miller,CMS UK11Featured articleAnnounced dateTarget companySubsectorTarget countryAcquirerDeal value EURm11/02/2025RENK Group AG(18.4%Stake)Armoured vehicles,Automotive components,Industrial equipment and machineryGermanyKNDS Deutschland GmbH&Co KG41329/01/2025Summa Defence Oy(100%Stake)Armoured vehiclesFinlandMeriaura Oy18819/05/2025Polska Grupa Militarna SAAerospace,Missiles and missile guidance systems,Small arms manufacturingPolandFidera Ltd2318/03/2025Pangea Aerospace SLMissiles and missile guidance systemsSpainCentre For Technological Development&Innovation;Primo Capital SGR SpA;Hyperion Fund Inc;Andre-Hubert Roussel(Private Individual)2316/06/2025AMMUNITY SIA(100%Stake)Small arms manufacturingLatviaScandinavian Astor Group AB3Top five defence deals,H1 2025 driven by heightened security concerns around the ongoing conflict in Ukraine.Several other countries are also emerging as key players in European defence M&A.Poland has significantly ramped up its defence spending and is actively pursuing industrial partnerships.Germany also stands out with its ambitious rearmament programme and growing role in cross-border acquisitions and joint ventures.The UK,under its Strategic Defence Review and new UK-EU pact,is fostering innovation and cross-border dealmaking,particularly among SMEs.Ukraine,meanwhile,is rapidly becoming a strategic partner and innovation hub,with battlefield-driven technologies,growing integration into EU defence frameworks and a surge in domestic and outbound M&A activity.US engagementTensions between Washington and Brussels have intensified Europes push for defence autonomy.The largest deal of H1 2025 involved Franco-German defence contractor KNDS exercising its option to acquire an additional 18.4%stake in Bavaria-based tank gearbox manufacturer RENK Group for EUR 413m.The remaining eight transactions also featured European bidders,underscoring the buy European approach championed in the 2024 Draghi report.That report urged a reduction in reliance on non-EU suppliers,highlighting that the majority of EU defence spending still flows to external contractors,particularly in the US.In response to this shift towards European consolidation and autonomy,US defence contractors keen to remain involved in EU defence projects are actively adapting their strategies to secure a share of the continents expanding defence budget.US companies like Honeywell and Anduril are investing in European subsidiaries and acquiring local firms to establish a credible,long-term presence in the region.Honeywells acquisition of Italys Civitanavi Systems,for instance,not only brought advanced navigation technology into its portfolio but also provided a manufacturing base within the EU critical for meeting EU funding requirements around IP control and local production.US defence firms are also forming joint ventures and subcontracting relationships with European primes and,increasingly,the growing ecosystem of start-ups and SMEs.Lockheed Martins collaboration with Poland on the HOMAR-A system and its HIMARS sustainment centre in Romania,as well as its partnership with Rheinmetall to develop the GMARS launcher in Germany,demonstrate this strategic adaptation.Partnerships are carefully structured to enable US firms to contribute advanced or non-sensitive technologies while ensuring that design authority,production control and access to classified capabilities remain within Europe an essential condition for compliance with EU sovereignty protocols and eligibility for certain EU funding mechanisms.12|European M&A Outlook 2026Featured articleSuch collaborations are particularly active in AI,autonomous systems and cyber defence,where European initiatives like EDF and PESCO are driving innovation and industrial resilience.Beyond regulatory compliance,US defence firms are increasingly prioritising co-development and cultural alignment with European partners.Executives stress the importance of acting like an EU company embedding engineering,R&D and manufacturing within Europe to build trust and long-term credibility.This approach is essential for aligning with EU frameworks such as the SAFE Regulation,which mandates that at least 65%of a defence products component cost must originate from entities in the EU,EEA-EFTA states or Ukraine.SAFE also requires local infrastructure,executive management and design autonomy,making cultural and operational integration a strategic necessity for accessing EU funding.While direct access to EU defence funding programmes remains limited,US firms can leverage NATO procurement frameworks and bilateral agreements with individual EU member states to maintain market access.Ongoing transatlantic dialogues,such as the US-EU Security and Defence Dialogue,reflect growing interest in establishing a formal EU-US Security and Defence Partnership.If realised,such a framework could eventually pave the way for trusted partner status or tailored exemptions under EU procurement rules.Looking ahead to 2026,we expect to see a continuation of defence consolidation within Europe,alongside a gradual reduction in direct US participation in EU-funded defence projects.Joint ventures will remain in vogue primarily among European partners but also involving US firms that meet the necessary compliance and eligibility standards.Role of private equityRising defence budgets and Europes push for industrial consolidation are creating attractive opportunities for PE investors.PE firms are increasingly active in defence M&A,particularly in building competitive European groups through acquisitions in dual-use or less politically sensitive areas such as aerospace components,electronics,logistics,and support services while investments in core weapon systems and highly sensitive technologies remain limited.However,there is a growing trend towards incorporating security considerations into environmental,social&governance(ESG)criteria,driven by heightened geopolitical tensions and the strategic importance of defence investments.We expect PE interest in defence tech start-ups and scale-ups to continue to grow in 2026,especially in AI,unmanned systems and cyber defence.These areas combine agility,commercial viability and fewer procurement constraints,making them attractive to private capital.While Europe still trails the US in overall PE defence investment,momentum is building.Dedicated funds like Tikehaus Dfense et Scurit and Weinbergs Eirn Fund are gaining traction,supported by EU initiatives such as Readiness 2030,which aims to mobilise private capital to strengthen Europes defence industrial base.Defence intricacies M&A in Europes defence sector is shaped by a uniquely intricate landscape of regulatory,political and operational hurdles.Dealmakers must contend with fragmented export controls,with rules differing not only between EU member states but also in their interpretation and enforcement.These controls can restrict the transfer of sensitive technologies,delay approvals and complicate cross-border integration,particularly in deals involving dual-use assets or classified capabilities.Relatedly,many European jurisdictions have strengthened their foreign direct investment(FDI)regimes in recent years,allowing governments to block or impose stringent conditions on acquisitions of defence-related assets,especially by non-EU investors.These reviews can significantly extend deal timelines,increase costs and introduce execution risk.Deals involving classified contracts or sensitive technologies require rigorous safeguards.Buyers may need to establish“clean teams”,secure national security clearances and implement ring-fenced IT systems to protect confidential data and comply with defence ministry protocols.Cybersecurity risks are also increasingly material,with acquirers needing to assess target vulnerabilities and ensure post-deal resilience.Similarly,in the case of joint ventures or cross-border collaborations,it is critical that design authority and control over critical technology systems remain within compliant jurisdictions to ensure access to EU funding and uphold strategic autonomy.Despite these hurdles,the defence sector remains attractive for well-prepared investors and acquirers.Success depends on proactive regulatory engagement,robust due diligence and strategic alignment with national and EU defence priorities.In an environment where security imperatives are reshaping industrial policy,M&A can serve as a powerful tool to accelerate innovation,enhance resilience and strengthen Europes collective defence capabilities.Gordon Anton,CMS UK14|European M&A Outlook 2026Featured articleUK public company takeovers in 2025 and beyondGordon Anton,James Parkes and Kristy Duane,Partners at CMS UK,discuss the surging momentum in the UKs public company takeover space and the near-term implications for dealmaking in the UKThe UK public M&A market has roared back to life in 2025,with activity levels not seen since the pre-pandemic era.With more than GBP 22bn in firm offers launched in the first half of the year,the market averaged seven firm offers per month,with 12 in June alone.This extraordinary pace is being driven by undervalued mid-cap shares,increased foreign interest and a more pragmatic regulatory environment,fuelling a wave of acquisitions.Valuation gaps are putting the spurs to dealmaking.Many UK-listed companies shares continue to trade at discounts to intrinsic value,creating fertile ground for opportunistic bids.By way of example,discounts to NAV per share for some listed real asset companies have been as wide as 40%.Private equity bidders remain active,drawn by attractive pricing and management teams open to proposals for life away from the public markets.As cash offers are made at historically low valuations,listed strategic bidders who can offer their own equity to target shareholders as an alternative to a pure cash exit from a private equity bidder are providing competitive tension to takeover processes,showing that private equity cash is not always king.In addition,listed strategics are benefiting from regulatory tailwinds,with reforms to the UK Listing Rules and Prospectus Regulation Rules making it significantly easier to transact and compete for attractive targets.Emerging deal dynamicsAcross the takeover space,the use of bidder shares as consideration is increasing,with 26%of firm offers in 2025 involving listed-paper consideration.This trend is satisfying institutional investors desire to support UK PLC,roll their investments and capture the upside in future synergies.As far as key sectors are concerned,real estate,along with TMT and financials,are drawing the most attention.These industries offer a combination of undervaluation,strategic fit and growth potential that is proving compelling to both financial and strategic bidders.Of late,dealmakers have focused their efforts on UK mid-cap targets nearly 74%of firm offers in H1 2025 were for companies valued under GBP 500m.Low share liquidity,limited analyst coverage and undervaluation are driving the focus on this segment of the market.The dynamics around early-stage announcements are also evolving.A significant number of offer periods now begin with a possible offer announcement(or leak),evidencing a more strategic approach to engagement.Given the paramount importance of confidentiality,this development has not James Parkes,CMS UKKristy Duane CMS UK15Featured articleescaped the attention of the Financial Conduct Authority(FCA),which is investigating this trend.Cross-border interest in UK-listed companies has been another defining feature of the 2025 public M&A landscape,with foreign bidders accounting for more than 53%of firm offers announced in H1.North American bidders remain the most active dealmakers from the US contributed 31%of foreign firm offers in H1,and their Canadian counterparts 9%with strategic and financial acquirers targeting UK assets for scale and innovation.European bidders,while fewer in number(accounting for 9%of foreign firm offers),have focused on mid-cap targets with strategic alignment.Regulatory reforms reshaping the landscapeRegulatory developments are also reshaping the transaction landscape,most notably for listed strategics.The threshold for requiring a prospectus for secondary issuances contained in the Prospectus Regulation Rules will soon be raised from 20%to 75%of existing securities admitted to trading(and up to 100%for closed-ended investment companies).This change effective 19 January 2026 allows bidders who structure their offer as a scheme of arrangement to issue equity for acquisitions without a full prospectus if the issuance remains under the specified threshold.Moreover,the most recent reforms to the UK Listing Rules effective 29 July 2024 abolished the requirement for shareholder approval of Class 1 transactions,which were previously triggered when a listed company undertook a deal representing 25%or more of its size under the FCAs class tests.This amendment allows bidders to pursue significant and transformational opportunities without needing to seek shareholder approval in a general meeting(save where a transaction would constitute a reverse takeover).These changes mean that,in addition to reducing regulatory friction,listed strategics can execute larger deals faster,incur less costs and compete better with private equity-backed bidders.What comes next?Looking to the future,we expect the UK public M&A market to remain active but the nature of dealmaking is evolving.Several key themes will shape the next phase of activity.The strong focus on sub-GBP 500m targets is likely to persist.These companies remain attractively priced,often under-researched and more agile(and willing)in responding to bidder approaches.Boards of mid-cap PLCs should be prepared for unsolicited interest and ensure their defence strategies are up to date.Inbound interest,particularly from North America,will also remain strong.The Competition and Markets Authoritys move towards more proportionate,predictable and faster merger reviews is making the UK an increasingly attractive jurisdiction for cross-border public M&A.As bidder confidence grows and valuations remain compressed,the market is likely to see more contested takeovers.Listed strategics are less likely to sit on the sidelines.Target boards should anticipate the possibility of multiple bidders or activist involvement,especially in sectors with strategic assets or underperforming governance.Prospective bidders,for their part,should familiarise themselves with the regulatory landscape in which UK takeovers play out to ensure they can seize compelling opportunities swiftly when they arise.While the regulatory reforms mentioned above are streamlining some aspects of the UK regime,the broader regulatory landscape remains complex.Boards and advisers will need to navigate evolving disclosure obligations,foreign investment screening and shareholder activism with greater precision and speed.With competition intensifying,bidders will continue to prioritise clean and de-risked execution.Expect to see more pre-bid stake building,an even greater focus on irrevocable undertakings to support bids and early engagement with key shareholders(often ahead of the target board being approached).For targets,this means being ready to respond quickly and credibly to approaches.Market research16|European M&A Outlook 2026The M&A environment and expectations for the year aheadEuropean dealmakers ended 2024 on an optimistic note,with M&A volumes and average deal values edging back upwards after a difficult two years.Yet the first half of 2025 reversed this trend,as political tensions between mainland Europe and the US re-emerged and the Trump administrations Liberation Day tariff announcements took the wind out of dealmakers sails.While a provisional agreement has set a baseline tariff of 15%on European exports to the US,the path to that settlement was undeniably rocky.That volatility was clearly reflected in lower M&A figures for H1 2025:deal counts were down by 11%on the same period in 2024,to 8,195 transactions.Aggregate deal value,however,proved more robust,rising 3.6%year-on-year to EUR 465bn,according to Mergermarket.The sharper reduction in deal volume than value suggests that European dealmakers have focused predominantly on larger deals when committing resources to comprehensive due diligence reviews,dealmakers would prefer to dedicate those resources to bigger,more meaningful transactions.However,as the 10 largest deals by value of the first half of 2025 demonstrate,blockbuster megadeals have been rare as investors take a risk-off approach in volatile times.The largest deal announced in the first half of the year fell in the financial services sector,specifically Banca Monte dei Paschi di Sienas(MPS)EUR 15.4bn bid for Italian banking peer Mediobanca.The deal proved contentious Mediobanca rejected the original unsolicited bid,but MPS was able to secure control by acquiring 62.3%of tendered shares in the bank from Mediobanca investors.Unusually,the second largest transaction for the period concerned Russian assets,as the holding company for Moscows Domodedovo Airport was acquired by the Federal Agency for State Property Management for EUR 11.1bn,a major nationalisation of one of Russias busiest transport hubs.Financial services sector takes the lead by valueWith financial services accounting for four of the five largest deals announced in H1,it is unsurprising that this sector tops the charts in value terms,contributing nearly EUR 92bn worth of transactions.This is up from EUR 67bn in the same period last year,in part because of high levels of activity among Italian institutions MPSs Mediobanca bid was not the only major financial services transaction to emerge in Italy.For instance,Generali Investments acquired France-based An unsettled start to the year made it more difficult for dealmakers to find their footing,while financing difficulties and a persistent mismatch of price expectations may constrain M&A in the coming monthsTop findings50%of respondents expect European M&A activity to increase in the next 12 months,while 29%anticipate a decline34%identify financing difficulties as one of the biggest obstacles to dealmaking,followed by 30%who identify buyer/seller valuation gaps as major barriers31%expect buyers to pursue undervalued targets and turnaround opportunities in the coming year,while non-core divestments and distress will drive sales17Market researchNatixis Investment Managers in a EUR 4.8bn deal,merging to create Europes second largest asset manager with almost EUR 2tn in assets under management.Other major financial services deals in H1 include Swiss insurer Helvetias EUR 9.4bn acquisition of long-time rival Baloise,as well as a EUR 6.8bn bid by Austrias Erste Group to buy the Polish arm of Santander Bank.This is the first time since 2018 that TMT has not been the sector with the highest aggregate deal value,though it missed the mark by the thinnest of margins.The first half saw just over EUR 91bn of TMT deals(down from EUR 97bn in H1 2024).Only one TMT deal broke into the all-sectors top-10 the restructuring of telecommunications business Europes financial services sector is riding a wave of consolidation,convergence,regulatory,macroeconomic and generational wealth shifts.Private capital growth is driving new investment structures and strategies.Fintechs and challengers are evolving and consolidating,while banks,insurers and asset managers are looking for opportunities to capture a greater share of pensions and savings and invest in long-term growth and investment asset classes and semi-liquid products.Dipesh Santilale,Partner,CMS UKNumber of dealsDeal value EURm05001,0001,5002,0002,5003,0003,5004,0004,5005,00020212023202220242025050,000100,000150,000200,000250,000300,000350,000400,000Deal value EURmNumber of dealsQ2Q1Q4Q3Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q2Q1European M&A trends 2021-Q2 2025Market research18|European M&A Outlook 2026Announced dateTarget companyTarget sectorTarget countryBidder companyBidder countryDeal value EURm24/01/2025Mediobanca-Banca di Credito Finanziario SpA(100%Stake)Financial servicesItalyBanca Monte dei Paschi di Siena SpAItaly15,42820/06/2025DME Ltd(100%Stake)TransportationRussiaFederal Agency for Management of State Property-RosimushchestvoRussia11,10022/04/2025Baloise Holding Ltd(100%Stake)Financial servicesSwitzerlandHelvetia Holding AGSwitzerland9,39105/05/2025Santander Bank Polska SA(49%Stake)Financial servicesPolandErste Group Bank AGAustria6,84613/06/2025Novo Banco SA(100%Stake)Financial servicesPortugalBPCE GroupFrance6,40023/02/2025Subsea 7 SA(100%Stake)ConstructionUnited KingdomSaipem SpAItaly6,05426/02/2025Altice France SA(45%Stake)TMTFranceCreditorsFrance5,77201/05/2025Cofinimmo SA/NV(100%Stake)Real estateBelgiumAedifica SA/NVBelgium5,68731/03/2025CEVA Sante Animale SAPharma,medical&biotechFranceMitsui&Co Ltd;Temasek Holdings(Pte)Ltd;EMZ Partners SAS;Sagard SAS;Public Sector Pension Investment Board;Bettencourt-Meyers Family;Continental Grain Co;Hopu Investment Management Co;ArchiMed SAS;Merieux Equity Partners SAS;Sofiproteol SASingapore5,50012/03/2025Zealand Pharma A/S(petrelintide monotherapy development and commercial license)(100%Stake)Pharma,medical&biotechDenmarkRoche Holding AGSwitzerland4,81624/02/2025Just Eat Takeaway com NV(100%Stake)TMTNetherlandsProsus NVNetherlands4,77021/01/2025Natixis Investment Managers SA(Asset management operations)(100%Stake)Financial servicesFranceGenerali Investments Holding SpAItaly4,75031/03/2025Fortnox AB(81.05%Stake)TMTSwedenEQT AB;First Kraft ABSweden4,10014/02/2025Apleona Group GmbH(100%Stake)Real estateGermanyBain Capital LP;Mubadala Investment Co PJSCUSA4,00006/02/2025Banca Popolare di Sondrio SpA(81.34%Stake)Financial servicesItalyBPER Banca SpAItaly3,86905/02/2025Metro AG(14.82%Stake)ConsumerGermanyEP Global Commerce GmbH;EP Global Commerce asCzech Republic3,84529/04/2025Stack Infrastructure Inc(European colocation business)(100%Stake)Business servicesSwedenApollo Global Management IncUSA3,77431/03/2025Corral Petroleum Holdings AB(100%Stake)Industrials&chemicalsSwedenVaro Energy Marketing AGSwitzerland3,64412/05/2025Daisy Group Ltd(100%Stake)TMTUnited KingdomVMED O2 UK LtdUnited Kingdom3,55903/02/2025Verallia SA(49.47%Stake)Industrials&chemicalsFranceBW Gestao de Investimentos LtdaBrazil3,545European M&A top 20 deals,H1 2025 19Market researchAltice France.However,the sector does take the gold medal for generating the highest number of deals,with 1,670.This is some way ahead of second-place business services,which saw 1,394.More caution aheadAfter an improvement in confidence among our respondents in last years survey,M&A activity in the next 12 months looks set to be more subdued.Half of respondents expect European M&A levels to rise over the coming year,down from the 65%who said the same in our study a year ago.While the proportion expecting a significant increase in dealmaking is the same as last years survey(20%),well over a quarter(29%)now expect a more muted European M&A market in the next 12 months,including 8%who are anticipating a significant decrease.This less confident outlook reflects the uncertainty that has descended on global economies since the beginning of the year.Though the US and European Union have agreed a provisional tariff deal,ambiguity lingers and the last few months had an unmistakable impact on Europes economic prospects,with GDP growth forecasts having been revised downwards.Last autumn,the European Commission projected GDP growth rates in the EU for 2025 at 1.5%and for 2026 at 1.8%;this springs forecast has just a 1.1%rate for 2025 and 1.5%for 2026.Even as M&A volumes increased in H2 2024,corporates appear to have been a little more circumspect than they had anticipated.In last years survey,41%of corporates were expecting to complete three or more deals,but only 19%of this years corporate respondents reached this threshold.What do you expect to happen to the level of European M&A activity over the next 12 months?4520 2420252023Increase significantlyIncrease somewhatNo changeDecrease somewhatDecreasesignificantly22!2! %4%8%3 %Market research20|European M&A Outlook 2026The picture for private equity firms is a little more mixed.Last year,19%expected to strike one or two deals in the 12 months ahead,45%anticipated three to four and 36%were bullish enough about M&A prospects to predict five or more.In the event,most(72%)were involved in three or four.In line with our respondents views on the prospects for European M&A in the year ahead,corporates intend to tread cautiously over the next 12 months.Almost a quarter(21%)expect to be involved in no deals at all(last year,just 8%said the same),while 55%anticipate launching one or two transactions and 21%three or four(36%said this last year).Private equity,meanwhile,remains under pressure both to deploy dry powder and to return capital to investors by exiting companies in ageing portfolios.Buyout firms globally hold USD 1.2tn of uninvested capital,of which 24%was at least four years old at the end of 2024,according to Bain&Co analysis.At the same time,there are 29,000 unexited companies in the global buyout portfolio,valued at more than USD 3.5tn.The average holding period for exits increased from 5.3 years in 2018 to 6.1 years in 2024 as realisations failed to keep pace with the industrys growth.Confronted with a lack of liquidity,fund investors face challenges in committing to new funds,with an unavoidable impact on fundraising.Private equity firms will therefore need to be active Approximately how many M&A deals do you expect your organisation to be involved in over the next 12 months in Europe?78563412Zero21G!(!FU!%1%CorporateTotalPE firmApproximately how many M&A deals was your organisation involved in over the last 12 months in Europe?781%4V1234722b%3%1%2%CorporateTotalPE firm21Market researchbuyers and sellers even amid uncertain conditions,and our survey results reflect this reality.While 21%of private equity respondents expect to be involved in one or two M&A transactions,nearly half(47%)are anticipating three or four and 32%five or more.As far as international M&A is concerned,nearly a third of private equity respondents(31%)completed three or four cross-border deals,whereas corporates focused more on their domestic markets more than two-fifths(42%)were involved in no deals with an overseas target or acquirer.This staid approach is likely to persist in the coming year.Over half of corporates(51%)expect to be involved in zero cross-border deals,while 31%of private equity respondents are expecting three or more such deals.Obstacles to dealmakingFinancing difficulties are expected to be the primary barrier to doing deals in Europe over the coming year,with 34%of respondents placing this in their top-two obstacles.Although the European Central Bank and Bank of England have lowered interest rates in the past few months(to 2%and 4.25%,respectively,as of the time of writing),they remain higher than the decade before the full-scale invasion of Ukraine and the rapid rise of inflation in 2022.The inevitable effect on financing costs and the uncertain environment are creating more constrained lending conditions,with the European Commission reporting a tightening of credit conditions among Approximately how many cross-border M&A deals was your organisation involved in over the last 12 months in Europe?53412Zero31%5SRRB5%1%CorporateTotalPE firm24%8PCQB%1%3%7S412ZeroCorporateTotalPE firmApproximately how many cross-border M&A deals do you expect your organisation to be involved in over the next 12 months in Europe?22|European M&A Outlook 2026Market researchbanks in the first quarter of the year.The CEO of a Poland-based corporate,for example,comments:“Financing difficulties will affect the way companies plan their investments.It will delay dealmaking,and companies may have to put aside their growth plans.”Buyer and seller price expectations are projected to be the next greatest hurdle to dealmaking,with 30%of respondents ranking this in their top-two obstacles for the coming year,including the largest share of first-choice votes(22%).As we reported last year,the intractable valuation gap between buyers and sellers has persisted since the inflation shock of 2022 and is taking longer to work through than in the past.The head of corporate development at a Spanish company points to regional differences,saying:“There are valuation gaps in Europe,especially in Germany,where expectations are particularly high among Mittelstand company sellers,and in markets where the cost of living is high.”Regulatory changes rank in third place for our respondents,with 29%citing these as an obstacle.This despite the European Commission embarking on a simplification drive in response to the Draghi report on EU competitiveness,which was published last year.The Commission has already announced the first of two omnibus packages that focus on sustainability reporting obligations for large companies and aims to“address overlapping,unnecessary or disproportionate rules that create barriers for EU companies.”Unsurprisingly,trade wars have moved up the list of obstacles compared with last year,when they ranked bottom.This year,26%cite trade wars as a top-two barrier to M&A,putting them in fifth place.As the managing director of a US private equity firm explains:“Many of the delays in cross-border deals are caused by the trade wars.They have increased uncertainty in markets,and its making the selection of targets and regions tougher for dealmakers.”Drivers of dealmakingUndervalued targets and turnaround opportunities will be the main buy-side drivers for European M&A activity in the next 12 months,according to our respondents.Both garnered nearly a third(31%)of top-two responses,as dealmakers cast around for value during uncertain economic times.Highlighting the benefits of these kinds of deal,the head of M&A at a UK corporate says:“Weve widened our range of services by investing in turnaround opportunities and they can prove to be very profitable.Its all about reading the opportunities realistically.”In a similar vein,respondents expect the biggest sell-side drivers to be non-core asset sales from large companies(42%place this in their top-two)and distress-driven M&A(38%).These beat private equity divestments,at 36%,despite the clear need for firms to exit investments.The ongoing growth of the GP-led deal market whereby firms tap secondary capital to roll portfolio companies into a new fund and offer existing investors a liquidity option has perhaps dampened expectations of full private equity exits boosting M&A.According to Mergermarket data,USD 67.3bn worth of secondary buyouts targeting European assets were announced in 2024,up 55.5%from the USD 43.3bn recorded in 2023.What do you believe will be the principal obstacles to M&A activity in Europe over the next 12 months?(Rank the top two,1=biggest obstacle,2=second biggest obstacle)0%5 %CurrencyfluctuationsGeopoliticalinstabilityHeightenedregulatory scrutinyRegulatory changesTrade warsInflationary andinterest ratepressuresFinancingdifficultiesVendor/acquirervaluation gapRank 2Rank 122%8%8%6%3%2#Market researchIt is perhaps unsurprising that the regulations that respondents find most challenging when doing deals in Europe are environmental and ESG regulations.ESG continues to form a key feature of M&A strategy and due diligence but it is clear that the European Commissions recently announced streamlining proposals have yet to filter through to make navigating these ESG rules any easier.Financial regulations are also a top concern,perhaps reflecting the level of activity in the sector,as are labour&employment regulations which come with well-known challenges.Kristy Duane,Partner,CMS UK0%5 %Private equitybuyoutsCash-richcorporateacquirersConsolidation inovercrowdedmarketsSupply chainresilience/securityTurnaroundopportunitiesDigitalisationIncreased appetitefrom foreignacquirersUndervaluedtargetsRank 2Rank 121%6%9%8%4%What do you believe will be the greatest sell-side drivers of M&A activity in Europe over the next 12 months?(Rank the top two,1=greatest driver,2=second greatest driver)0%5 %pital raising forexpansion in fastergrowing areasSuccession issuesPick-up in valuationsNon-core assetsales from largercompaniesDistress-driven M&APrivate equitydivestmentsRank 2Rank 125 %9%8%What do you believe will be the greatest buy-side drivers of M&A activity in Europe over the next 12 months?(Rank the top two,1=greatest driver,2=second greatest driver)24|European M&A Outlook 2026Market researchTop findings38%of respondents expect the Benelux region to see the highest M&A growth in the next 12 months,placing it in top spot for the second year in a row59%anticipate that TMT will top the M&A growth tables,followed by industrials&chemicals with 42%of respondents51%expect increased appetite among Middle Eastern buyers targeting European assets,with real estate,leisure and energy the favoured sectorsThe Benelux region is making quite a name for itself among dealmakers.It is the region expected to see highest growth in M&A activity over the next 12 months,with 38%of respondents ranking it in first or second place.This follows on from its joint top spot in last years survey,when it tied with Germany.Many respondents pointed to strong sustainability credentials among Benelux-based companies as well as a solid set of financial institutions.There are other attractions besides.A France-based CFO,for example,homes in on a willingness among targets to meet buyers need to mitigate risk:“We find a supportive investment ecosystem in these countries,and this does help dealmakers concentrate on generating value from deals.Companies are also open to alternative deal structures.”A private equity partner in Belgium also highlights the countrys strong logistics base:“Belgium has a good infrastructure with connectivity to other key markets.For companies focused on strong distribution and supply-chain lines,they should consider investing in Belgium.”The UK&Ireland secured the second spot,with 29%of top-two votes.Among those opting for the region,key reasons included the markets scale and developed financing markets as well as companies growth ambitions.“Investment choices are greater in the UK because of the market size,”says an Italy-based corporate CEO.“Companies in many sectors have strong globalisation potential.”A US strategy officer also says:“Companies from the US have always found the UK to be stable for their investment intentions.There are feasible financing options,mainly when we think about larger investments.”Austria&Switzerland,meanwhile,garnered 27%of responses,placing it third.Respondents cited a variety of reasons,including its strategic location for opening new opportunities in other parts of Europe,an international workforce and political and economic stability.In fact,wherever they chose,many respondents appear to prize political stability particularly highly this year this was a factor cited in qualitative comments far more than in previous editions of this survey.A Japanese corporate business development director,for example,says of the UK&Ireland:“In other regions,we see political instability affecting the value from deals negatively.This can be a challenge to overcome.By contrast,UK and Ireland are more stable for us.”Focus on regions and sectorsBenelux and TMT take the top spots for expected M&A growth by region and sector,with the UK&Ireland and industrials&chemicals securing second place25Market researchAside from Benelux,UK&I,Austria and Switzerland,we also expect Iberian M&A to stay strong in 2026.The cybersecurity and defence sectors are expected to be among the most active and,in our view,will be leading the market in terms of transaction volumes locally.Technology and strategic expansion will probably be important M&A drivers for M&A transactions,and ESG criteria are also expected to gain weight in negotiations.Irene Mir,Partner,CMS Spain Central and Eastern Europe is poised to surprise on the upside.With GDP growth in the region outpacing the eurozone average,and sectors like tech,defence,infrastructure and energy attracting strategic capital,CEE offers a compelling mix of resilience and opportunity for dealmakers.Improving financing conditions and strong domestic demand could result in CEE outperforming expectations in the next 12 months.Its a region where strategic investment is increasingly translating into tangible momentum and dealmaking confidence.Horea Popescu,Partner,CMS Romania0%5 %SEEItalyGermanyNordicsCEEFranceIberiaAustria&SwitzerlandUK&IrelandBeneluxRank 2Rank 121%5%9%8%5%6%4%7%2%4%Which countries/regions will see highest growth in the next 12 months?(Rank the top two,1=highest growth,2=second highest growth)Market research26|European M&A Outlook 20260%5 neluxAustria&SwitzerlandUK&IrelandNordicsCEEIberiaGermanySEEFranceItaly20%9%6%8%8%7%7%6%4%4%1%2%Rank 2Rank 1Which countries/regions will see lowest growth in the next 12 months?(Rank the top two,1=highest growth,2=second highest growth)Market research27Sector dynamicsEchoing last years study,TMT takes the pole position as the sector respondents expect to enjoy the strongest M&A growth over the next 12 months,with 25%ranking it first and 34%second,or 59%combined.Given continued developments in AI-related technologies in particular,this result is hardly surprising.Industrials&chemicals is perhaps a less obvious choice.It secures the second overall spot with 42%of respondents predicting high M&A growth,but it is the leader by first-rank votes,with 30%.Dealmakers expect continued high energy costs in Europe and the prospect of elevated tariffs on some products to generate turnaround or distressed opportunities.Concerns about supply-chain resilience are also anticipated to spur investment in industrials&chemical businesses to supply local markets.In a reversal from last years survey,when respondents felt the pharmaceuticals,medical&biotech sector was third most likely to see the highest growth in M&A,this year it comes in second to last.Accordingly,it is also the sector respondents expect will see the lowest M&A growth(42%say this).This reflects the range of challenges in the sector,including potential drug pricing and regulatory reforms in the US,one of the worlds largest healthcare markets.Respondents also expect consumer&leisure to see low M&A growth(28%say this),reflecting the risk of softer discretionary spending.And,in contrast to the trends of the past year,dealmakers also expect a slowdown in business&financial services M&A(also 28%).Respondents are also not anticipating a spike in defence M&A,though this may reflect the sectors specialised nature most respondents operate in core industries and may have limited visibility to defence dealmaking.Just 7lieve it will see the highest growth,though this is an improvement on our previous study,when zero respondents cited it.TransportationPharmaceuticals,medicaland biotechAgricultureDefenceReal estateand constructionBusiness and financialservices(includingcomputer services)Consumer and leisureEnergyTechnology,mediaand telecommunicationsIndustrials and chemicals(including automotive)Rank 2Rank 130%7%4%6%2%5%1%0%0%3%0%3%4%Which sectors will see highest growth in the next 12 months?(Rank the top two,1=highest growth,2=second highest growth)Which sectors will see lowest growth in the next 12 months?(Rank the top two,1=highest growth,2=second highest growth)Technology,mediaand telecommunicationsIndustrials and chemicals(including automotive)EnergyReal estateand constructionTransportationAgricultureDefenceBusiness and financialservices(includingcomputer services)Consumer and leisurePharmaceuticals,medicaland biotechRank 2Rank 125%9%9%9%3%0%2%2%0%1%Market research28|European M&A Outlook 2026Middle Eastern interestAs Middle Eastern countries increasingly seek to diversify their economies away from hydrocarbons,their sovereign wealth funds(SWFs)and home-grown businesses are investing globally,with Europe a preferred destination.Middle Eastern and North African SWFs,for example,invested nearly USD 159bn outside their home region in 2024 the highest total for five years,EY reports.Accordingly,around half of our respondents(51%)note that Middle Eastern buyers were more present in the European M&A market over the past 12 months than previously.This was particularly true in the real estate and leisure sectors,where 86%and 79%of respondents,respectively,saw an increase in Middle Eastern acquirers.Over the coming year,again around half of respondents are anticipating an increase in activity led by Middle Eastern bidders,with the real estate and leisure sectors remaining in the top spots(77%and 71%,respectively).Energy is a close third,with 68%of respondents from this sector predicting a rise,presumably as buyers from the region increasingly focus on energy transition and renewables assets.For instance,Abu Dhabis Masdar,a renewable energy business,has been on the acquisition trail in Europe.It recently acquired Greeces Terna Energy and a significant minority stake in four Endesa solar assets in Spain after last year partnering with Endesa on a 2GW portfolio of solar assets and 0.5GW of battery storage.Middle Eastern acquirers are also increasingly targeting European sectors such as those related to food-security,technology(including AI and data centres),manufacturing,energy and healthcare,reflecting their domestic priorities and ambitions to diversify.Sovereign Wealth Funds and large conglomerates are leading this activity.Elevated oil prices and robust financial capacity continue to underpin this outward investment,even amid evolving geopolitical and macroeconomic dynamics.Graham Conlon,Partner,CMS UAELeisureEnergyConsumerTechnology,media andtelecommunicationsBusiness andfinancialservices(includingcomputerservices)Industrialsand chemicals(includingautomotive)Pharmaceuticals,medical andbiotechTotalReal estate andconstructionNoYes86y!b8SGSGDVBX4f(rQIQI%LeisureEnergyConsumerTechnology,media andtelecommunicationsIndustrialsand chemicals(includingautomotive)Pharmaceuticals,medical andbiotechTotalReal estate andconstruction77#w#q)h2GSGSFT8b(rQI%NoYesBusiness andfinancialservices(includingcomputerservices)Over the past 12 months have you seen more Middle Eastern buyers in the European M&A market?Do you expect to see a greater level of interest from Middle Eastern investors in M&A in Europe over the next 12 months?30|European M&A Outlook 2026Market researchWe currently see many businesses streamlining their portfolios and divesting non-core assets.Succession planning also remains an important driver;however,some of these transactions face significant challenges due to geopolitical uncertainty,which has a profound impact on the reliability of business plans.Industrial companies in particular have experienced a slowdown in activity due to ongoing tariff discussions making it extremely difficult to forecast with confidence.Furthermore,some companies are struggling to survive under these conditions,leading to an observable increase in distressed M&A.Ultimately,we believe the defining feature of dealmaking through the remainder of 2025 and into early 2026 will be this combination of portfolio optimisation and distressed opportunities.Stefan Brunnschweiler,Partner,CMS SwitzerlandTop findings61%of corporates are currently considering acquisitions,while 79%of private equity firms are looking at both acquisitions and divestments38%expect to pursue sizeable,transformational acquisitions,the top motivation and a big jump from last year,when this took sixth place46%say environmental regulations are among the top-two challenges to European dealmaking,while 40%cite financial regulationsDeal dynamics and motivationsAmong corporate respondents,nearly two-thirds(61%)are currently considering acquisitions as part of their M&A strategies.While encouraging,given the uncertainty clouding the macroeconomic landscape,this is a decline from last year,when 75%were debating acquisitions.This year also marks a shift in the proportion of corporates not considering M&A:21%of corporates say this,up from just 8%last year.Meanwhile,echoing our finding that non-core asset disposals will be a major sell-side M&A driver,14%are currently looking at making divestments and 4%are considering both acquisitions and divestments.Unsurprisingly,given private equitys model of buying and selling companies,most of these respondents(79%)are currently considering both acquisitions and divestments,a marginal increase on the 76%who said the same last year.Just 16%are currently considering acquisitions only,down from 21%last year,a fall that perhaps reflects the growing pressure for fund managers to exit their companies fully and return capital to investors.In a recent Bain-ILPA poll,private equity limited partners overwhelmingly favoured conventional exits,even at below mark pricing(63%cited this as a preferred route)to any other form of exit.Dividend recapitalisations came in second(33%)followed by LP-led secondaries deals(20%).Buyers are prioritising transformative deals,new technologies and distressed opportunities in their M&A strategies over the coming year,but a sizeable minority of corporates will remain on the sidelines31Market researchDeal rationaleThe motivations for making acquisitions have also evolved year-on-year,when technology acquisition led the pack.This time,many respondents currently considering acquisitions have their sights set on transformational purchases,financed in many instances by divestments of non-core assets.This is the most popular response,with 38%identifying this as a top-two reason for deals.By contrast,transformational deals only featured in sixth place in last years survey.Growth in new geographies and customer bases is the second greatest driver,cited by a third of respondents,while acquisitions of new technologies/corporate VC investment an essential lever for accelerating growth prospects in general comes third,with 30%.Analysing first-choice responses only,distressed/turnaround opportunities take the top spot among our respondents.This is consistent with the sentiment outlined previously,that turnaround deals would be one of the biggest drivers of buy-side M&A in the coming year.As the CFO of an Italian company puts it,turnaround opportunities present“the most cost-effective way to grow the business and initiate strategies for long-term value creation”,with a finance director in the UK adding that they“reduce the financial pressure when we are acquiring.There are fewer parties interested in the deal because of the higher risks,and we can capitalise on opportunities.”Taken together,these responses suggest a varied set of reasons for pursuing M&A as opposed to a major trend in one direction.Clearly,the advance of technology AI in particular continues to drive M&A activity.But the large,transformational purchases hint at respondent organisations ambitious and strategic future plans,while distressed and turnaround deals sit at the other end of the spectrum,as buyers seek more opportunistic ways of growing and boosting return on investment.Where does M&A currently fit into your corporate strategy?(Select one)Corporate respondentsPE respondentsAll respondentsNot consideringM&A at this time15!%Currently consideringdivestments4%Currently consideringacquisitions49a%Currently considering bothacquisitions and divestments79%4%2|European M&A Outlook 2026Market researchRegulatory challengesEven as the EU seeks to simplify and streamline some of its sustainability laws including flagship initiatives such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive there remains a patchwork of regulations intended to stimulate the circular economy,promote nature restoration and prevent biodiversity loss and environmental degradation,among other areas.There are also many environmental regulations set at the national level.Given these are subject to frequent updates and revisions,companies and investors can often find it challenging to keep up to date.As the corporate finance director of a company based in Greece puts it,“With the heightened regulatory scrutiny,mainly when it comes to environmental regulations,acquirers have to be very careful with their ESG due diligence.It will increase dealmaking risks in the coming months.”This is perhaps why respondents so frequently cite environmental regulations as the most challenging form of regulation to address.Nearly half say this(46%),followed by 40%who cite financial regulation as a top-two challenge.This is a shift from last year,when the top form of regulatory obstacle was labour&employment,which has now moved to third place(32%).As climate-related economic pressures increase,regulators are introducing increasingly stringent environmental and ESG requirements,making compliance a key consideration in M&A activities.Although recent developments in Europe suggest that proposed regulations may be softening,the overall legal framework is tightening,particularly at the national level.ESG remains a critical issue in M&A,and companies can gain a strategic advantage by incorporating ESG into their corporate strategy and conducting ESG due diligence at an early stage in the deal process.Continued investment in ESG innovation and solutions will be essential across all sectors to mitigate risks,capture value and build long-term resilience.Dne Yalcin,Partner,CMS TurkeyIf you are considering acquisitions in Europe,or considering both divestments and acquisitions,what is the motivation for this?(Rank the top two,1=most important,2=second most important)0%5 %Supply chainresilience/securityBolt-on acquisitions inexisting geographiesand segmentsGrowth in newgeographies andcustomer basesSizeable,transformationalacquisitionsFavourable valuationsAcquisition of newtechnologies/corporateVC investmentDistressed/turnaroundopportunitiesRank 2Rank 117%8$%8 3Market researchWhich form of regulation do you find most challenging when doing a deal in Europe?(Rank the top two,1=most challenging,2=second most challenging)Rank 2Rank 1ESG-relatedregulation1%Environmentalregulations22$taprotection12%Labour&employment14%Financialregulation23%Antitrust13%Export controls/foreign direct investmentregimes15%74|European M&A Outlook 2026Market researchForeign direct investment environmentEurope has been struggling to attract foreign direct investment(FDI)for some time,and last year was no exception.A combination of muted economic growth,high energy prices and geopolitical tensions fed into the lowest number of FDI projects in Europe for nine years in 2024,according to EY.At 5,383,the number of projects fell by 5%on the previous year,with the number of jobs created by FDI declining by 16%over the same period.France,the UK and Germany signed the most FDI projects last year,but the report notes that these markets saw investment decline by 14%,13%and 17%,respectively.Part of the reason for these declines was an 11ll in the number of projects coming from US investors,presumably as initiatives such as the Inflation Reduction Act kept more dollars at home.Another factor is the long-term erosion in manufacturing competitiveness,compared with markets such as China.This has hit countries such as Germany,with its historically strong industrial base,particularly hard.Looking forward,our survey finds that the Benelux region and the UK&Ireland will be the leading investment destinations over the coming year,with 18%and 16%of respondents,respectively,citing these two markets.This tallies with the earlier result that respondents expect these two regions to see the most M&A growth in the next 12 months relative to other parts of Europe.Risk factorsWhen asked about the main risks for their chosen destination,a competitive bidding environment(23%),administrative burdens(15%)and challenging compliance management(also 15%)emerge as the top responses.Indeed,in both the Benelux and UK&Ireland,the competitive bidding environment is Germany remains the largest economy in the European Union and despite some political turbulence in 2025 it continues to be a significant target for foreign direct investments.Recent remarks by Heri Kravis,co-founder of KKR,underscore this ongoing importance.Nevertheless,Germanys administration must address its regulatory and tax environment in the short term to maximise the countrys potential.Jacob Siebert,Partner,CMS Germanythe greatest risk,cited by 39%and 28%of respondents,respectively.Clearly,despite some of Europes FDI woes,there is sufficient investment interest in the region for there to be competitive tension,particularly as this risk has jumped in the overall results to first place from 10th in last years survey.SEEItalyGermanyFranceNordicsIberiaCEEAustria&SwitzerlandUK&IrelandBenelux18%7%6%4%2%Which country/region in Europe will be the leading investment destination?(Select one)35Market researchIn our previous survey,respondents foregrounded their concerns about political and economic instability,reflecting the unusually high number of elections across the continent in 2024.With many of those resulting in at least reasonably decisive wins,this factor has slipped down the list overall to sixth place,with just 7%of respondents mentioning an unstable political or economic environment as the single biggest risk for their chosen destination.Some of Europes major economies France,Germany and Italy languish at the bottom of respondents destination choices.The reasons for this vary widely.In France,the principal risk cited by respondents is France needs to reignite confidence in its growth outlook accelerating structural reforms that lift GDP expansion and signal long-term macro stability.At the same time,streamlining regulation,trimming administrative hurdles and delivering a clearer,investor friendly tax framework would directly address investors top selection criteria and mitigate key perceived risks,positioning France far more competitively for foreign direct investment.Thomas Hains,Partner,CMS Francean uncertain regulatory environment,with 29%saying this,although political and economic sanctions(24%)and an unstable political and economic environment(also 24%)likewise feature highly.In Germany,which ranked second last year but eighth this year,the biggest factor by some margin is the Italy still suffers from complex rules,slow permitting processes and regional disparities.Nevertheless it still has one of the largest markets in the EU,a diversified economy,a skilled workforce and is strategically located.Reforms are also taking place to target systemic inefficiencies and foster a more transparent,agile and supportive business environment.Daniela Murer,Partner,CMS ItalyInstability in Eastern EuropeInflationary and interestrate pressuresMore unstable political andeconomic environmentLack of counterpartyadherence to agreeddeal termsUncertain regulatoryenvironmentOngoing political/economic sanctionsLarge administrative burdenChallenging compliancemanagementCompetitive biddingenvironment15%8%7%7%6#%4%What do you expect will be the biggest risk to investing in your country/region of choice?36|European M&A Outlook 2026Market researchadministrative burden associated with investments:40%of respondents say this.Meanwhile in Italy,there appears to be a high trust deficit.Nearly half of respondents(45%)cite a lack of counterparty adherence to agree deal terms as the biggest risk to investment in the country.Investment typesIn line with last years survey,distribution/warehouse projects and manufacturing/processing plants are the two most popular types of facility that respondents plan to build overseas,although their position has swapped.Leading the pack this year is distribution/warehouse facilities,which accrues 30%of first-choice votes and 35%of second-place votes,the largest such share in each case.This is followed by manufacturing/processing,with a combined 53%of top-two votes.The nearshoring trend clearly continues apace in Europe,with several large companies recently announcing significant investment in the region,such as Swedish The compliance burden in Europe is real,especially in regulated sectors or where FDI regimes apply.Investors should involve local advisers early.Not just lawyers,but also tax and regulatory specialists,so that they are not firefighting when the deal is already moving.In competitive processes,price still matters,but being prepared,fast and credible can often tip the scales when bids are otherwise close.Sasa Sodja,Partner,CMS Sloveniaelectric vehicle manufacturer Polestar opting to manufacture one of its new models,the Polestar 7,in Slovakia in what is a strategic shift away from Chinese production.Indeed,more than half(55%)of European respondents to a recent Capgemini study say they have invested in nearshoring.When deciding where to invest outside their home country,respondents consider a range of factors.Around a fifth of survey participants(18%)say the single most important factor is the level of economic growth in the country,though regulation that is favourable to investment is not far behind(16%).Favourable tax laws,cited by 14%,are similarly important.On GDP growth,a France-based partner of a private equity firm explains:“Economic growth does not happen over a short period of time.Government support,supportive policies and investor interest affect Rank 1Rank 2Sourcingraw materials14%Outlet18%7%Distribution/warehouse305%Manufacturing/processing34%R&D16%8tacentre6%3%What type of facility is your organisation planning to build overseas?(Rank the top two,1=most important,2=second most important)37Market researchthe economic growth prospects,which is why it impacts our decisions.”Meanwhile,having a supportive regulatory environment for investment is particularly important to an Italy-based corporate CEO,who comments:“Investment-favourable regulations increase our confidence to proceed with deals,even if there are other risks.We clearly see the benefits of investing in these regions.”Availability of local financingAvailability of distressedassets for saleStable regulatory/legal frameworkStable political environmentCultural alignment oflocal marketFavourable taxation lawsInvestment-favourableregulationLevel of economic growth/GDP per capita16%5%Which of the following factors does your organisation most take into account when deciding where to invest outside your home country?UK&IrelandVolume%Value EUR bn%1,992111.4-25neluxVolume%Value EUR bnf434.7-20I%2%FranceVolume%Value EUR bn257.1-17%IberiaVolume%Value EUR bnd132.9-22%-24%ItalyVolume%Value EUR bna338.4-12%08|European M&A Outlook 2026Market researchAcross Europe,H1 2025 was characterised by a pronounced drop in deal volume,with 8,195 transactions announced a decline of 11%year-on-year,reflecting tariff-related volatility and broader macroeconomic and geopolitical uncertainty.Considering these unsettled conditions,the M&A market performed well in aggregate value terms,with H1s EUR 465bn up 3.6%year-on-year.The UK&Ireland remained Europes busiest market,generating 1,992 deals in H1,followed by the Nordic nations with 1,630 announcements.However,the former saw a major downshift in deal value,with its EUR 111.4bn total representing a 25%year-on-year drop.The Nordics,meanwhile,saw aggregate deal value rise by a massive 87%over the same period,to EUR 69bn.Other markets also enjoyed significant jumps in deal value.Hot on the Nordics heels,Southeast Europes M&A markets logged a 63%year-on-year increase,to EUR 13.1bn.Larger deal markets in Western Europe,including Benelux(up 49%)and France(27%)also recorded rising deal values,helping to offset the broad decline in M&A volume.Regional round-upSEEVolume%Value EUR bn413.1-8cEVolume%Value EUR bnF519.1-24%7%Austria&SwitzerlandVolume%Value EUR bn&123.2-16A%GermanyVolume%Value EUR bn446.2-14%-15%NordicsVolume%Value EUR bn%1,63069.0-3%This infographic compares H1 2024 with H1 2025 39Market research40|European M&A Outlook 2026Market researchEuropes banks are,by and large,in good health,with results in Q1 2025 exceeding expectations,according to an EY report.Despite heightened economic uncertainty in the period,lenders did not see deteriorating asset quality.However,as the European Central Bank noted in its May 2025 Financial Stability Review,global trade policy shifts could increase credit risk for banks and non-bank lenders.Our respondents appear to be leaning more towards the risks ahead than positive news about bank and loan portfolio resilience.They may also be taking into account the new Basel IV framework,which came into effect at the start of 2025.This will require European banks in particular to find additional Tier 1 capital,which will affect their cost of capital.Indeed,more than three-quarters of respondents(76%)believe the cost of capital for Europes major banks will increase over the next 12 months,including 29%who foresee significant increases.This is up markedly from last year when just over half(56%)anticipated a rising cost of capital for banks.As a result,it is unsurprising that 78%of respondents expect financing conditions to become more challenging in the year to come,including 29%anticipating them to be much more difficult.This is up from the 60%logged in last years survey,when just 13lieved conditions would worsen significantly.With expectations of worsening financing conditions,Europes dealmakers will turn to cash reserves and alternative deal structures to get transactions across the lineFinancing conditionsTop findings78%of respondents expect financing conditions to worsen over the coming year,up from 60%in our previous study51lieve that cash reserves will be the most available source of finance in the next 12 months,followed by debt capital markets(38%)67%of respondents will consider using alternative deal structures as part of their M&A financing strategy in the year to comeTo what extent do you expect the cost of capital for Europes major banks to change over the next 12 months?(Select one)47%Increasesomewhat1creasesignificantlyIncreasesignificantly29%4creasesomewhatNochange19AMarket researchCash set to dominateThis sentiment shows through clearly when respondents rank the sources of finance that will be most available in the next 12 months.Bank lending comes in fifth(just 22%of top-two votes),while cash reserves take the top spot by a considerable margin(51%,including 28%who rank it in first place.)Corporates holding large amounts of cash is nothing new,but the uncertainty of recent times has made many cautious of investing.With many planning transformational acquisitions in the coming year,it looks as though some of these reserves will go towards deal financing.“A bulk of financing will come from cash reserves,”says a China-based vice president of business development.“Companies are starting to create more substantial reserves,especially as a measure to protect against financial crisis situations.”In fact,some believe that rising cash piles could bolster dealmaking activity.“Cash reserves will be one of the drivers of M&A deals in the corporate world,”says a business development director at a Swedish business.“It is a definite advantage and puts corporates in a good position to continue with their M&A deals.”Many respondents comment that cash reserves will help corporates in potentially competitive situations,with certainty of deal completion a big factor for vendors today.“Sellers should be willing to negotiate good valuations because cash reserves provide better certainty that the deal will be completed as promised,”says the managing director of a Poland-based private equity firm.“Buyers will also initiate deals more confidently.”These responses perhaps explain why private equity,which ranked first last year,has slipped to third place,with 35%of top-two votes.Despite the ageing USD 1.2tn of uninvested capital on which global buyout firms are sitting,private equity remains circumspect about making new investments in volatile times.The value of new European private equity deals fell by 10%in Q2 2025 on the previous quarter,although it was up 3.1%by volume,according to PitchBook figures.Even so,some respondents were more positive about private equity as a funding source.An M&A director at an Italian corporate says:“When we see the recent growth in private equity,it is safe to assume that these firms will be good financing sources and will improve funding for various business activities.”How do you expect financing market conditions to be over the next 12 months compared to the preceding 12 months?(Select one)4%Slightlyeasier29%MuchharderMucheasier1I%SlightlyharderNochange17B|European M&A Outlook 2026Market researchDebt capital markets come in second overall,garnering 38%of top-two votes.Europes broadly syndicated loan market reached record levels in 2024,with institutional loan issuance totalling EUR 207bn,a big jump on the previous high of EUR 158bn in 2017,according to DC Advisory figures.This year also started strongly,with EUR 99.8bn of issuance in Q1 2025(versus EUR 53.4bn in Q1 2024),although M&A loan issuance fell to EUR 9.4bn from EUR 12.2bn in the previous quarter as tariff uncertainty delayed sale processes.Many respondents feel confident that debt capital markets are a strong option in todays environment,with comments that again reflect our earlier finding that large,transformational deals will play a considerable part in shaping M&A strategies over the coming year.“In the next 12 months,debt capital markets will be the main source of funding for M&A deals,”says the managing partner of a France-based private equity firm.“Debt capital markets will be particularly important for deals where a large amount of financing is needed.”The CFO of a Germany-based corporate echoes this sentiment:“For larger loan requirements,debt capital markets can provide the right amount of capital.”Just over a third of respondents(34%)believe non-bank lenders and credit funds will provide a high level of funding over the next 12 months.Private debt funds have raised significant amounts of capital in recent years,with direct lending leading the pack.Direct lending funds globally raised nearly USD 120bn in 2024,up 41%from the previous year,according to PitchBook.With direct lenders typically working alongside private equity firms to finance transactions,it is unsurprising that some respondents comment that both forms of financing will be readily available in the year to come.“Over the next 12 months,the macro conditions will remain uncertain,”says a US-based corporate finance director.“Financing from banks will slow down further,and this is where private equity and non-bank lenders will be more active.”Alternative deal structures on the riseUncertain environments call for cautious or value-protective mechanisms as a means of getting deals across the line.This is perhaps why 67%of respondents say they are likely to use alternative deal structures such as convertible instruments,joint ventures,earn-outs,club deals and minority investments as part of their M&A strategy over the next 12 months.A director of finance in a Poland-based corporate,for example,says:“Non-traditional deal structures are effective and support our dealmaking intentions when conditions are uncertain.”What sources of financing do you think will be most available over the next 12 months?(Rank the top two,1=most available,2=second most available)0%5 %0%Equity capitalmarketsFamily officesDebt capitalmarketsBank lendingNon-bank lenders/credit fundsPrivate equityCash reservesRank 2Rank 19%9&(#%7%0%2CMarket research“Convertible instruments are important for additional flexibility,”adds a Sweden-based corporate CEO.“The same goes for earn-outs.When we are unprepared as acquirers to pay the full amount upfront,we can split it and set performance milestones that work for all parties.”Inflationary pressures,underlying economic weakness and company performance are the three biggest challenges to arranging acquisition finance,according to our respondents.Nearly two-fifths(38%)say inflation will be a barrier,35%say that the poor macroeconomic picture presents challenges,while 34lieve individual company issues will hamper financing efforts.Unlike last year,when 29%cited the cost and availability of leverage,this now seems less of an issue it ranks in last place with 19%of responses.What do you view as the greatest challenge to financing acquisitions over the next 12 months?(Rank the top two,1=greatest challenge,2=second greatest challenge)Likely41%Neutral29%Unlikely4%Very likely26%How likely is your organisation to consider using alternative/non-traditional deal structures over the next 12 months?0%5 %0%Availability/costof leverageUnderlyingeconomic weaknessContinuously highlevel of interest ratesGeopolitical conflictsAttitudes of lendersCompanyperformanceInflationary pressuresRank 2Rank 18 %8#%8%5D|European M&A Outlook 2026Market researchMarket researchEnvironmental,social&governance(ESG)considerations have long been part of the M&A process,particularly when they have involved European targets or buyers.Part of this is the result of a rising tide of regulatory requirements in Europe,as well as investors own environmental,climate and social commitments.So,even as the EU embarks on a simplification of its ESG-related rules,more than three-quarters of respondents(79%)believe these considerations are important to their M&A strategy and their investment process,including 32%who say they are very important.The remainder say they are neutral on these considerations,leaving no respondents saying they are unimportant.For many,identifying and managing ESG factors forms part of their long-term value protection and creation plans for the businesses they are acquiring.As a Hungary-based corporate CFO puts it:“ESG is an essential part of the long-term growth and development strategy.”Despite vocal anti-ESG sentiment in some market segments,consideration of these factors is now firmly entrenched in European M&A processesESG factors in European M&ATop findings79%of respondents say ESG considerations are important to their M&A strategy and investment decision-making process,including 32%who say they are very important63%expect more ESG-related scrutiny in deals over the next three years99%of respondents carry out specific ESG due diligence reviews and reports on at least some of the opportunities they pursue,including 61%who do this on every potential dealIrrespective of potential anti-ESG sentiments or initiatives to recalibrate perceived overregulation,ESG considerations continue to be an important lever for dealmakers when assessing targets growth potential and long-term prospects.While complying with the relevant mandatory standards is of course a must,being ahead of the curve could be a way of unlocking further economic upside.Alexander Rakosi,Partner,CMS Austria45Market researchView from across the pondInterestingly,the results for US-based respondents to our survey follow a similar pattern to the overall proportions,with 84%ranking ESG factors as important,including 30%who say they are very important.This is set against the backdrop of considerable anti-ESG sentiment in some US circles.The Trump administration has rolled back a swathe of environmental protections and outlawed some diversity,equity&inclusion programmes,while the Securities and Exchange Commission recently dropped a set of climate disclosure rules.This result may reflect the need to comply with Europes more stringent regulations,as one US-based private equity managing director comments:“It is vital that target companies have a reasonable ESG roadmap.This ensures that they are moving in the right direction and not ignoring the complications related to ESG non-compliance.”Yet US respondents do also point to wider reasons for focusing on ESG,including shifting societal expectations.“Promoting sustainable practices is critical now,and we are also facing more pressure from customers to do so,”says an M&A vice-president at a US corporate.“This has also reduced the
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Igniting growthEvolving asset management regulation 2025 reportKPMG.Make the Difference.KPMG I global networkMember firm practices offer specialized services to a wide range of industry clients at local,national and global levels.KPMG professionals in Audit,Tax and Advisory are specialists in their fields and have deep experience in the issues and needs of investment management businesses.Regulatory Insight CentreKPMGs EMA Regulatory Insight Centre provides pragmatic and insightful intelligence on regulatory developments.It supports and enables clients to anticipate and manage the impact of regulatory change across the UK and EU.Global perspectivesKPMGs new thought leadership publication explores the implications of regulation across the global landscape,looking at trends such as the potential for deglobalization and further regulatory divergence,highlighting key areas of regulatory focus and opportunity.KPMG Regulatory HorizonRegulatory Horizon is a foundation stone for this years edition of the Evolving Asset Management Regulation report.Powered by KPMG technology and specialists,Regulatory Horizon covers a live feed of more than 170 sources across 70 broad themes and specific regulations to help clients shape their regulatory change management processes.A wide variety of acronyms are used in this report.For definitions,please refer to EAMR abbreviations at the end of the report.2|Evolving asset management regulation 2025 report 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.ContentsForeword 04About the authors 05Executive summary 06Key regulatory milestones around the world 0801.Delivering growth and competitiveness1002.Public and private markets2103.Digital innovation and artificial intelligence3304.Protecting investors4305.Firm and system resilience5306.ESG and sustainable finance60How KPMG can help 69Report scope and methodology 70Acknowledgements 71EAMR abbreviations 73Contact us 743|Evolving asset management regulation 2025 report 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.ForewordWelcome to the 15th edition of KPMGs annual flagship Evolving asset management regulation report,bringing you analysis of more than 200 regulatory developments from nearly 30 jurisdictions and global regulatory standard setters.Jim Suglia Global Head of Asset Management KPMG International Amid a challenging geopolitical environment,sluggish economic growth and industry demands for simplification,there is a new focus in many jurisdictions on facilitating growth and risk-taking not just introducing ever-more requirements.In practice,this means greater regulatory support for new and innovative products,better facilitation of technological developments in a regulated environment,reinvigorating public markets and delivering simplified,more targeted policymaking alongside more proportionate supervision.Despite this new dynamic,staying on top of the evolving asset management regulatory environment remains critical to maintaining clients trust and meeting regulators expectations.So once more,we have gathered specialists from KPMG firms around the world to identify some of the most impactful themes and developments that should serve as inputs into your strategic thinking while influencing your regulatory agendas and change programs.This report is intended to help asset management C-suite executives and first-line-of-defense staff to understand the regulatory direction of travel and associated risks and opportunities.For regulatory change teams as well as compliance,risk and internal audit staff it should serve as a useful cross-check of incoming initiatives to inform implementation and monitoring activities by providing a broader,global perspective on key developments.Compared with last years report,we have observed a dramatic shift in many regulators priorities.If I were to use one word to describe the implications,it would be“opportunity”.Asset managers should be prepared to make the most of it while it lasts.That said,regulators remain mindful of maintaining sufficient focus on their core objectives,particularly the protection of retail investors,and the orderly and clean functioning of markets.The latter has manifested itself,in particular,with increased scrutiny on the growing private assets industry.You can read more on these topics throughout this years report.Or contact your local KPMG member firm to talk about your organizations regulatory position.Executive summary01.Delivering growth and competitiveness02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors4|Evolving asset management regulation 2025 reportForeword 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.About the authorsJim is the Global Sector Head of Asset Management and also serves as the Leader of the Alternative Investments practice in the US.He joined the US firm in 2000 and became a partner in 2004.Throughout this time,Jim has held various leadership positions in the asset management practice,including serving as the Global Advisory industry leader and the US National Sector Leader.Prior to joining KPMG,Jim held the position of CFO at a boutique private credit firm.Throughout his career,Jim has proactively guided clients through complex risk management and regulatory matters,business combinations,and transformation initiatives.As a trusted advisor to management and boards,Jim has established strong relationships through collaboration and transparent communication.With over 35 years of industry experience Jim leverages his knowledge to collaboratively manage cross-functional teams that deliver business results and meet client needs.As the Leader of the Alternative Investments practice in the US,Jim works closely with functional industry leaders to develop and execute national growth strategies that are adaptable and actionable at the local level.David scans the horizon and analyzes incoming regulatory developments that could impact on the asset management sector.He also works on a variety of advisory projects where he helps asset managers implement regulations and improve their practices to meet regulators expectations.Since 2022,David has led the development of KPMG Internationals annual Evolving Asset Management Regulation report,leveraging KPMGs global network,research and tools to provide clients with deep insights into the changing regulatory landscape facing asset managers around the world.Prior to joining KPMG in the UK,David worked in asset management supervision at the UK Financial Conduct Authority.During that time,he was also seconded to the Bank of England.Jim Suglia Global Head Asset Management KPMG InternationalDavid Collington Asset Management Lead EMA Regulatory Insight Centre Senior Manager,KPMG in the UKPlease refer to the Acknowledgments section for details of the many KPMG teams and professionals that have contributed to this years report.Executive summary01.Delivering growth and competitiveness02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can help5|Evolving asset management regulation 2025 reportForewordAbout the authors 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Executive summaryAmid a challenging geopolitical environment,sluggish economic growth and industry demands for simplification,this years edition of KPMGs Evolving asset management regulation report explores a renewed focus on facilitating growth.Significant opportunities should be created through greater regulatory support for new and innovative products,better facilitation of technological developments in a regulated environment,reinvigorated public markets and more simplified,targeted policymaking.Yet the focus on investor protection and the orderly function of markets remains strong.Based on our analysis of more than 200 recent and upcoming regulatory developments from nearly 30 jurisdictions and global regulatory standard setters,here are six key areas where asset management executives and firms should be focusing on.With growth and competitiveness rocketing up the regulatory agenda,many jurisdictions are now seeking to better support asset managers and bolster private investment.Requirements are being streamlined and new opportunities to boost retail investment are being considered.And many asset managers are revisiting their offerings with the aim of ensuring they are keeping pace with changing client demand.The growth of private markets has propelled them up the supervisory agenda with several authorities now working on new rules and guidance to increase transparency,improve conduct and better manage loan-originating products.At the same time,some regulators and firms are considering how to best provide retail investors with exposure to private assets for the first time.Digital innovation and artificial intelligence are also a priority with authorities seeking to find the right balance between managing risk and encouraging innovation.Regulatory approaches to tokenization are being refined and the regulation of digital assets is evolving rapidly.Perhaps not surprisingly,regulators continue to sharpen their focus on investor protection with new conduct frameworks alongside updated accountability-related requirements and disclosure rules.While some regulators are exploring changes to how customers may receive advice,protecting vulnerable customers remains a key priority.Against a backdrop of unprecedented financial and geopolitical uncertainty,firm and system resilience has remained at the top of the regulatory agenda.And while prudential frameworks remained largely stable,several new operational resilience requirements have been introduced while others have been embedded.Meanwhile,the focus on ESG and sustainable finance is shifting.Few new frameworks or regulations have been introduced recently.Much of the action here has been around clarifying regulatory expectations on fund names,and preparations for new economy-wide corporate reporting requirements.01.Delivering growth and competitiveness02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors6|Evolving asset management regulation 2025 reportForewordExecutive summary 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Delivering growth and competitiveness Review your product suite and explore new international market access possibilities.Protecting investors Use new conduct frameworks to encourage a positive shift in culture and to re-evaluate whether current products and services continue to meet customer needs.Digital innovation and artificial intelligence Continue to develop compliant AI use cases and work with pilot regimes to explore the benefits of AI,tokenization and digital assets.ESG and sustainable finance Capitalize on efforts to simplify disclosure requirements and assess newly available data points to better inform investment decision-making.Public and private markets Check core competencies around valuation and ensure that conflicts of interest frameworks align with regulators expectations.Look for opportunities to offer retail investors private asset exposure within robust governance arrangements.Firm and system resilience Look at operational resilience as a source of competitive advantage and focus on moving it out of project implementation and embedding it across the first line of defense.Key takeawaysKey takeaways for asset management executives01.Delivering growth and competitiveness02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors7|Evolving asset management regulation 2025 reportForewordExecutive summary 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Key regulatory milestones around the world JanuaryCanada:Effective date of the CSAs final total cost reporting rulesJanuaryUK and Switzerland:Berne Financial Services Agreement on mutual recognition takes effectMarchIreland:Revised Consumer Protection Code compliance deadlineTBCUK:FCA consultation on reforming the UK AIFMD regimeTBDSwitzerlands Federal Act on the Transparency of Legal Entities expectedTBCIOSCO:Consultation on valuation principlesTBCLuxembourg:Updates to CSSF Circulars 11/512 and 18/698OctoberUS:Revised Form PF compliance deadlineOctoberDecemberEU:SFDR review to be carried outDecemberUK:Final rules to be published on revised retail disclosuresJulyFSB:Final report on vulnerabilities associated with leverageJulyAustralia:APRAs new prudential standard on operational risk and service disruption took effectAugustEU:AI Act rules on General Purpose AI models and governance appliedAprilEU:AIFMD II package takes effectJuneUS:SEC Names Rule compliance deadline for larger fund groupsTBCEU:Retail Investment Strategy to be finalizedAprilEU:AIFMD II reporting requirements take effectAugustEU:AI Act requirements for high-risk systemsOctoberEU,Switzerland and the UK:T 1 transition deadlineNovemberUS:N-PORT:Compliance deadline for larger fund groupsTBCSwitzerland:Latest decision point on whether mandatory state-level ESG disclosure requirements for asset managers will be implementedMayEU:ESMAs ESG fund name guidelines took effectMayJapan:AI act adoptedQ2Q3Q4202520262027Q2Q101.Delivering growth and competitiveness02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors8|Evolving asset management regulation 2025 reportForewordExecutive summary 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Chapters at a glance01Delivering growth and competitiveness Fostering a competitiveenvironment Updating assetmanagement regulatoryframeworks Boosting retailinvestment Encouraging productinnovation Enhancing cross-borderaccess02Public and private markets Revising regulations forprivate markets Updated private marketssupervisory priorities The retailization of privateassets Focusing on fund riskmanagement Transitioning to T 1settlement03Digital innovation and artificial intelligence Diverging approaches toAI regulation Facilitating fundtokenization Regulating digital assets04Protecting investors Expanding conductframeworks Clarifying accountability Strengtheninggovernance,culture andcontrols Modernizing disclosures Making advice accessible Supporting vulnerablecustomers Promoting financialliteracy05Firm and system resilience Maintaining financialresilience Strengthening operationalresilience Combatting financialcrime06ESG and sustainable finance Rethinking strategicsustainability frameworks Improving disclosureregimes Tightening fund namingrequirements Defining defense-relatedinvestments Evolving corporatereporting requirements Sustainability in thecapital markets01.Delivering growth and competitiveness02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors9|Evolving asset management regulation 2025 reportForewordExecutive summary 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.01Delivering growth and competitivenessSummaryIn the face of sluggish economic activity,fiscal constraints and industry demands for greater competitiveness,growth has rocketed up the regulatory agenda.Many policymakers around the world have shifted their stance to better support asset managers and refocus their activities on the growth agenda.This includes a range of initiatives attempting to revitalize public markets,attract overseas managers,and bolster private investment.With the overall regulatory framework for asset managers again under review in some jurisdictions,we expect to see an increased focus on streamlining requirements.However,in other cases,this reassessment may lead to existing frameworks being expanded.Either way,asset managers face the challenge of taking advantage of the overall deregulatory shift without creating undue risk.One theme many regulators and asset managers can agree on is the need to boost retail investment.We are seeing several authorities seriously considering the role that tax incentives can play in the development of product wrappers and the digitalization of retail-facing interfaces(including those related to pensions).At the same time,many asset management firms are revisiting their product ranges with the aim of ensuring that they keep pace with their clients changing demands and needs facilitated by technology wherever possible.Other activities aimed at driving growth,such as potential adjustments to cross-border access arrangements for products and services,are also being explored.Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authorsForeword10|Evolving asset management regulation 2025 report01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Fostering a competitive environmentAs policymakers and regulators refocus their agenda towards driving growth,we are seeing many jurisdictions move to scrap proposed new rules,simplify existing requirements and adopt a more proportionate approach to supervision.In other cases,new requirements continue to be introduced.However,firms want regulatory predictability,not just for portfolio managers reacting to fast-moving external events,but also for regulatory change teams as they strive to keep pace with authorities and regulators shifting agendas.Perhaps the biggest shift in this regard has been in US trade policy and financial services regulation,which has had a ripple effect on other policymakers agendas and approaches around the world.Having dropped proposals for several rules that had been put forward under the previous administration,the Securities and Exchange Commission(SEC)is expected to reprioritize its agenda to reflect the reality of tighter budget constraints.This pivot is expected to result in the reallocation of the SECs resources to focus more on protecting retail investors and the security and resilience of US capital markets.We also anticipate any residual efforts applied to ESG to be towards preventing greenwashing.There is also likely to be a notable new emphasis on promoting innovation and meeting investors demands for new products(such as crypto-related products and exposure to private assets).1 Yet,despite the drive for efficiency and reduced headcount,all signs suggest that the SEC does not plan to scale back its enforcement program.In the EU,the European Commission published a competitiveness compass2 that aims to boost economic growth,followed by a consultation on breaking down barriers in the single market,including those impacting asset managers.3 One of the more controversial proposals in the package was a call for more centralized EU-level supervision of asset managers,which received a mixed reception from the industry.This year has also continued the overall trend of member states moving away from gold-plating initiatives to instead focus on implementing EU-level directives and regulations,which continue to be rolled out at pace(in the short-term at least).The volume of work for the European Securities and Markets Authority(ESMA)was one factor that led to the reprioritization of its deliverables.4Meanwhile in the UK,there is significant pressure on the Financial Conduct Authority(FCA)to continue to operationalize its secondary growth and competitiveness objective that was assigned by the government in 2023.5 The government published a policy paper with actions it will take to ensure that UK regulators and regulation support growth.6 And it launched a growth and competitiveness strategy for financial services,which included asset management as a priority focus area.7 A drive to streamline requirements is also underway,for example across retail conduct rules8 as well as stewardship disclosures,which were revised to reduce unnecessary reporting and increase engagement.9Asset managers face the challenge of taking advantage of the overall deregulatory shift without creating undue risk.1 Prepared Remarks Before SEC Speaks,SEC,19 May 20252 Competitiveness compass,European Commission,29 January 20253 Targeted consultation on integration of EU capital markets,European Commission,15 April 20254 Prioritisation of 2025 ESMA deliverables,ESMA,3 March 20255 Our secondary objective,FCA,25 March 20256 Radical action plan to cut red tape and kickstart growth,HMT,17 March 20257 Financial services growth and competitiveness strategy,UK government,15 July 20258 Feedback Statement FS 25/2,FCA,25 March 20259 FRC overhauls the Investor Stewardship Code to focus on value creation,reducing burdens and enhanced engagement between market participants,Financial Reporting Council,3 June 2025Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors11|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.In Europe,there have also been efforts to bolster investment research.Both the EU10 and the UK11 have repealed previous rules under the Markets in Financial Instruments Directive(MiFID II)that required research and execution payments to be unbundled,bringing them into line with other jurisdictions around the world.Also in Switzerland,the Bankers Association is currently revising its directives on the independence of financial research.Indeed,we are seeing many jurisdictions progress similar efforts to facilitate growth.For example:The Australian Securities and InvestmentsCommission(ASIC)released a discussion paper toexplore the dynamics between public and privatemarkets and potential adjustments that could increasethe attractiveness of public markets.12 Canadas Securities Administrators(CSA)announcedplans to support the competitiveness of Canadianmarkets,focusing on listed companies.13Japan continues to make progress with its plan toreform the asset management sector.14 As ofMay 2025,certain restrictions for asset managerson outsourcing middle-and back-office operationshave been relaxed.15 And recommendations havebeen published to encourage the development ofthe venture capital sector,which managers areexpected to use in their fundraising andmanagement practices.16Jersey launched a new financial servicescompetitiveness program that aims to strengthen itsposition as a leading international financial center.17Guernsey updated its rules on prospectuses withcertain exemptions to make it easier to raise capital inthe Bailiwick.18The Malta Financial Services Authority(MFSA)finalizedtwo new non-retail fund vehicles to foster innovation andsupport the needs of the local industry.19Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authorsForeword01.Delivering growth and competitiveness10 Technical Advice to the European Commission on the amendments to the research provisions in the MiFID II Delegated Directive in the context of the Listing Act,ESMA,8 April 2025 11 Investment research payment optionality for fund managers,FCA,9 May 202512 Australias evolving capital markets:A discussion paper on the dynamics between public and private markets,ASIC,26 February 202513 Canadian securities regulators announce actions to support competitiveness of Canadian markets,CSA,17 April 2025,Reproduced with the permission of Autorits canadiennes en valeurs mobilires/Canadian Securities Administrators,202514 Policy Plan for Promoting Japan as a Leading Asset Management Center,8 November 202415 Promoting Japan as a Leading Asset Management Center,JFSA,3 March 202516 Publication of the finalized“Venture Capitals:Recommendations and Hopes”(VCRHs),JFSA,8 November 202417 Financial services competitiveness programme,States of Jersey,22 April 202518 The Commission announces updated Prospectus Rules,GFSC,10 June 202519 MFSA Launches New Regulatory Initiatives in the Area of Asset Management,MFSA,13 February 202512|Evolving asset management regulation 2025 report 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Goals for financial services policymakers in SaudiArabia include increasing inbound capital flows,butsupervisors are alert to potential risks for examplerelating to AML,client money,and data protection.In anoteworthy development,the Capital MarketsAuthority(CMA)approved the largest set of regulatoryenhancements ever made in the Sukuk and debtinstruments market since its launch.20 These changesallow the Kingdoms development funds,developmentbanks,and sovereign funds to issue debt instrumentsunder an exempt offering,reducing the contents of theprospectus for public offering by half,and also makeprivate offerings more efficient.Singapore is hoping to strengthen its equities market.One particularly interesting initiative is the launch of anew Equity Market Development Program,wherebythe Monetary Authority of Singapore(MAS)will investwith those fund managers that have the capability toimplement investment mandates with a strong focuson Singapore stocks,alongside initiatives to make localIPOs more attractive.21 MAS is also aiming toencourage private equity managers to promoteSingapore as a springboard into the region for their portfolio companies.22Spains Comisin Nacional del Mercado de Valores(CNMV)has published a six-year roadmap withnine strategic priorities,which include improvingcompetitiveness with supply-and demand-relatedmeasures.One of the specific actions will establish aworking group to follow up on the OECDsrecommendations for revitalizing the Spanishsecurities market.23 These developments sit in thecontext of wider discussions on simplifying andstreamlining the Spanish regulatory and supervisoryframework.In Switzerland,the revision of the Financial MarketSupervision Act(FINMASA)seeks to align the Swisslegal framework with international standards forcooperation in the financial market sector,with thegoal of reinforcing the global integration of the Swissfinancial system and enhancing market integrity,transparency,and stability.24Firms want regulatory predictability,not just for portfolio managers reacting to fast-moving external events,but also for regulatory change teams as they strive to keep pace with authorities and regulators shifting agendas.20 The Capital Market Authority Approves the Largest Set of Regulatory Enhancements Since the Launch of the Sukuk and Debt Instruments Market in Saudi Arabia,CMA,13 November 202421 A comprehensive set of measures to strengthen Singapores equities market,MAS,21 February 2025,Reproduced with the permission of the Monetary Authority of Singapore 2025 The Monetary Authority of Singapore.22“How Private Markets Can Underwrite Asias Growth Story”Keynote Speech,MAS,25 September 202423 2030 A supervisor for a new era,CNMV,11 June 202524 Federal Council initiates consultation on amending Financial Market Supervision Act and other legislation concerning international cooperation,Federal Council of Switzerland,20 September 2024 With listings on public markets declining and private asset allocations booming,we are seeing many markets move to revitalize their public markets which,in turn,is driving new policy and supervisory initiatives for the sector(read more in chapter 2).Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors13|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.-2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,0002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Dry powderUnrealized valueSource:Preqin,a part of BlackRock Global private asset AUM(US$bn)Updating asset management regulatory frameworksIn addition to the specific developments discussed throughout this report,regulators in some jurisdictions are revisiting the overall framework that applies to asset managers and related firms and their funds.For example,the Singapore MAS provided an update on its proposals to harmonize the regulatory criteria and streamline the regulatory regime for certain family offices,making it simpler and faster to do business and to focus only on key risks,such as money laundering.25 Similarly,the UK authorities consulted on streamlining regulatory requirements for alternative managers to reduce regulatory burdens while maintaining core protections for consumers and markets.26However,in some cases,jurisdictions are introducing new or additional requirements.The EU,for example,will introduce broad-ranging new requirements for mainstream and alternative managers from April 2026,covering areas such as loan-origination funds and fund liquidity management27(see chapter 2).25 Consultation Paper on Proposed Framework for Single Family Offices,MAS,6 November 2024,Reproduced with the permission of the Monetary Authority of Singapore 2025 The Monetary Authority of Singapore.26 Rules for investment managers to be reformed to support growth,FCA,7 April 202527 Directive(EU)2024/927 of the European Parliament and of the Council,EUR-Lex,26 March 2024Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors14|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Loan-originating AIFsRequirements for newly defined“loan-originating AIFs”as well as AIFs that originate loans but do not fall into that definition.Liquidity management toolsStandardizing the definition of LMTs and introducing new obligations that will formalize some practice already prevalent in the industry.Regulatory reportingExpanded scope of reporting requirements for regulations and new information to be provided on delegation arrangements.DisclosuresAdditional information to be provided on costs,liquidity management tools and loan-origination activities.Wider changesSuch as new requirements for host fund managers,adjustments to the rules for depositaries,and an expansion of services that can be provided by fund managers.Delegation of AIFM functionsSmall changes,including extending the scope of delegation conditions to also cover top-up services.Overview of the EU AIFMD II packageAmendments will be made to the EUs UCITS and AIFMD frameworks from 16 April 2026,with some changes phased in thereafter.Client feedback suggests that the most challenging updates to implement relate to the new regime for loan-origination funds,and liquidity management tools.Other countries continue to modernize and tighten up the regulatory framework for investment funds.Chinas Securities Regulatory Commission(CSRC)has introduced an action plan for the promotion of high-quality public funds.28 And,according to a recent report by the Financial Stability Board(FSB),Brazil has also made significant progress,with the Comisso de Valores Mobilirios(CVM)having now addressed many of the recommendations made by the FSB in 2017.Saudi Arabia continues to push ahead with its ambition to strengthen its asset management sector,growing from five licensed managers in 2019 to 36 in 2024,including overseas managers.29 Most recently,the CMA approved regulatory enhancements for investment funds in the Kingdom to increase competitiveness,enhance transparency and provide greater protection for investors.30 Specific examples of changes include permitting electronic money institutions to distribute fund units,expanded investment opportunities for REITs,and enhanced disclosures regarding the credit profile of funds debt holdings.28 关于印发 推动公募基金高质量发展行动方案 的通知,CSRC,7 May 2025 29 Vision 2030,2024 annual report,Kingdom of Saudi Arabia,25 April 202530 The Capital Market Authority Approves a Set of Regulatory Enhancements for Investment Funds in the Kingdom,CMA,9 July 2025Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors15|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Boosting retail investmentAnother way regulators are hoping to use the financial system to drive economic growth is by encouraging their citizens to shift excess cash savings to investments in funds and securities,in part through better access to investments and advice.While potentially improving outcomes for individuals(see chapter 4),there is also a clear benefit for authorities who are keen to revitalize flagging public markets(see above)and bolster funding for defense initiatives(see chapter 6).Its fair to say that jurisdictions around the world are at different stages of this journey.While retail investment is common in the US,and the value of superannuation schemes in Australia have reached AUD 3.9 trillion,31 others are racing to catch up.The most notable example of this is the EUs proposed Savings and Investments Union(SIU)which aims to improve the way savings are channeled to productive investments through the EU financial system.32 Specific follow-up consultations in the EU have focused on breaking down barriers within the single market(see above)and developing a blueprint for savings and investment accounts with potentially simplified tax procedures alongside tax incentives.33 The Commission is seeking to learn lessons from popular initiatives at the member state level,such as Swedens tax wrapper,the Investeringssparkonto.While an EU-wide solution is being developed,some member states have proposed their own solutions,including the Finance Europe label that aims to promote retail investment in the EU economy.34EU supervisors also have their own plans;for example,in Spain one of the CNMVs new strategic priorities is to develop measures that promote retail investors participation in securities markets by shifting their perception of risk and promoting a culture of risk awareness.35 It also plans to encourage firms to explore digital solutions that can improve the investor experience.36Indeed,several jurisdictions are revisiting the overall investor experience.The new digitalized Mandatory Provident Fund(MPF)platform in Hong Kong(SAR),China for example,aims to make it easier for pension investors to manage their plans and investments in one place.37 Even with Australias successful superannuation system,there is a drive for continued improvement on the retirement phase,with funds being required to define their retirement income strategies.That has led to increased focus on retirement products and services and notably a members customer journey through the varying retirement phases.3831 Australian superannuation industry insights and analysis 2025,KPMG Australia,20 May 202532 Commission unveils savings and investments union strategy to enhance financial opportunities for EU citizens and businesses,European Commission,19 March 202533 Call for evidence:Recommendation on Savings and Investment accounts,European Commission,10 June 202534 Speech by Commissioner Albuquerque at the launch event of the European Long-Term Savings Label,European Commission,5 June 2025 35 2030 A supervisor for a new era,CNMV,11 June 202536 2025 Activity Plan,CNMV,26 February 202537 About eMPF,EMPF,202538 APRA Deputy Chair Margaret Cole Remarks to the Conexus Retirement Conference,13 August 2025Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors16|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.KPMG client storyInsights on delivering growthHow can governments better support growth in the sector?KPMG in the UK recently worked with two trade bodies UK Finance and PIMFA to publish a joint report that explored how the UK government can further enable the wealth management and private banking sector to support national growth and drive better financial outcomes for consumers.Based on discussions with CEOs and senior leaders,the key themes centered around:Policy and regulatory environmentTaxation and incentivizationBusiness and client outcomesFinancial literacyPublished ahead of the UK Governments growth and competitiveness strategy for financial services,the report played a role in driving debate across the industry.Encouraging product innovationAcross the globe,firms are revisiting their entire fund and product offering with the aim of ensuring that it remains relevant and valuable to investors and distributors.Consider,for example,the increasing popularity of active ETFs in the EU and the US,demand for Real Estate Investment Trusts(REITs)in Saudi Arabia,the growth of robo-advice platforms in Canada,and the roll out of model portfolio solutions in the UK.At the same time,regulatory developments have created new opportunities for firms and product managers around the world.Some examples include:Efforts to facilitate the democratization of privateassets and allow retail customers exposure for thefirst time(see chapter 2).Facilitation of new technology-enabled approachesvia regulatory sandboxes and the introduction ofnew policy frameworks and guidance for theregulation of digital assets and fund tokenization(see chapter 3).Introducing new forms of regulated advice to reach awider audience in the UK(see chapter 4).Permitting the introduction of semi-transparent ETFsin Luxembourg39 and Ireland.40Switzerland introduced the Swiss Limited QualifiedInvestor Fund(L-QIF)in March 2024.Since theintroduction,more than 20 L-QIFs have been launched.Their investment strategies range from private marketsand real estate to niche equity sectors.41Clarifying the status of defense investments in thecontext of ESG,potentially facilitating the launch ofnew products(see chapter 6).While the trend towards product innovation is commercially attractive for firms,it will likely keep compliance teams busy as product and strategy teams seek to make the most of new opportunities.The need to continuously protect investors will be front of mind especially as new conduct and governance frameworks are introduced(see chapter 4).39 Update of the CSSF FAQ concerning the Luxembourg Law of 17 December 2010 to provide clarifications regarding portfolio transparency for actively managed ETFs,CSSF,19 December 202440 UCITS Questions and Answers 42nd Edition,Central Bank of Ireland,17 April 2025 41 Verzeichnis gemeldeter L-QIF,Federal Council of Switzerland,6 May 2025 Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors17|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.With regulatory positions rapidly shifting towards a growth agenda,the leading asset managers will be those poised to take advantage of new opportunities as they emerge.Indeed,I believe that regulatory agility,combined with a strategic review of products offered,will be key to attracting inflows,generating alpha and retaining clients in the future.”Jim SugliaGlobal Sector Head,Asset ManagementEnhancing cross-border accessAnother way that financial regulators can help contribute to the growth agenda is by allowing firms to sell their products and services on a cross-boundary basis.Some jurisdictions are making notable progress in this regard.Mainland China and Hong Kong(SAR),China have taken steps to enhance the existing Mutual Recognition of Funds(MRF)scheme,effective 1 January 2025.42 The new measures relax the sales limit imposed on Hong Kong funds being sold on the mainland and lessen Chinas overseas delegation restrictions,thereby providing new opportunities for international asset managers.In Europe,the UK and Switzerland are progressing full implementation of the Berne Financial Services Agreement,signed in 2023.43,44 Once relevant legislation is passed and guidance published,from January 2026,UK and Swiss firms will be able to provide cross-border investment services to high net worth(HNW)clients without needing to comply with the host states regulatory requirements.This will unlock significant new opportunities and markets for wealth managers and private banks in both countries.The FCA has invited Swiss firms to express their interest in providing cross-border services under the agreement.45 42 Mainland-Hong Kong Mutual Recognition of Funds enhancements to take effect on 1 January 2025,SFC,20 December 202443 The Berne Financial Services Agreement,UK government,21 December 2023 44 Federal Council adopts dispatch on agreement with the United Kingdom on mutual recognition in financial services,Federal Council of Switzerland,4 September 202445 FCA helps unlock market access for UK and Swiss firms,FCA,23 July 2025Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors18|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Opportunities for asset managersProduct and service review:Strategically review your firms product suite and risk appetite in the context of the growth and competitiveness agenda to check whether any growth opportunities are being ignored,or excessive costs incurred.Markets:Explore new international market access possibilities,with the potential to reach a wider target market or to rationalize operations in one or more jurisdictions.Efficiency:As regulation is simplified or made more proportionate,look for opportunities to devote more time and resources to product teams and the first line of defense.Risks for asset managersCapabilities:As new or innovative products and services are brought to market,ensure that the second and third lines of defense keep pace with the business.Competition:Monitor the entrance of peers and competitors and assess if they are better placed to take advantage of growth opportunities.Divergence:Prepare for increased regulatory divergence and fragmentation as the growth agenda creates differing regulatory stances across jurisdictions.Investors:Understand how regulatory and tax policymaking is influencing investor decisions,particularly within the high-net-worth end of the spectrum.Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors19|Evolving asset management regulation 2025 reportForeword01.Delivering growth and competitiveness 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Experts cornerDaniel Barry Partner KPMG in the UKVolker Kang Director KPMG in SwitzerlandUK and Swiss asset managers are fundamentally revisiting their product ranges in the context of efforts to boost growth.For firms,this includes assessing how they may be able to provide streamlined advice under the UKs new targeted support regime to reach a broader audience.Meanwhile,UK fund and wealth managers are considering whether and how it would be appropriate to provide retail investors with private asset exposure for the first time potentially via NURS or LTAF funds.In Switzerland,fund managers are particularly interested in launching L-QIF vehicles.In both countries,firms are preparing for the implementation of the Berne Financial Services Agreement,which will facilitate greater cross-border access between the UK and Switzerland for high-net-worth clients from January 2026.”Daniel and Volker were asked about how UK and Swiss asset managers are making the most of opportunities associated with the growth agenda.Marcus Threadgold Partner KPMG in the UAEThe Gulf Cooperation Council(GCC)region is experiencing remarkable growth in AUM with global asset managers identifying the region as a key growth territory.In the UAE,the international financial centers in Dubai(DIFC)and Abu Dhabi(ADGM)continue to attract leading asset managers and service providers drawn by large asset pools,ease of registration,an attractive tax regime with certain exemptions under the Qualifying Investment Fund(QIF)framework,and robust legal and regulatory frameworks.With a clear vision to lead in digital finance the UAE has refined its Virtual Asset Regulatory Framework to encourage participation in digital assets while ensuring investor protection.In the Kingdom of Saudi Arabia(KSA),the Financial Service Development Plan is drawing in global investment with 20 percent year-over-year-growth in AUM and broader investor participation.The development of a broader set of investable products,including ETFs and real estate assets,is supporting the development of KSA as a fund domicile.The region is also seeing strong demand for Islamic and ESG-related investments.”Marcus was asked to expand on how the UAE and Saudi Arabia are seeking to attract capital and asset managers to the region.Executive summary02.Public and private markets03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authorsForeword 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.20|Evolving asset management regulation 2025 report01.Delivering growth and competitiveness02Public andprivate marketsSummary As jurisdictions take action to boost growth and competitiveness,the growth of private assets has moved up the regulatory agenda.Around the world,we are seeing regulatory frameworks for private asset managers being enhanced with new rules and guidance to increase transparency,improve conduct and introduce standards for loan-originating products.Private markets also dominate supervisors latest priorities with a particular focus on valuation governance,identifying and mitigating conflicts of interest and producing accurate and complete client-facing disclosures.But there are opportunities too,if good consumer outcomes can be delivered.Several jurisdictions around the world are considering how retail investors can be provided with exposure to private assets for the first time,with a range of new vehicles now established or under consideration.At the same time,fund risk management continues to be a high priority for regulators,particularly in the context of liquidity risk management tools.Asset managers investing in public markets will also want to start preparing for the impending European transition to T 1 settlement,scheduled for 2027.Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors21|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.21|Evolving asset management regulation 2025 reportRevising regulations for private marketsAs investors shift greater allocations towards private market assets,policymakers continue to consider whether existing requirements and guidance remain appropriate for the growing and innovating industry.At the global level,IOSCO is concluding its review of its 2013 Principles for the Valuation of Collective Investment Schemes,which could result in updated guidance to promote more consistent valuation practices.46Individual jurisdictions are also refining their approach,in some cases resulting in the introduction of new rules:As part of the EUs AIFMD II package(see chapter 1),ESMA has consulted on detailed rules that would applyto loan origination funds that have been specificallydefined for the first time.47 The latest draft rules set outthe characteristics needed to permit loan-originatingfunds with open-ended structures.Private managerswill also be subject to enhanced reportingrequirements,expected to take effect in 2027.In China,regulators are revising the requirements forcustodians of private funds,including suggestionsfor strengthened compliance and risk controlcapabilities and requiring custodians to take measures to verify the information provided to them by fund managers.48 Separately,the National Financial Regulatory Administration(NFRA)revisited and tightened the rules that apply to Chinese banks that distribute private funds,with enhanced requirements applying from 1 October 2025.49In Singapore,the MAS updated its guidelines oninternal controls by adding an additional section onsecuritization.50 The new guidelines require financialinstitutions to have appropriate systems,policies andprocedures in place to address risks arising fromtheir involvement in securitizations and to conductnecessary due diligence when acting as an investorin a securitization.However,there are also examples of potentially increased flexibility around the regulation of private assets:The US SEC has twice delayed the introduction ofnew reporting requirements aimed at increasing thetransparency of private funds via amendments toForm PF.The delays reflect the associatedtechnology requirements,costs and time needed fortesting.The revised deadline is 1 October 2025.5146 2025 Work Program,IOSCO,12 March 202547 ESMA consults on open-ended loan originating alternative investment funds,ESMA,12 December 202448 证监会就 证券投资基金托管业务管理办法（修订草案征求意见稿）公开征求意见,Asset Management Association of China,3 April 202549 国家金融监督管理总局关于印发 商业银行代理销售业务管理办法 的通知,National Financial Regulatory Administration,21 March 202550 Internal controls guidelines,MAS,23 June 2025,Reproduced with the permission of the Monetary Authority of Singapore 2025 The Monetary Authority of Singapore.51 Further Extension of Form PF Amendments Compliance Date,SEC,11 June 202552 Release No.35561,SEC,29 April 202553 The Commission announces streamlined private fund regime,GFSC,19 May 2025At the global level,IOSCO is concluding its review of its 2013 Principles for the Valuation of Collective Investment Schemes,which could result in updated guidance to promote more consistent valuation practices.Separately,the SEC appears to be permitting more flexibility relating to the co-investing arrangements of US funds.An order granted in April 2025 allowed registered closed-end investment companies and business development companies to co-invest in portfolio companies with each other and with certain affiliated investment entities.52Guernsey streamlined its Private Investment Fund(PIF)framework,resulting in a simpler,more flexible fundstructure for private markets strategies.53 Examples of thechanges include removing the compulsory auditrequirement and removing the upper limit on the numberof qualifying investors.Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors22|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.54 Enhancements to the Jersey Private Fund regime,JFSC,23 July 2025 55 Australias evolving capital markets:A discussion paper on the dynamics between public and private markets,ASIC,26 February 202556 PS25/6:Private Intermittent Securities and Capital Exchange System:sandbox arrangements,FCA,10 June 202657 Thematic Analysis:Emerging Risks in Private Finance,IOSCO,September 202358 Private market valuation practices,FCA,5 March 202559 Asset Management&Alternatives Supervisory Strategy,FCA,26 February 202560 Final report on the 2022 CSA on valuation,ESMA,24 May 202361 Circular CSSF 18/698,CSSF,23 August 2023In Jersey,the JFSC published enhancements to theJersey Private Fund Guide,aimed at strengthening theframework and aligning it with the needs of internationalinvestors.This includes changes such as the introductionof a 24-hour authorization process for applicants andlifting the 50-offer/investor cap.54In Australia,industry feedback to ASICs discussionpaper suggested that any regulatory guidance on privatemarkets should be measured,developed with industryand aligned to international standards.55And in the UK,new opportunities for investors are beingcreated via the FCAs Private Intermittent Securities andCapital Exchange System(PISCES)Sandbox,which willallow the intermittent trading of private company sharesfor the first time.56Updated private markets supervisory prioritiesThe rapid growth of the private markets industry has led to international supervisory focus on several potential risk areas.Clear lines can be drawn from IOSCOs 2023 report on emerging risks,57 its ongoing review of its valuation principles,and the FSBs recommendations on leverage to national supervisors priorities.We are seeing a consistent supervisory focus on valuation and conflicts of interest across all asset classes under the private markets banner.The UK FCAs valuation review identified some good practices within the industry but noted that improvements are needed in several areas.58 It has now launched a follow-up review on potential conflicts of interest,focusing on the oversight of the conflicts framework,the role of governance bodies and reviews undertaken by all three lines of defense.59Following ESMAs common supervisory action(CSA)on asset valuation,60 the CSSF undertook follow-up inspections of asset management companies in Luxembourg to ensure they were compliant with ESMAs expectations.It reviewed the independence of the valuation function,challenged the skills and credentials of valuation teams based in Luxembourg,and checked the robustness of overall valuation governance arrangements.The CSSF is expected to formalize ESMAs expectations on valuation in its upcoming overhaul of Circular 18/698.61 Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors23|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.62 Australias evolving capital markets:A discussion paper on the dynamics between public and private markets,ASIC,26 February 202563 APRA review highlights the need for improved valuation and liquidity risk governance in superannuation,APRA,17 December 202464 Fiscal Year 2025,Examination Priorities,Division of Examinations,SEC,21 October 2024Valuation governance supervisory focus areasIn Australia,ASIC plans to increase its surveillance of private market funds valuation practices,conflicts of interest management,and the fair treatment of investors.62 And the Australian Prudential Regulation Authority(APRA)completed a review that identified concerning areas where improvements are needed by superannuation trustees.63 Specifically in relation to unlisted asset valuation,it found weaknesses relating to valuation governance,board oversight,conflicts of interest management and revaluation frequency,as well as triggers,valuation control and fair value reporting.Meanwhile in the US,the SECs latest examination priorities include reviewing the accuracy of disclosures,fee calculations and expense allocations,conflicts of interest and compliance with new rules such amendments to Form PF(see above).64 Third-party valuation Policies,proceduresand documentationValuation methodologiesTransparency to investorsGovernance arrangementsValuation frequencyFunctional independenceand expertise01020304050607Valuation focus areasReview valuation-related conflicts of interestNext steps for firmsReview valuation policies and proceduresTest the effectiveness of governance arrangementsAssess independence of the processFormalize ad hoc valuations processesExecutive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors24|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.The retailization of private assetsAsset and wealth managers are moving quickly to assess how they can provide retail and high-net-worth clients with private assets exposure for the first time,with a strong emphasis on finding practical solutions that deliver good client outcomes.The EUs European Long-Term Investment Fund(ELTIF)vehicle continues to grow in popularity following the Level 2 delegated regulation taking effect in October 2024,providing much needed clarity for firms.65 Luxembourg remains the clear domicile of choice,with 63 percent of the ELTIF population,followed by France with 20 percent.66 Some national fund vehicles(such as the Luxembourg UCI Part II vehicle)also remain popular offering more flexible investment criteria than the ELTIF,but with more restricted distribution possibilities.There have also been further developments in relation to the UKs Long-Term Asset Fund(LTAF)regime,first introduced in 2021,with distribution possibilities expanded in 2023.Most recently,the FCA made updates to the Non-UCITS Retail Scheme(NURS)framework in relation to LTAFs.67 These changes permit NURS to invest in LTAFs that hold more than 15 percent of their assets in underlying funds,making LTAFs more attractive for mainstream UK retail funds.Wider changes will permit LTAFs to be held in a more mainstream tax wrapper,potentially increasing their uptake.68Other jurisdictions are considering introducing retail private asset vehicles.In Singapore,the MAS has proposed a new framework:the Long-Term Investment Fund(LIF).69 It consulted on the creation of two vehicles,a direct fund that invests directly in private assets,and a 65 Commission Delegated Regulation(EU)2024/2759 of 19 July 2024,EU,25 October 202466 ELTIF Register,ESMA,20 June 202567 Handbook Notice 125,FCA,9 December 202468 Financial services growth and competitiveness strategy,UK government,15 July 202569 Consultation Paper on Providing Retail Access to Private Market Investment Funds,MAS,27 March 2025,Reproduced with the permission of the Monetary Authority of Singapore 2025 The Monetary Authority of Singapore.70 OSC Staff Notice 81-738 Next Steps Following OSC Consultation Paper 81-737,Ontario Securities Commission,29 May 2025Some national fund vehicles(such as the Luxembourg UCI Part II vehicle)also remain popular offering more flexible investment criteria than the ELTIF,but with more restricted distribution possibilities.Long-Term Fund of Funds(LIFF)vehicle that would invest primarily in other private asset funds.The MAS is currently reviewing responses to the consultation before deciding on its next steps.Canadas Ontario Securities Commission(OSC)is considering introducing the Ontario Long-Term Fund(OLTF).70 The feedback to the Commissions consultation was mixed,so while the OSC continues to consider rulemaking to operationalize a new fund vehicle,its next focus will be on providing exemptive relief within existing frameworks to facilitate fund launches under its Long-Term Asset Fund Project.Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors25|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.In the US,the SEC has signaled plans to revisit existing restrictions on closed-ended funds investing in private assets.71 Potential changes would increase diversification opportunities for retail investors while addressing disclosure-related issues identified for registered closed-ended funds.However,some in the SEC have questioned whether these changes would be in retail investors best interests.72More recently,an Executive Order73 was issued that aims to enable retirement plans to better access alternative assets.The order directed the SEC to consider how it could facilitate access to these assets for DC retirement savings plans,and required the Department of Labor to review current guidance on a fiduciarys duties.It also clarified what would be captured within the scope of alternative assets which includes private market investments.In Hong Kong(SAR),China,the Securities and Futures Commission(SFC)released clarifying guidance on listing closed-ended alternative funds for the private equity industry.74 It recapped distribution requirements,such as ensuring that intermediaries assess whether clients have knowledge of investing in alternative funds or assets before executing transactions for them.Meanwhile in France,the Autorit des Marchs Financiers(AMF)updated its guidelines to help private equity funds improve their compliance with end-of-life liquidation deadlines and to provide better information to unitholders.75 For example,private equity fund managers must now send the AMF half-yearly reports on the liquidation of these funds from the moment they begin winding up.71 Prepared Remarks Before SEC Speaks,SEC,19 May 202572 A Reckless Game of Regulatory Jenga Remarks at“SEC Speaks”,SEC,19 May 202573 Democratizing access to alternative assets for 401(k)investors,The White House,7 August 202574 SFC supports listing of alternative funds to broaden investor choice and bolster market development,SFC,17 February 202575 End of life of private equity funds:the AMF amends its General Regulation and policy,AMF,31 January 2025Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors26|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Retail-focused private asset initiatives in selected jurisdictionsThis table summarizes some of the ways that jurisdictions around the world are seeking to provide retail investors with exposure to private assets:*ELTIF Register,ESMA,June 2025*Global situation of undertakings for collective investment at the end of September 2024,CSSF,6 November 2024*ICI Research Perspective,Investment Company Institute,April 2025*LTAF Register,FCA,June 2025JurisdictionVehicleStatusKey characteristics or rulesFunds launched to dateDistribution possibilitiesCanada(Province of Ontario)Ontario Long-Term Fund(OLTIF)Consultation Fixed term or evergreen structureRequired to hold between a minimum andmaximum level of long-term assetsN/AIf progressed,would only be available to Ontario investorsEuropean UnionEuropean Long-Term Investment Fund(ELTIF)In force(2015),revised(2024)Closed-ended,unless certain criteria are metRestrictions on eligible assets159*Passport to retail investors across the EULuxembourgUCI Part IIIn force(2010)No specific restrictions on eligible assetsMust be authorized by the Commission deSurveillance du Secteur Financier(CSSF)May qualify to use the ELTIF label if criteria are met256*Without the ELTIF label,may be marketed to professional investors,as well as retail or sophisticated investors,subject to individual countries requirementsSingaporeLong-Term Investment Fund(LIF)ConsultationProposals for direct and fund of fund vehiclesFeedback sought on a range of topics andconsiderationsN/ARetail investors;precise possibilities to be confirmed(depending on whether the product is complex or non-complex)United StatesClosed-ended registered fundsExisting restrictions may be relaxed for closed-ended funds that invest more than 15 percent of their assets in private fundsCurrently,such funds must impose a minimuminitial investment requirement(USD 25k).May only be sold to investors that satisfy theaccredited investor standard.382*May be distributed to accredited investors if the fund complies with the relevant restrictionsUnited KingdomLong-Term Asset Fund(LTAF)In force(2021),distribution possibilities expanded(2023)Open-endedMonthly valuationMinimum 90-day notice period31*UK defined contribution pension schemes,SIPPs,and retail investorsExecutive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors27|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Challenges associated with the retailization of private assetsLiquidity management:Being able to meet redemption requests without compromising the stability of the fund or harming investors.Valuation:Requires robust policies,procedures,methodologies and overarching governance,challenge and scrutiny.It is also essential to develop workable solutions to address mismatches in valuation frequencies(e.g.monthly vs quarterly).Distribution:Appropriately identifying the target market and controls to ensure there is no distribution outside of the target market.And identifying distribution partners in the wider ecosystem that have the capability to bring the product to retail investors.Conduct risk:Addressing any potential conflicts of interest and ensuring that good customer outcomes are identified and monitored.Tax:Assessing the impact of tax regulations associated with investors,the fund and the underlying investments.Focusing on fund risk managementFollowing consultation,IOSCO published revised recommendations and implementation guidance on fund liquidity management and the use of liquidity management tools(LMTs),76 concluding several years of work in collaboration with the Financial Stability Board(FSB).Despite industry pushback,IOSCO proceeded with its proposals for funds to be categorized as liquid,less liquid,or illiquid based on the liquidity of their underlying assets,resulting in a relatively prescriptive approach.IOSCOs members will now consider how they will adjust their regulatory frameworks to reflect these updates.Ahead of IOSCO releasing its recommendations,ESMA published draft Regulatory Technical Standards(RTS)and final guidelines for EU asset managers on the use of LMTs,complementing the revised rules under the AIFMD II package that take effect from 16 April 2026.77 The RTS and guidelines set out additional detail on the definition,activation and calibration of LMTs.Although broadly aligned with existing industry practice,many fund managers LMT frameworks will require uplifts and enhancements.ESMA also issued advice to the Commission on the scope of assets that should be eligible for a UCITS fund.78 It could ultimately result in changes that would require EU managers to do more analysis on listed securities before investing,and to look-through certain assets to underlying assets that their performance relates to.In the US,the SEC finalized new guidance on open-end fund liquidity management.79 This covered the frequency of classifying the liquidity of fund investments,the meaning of cash in the SECs liquidity rule and actions for determining and reviewing highly liquid investment minimums.In the same package,the SEC also introduced amendments to portfolio-related reporting requirements under Form N-PORT.However,subsequently the SEC announced that these enhanced reporting requirements would be delayed by two years.80 It is possible that amendments will be proposed during the extension period.As the policy landscape becomes more accommodating,fund managers will need to focus on strategic product structuring while addressing key challenges including:76 Revised Recommendations for Liquidity Risk Management for Collective Investment Schemes,IOSCO,26 May 2025 77 ESMA publishes implementing rules on Liquidity Management Tools for funds,ESMA,15 April 202578 ESMA provides advice on eligible assets for UCITS,ESMA,26 June 202579 SEC Adopts Reporting Enhancements for Registered Investment Companies and Provides Guidance on Open-End Fund Liquidity Risk Management Programs,SEC,28 August 202480 SEC Extends Effective and Compliance Dates for Amendments to Investment Company Reporting Requirements,SEC,16 April 2025Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors28|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.The Canadian Securities Administrators completed a review of fund liquidity risk management arrangements over the course of 2024.Their findings are likely to influence their future policymaking on this topic.In Singapore,the MAS has started work to improve the frequency and granularity of its data collection to better analyze potential liquidity and leverage risks in funds.81 Similarly,ESMA has launched a discussion paper regarding the data to be collected from EU funds.82Beyond these topics,the FSB explored firms preparedness to respond to margin calls83 and also published policy recommendations to address risks associated with leverage in non-banks,including asset managers and their funds.84 You can read more about wider efforts to enhance system-wide resilience in chapter 5.OEFs that allocate a significant portion to illiquid assetsDealing frequency to be lowerthan daily or implement longnotice periodsPotentially structure as closed-endedOEFs that invest mainly in less liquid assetsDaily dealing may remainappropriate but anti-dilution LMTsneededReduced redemption frequency ornotice periods potentially neededOEFs that invest mainly in liquid assetsDaily dealing is appropriateEnhance liquidity managementpractices where neededDilution expected to be toosmall to be materialIOSCOs recommended buckets for categorizing open-ended funds(OEFs)81“Capital Markets Priorities in a Dynamic Landscape”,MAS,4 December 2024,Reproduced with the permission of the Monetary Authority of Singapore 2025 The Monetary Authority of Singapore.82 Discussion Paper on the integrated collection of funds data,ESMA,23 June 202583 Liquidity Preparedness for Margin and Collateral Calls:Final report,FSB,10 December 202484 Leverage in Non-Bank Financial Intermediation:Final report,FSB,9 July 2024Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors29|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Transitioning to T 1 settlementA successful transition to T 1 securities settlement took place in the US and Canada in May 2024.Some follow-up supervisory work is now expected,including plans by the SEC to evaluate broker-dealers compliance with the revised rules,including across the allocation,confirmation and affirmation process.85Regulators across the EU,Switzerland and the UK are now preparing for the T 1 transition ahead of the European deadline of 11 October 2027.86,87 These regulators are urging asset managers to begin putting the necessary arrangements in place,following a slow start by the industry.Political agreement on the required legislative changes has been reached in the EU,88 while final industry recommendations are now being implemented in the UK.89 The European transition has the potential to be more complex than the 2024 North American transition due to the greater number of regulators,currencies and securities depositories involved.With many European funds currently settling on a T 3 basis,some fund managers will also need to consider the impact of the shortened securities settlement cycle on their fund unit settlement lifecycle.Regulators such as the UKs FCA have already welcomed industry proposals to move to T 2 fund settlement and stated that a strong justification would be needed for exceptional cases where UK funds continue to settle T 3 after the 2027 deadline.9085 Fiscal Year 2025,Examination Priorities,Division of Examinations,SEC,21 October 202486 About T 1 settlement,FCA,6 June 202587 Commission proposes to shorten settlement cycle for EU securities from two days to one,European Commission,12 February 2025 88 Commission welcomes political agreement increasing efficiency of EU capital markets thanks to shorter settlement cycle for EU securities,European Commission,19 June 202589 UK Implementation Plan for first day of trading for T 1 settlement,The Accelerated Settlement Taskforce Technical Group,6 February 202590 FCA welcomes statement supporting faster settlement of trades in funds,FCA,30 May 2025Work needs to start now on the European T 1 transition The settlement cyclewill be shorted fromT 2 to T 1 for:Shares Bonds Money marketinstruments ETFs Certain derivativesSecurities trading and settlement Fund unit settlementcycles are expected tobe shortened from T 3/T 4 to T 2 This is not likely to belegally mandated byregulators,but it will bestrongly encouragedFund unit settlement Impact assessmenton operations andtechnology Optimize front,middleand back-officeprocesses Coordinate approach withexternal parties/partners Consider changes to FXand securities lendingKey actionsExecutive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors30|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Opportunities for asset managersProduct innovation:Consider how growing your private markets capability can support product diversification(including higher margin products),offsetting fee pressure in public market products and taking advantage of growing private market allocations by asset owners.Enhanced liquidity risk management:With the final wave of international fund liquidity-related recommendations announced,consider how you might put in place a future-proof operating model and governance arrangements.Efficient operating models:Revise your operating model to efficiently bring together your firms public and private markets activities,with a focus on enabling functions such as risk and compliance to have coverage over all relevant risks.Risks for asset managersInsufficient capabilities:Assess what new skills and experience could be required in complex areas of private markets(such as valuation and liquidity management).Poor outcomes:Identify and mitigate key risks for retail products,particularly in the context of defining the appropriate target market,the transparency of client disclosures and the robustness of liquidity management arrangements.Risk and compliance maturity:Ensure that the risk and compliance function keeps pace with evolving regulatory expectations(for example,around private asset valuation),significant policy developments(such as the transition to T 1)and product evolution(e.g.retail private asset exposure).Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors31|Evolving asset management regulation 2025 reportForeword02.Public and private markets 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Experts cornerZeynep Meric-Smith Partner KPMG in the UKWhen selecting service providers to support the launch and ongoing delivery of semi-liquid funds,fund managers can consider the following three key points:1.Capabilities in supporting large volumes of investors and meeting their needs including activities such as mass noticeproduction and reporting services,2.Ability to onboard new investor types at pace e.g.,digitized AML/KYC processes,and3.Ability to support liquidity requirements such as the ability to handle monthly redemptions.Leading service providers are supporting managers through their ability to include distributors as a specific type/category of investor(as part of distributor oversight)in order to provide greater transparency over the full value-chain.Other leading providers can provide API connectivity with third parties such as the transfer agent or distributors seamlessly.Many service providers are upgrading their technology and data architecture to support hybrid fund vehicles,often running parallel operating models.As the industry matures,we expect to see further development in dedicated platforms that minimize the dependency on manual intervention and increase scalability and efficiency in servicing these fund types.”Zeynep was asked to share insights on key considerations and leading practice for fund managers when assessing service providers to support their private asset democratization ambitions.Executive summary01.Delivering growth and competitiveness03.Digital innovation and artificial intelligence04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authorsForeword 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.32|Evolving asset management regulation 2025 report02.Public and private marketsDigital innovation and artificial intelligence Summary Regulatory approaches to AI are in flux,as authorities seek to find a balance between promoting innovation and ensuring that the potential risks of AI adoption are controlled both in the asset management sector and beyond.At the same time,the regulatory landscape for fund tokenization is being refined.Supervisors have continued to publish guidance aiming to provide sufficient clarity for tokenization to move from small pilots to mainstream adoption.This would unlock cost savings and reduce complexity for fund managers and their investors.Digital assets are also experiencing something of a regulatory overhaul.Significant new policies have been rolled out globally and adjustments to frameworks or proposed approaches have been made,increasingly with one eye on growth and competitiveness.Across these topics,the one commonality is regulatory divergence,which is likely to be particularly challenging for global asset managers,where AI tools and technology can be developed and deployed centrally at enterprise level.As such,it will be important to ensure that effective compliance frameworks are developed as AI and technology use cases are scaled up in the business,from portfolio management and advice,all the way through to customer experience and support.03Executive summary01.Delivering growth and competitiveness02.Public and private markets04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors33|Evolving asset management regulation 2025 reportForeword03.Digital innovation and artificial intelligence 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Diverging approaches to AI regulation Approaches to the regulation of AI continue to evolve around the world,with differing views and increasingly stark policy divergence emerging across jurisdictions.A joint report by KPMG International and the University of Melbourne found that 70 percent of surveyed individuals believed that AI regulation is necessary and only 43 percent believe that current laws are adequate.91While regulators acknowledge the potential benefits associated with AI,there is tension in approaches between those seeking to set a gold standard with specific requirements around the use of AI,versus a reliance on the existing,technology-agnostic regulatory framework.It is worth noting that,where introduced to date,AI requirements have generally not been specific to financial services and do not override existing financial services rules and guidance.Transformational AI use cases have yet to become mainstream in asset management.However,global financial services regulators continue to investigate potential financial stability impacts.91 Gillespie,N.,Lockey,S.,Ward,T.,Macdade,A.,&Hassed,G.(2025).Trust,Attitudes and Use of Artificial Intelligence:A Global Study 2025.The University of Melbourne and KPMG.DOI 10.26188/2882291992 The Financial Stability Implications of Artificial Intelligence,FSB,14 November 202493 Global Financial Stability Report,IMF,22 October 202494 Financial Stability in Focus:Artificial intelligence in the financial system,Bank of England,9 April 202595 Artificial Intelligence in Capital Markets:Use Cases,Risks,and Challenges,IOSCO,12 March 202596 AI Survey 2025,EU Survey(on behalf of ESMA),2 June 202597 Removing barriers to American leadership in artificial intelligence,The White House,23 January 202598 Americas AI Action Plan,The White House,23 July 202599 SEC Proposes New Requirements to Address Risks to Investors From Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers,SEC,26 July 2025Approaches to the regulation of AI continue to evolve around the world,with differing views and increasingly stark policy divergence emerging across jurisdictions.The FSB published its latest stock-take,finding that AI has the potential to amplify certain financial sector vulnerabilities.92 And the International Monetary Fund(IMF)noted that policy responses may be needed to address potential risks,for example,through enhanced data collection from firms such as hedge funds.93 Individual central banks have flagged their own concerns,such as the potential for asset managers to take increasingly correlated positions,thereby amplifying shocks during times of stress.94IOSCO is leading securities regulators efforts to identify potential issues,risks and challenges associated with AI use cases.Its latest report found that the most common asset management-related use cases are automated advice,portfolio management and investment research.95 In addition to IOSCOs consultation report,various regulators are launching surveys to gather information on the level of adoption of AI use cases in the financial services sector;ESMA and EU regulators latest survey,for example,launched in June 2025.96Some jurisdictions are focusing on promoting AI innovation.Following an Executive Order in the US to remove barriers to the development of AI systems,97 an AI action plan was launched with three pillars:innovation,infrastructure and international diplomacy and security.98 Ahead of this,the SEC had already dropped plans to introduce a proposed rule on conflicts of interest associated with AI and predictive data analytics.99Executive summary01.Delivering growth and competitiveness02.Public and private markets04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors34|Evolving asset management regulation 2025 reportForeword03.Digital innovation and artificial intelligence 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Conversely,in other cases the national and regional rollout of new policy has continued.Examples of new rules include:Some of the latest requirements within the EUsAI Act,which include certain prohibitions and AIliteracy obligations,took effect on 2 February 2025.These were followed by the governance rules andobligations for the deployment of general-purposeAI(Gen AI)models on 2 August 2025.In addition,in July 2025,the Commission released a voluntaryAI Code of Practice to help industry comply withthe Gen AI rules.100 The rules for high-risk AIsystems(which are less likely to be relevant to assetmanagers)have an extended transition period untilAugust 2027.101 However,the shape of the Act islikely to evolve in the face of significant industryresistance and the competitiveness agenda.EU member states are considering their own proposalstoo.Swedens AI Commission,for example,presentedproposals to the Swedish government on strengtheningthe development and use of AI.102 Japans parliament has passed a bill on promotingthe research,development and utilization of AI-related technologies.103 Aspects of the bill focuson ethical considerations and ensuring necessaryprotection for citizens.In addition,Japans Financial Services Agency(FSA)published a discussion paper on promoting the utilization of AI in the financial services sector.104 It provided an overview of current FS use cases and intends to use feedback gathered to refine its future policymaking.Meanwhile,South Africas government has publisheda national policy framework on AI,setting out anapproach to tap into AIs potential while mitigatingrisks,and facilitating the development of sector-specificstrategies.105 The framework could serve as the basisfor creating an AI Act in South Africa.Financial services regulators are also providing more guidance to firms,including asset managers:In Switzerland,the Financial Market SupervisoryAuthority(FINMA)found that most firms are still in theearly stages of AI development and that appropriategovernance and risk management structures are stillbeing established.It noted that its existing technology-neutral requirements apply in the context of AI.Itexpects firms to actively consider how the use of AIcould impact their risk profile and then to align theirgovernance,risk and control capabilities.Accordingly,new guidance on governance and risk managementwhen using AI was issued.106100 General-Purpose AI Code of Practice now available,European Commission,10 July 2025101 AI Act,European Commission,June 2025102 AI commission has presented proposals to the Government,Government Offices of Sweden,5 December 2024103 議案審議経過情報 人工知能関連技術研究開発及活用推進関法律案,House of Representatives of Japan,May 2025 104 Publication of AI Discussion Paper,JFSA,4 March 2025105 South Africa National Artificial Intelligence Policy Framework,Department of Communications and Digital Technologies106 FINMA Guidance 08/2024,FINMA,18 December 2024Four key considerations can help accelerate asset managers AI adoption:Design an AI strategy,aligned with the firms core competencies.Build trust into the implementation roadmap,addressing data privacy,security and regulatory challenges.Build a robust data governance framework,focused on quality,integration and security.Create a culture that uses AI to uplift human potential.Upskilling should be a key priority.Executive summary01.Delivering growth and competitiveness02.Public and private markets04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors35|Evolving asset management regulation 2025 report 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Foreword03.Digital innovation and artificial intelligenceKPMG client storiesAI strategy and governanceKPMG firms have supported wealth and asset management clients in defining their AI strategy and developing their AI governance framework.Here are two recent examples:AI strategy and roadmap A KPMG member firm helped a wealth manager define its AI strategy and roadmap for the next two years.Leveraging KPMGs Trusted AI framework,the member firm also supported the client with the definition and prioritization of high-value use cases across its front,middle and back-office functions.This included the formation of potential approaches,comparison with peer activities,and coordination across business,data,operations and technology teams,as well as their strategic vendors.This AI strategy will be the first step towards articulating how AI can support the business in attaining its corporate goals,primarily around creating competitive advantage through bespoke client service,increased productivity and cost optimization.AI governance A KPMG member firm worked closely with a global asset manager to design a governance model around how it deploys and uses AI in practice.The goal was to build a model that aligns with leading market practice,the clients enterprise-level approach and local regulators rules and expectations.The project outputs included designing an AI governance operating model,defining roles and process steps,and modeling resource requirements,including the identification of resource and skills gaps.The proposed model was socialized with wider stakeholders in the business,and an AI governance implementation roadmap was developed that included key milestones and dependencies.The outcome for the organization was that this approach enabled it to effectively and efficiently assess the risks of AI to enable rapid adoption and value realization as it digitizes the business.In Singapore,the MAS published itsobservations from a thematic review on AImodel risk management.107 The paper focusedon AI governance and oversight,AI identification,inventory management and risk materialityassessment,and AI development and deployment.In Canada,the CSA issued guidance and consultedon the use of AI in capital markets,aiming tobalance innovation while addressing risks.108Notably,the CSA clarified that the guidance is basedon existing securities laws and does not createnew legal requirements for firms.Some regulators,such as the Ontario Securities Commission,planto examine firms compliance.109 Some firms havesought to launch products where all investmentdecisions are made by an AI model.However,theCSA ultimately requires human portfolio managersto make final investment decisions.Similarly in Australia,the Chair of ASIC recentlycommented that firms should harness technologicaladvances and use them for customers andcommunities benefit.However,customer trust iscritical.According to the speech,regulators shouldfor now rely on existing regulations because theyare technology neutral and regulators will enforcethem.However,it acknowledged there may be aneed for more regulation in future.110Executive summary01.Delivering growth and competitiveness02.Public and private markets04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authorsForeword03.Digital innovation and artificial intelligence107 Artificial intelligence model risk management,MAS,December 2024108 Canadian Securities Administrators issue guidance and consult on use of AI systems in capital markets,CSA,5 December 2024,Reproduced with the permission of Autorits canadiennes en valeurs mobilires/Canadian Securities Administrators,2025109 OSC Staff Notice 33-758 Examination Priorities for the Registration,Inspections and Examinations Division,OSC,10 June 2025110 “AI:A blueprint for better banking?”,Keynote address by Joe Longo at the ABA Banking Conference in Sydney,ASIC,23 July 2025 36|Evolving asset management regulation 2025 report 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Where jurisdictions have not yet rolled out new legislation or guidance,authorities continue to monitor developments and potential risks.For example,a UK parliamentary committee launched a call for evidence on the impact of the increased use of AI,particularly to understand whether there are adequate safeguards in place to protect customers.111 The UKs regulatory approach relies on existing regulatory frameworks such as the Senior Managers Regime and the Consumer Duty.A report by the Technology Working Group explored use cases for AI within the UKs asset management sector,as well as the barriers firms have or are anticipated to encounter in adopting AI.112Regulators also continued to provide an environment for firms to experiment with AI use cases.In the UK for example,the FCA launched a Supercharged Sandbox with NVIDIA to provide firms with more advanced computing power,tools and enhanced datasets.113 This was the latest addition to the FCAs AI Lab that aims to support the development of new AI models and solutions.114 The AI space is evolving rapidly,and individuals are continuously finding new ways to use AI to attract the attention of retail investors or even to defraud them.Read more on regulators concerns in this context in chapter 4.111 Use of AI in banking,pensions and other financial services to be subject of new inquiry by MPs,UK Parliament,3 February 2025112 Technology Working Group publishes report on artificial intelligence,HMT,10 October 2024113 FCA allows firms to experiment with AI alongside NVIDIA,FCA,9 June 2025114 AI Lab,FCA,9 June 2025Portfolio optimization Use of algorithms to analyze market data and trends to support risk analysis and create optimal investment portfolios.Client onboarding Support with analyzing large data sets from diverse sources to help analyze and evaluate potential AML and wider onboarding risks.Disclosure production AI can be used to consistently identify and extract essential information needed to produce client-facing material and disclosures.Fraud detection AI-supported client transaction monitoring and analysis can help reveal anomalies,triggering alerts and preventing harm.Investment advice Support suitability assessments,including the development of recommendations based on analysis of the clients goals and risk tolerance.Market analysis Analysis of news stories,social media posts and wider sources to gauge market sentiment and identify investment opportunities and risks.Operational efficiency Automation opportunities across all three lines of defense(e.g.support for back-office trade processing).Client insights and support Virtual assistants can enable the delivery of round-the-clock support,while AI tools can be used to personalize client interactions.Some of the most exciting AI use cases for wealth and asset managers in the market include:Executive summary01.Delivering growth and competitiveness02.Public and private markets04.Protectinginvestors05.Firm and system resilience06.ESG and sustainable financeHow KPMG can helpAbout the authors37|Evolving asset management regulation 2025 reportForeword03.Digital innovation and artificial intelligence 2025 Copyright owned by one or more of the KPMG International entities.KPMG International entities provide no services to clients.All rights reserved.Facilitating fund tokenizationAs we noted in last years Evolving asset management regulation report,the past few years have seen a raft of new guidance and initiatives focused on fund tokenization.Over the last year,regulators have continued their progress,exploring how tokenization can be facilitated in a manner that delivers good outcomes for investors.IOSCO is coordinating efforts at an international level.It plans to continue to closely monitor developments in asset tokenization,recognizing its potential for growth and its implications on investor protection and market integrity.115In a significant collaboration between industry and regulators,Project Guardian,led by the Singapore MAS,published a new report with a vision of how distributed ledger technology(DLT)can be used in asset management for fund tokenization.116 The paper discussed the standards needed to scale use cases,which should help align regulatory standards and act as a useful guide for fund managers when bringing tokenized funds to market.The report was welcomed by the UKs FCA,which contributed to the work.117With Singapore having established itself as a leading jurisdiction for tokenization,the MAS announced plans to further suppor
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China Monetary Policy ReportQ2 2025(August 15,2025)Monetary Policy Analysis Group ofthe Peoples Bank of ChinaIExecutive SummarySince the beginning of 2025,under the strong leadership of the CPC CentralCommittee with Comrade Xi Jinping as its core,stepped-up efforts have been made toimplement proactive and effective macroeconomic policies.Chinas economy hasdeveloped steadily on a positive trajectory,and major economic indicators haveperformed well,demonstrating strong vitality and resilience.In H1,the GrossDomestic Product(GDP)grew 5.3 percent year on year,with a sustained uplift insocial confidence as well as solid progress in high-quality development.Following theguidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a NewEra,the Peoples Bank of China(PBOC)earnestly implemented the decisions andarrangements of the CPC Central Committee and the State Council.The PBOC haspursuedanappropriatelyaccommodativemonetarypolicy,strengthenedcounter-cyclical adjustments,and employed a mix of policy tools to support thehigh-quality development of the real economy,thereby creating a favorable monetaryand financial environment for sustained economic recovery and development.First,money and credit maintained reasonable growth.In May,the required reserveratio(RRR)was lowered by 0.5 percentage points,releasing approximately RMB1trillion in long-term liquidity into the market.The PBOC kept liquidity adequate byusing a mix of tools,including the open market operations(OMOs),medium-termlending facility(MLF)operations,and central bank lending and discounts.Financialinstitutions were encouraged to fully satisfy the effective credit needs of the realeconomy and to enhance the efficiency of fund utilization so as to improve the qualityand efficiency of financial services for the real economy.Second,overall socialfinancing costs were guided to move downward.The PBOC continued to improve themarket-oriented interest rate adjustment framework.In May,the policy interest ratewas cut by 0.1 percentage points,interest rates on structural monetary policyinstruments were reduced by 0.25 percentage points,and interest rates on personalhousing provident fund loans were also lowered by 0.25 percentage points.In addition,the PBOC strengthened implementation of the interest rate policy to bring down bothdeposit and loan rates.Third,the credit structure was improved.In May,a centralbank lending facility of RMB500 billion was established to support serviceconsumption and elderly care,central bank lending in support of sci-tech innovationand technological upgrading was increased by RMB300 billion,and a risk-sharinginstrument for sci-tech innovation bonds was introduced,all in efforts to strengthensupport for key domestic demand sectors,such as consumption and sci-techinnovation.While ensuring effective use of existing structural monetary policyinstruments,the PBOC continued its efforts to develop technology finance,greenfinance,inclusive finance,old-age finance,and digital finance.Fourth,the RMBexchange rate remained basically stable.Upholding the decisive role of the market inthe formation of the exchange rate,the PBOC gave play to the role of the exchangerate in adjusting the macro economy and the balance of payments.It implemented aIImix of policies to keep expectations stable,and the RMB exchange rate remainedbasically stable despite the complex circumstances.Fifth,risk prevention andresolution were strengthened.Risk resolution in key areas was steadily promoted,andthe system of financial risk monitoring,assessments,and early warnings wascontinuously improved.The counter-cyclical adjustments of monetary policy achieved significant results.Financial aggregates witnessed steady growth.At end-June,outstanding aggregatefinancing to the real economy(AFRE)and broad money supply(M2)recordedyear-on-year growth of 8.9 percent and 8.3 percent,respectively.OutstandingRMB-denominated loans registered RMB268.6 trillion.Social financing costs were ata historic low.From January to June,interest rates on new corporate loans and on newpersonal housing loans dropped by about 45 basis points and 60 basis points year onyear,respectively.The credit structure continued to improve.The RMB exchange rateremained basically stable at an adaptive and equilibrium level.At end-June,thecentral parity of the RMB against the U.S.dollar was roughly on par with that atend-2024.As the external environment is becoming more complex and severe,with weakeningglobal growth momentum,rising trade barriers,and diverging economic performanceamong the major economies,Chinas economic performance still faces multiple risksand challenges.At the same time,Chinas economy is underpinned by solidfundamentals,multiplestrengths,strongresilience,andvastpotentials.Theunderlying conditions and fundamental trend supporting its long-term growth remainunchanged.It is essential to maintain strategic resolve,focus our efforts on pursuingour goals,and drive significant breakthroughs in strategic tasks that are crucial toadvancing Chinese modernization.Looking ahead,under the guidance of Xi JinpingThought on Socialism with Chinese Characteristics for a New Era,the PBOC willfully implement the guiding principles of the Third Plenary Session of the 20th CPCCentral Committee and the Central Economic Work Conference.It will adhere to thegeneral principle of seeking progress while maintaining stability and apply the newdevelopment philosophy fully and faithfully on all fronts.Firmly following the pathof financial development with Chinese characteristics,the PBOC will further deepenfinancial reforms and a high-standard opening-up,and it will continue its efforts topromote high-quality financial development and to build China into a financialpowerhouse.It will accelerate the pace of improving the central banking system andfurther optimize the monetary policy framework.The PBOC will work to strike abalance between short-term and long-term considerations,between growth stabilityand risk prevention,between internal and external equilibria,and between supportingthe real economy and maintaining the soundness of the banking system.The PBOCwill make macro regulation more forward-looking,targeted,and effective,maintainthe continuity and stability of policies,and enhance their flexibility and predictability.It will enhance the consistency of the macro policy orientation,with a focus onIIIstabilizing employment,businesses,markets,and expectations.The PBOC will striveto fulfill the years targets for economic and social development and to bring the 14thFive-Year Plan to a successful conclusion.The PBOC will implement an appropriately accommodative monetary policy.It willflexibly adjust the intensity and pace of policy implementation in light of theeconomic and financial situations both at home and abroad as well as the performanceof the financial market in a bid to keep liquidity adequate and to keep the growth ofaggregate financing and money supply in step with the expected targets for economicgrowth and general price levels.This will help sustain a favorable financialenvironment.Promotingareasonablepricerecoverywillbeanimportantconsideration for the implementation of monetary policies so as to keep prices at areasonable level.The PBOC will further improve the interest rate adjustmentframework,strengthen the guiding role of central bank policy rates,improve themarket-based interest rate formation and transmission mechanism,leverage theself-regulatory mechanism for market-based interest rate pricing,and strengthenimplementation and oversight of interest rate policies.The PBOC will work to reducethe banks liability costs and to promote a decline in overall financing costs.It willalso smooth the monetary policy transmission mechanism,improve the efficiency offund utilization,prevent capital from circulating within the financial system withoutserving the real economy,and strike a balance between supporting the real economythrough finance and maintaining the soundness of the banking system.It will giveplay to the role of monetary policy tools in adjusting both the aggregate and thestructure,make good use of structural monetary policy instruments,and strengthensupport for sci-tech innovation,consumption expansion,inclusive financing for microand small businesses(MSBs),and foreign trade stabilization.Pursuing a managedfloating exchange rate regime based on market supply and demand with reference to abasket of currencies,the PBOC will let the market play a decisive role in theformation of the exchange rate to enhance the resilience of the foreign exchangemarket and to stabilize market expectations.It will take resolute steps to correctpro-cyclical market behavior,address any conduct that disrupts market order,andguard against the risks of exchange rate overshooting so as to keep the RMBexchange rate basically stable at an adaptive and equilibrium level.While exploring toexpand its functions in macro-prudential regulation and financial stability,the PBOCwill safeguard financial market stability and firmly defend the bottom line whereby nosystemic financial risks will occur.IVContentsPart 1 Money and Credit Analysis.1I.Liquidity in the banking system was adequate.1II.The volume of deposits and loans at financial institutions remained stable,while interest ratesedged downward.2III.Money supply and the AFRE grew at a reasonable pace.9IV.The RMB exchange rate remained basically stable at an adaptive and equilibrium level.11Part 2 Monetary Policy Operations.12I.Conducting open market operations(OMOs)with a combination of short-and long-term tools12II.Conducting standing lending facility(SLF)and medium-term lending facility(MLF)operations.13III.Lowering the RRR for financial institutions.14IV.Further improving the macro-prudential system and the management framework.14V.Giving play to the role of monetary policies for structural optimization.15VI.Enhancing the quality and effectiveness of credit policies.16VII.Improving the formation and transmission mechanism for market-oriented interest rates.24VIII.Deepening the market-based reform of the RMB exchange rate.25IX.Forestalling and defusing financial risks.26X.Enhancing cross-border trade,investment,and financing services.26Part 3 Financial Market Conditions.27I.Financial market overview.27II.Development of institutional arrangements in the financial markets.32Part 4 Macroeconomic Overview.34I.Global economic and financial developments.35II.Macroeconomic developments in China.38Part 5 Monetary Policy Outlook.44I.Chinas macroeconomic and financial outlook.44II.Monetary policy for the next stage.47VBoxesBox 1A Decade of Progress in Inclusive Financial Services for Micro and Small Businesses(MSBs)and the Path Forward.6Box 2Financial Support for Technological Innovation Continues to be Strengthened.17Box 3Continuous Optimization of the Credit Structure and Enhanced Quality and Efficiency ofFinancial Support for the Real Economy.21Box 4Financial Support for Boosting Consumption Should Focus on Improving the Supply ofHigh-Quality Services.45TablesTable 1New RMB Loans from Financial Institutions in H1 2025.2Table 2The Structure of RMB Deposits in H1 2025.2Table 3Weighted Average Interest Rates on New Loans Issued in June 2025.3Table 4Shares of RMB Lending Rates at Different Levels,from January to June 2025.3Table 5Average Interest Rates on Large-value USD-denominated Deposits and Loans,January toJune 2025.4Table 6The Structure of RMB Loans in H1 2025.5Table 7Aggregate Financing to the Real Economy in H1 2025.10Table 8The Trading Volume of the RMB Against Other Currencies in the Interbank ForeignExchange Spot Market in H1 2025.25Table 9Fund Flows of Repos and Interbank Lending Among Financial Institutions in H1 2025.28Table 10Interest Rate Swap Transactions(including Standard Swaps)in H1 2025.29Table 11Bond Issuances in H1 2025.30Table 12Asset Allocations in the Insurance Sector at end-June 2025.32Table 13Macroeconomic and Financial Indicators in the Major Advanced Economies.36FiguresFigure 1Movement of Money Market Interest Rates.1Figure 2YOY Growth of Outstanding Broad Money(M2)and the AFRE.9Figure 3Monthly RMB Settlements under the Current Account.11Figure 4Yield Curves of Government Bonds in the Interbank Market.301Part 1 Money and Credit AnalysisSince the beginning of 2025,the Peoples Bank of China(PBOC)has followed theguidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Eraand fully implemented the guiding principles of the 20th CPC National Congress,theSecond and Third Plenary Sessions of the 20th CPC Central Committee,and the CentralEconomic Work Conference.In line with the arrangements in the Report on the Work ofthe Government,the PBOC has implemented an appropriately accommodative monetarypolicy.This has effectively facilitated the reasonable growth of money,credit,andaggregate financing to the real economy(AFRE),driven the overall financing costs tomove downward from a low level,continuously optimized the credit structure,and keptthe RMB exchange rate generally stable at an adaptive and equilibrium level.I.Liquidity in the banking system was adequateIn H1 2025,the PBOC employed a mix of monetary policy instruments to keep liquidityadequate in the banking system.The PBOC lowered the required reserve ratio(RRR)and7-day reverse repo rate to maintain an appropriate liquidity environment.At the sametime,the PBOC flexibly managed the intensity and pace of open market operations(OMOs),promptly smoothing out short-term fluctuations caused by seasonal factors suchas fiscal tax payments and government bond issuances so as to maintain stable moneymarket rates.At end-June,the excess reserve ratio for financial institutions registered 1.4percent.Figure 1 Movement of Money Market Interest RatesSource:%2II.The volume of deposits and loans at financial institutions remained stable,whileinterest rates edged downwardCredit aggregates expanded at a reasonable pace.In H1,the domestic economy wasgenerally stable,while the external environment was becoming more complex andchallenging.The domestic willingness of consumption and investment required furtherimprovements,and credit growth continued to face pressures to maintain stablemomentum.The PBOC has placed an emphasis on guiding financial institutions tostabilize the supply of credit,improve the quality and efficiency of credit growth,andstrengthen financial support to the real economy.At end-June,outstanding loans issuedby financial institutions in domestic and foreign currencies grew 6.8 percent year on yearto RMB272.6 trillion,an increase of RMB13 trillion from the beginning of 2025.Outstanding RMB loans grew 7.1 percent year on year to RMB268.6 trillion,upRMB12.9 trillion from the beginning of 2025.Table 1 New RMB Loans from Financial Institutions in H1 2025Unit:RMB100 millionIncrease from the beginning ofthe yearChinese-funded large-sized banks82921Chinese-funded small and medium-sized banks51514Small-sized rural financial institutions12540Foreign-funded financial institutions-583Notes:1.Chinese-funded large-sized banks refer to banks with assets(in both domestic and foreigncurrencies)of RMB2 trillion or more(according to the amount of total assets in both domestic andforeign currencies at end-2008).2.Chinese-funded small and medium-sized banks refer to banks withtotal assets(in both domestic and foreign currencies)of less than RMB2 trillion(according to theamount of total assets in both domestic and foreign currencies at end-2008).3.Small-sized ruralfinancial institutions include rural commercial banks,rural cooperative banks,and rural creditcooperatives.Source:The Peoples Bank of China.Deposits witnessed continued growth.At end-June,outstanding deposits in domestic andforeign currencies at all financial institutions increased 8.6 percent year on year toRMB327.5 trillion,up RMB19.1 trillion from the beginning of 2025.Outstanding RMBdeposits grew 8.3 percent year on year to RMB320.2 trillion,an increase of RMB17.9trillion from the beginning of 2025.Outstanding deposits in foreign currencies stood atUSD1.0 trillion,an increase of USD165.5 billion from the beginning of 2025.Table 2 The Structure of RMB Deposits in H1 2025Unit:RMB100 millionOutstandingdeposits atend-JuneYOY growthIncrease fromthe beginning ofthe year3Outstandingdeposits atend-JuneYOY growthIncrease fromthe beginning ofthe yearRMB deposits:32017408.39434Household deposits162025510.87747Non-financial enterprise deposits8001913.6704Public entity deposits3864794.9850Fiscal deposits6877723.9538Non-banking financial institutiondeposits30740210.6%499Overseas deposits18636-8.3Source:The Peoples Bank of China.The weighted average lending rate on new loans remained at a historic low.The PBOChas continuously advanced the market-oriented reform of interest rates,improved themarket-based interest rate adjustment framework,and strengthened the implementationand oversight of interest rate policies so as to promote a decline in overall financing costs.In June,the one-year loan prime rate(LPR)and the over-five-year LPR stood at 3.0percent and 3.5 percent,respectively,both down 0.45 percentage points year on year,andthe weighted average interest rate on new loans recorded approximately 3.3 percent,down about 0.4 percentage points year on year.Table 3 Weighted Average Interest Rates on New Loans Issued in June 2025Unit:%JuneChange from March YOY ChangeWeighted average interest rate on new loans3.29-0.15-0.39on ordinary loans3.69-0.06-0.44of which:on corporate loans3.22-0.04-0.41on bill financing1.27-0.28-0.33on mortgage loans3.06-0.06-0.39Source:The Peoples Bank of China.Table 4 Shares of RMB Lending Rates at Different Levels,from January to June2025Unit：%Month YearLPR-bpsLPRLPR bps40,LPR-1%LPR-1%,LPR-0.5%)LPR-0.5%,LPR)SubtotalLPRSubtotal（LPR,LPR 0.5%)LPR 0.5%,LPR 1.5%)LPR 1.5%,LPR 3%)LPR 3%andaboveAugust 20193.191.7910.5715.55 0.32 84.1320.2626.9616.6920.23January20256.0318.2819.8444.15 5.88 49.9713.7517.949.938.35February20258.5315.2219.8743.61 6.09 50.3013.3616.389.8310.74March 20257.1118.9021.1647.17 6.43 46.4013.1215.739.587.98April 20258.9820.6218.4948.09 5.35 46.5611.9614.969.6110.03May 20258.7319.1817.9945.91 5.74 48.3613.2515.1610.199.75June 20256.7320.4118.9146.06 7.28 46.6712.9414.9810.128.64Notes:In August 2019,the PBOC reformed and improved the LPR formation mechanism.Source:The Peoples Bank of China.Interest rates on foreign-currency deposits and foreign-currency loans generally declined.In June,the weighted average interest rate on large-value USD-denominated demanddeposits registered 2.7 percent,up 0.1 percentage points year on year,while the weightedaverage interest rate on large-value USD-denominated deposits with maturities withinthree months registered 4.1 percent,down 0.9 percentage points year on year.Theweighted average interest rates on USD-denominated loans with maturities within threemonths and with maturities between three months(including three months)and sixmonths both registered 4.7 percent,a decrease of 1.2 percentage points year on year.Table 5 Average Interest Rates on Large-value USD-denominated Deposits andLoans,January to June 2025Unit:%MonthLarge-value depositsLoansDemanddepositsWithin 3months36 months(including3 months)612months(including6 months)1 yearOver 1yearWithin 3months36 months(including3 months)612months(including 6months)1 yearOver 1yearJanuary2.603.754.194.334.264.464.894.724.484.625.19February2.663.894.224.434.174.424.884.714.444.354.70March2.673.854.183.754.094.185.044.534.224.375.06April2.784.024.234.264.084.194.694.624.024.354.685May2.754.064.174.074.094.294.754.664.314.344.92June2.704.064.144.194.244.004.724.674.334.074.93Source:The Peoples Bank of China.The financing structure has been improving.In recent years,the PBOC has beencontinuously optimizing and enriching structural monetary policy tools to support majorstrategies,key areas,and weak links,further enhancing the adaptability and precision offinancial services for economic structural adjustments and high-quality development,andit has been promoting the continuous optimization of the financing structure.In terms ofinvestment destination,at end-June,technology loans,green loans,inclusive loans,elderly care industry loans,and digital economy industry loans registered year-on-yeargrowth of 12.5 percent,25.5 percent,11.5 percent,43.0 percent,and 11.5 percent,respectively,all outpacing the overall loan growth.In terms of the maturity structure,atend-June,RMB short-term loans accounted for about 26 percent of the total,whilemedium and long-term(MLT)loans accounted for about 67 percent,basically unchangedfrom end-Q1 2025.Among them,MLT loans to enterprises and public entities grew byRMB7.2 trillion from the beginning of 2025,accounting for 64.2 percent of totalcorporate loans.The year-on-year growth of MLT loans to the manufacturing sectorregistered 8.7 percent,1.6 percentage points higher than the growth of total loans.Interms of the entity structure,at end-June,RMB household loans of financial institutionsaccounted for about 31.3 percent of the total,while loans to enterprises and public entitiesaccounted for about 67.5 percent.Compared with end-March 2025 and end-2024,theproportion of loans to enterprises and public entities increased by 0.3 and 1.1 percentagepoints,respectively.In terms of financing methods,at end-June,direct financing,including corporate bonds,government bonds,and domestic equity financing bynon-financial enterprises,accounted for about 31.1 percent of the AFRE,with an increaseof 0.5 and 0.45 percentage points,respectively,compared to end-March 2025 andend-2024.Table 6 The Structure of RMB Loans in H1 2025Unit:RMB100 millionOutstandingamount at end-JuneYOY growthIncrease from thebeginning of theyearRMB loans to:26855907.19208Households8399983.0700Enterprises and public entities18126078.95685Non-banking financialinstitutions10946-6.031Overseas2203928.091Note:Loans to enterprises and public entities refer to loans to non-financial enterprises,governmentagencies,and organizations.6Source:The Peoples Bank of China.Box 1 A Decade of Progress in Inclusive Financial Services for Micro and SmallBusinesses(MSBs)and the Path ForwardMSBs constitute a vital pillar for stabilizing employment and improving peopleswell-being.Therefore,supporting the development of MSBs is essential to achievingprogress in advancing inclusive finance.Since 2013,when it was formally proposed atthe Third Plenary Session of the 18th CPC Central Committee that we shall“developinclusive finance”,the PBOC has been firmly implementing the arrangements made bythe CPC Central Committee and the State Council.Focusing on key areas of inclusivefinance,namely,support for MSBs,the PBOC has gradually established and improvedthe systems and mechanisms for financial support,thereby providing a strong guaranteefor the development of MSBs.First,the PBOC strengthened its policy guidance and funding support to enhancethe accessibility of funding for MSBs.It took the lead in issuing a series of policydocuments,including the Guiding Opinions on Further Deepening Financial Services forMSBs and the 25 Measures on Providing Financial Support for the Private Economy.Itconvened multiple consultative meetings on financial support for MSBs and privateenterprises,and it conducted policy effectiveness assessments on a regular basis.Theseefforts serve to guide financial institutions to fully embrace the principle of equaltreatment and to expand funding access for MSBs and private enterprises,fosteringself-motivation and a favorable environment for serving MSBs across the financialsystem.In the meanwhile,the PBOC put money on the table to incentivize financialinstitutions to increase lending to MSBs.In 2014,the PBOC introduced central banklending for MSBs.During the decade,it cut the rate and raised the cap on the instrumenton multiple occasions.To satisfy the varying funding needs of MSBs at different stagesof their lifecycle,the PBOC established various monetary policy facilities supportinginclusive MSB loans,including two instruments directly supporting deferred repaymentsand inclusive unsecured MSB loans,one facility encouraging interest rate cuts for MSBloans,and one instrument specifically supporting inclusive MSB loans.The instrumentsdirectly linked central bank funding to the lending of commercial banks to MSBs,enabling targeted credit provision to MSBs.Since 2014,the outstanding balance ofcentral bank lending for MSBs has surged more than thirtyfold,which has significantlybolstered the growth of MSB lending.Second,the PBOC facilitated policy transmission to enhance the inclusiveness offinancing to MSBs.The PBOC has been constantly pressing ahead with the interest rateliberalization reform by continuously amplifying the efficacy of the Loan Prime Rate(LPR)reform and the market-based adjustment mechanism for deposit rates,therebydriving steady reductions in overall financing costs for MSBs.In June 2025,the averageinterest rate on newly issued inclusive loans to MSBs registered 3.48 percent,more than2 percentage points lower than the pre-LPR reform level.For non-interest financing costs,the PBOC launched a pilot program requiring clear disclosure of the overall financingcosts of loans to enterprises,guiding banks to explicitly state the fee structure,totalpayment,and the actual recipient of the payment in the loan contracts,which improved7the quality of financing services for MSBs.Third,the PBOC promoted the development of financial service capabilities tofacilitate the access of MSBs to financing.It encouraged commercial banks to establishdedicated inclusive finance departments and to prescribe preferential treatments for MSBloans in internal fund transfer pricing,due diligence-based liability exemption,andperformance evaluations,thereby boosting the proactiveness of bank branches and creditofficers in lending to MSBs.Commercial banks have been giving full play to fintechsolutions,including big data and cloud computing,to enhance client acquisitionefficiency and customer service accuracy.Banks are also encouraged to develop onlineproducts.Furthermore,the National Micro,Small,and Medium-sized Enterprise(MSME)Cash Flow Credit Information Interchange has been established and launched to promotecross-bank sharing of non-credit financial information,which facilitates more informedcredit decisions by banks.Currently,applying for loans via mobile banking apps andother online channels has become increasingly common and convenient.Fourth,the PBOC facilitated the broadening of financing channels to diversifyfunding sources for MSBs.While ensuring sufficient credit supply through commercialbanks as the primary financing channel,the PBOC proactively supported MSBs to securefunding through other channels.The PBOC arranged a“fast-track”for private enterprisesand MSBs to register and issue debt financing instruments,and it established a supportinginstrument for bond financing of private enterprises(“the second arrow”)to providecredit enhancement for corporate bond issuances.To address the financing needs ofMSBs in the supply chain,the PBOC actively promoted the unified registration andpublic notification system for movable properties financing,the supply chain commercialbills platform,and the receivables financing service platform.These instruments andinitiatives helped enterprises leverage idle resources and assets such as accountsreceivable.By the end of Q2 2025,the receivables financing service platform hadfacilitated financing for MSBs through a cumulative total of 509,000 transactionsamounting to RMB19.5 trillion.Overall,the financing environment for MSBs has improved significantly comparedto a decade ago.After over ten years of sustained efforts,MSBs have gained notablybetter access to financing.In April 2025,the World Bank released its Enterprise Survey,of which Chinas access-to-finance related index reached 92.5,tying with Singapore forthe highest score among the first batch of economies published.More specifically,lending to MSBs has maintained rapid growth.At end-Q2 2025,outstanding loans toMSBs registered RMB65 trillion,raising their share of total corporate loans to 38.2percent,up from 30.4 percent at the end of 2014,with an average annual growth rate ofabout 15 percent during the past decade.Since the end of 2018,inclusive MSB loanshave achieved an average annual growth rate of over 20 percent,with the number ofenterprises approved for credit more than tripling,which is clear evidence of targetedsupport for“genuine MSBs with real inclusive financing needs”.Although the financingenvironment has continued to improve,some constraints still stand in the way of furtherenhancing the quality and efficiency of financial services for MSBs.For example,operational pressures on some MSBs are increasing,the operational feasibility of banks8due diligence-based liability exemption mechanism requires further enhancements,andsupporting mechanisms such as financing guarantees and information sharing requirefurther improvements.Figure:Growth of Loans to MSBs over the Past DecadeSource:The Peoples Bank of China.Moving forward,the PBOC will maintain a problem-focused and objective-drivenapproach,ensuring effective implementation and close monitoring of existing policies.Meanwhile,it will focus on key concerns of MSBs and financial institutions,working toremove barriers and to tackle problems.It will be committed to advancing inclusivefinance by constantly improving the accessibility and sustainability of inclusive financialservices,thereby achieving high-quality development of inclusive finance.First,it willstudyandimprovethecreditenhancementmechanismforprivatesmallandmedium-sizedenterprises(SMEs).Facilitieslikegovernment-backedfinancingguarantees,information sharing platforms,and credit derivatives should be fullyleveraged to mitigate the problems of insufficient credit quality and informationasymmetry that private SMEs often face,thereby enhancing their ability to securefinancing.Second,it will refine implementation of the financial service capabilityenhancement program.The PBOC will fully leverage functions such as lead distributionand information sharing through various service platforms and the National MSME CashFlow Credit Information Interchange to enhance financing efficiency,thereby betterfacilitating both business entities financing and financial institutions client acquisition.Third,the PBOC will further enhance the synergy among its policy tools.It will betterleverage the guiding role of central bank policy tools and utilize structural monetarypolicy instruments,such as the central bank lending for sci-tech innovation andtechnological transformation,the carbon emission reduction facility,and the central banklending for service consumption and elderly care,guiding financial institutions to step upfinancial support for MSBs in key sectors.9III.Money supply and the AFRE grew at a reasonable paceMonetary aggregates grew at a reasonable pace.At end-June 2025,outstanding broadmoney M2 registered RMB330.3 trillion,up 8.3 percent year on year;narrow money M1stood at RMB113.9 trillion,up 4.6 percent year on year;currency in circulation M0registered RMB13.2 trillion,up 12.0 percent year on year.In the first half of 2025,netcash injections totaled RMB363.3 billion,RMB65.9 billion less than that in 2024.Figure 2 YOY Growth of Outstanding Broad Money(M2)and the AFRESource:The Peoples Bank of China.The AFRE maintained reasonable growth.Preliminary statistics show that at end-June2025,the outstanding AFRE stood at RMB430.2 trillion,representing year-on-yeargrowth of 8.9 percent,0.9 percentage points higher than that at end-2024.In H1 2025,theincrement of the AFRE totaled RMB22.8 trillion,RMB4.7 trillion more than that duringthe same period of 2024.The AFRE was characterized by the following features:first,RMB loans maintained reasonable growth.In H1 2025,RMB loans issued by financialinstitutions to the real economy increased by RMB12.7 trillion,RMB279.6 billion morethan that in H1 2024,accounting for 55.8 percent of the AFRE increment during the sameperiod.Second,entrusted loans and undiscounted bankers acceptances registered smallerdecreases year on year,while trust loans registered a smaller increase.In H1 2025,entrusted loans decreased by RMB51.3 billion,a reduction that was RMB40.4 billion lessthan the decline in H1 2024;trust loans increased by RMB144.3 billion,which wasRMB165.5 billion less than the increase in H1 2024;undiscounted bankers acceptancesdecreased by RMB55.7 billion,RMB180.8 billion less than the decrease during the sameperiod of the previous year.Third,domestic equity financing by non-financial enterprisesregistered a higher year-on-year increase,while corporate bond financing registered asmaller increase.In H1 2025,equity financing on the domestic stock market bynon-financial enterprises reached RMB170.7 billion,RMB49.3 billion more than that inH1 2024,while net financing of corporate bonds amounted to RMB1.2 trillion,RMB256.2 billion less than that in H1 2024.Fourth,government bond financing saw ahigher year-on-year increase.In H1 2025,net financing of government bonds totaledRMB7.7 trillion,RMB4.3 trillion more than that in 2024.Fifth,asset-backed securities ofdepository institutions saw a narrower year-on-year decline,while loan write-offs10increased at a faster pace.In H1 2025,financing through asset-backed securities ofdepository institutions decreased by RMB110.1 billion,RMB298.9 billion less than thatduring the same period of the previous year,while loan write-offs increased byRMB684.4 billion,RMB94.9 billion more than the increase during the same period oflast year.Table 7 Aggregate Financing to the Real Economy in H1 2025End-June 2025H1 2025Stock(RMB trillion)YOY growth(%)Flow(RMB100 million)The AFRE430.228.9228329Of which:RMB loans265.227.0127363Foreign currencyloans(RMB equivalent)1.22-26.6-638Entrusted loans11.80.0-513Trust loans4.455.51443Undiscountedbankers acceptances2.08-7.4-557Corporate bonds33.133.511509Government bonds88.7421.376560Equity financing onthe domestic stock market bynon-financial enterprises11.892.91707Other financing12.0410.45556Of which:Asset-backed securities ofdepository institutions0.68-27.9-1101Loan write-offs10.6215.56844Notes:The AFRE(stock)refers to outstanding funds provided by the financial system to the realeconomy at the end of a period.The AFRE(flow)refers to the volume of funds provided by thefinancial system to the real economy within a certain period of time.Since January 2023,the PBOChas included three types of non-depository financial institutions,namely,consumer finance companies,wealth management companies,and financial asset investment companies,in the scope of its financialstatistics.Accordingly,adjustments have been made to the data on“RMB loans issued by the realeconomy”and“loan write-offs”in the scale of social financing.YOY statistics in the table are on acomparable basis.Sources:The Peoples Bank of China,National Financial Regulatory Administration,China SecuritiesRegulatory Commission,China Central Depository&Clearing Co.,Ltd.,National Association of11Financial Market Institutional Investors,etc.IV.The RMB exchange rate remained basically stable at an adaptive andequilibrium levelSince the beginning of 2025,cross-border capital flows have remained stable and orderly,supply and demand in the foreign exchange market have been basically in equilibrium,and expectations for the RMB exchange rate have remained generally stable.Theexternalenvironmenthasbecomeincreasinglycomplexandchallenging,withuncertainties surrounding economic growth,inflation trends,and monetary policyadjustments in the major economies.The U.S.Dollar Index showed a general downwardtrend with volatility,while the RMB exchange rate moved in both directions andremained basically stable at an adaptive and equilibrium level.Driven by market supplyand demand,the RMB exchange rate depreciated against a basket of currencies in H12025.At end-June 2025,the China Foreign Exchange Trade System(CFETS)RMBExchange Rate Index closed at 95.35,depreciating by 6.0 percent from end-2024.According to calculations by the Bank for International Settlements(BIS),the nominaleffective exchange rate(NEER)and the real effective exchange rate(REER)of the RMBappreciated by 40.1 percent and 28.8 percent,respectively,from the beginning of theRMB exchange-rate formation regime reform in 2005 to end-June 2025.At end-June2025,the central parity of the RMB against the U.S.dollar stood at 7.1586,appreciatingby 0.4 percent from end-2024 and appreciating by a total of 15.6 percent since thebeginning of the reform in 2005.Cross-border RMB businesses have maintained growth.In H1 2025,cross-border RMBreceipts and payments totaled RMB34.9 trillion,up 14.1 percent year on year.Specifically,receipts and payments registered RMB17.1 trillion and RMB17.8 trillion,respectively.Cross-border RMB receipts and payments under the current account totaledRMB8.3 trillion,a year-on-year increase of 7.6 percent,of which RMB6.4 trillion wasrelated to trade in goods and RMB1.9 trillion was related to trade in services and othercurrent account items.Under the capital account,cross-border RMB receipts andpayments reached RMB26.6 trillion,up 16.3 percent year on year,including RMB4.1trillion in direct investments,a year-on-year decrease of 0.4 percent.Figure 3 Monthly RMB Settlements under the Current Account12Source:The Peoples Bank of China.Part 2 Monetary Policy OperationsIn H1 2025,the PBOC resolutely implemented the decisions and arrangements of theCPCCentralCommitteeandtheStateCouncil.Itadoptedanappropriatelyaccommodative monetary policy and further intensified counter-cyclical adjustments.InMay,a monetary policy package consisting of ten measures across three categories wasannounced and fully enacted within a month.These measures effectively boostedconfidence,stabilized expectations,and created a favorable monetary and financialenvironment for a sustained economic recovery.I.Conducting open market operations(OMOs)with a combination of short-andlong-term toolsLowering the policy interest rate by 0.1 percentage points.In May,the policy interestrate was lowered by 0.1 percentage points.Specifically,the 7-day reverse repo rate forOMOs was cut from 1.5 percent to 1.4 percent,driving down overall social financingcosts.From the rate cut through the end of June,the weighted average overnight repo ratefor depository institutions in the interbank market(DR001)averaged 1.43 percent,andthe 7-day repo rate(DR007)averaged 1.58 percent,remaining stable near the centralbanks policy rate.Continuously conducting outright reverse repo operations to address the medium-and long-term liquidity gaps.The PBOC conducted monthly outright reverse repooperations in the amount of RMB1.2 trillion,RMB700 billion,and RMB1.4 trillion inApril,May,and June,respectively.Specifically,the cumulative amounts of three-monthand six-month operations registered RMB2.1 trillion and RMB1.2 trillion,respectively.As of the end of June,outstanding outright reverse repos totaled RMB4.6 trillion,up13RMB1.9 trillion from the end of 2024.The timeliness of information disclosures foroutright reverse repo operations was further improved.Starting in June,tenderannouncements were released before operations,clearly indicating the operation date andthe amount so as to stabilize market expectations.Conducting 7-day reverse repo operations in the open market as needed to maintainstability in the money market around the half-year end.As the mid-year approached,precautionary funding demand from financial institutions increased due to concentratedliquidity needs,regulatory metric evaluations,and other factors.Consequently,liquiditypressures for some institutions became apparent.The 7-day open market reverse repooperations fully met the demand of primary dealers.From June 24 to June 30,the PBOCcumulatively provided RMB2.1 trillion to the market through 7-day reverse repooperations,ensuring an adequate liquidity supply at the end of the mid-year andsmoothing quarter-end operations for all types of institutions in the money market.Adding an information section titled Overview of Monetary Policy InstrumentOperations.In early June,the PBOC added a sub-section titled Overview of MonetaryPolicy Instrument Operations under the monetary policy section of its official website.This sub-section consolidates the disclosures of the liquidity provision from the previousmonth,covering monetary policy tools such as reserve requirements,central bank lending,and OMOs.The information is now published at the beginning of each month in a clearerand more concise manner,thereby enhancing the transparency of central bank policies.Continuing the issuance of RMB central bank bills in Hong Kong.In H1 2025,globaltrade frictions intensified,and the safe-haven attribute of U.S.dollar assets weakened.Tomeet the demand for RMB assets in the offshore market,the volume of central bank billissuances in Hong Kong was relatively large in January and February.As the marketstabilized,the issuance volume decreased.The outstanding balance at the end of Junewas approximately RMB140 billion,unchanged from the end of the previous year.Theregular issuance of central bank bills in Hong Kong helps improve the RMB yield curvein Hong Kong,thereby encouraging other market entities to issue RMB bonds offshoreand promoting the healthy development of the offshore RMB market.II.Conducting standing lending facility(SLF)and medium-term lending facility(MLF)operationsConducting MLF operations as appropriate.To ensure medium and long-termliquidity supply,in H1 2025,the PBOC provided a cumulative total of RMB2.4 trillionthrough 1-year MLF operations.The outstanding MLF totaled RMB5.2 trillion atend-June,up RMB61 billion from the beginning of the year.Starting in March,the MLFoperations were conducted through variable-rate tenders with a fixed quantity in the formof multiple price auctions,in order to better meet the diverse funding needs ofparticipating institutions.Conducting SLF operations in a timely manner.SLF operations provide locallyincorporated financial institutions with sufficient short-term liquidity support as needed,14thus helping to stabilize the money market.In H1 2025,the PBOC conducted SLFoperations in the amount of RMB26 billion.At end-June,the outstanding SLF balanceregistered RMB1.7 billion,while the overnight,7-day,and 1-month SLF rates stood at2.25 percent,2.4 percent,and 2.75 percent,respectively,all down by 0.1 percentagepoints from the end of the previous quarter.III.Lowering the RRR for financial institutionsLowering the RRR by 0.5 percentage points.In May,the RRR for financial institutionswas cut by 0.5 percentage points,injecting approximately RMB1 trillion of long-termliquidity into the market.This helped adjust the structure of market liquidity and keepliquidity adequate.Meanwhile,the reserve requirement system was further improved.The RRR for auto financing companies and financial leasing companies was reducedtemporarily from 5 percent to 0,lowering the funding costs of these two types ofinstitutions and enhancing their ability to extend credit to specific sectors,such asautomobile consumption and equipment renewal investments.IV.Furtherimprovingthemacro-prudentialsystemandthemanagementframeworkImproving the macro-prudential governance mechanism.To implement the decisionsand arrangements made at the Central Economic Work Conference on“exploring ways toenhance the central banks function of macro-prudential management and maintainingfinancial stability”,the PBOC established the Macro-Prudential and Financial StabilityCommittee in January.The Committee is responsible for strengthening the analysis andassessment of systemic financial risks,formulating macro-prudential and financialstability policies,and enhancing the analysis,research,communication,coordination,andimplementation of major issues concerning macro-prudential management and financialstability.Focusing the macro-prudential assessment(MPA)on serving the implementationand transmission of monetary policy.Since its establishment in 2016,the MPAframework has played a significant role in strengthening financial macro-regulation,optimizing credit structures,and reinforcing self-discipline in interest and exchange rates.To some extent,it has also assumed responsibility for identifying systemic financial risks.As the macro-prudential policy framework and the PBOCs rating system of financialinstitutions continue to improve,the MPA will increasingly align with its position ofserving monetary policy implementation.It will reflect the aim of promoting greaterefficiency of monetary policy transmission.By leveraging its guiding role,it will guidefinancial institutions to better implement monetary policy,smooth the monetary policytransmission mechanism,and increase credit support for key sectors and vulnerable areas.Continuously consolidating additional regulation over systemically importantfinancial institutions.The assessment of systemically important financial institutions for2025 was launched,and the PBOC studied and promoted the steady expansion of thecoverage of additional regulation to the non-banking sector.It closely monitored the15marginal changes in the operations of systemically important banks(SIBs)and enhancedthe monitoring and analysis of typical risks and weak links.It urged the SIBs to meet therequirements for additional capital and the leverage ratio,improving their ability towithstand and respond to risks.Raising the macro-prudential adjustment parameter for cross-border financing.Tofurther improve the macro-prudential management of full-caliber cross-border financing,expand funding sources for enterprises and financial institutions,and guide them tooptimize their asset and liability structures,in January the PBOC and the StateAdministrationofForeignExchange(SAFE)jointlydecidedtoraisethemacro-prudential adjustment parameter for cross-border financing of enterprises andfinancial institutions from 1.5 to 1.75.Supporting the real estate sector to ensure its stable and sound development.ThePBOCmadegooduseofPledgedSupplementaryLending(PSL)tosupportpolicy-oriented and development-oriented financial institutions in providing credit for theconstruction of affordable housing,urban village redevelopment,and the development ofpublic infrastructure for both regular and emergency use.By end-June,the outstandingPSL balance stood at around RMB1.5 trillion.In July,the scope supported by the centralbank lending facility for affordable housing was expanded.The PBOC strengthenedcoordination with policies of relevant government departments,granted greater autonomyto local governments,and promoted the destocking of existing commercial housing.Promoting the stable operation of the capital market.Two monetary policy toolssupporting the capital market were optimized by integrating the RMB500 billion swapfacility for securities companies,fund management companies,and insurance companieswith the RMB300 billion of the central bank lending for supporting share buybacks andshareholding increases.The PBOC continuously implemented the central bank lendingfacility for supporting share buybacks and shareholding increases,guiding financialinstitutions in providing loans to eligible listed companies and their major shareholders,encouraging listed companies to actively use tools such as share buybacks andshareholder shareholding increases for market capitalization management,thereby furthersafeguarding the stable operation of the capital market.By end-June,listed companieshad disclosed plans to apply for loans to support share buybacks and shareholdingincreases,with the maximum amount exceeding RMB320 billion.Financial institutionshad signed loan contracts for share buybacks and shareholding increases amounting toaround RMB310 billion,with approximately RMB90 billion already disbursed.V.Giving play to the role of monetary policies for structural optimizationIntroducing a number of incremental and optimized structural monetary policymeasures.In May,the PBOC cut the central bank lending rate by 25 basis points(bps),increased the quotas of central bank lending for scientific and technological innovationand technological upgrading,and for rural development and MSBs.It also created a newcentral bank lending facility targeting consumer services and elderly care,and it launcheda risk-sharing tool for sci-tech innovation bonds.16Giving full play to the incentive and guiding role of structural monetary policy tools.The PBOC enhanced support for inclusive finance.It raised the quota for central banklending for rural development and MSBs by RMB300 billion.It actively used the centralbank lending for rural development and MSBs and the central bank discount to guidelocal financial institutions to expand credit supply to agriculture-related entities,MSBsand private enterprises,thereby supporting rural revitalization and promoting coordinatedregional development.The PBOC continuously advanced development of green finance.The carbon emission reduction facility remained in place,and a pilot program waslaunched in Shanghai to expand the scope of sectors supported by this facility,in linewith the needs of transition financing.It stepped up support for technology finance.Thequota for central bank lending supporting scientific and technological innovation andtechnological upgrading was raised by RMB300 billion to RMB800 billion,guidingfinancial institutions to accelerate credit disbursement in relevant sectors and facilitatingthe expanded and strengthened implementation of the“Two New”policies(new types ofurbanization and new initiatives in rural development)with expanded coverage andgreater support.A risk-sharing tool for sci-tech innovation bonds was established tosupport equity investment institutions in issuing long-term bonds for financing,therebychanneling more private capital into the field of scientific and technological innovation.Support for elderly care finance was enhanced.A new central bank lending facilitytargeting consumer services and elderly care was created with a quota of RMB500 billionto encourage financial institutions to increase financial support for key consumer serviceareas and the elderly care industry.As of end-June,the outstanding balance of thestructural monetary policy tools supporting the five major areas in financial sectorreached RMB3.8 trillion.VI.Enhancing the quality and effectiveness of credit policiesWhile promoting implementation of the Guidelines on Advancing Technology Finance,Green Finance,Inclusive Finance,Old-age Finance,and Digital Finance,the PBOC hasestablished a comprehensive statistical system for the five major areas,continued torefine and capitalize on various policy tools,and built communication platforms indifferent forms.These efforts have yielded remarkable results in the development of thefive major areas.Reinforcing support for technology finance.In collaboration with the Ministry ofScience and Technology and five other authorities,the PBOC issued the Measures onAccelerating Development of the Technology Finance System to Support High-levelSci-tech Self-reliance and Self-strengthening.The PBOC refined the central bank lendingfor sci-tech innovation and technological transformation and launched the“sci-tech board”in the bond market,thereby improving the capacity,strength,and level of financialsupport for sci-tech innovations.At the end of June,the cumulative value of loanagreements signed for sci-tech innovation and technological transformation exceededRMB2.2 trillion,with over RMB850 billion already disbursed.The outstanding RMB andforeign currency loans to technology-based SMEs reached RMB3.5 trillion,markingyear-on-year growth of 22.9 percent,which is 16.1 percentage points higher than the17growth rate of total loans in the same period.In the bond market,a total of 288 entitiesissued approximately RMB600 billion worth of sci-tech innovation bonds,including overRMB400 billion issued in the interbank market.Box 2 Financial Support for Technological Innovation Continues to beStrengthenedCredit support for technological innovation continues to be strengthened.Chinasfinancial system is predominantly based on indirect finance,making credit resourcescritical for strengthening financial support for technology.In recent years,the PBOC hasencouraged banks to improve policies on resource allocation,performance evaluation,and other arrangements,so that they are capable,skilled,confident,and willing to lend.In 2024,the PBOC launched RMB500 billion of central bank lending for sci-techinnovation and technological upgrades,with an additional RMB300 billion quota addedin May of this year to further incentivize banks to increase credit support fortechnology-based enterprises and to upgrade traditional industries.Since the beginning of2025,sci-tech lending has maintained a trend of volume expansion,cost reductions,andcoverage extensions.First,sci-tech loans have maintained rapid growth.As of end-June,outstanding sci-techloans amounted to RMB44.1 trillion,up 12.5 percent year on year,and 5.8 percentagepoints higher than overall loan growth during the same period.In particular,loans totechnology-based SMEs have increased most rapidly,with a growth rate above 20percent since the beginning of this year.Second,interest rates on sci-tech loans have continued to decline.In June,the weightedaverage interest rate on newly issued sci-tech loans was 2.90 percent,0.36 percentagepoints lower than the overall rate on newly issued corporate loans,and down 0.21 and0.44 percentage points from the beginning of the year and from the same period of lastyear,respectively.The decline in interest rates was even more pronounced for newlyissued loans to technology-based SMEs,down 0.31 and 0.67 percentage points from thebeginning of the year and from the same period of last year,respectively.Third,loan approval rates for technology-based enterprises have remained high.As ofend-June,banks provided sci-tech loans to 1.085 million enterprises,with an averageloan approval rate of 51.9 percent for technology-based enterprises,up 1.3 and 2.3percentage points from the beginning of the year and from the same period of last year,respectively.Notably,the loan approval rates for national technology innovationdemonstration enterprises,manufacturing champions in individual fields,and“LittleGiant”enterprises in sophisticated,distinctive,and innovative areas,all exceeded 80percent.Figure:Trends in the Outstanding Balance and Growth Rate of Sci-Tech Loans18Source:The Peoples Bank of China.Financing channels for sci-tech innovation have been further diversified and refined.As one of the major channels for direct financing,the bond market features large-scalefinancing,low costs,and long maturities,giving it unique advantages in supportingsci-tech innovation.In May 2025,the PBOC and the China Securities RegulatoryCommission(CSRC)jointly launched the bond markets“sci-tech board”as aninnovation to enable three categories of entities,namely,financial institutions,technology-based enterprises,and private equity investments institutions,to issue sci-techinnovation bonds.Since its inception,market participants have shown enthusiasm.As ofend-June,288 entities across the market had issued approximately RMB600 billion worthof sci-tech innovation bonds.First,technology-based enterprises issuing bonds have become more diversified,broadlycovering all sectors.As of end-June,94 technology-based enterprises issued RMB166.37billion worth of sci-tech innovation bonds in the interbank bond market,with a maximummaturity of 20 years.Specifically,24 private technology-based enterprises issuedRMB44.35 billion worth of bonds across 21 provinces,spanning cutting-edge andemergingsectors,suchasintegratedcircuits,AIcomputingcenters,andbiopharmaceuticals.The supporting instrument for bond financing of private enterpriseshascontinuouslyprovidedcreditenhancementsforbondissuancesofprivatetechnology-based enterprises.Second,a risk-sharing instrument for sci-tech innovation bonds was launched to supportbond issuances and financing of equity investment institutions.Equity investmentinstitutions play a pivotal role in early-stage,small-scale,long-term,and hard-techinvestments,but their asset-light nature and long investment cycles drive up the costs of19bond financing.The PBOC introduced a risk-sharing instrument for sci-tech innovationbonds,collaborating with local governments and market-based credit enhancementagencies to provide effective credit enhancements for equity investment institutions,especially private institutions.Furthermore,a variety of maturities are offered to facilitateequity investment institutions in issuing 5-year and 10-year bonds.This better aligns withthe capital utilization characteristics and funding needs of equity investments,andsignificantly reduces their bond financing costs.As of end-June,27 equity investmentinstitutions issued RMB15.35 billion worth of bonds in the interbank market,withrelatively low coupon rates ranging from 1.85 to 2.69 percent.Third,financial institutions have responded quickly,actively engaging in the issuance,underwriting,market making,and investment of these bonds.As of end-June,23financial institutions issued RMB220.6 billion worth of sci-tech innovation bonds in theinterbank market,with proceeds dedicated to providing loans to technology-basedenterprises and investing in their equities,bonds,and funds.Meanwhile,financialinstitutions have actively participated in investing in sci-tech innovation bonds,providinghigh-quality underwriting and market-making services,thereby continuously facilitatingthe expansion and extension of coverage of the sci-tech innovation bond market.Moving forward,the PBOC will deepen supply-side structural reforms in finance,implement the work plan for bolstering technology finance,and continue to refine thepolicy framework for financial support for sci-tech innovation.It will step up creditsupport for technology-based SMEs,leverage the combined efforts of central and localgovernments,jointly promote the development of the sci-tech innovation bond market,and cultivate a well-rounded financial ecosystem that supports sci-tech innovation,thereby providing stronger financial support for achieving high-level self-reliance inscience and technology.20Giving play to the leading role of green finance.The PBOC continuously strengthenedpolicy guidance by better leveraging the incentivizing and guiding role of structuralmonetary policy tools,strengthening policy efficacy,and improving the incentive andconstraint mechanisms.It carried out the green finance assessment of financialinstitutions,aiming to enrich green financial products and propel market development,and to channel more financial resources to green development and low-carbon transitionareas.In addition,the PBOC continued to promote the working mechanism fordeveloping green finance to serve the Beautiful China Initiative.This has improvedcoordination and cooperation among industrial departments,the financial system,andmarket entities,facilitating the rapid growth of green loans.At the end of June,outstanding green loans stood at RMB42.4 trillion,increasing by 14.4 percent comparedto the beginning of the year.The PBOC also inspected the use of green bond proceeds,thereby promoting high-quality development of the green bond market.The cumulativeissuance of green bonds reached RMB4.6 trillion,of which green financial bonds reachedRMB2.0 trillion,providing stable capital sources for financial institutions to grant greencredits.Improving the quality and efficiency of inclusive financial services.The PBOCcontinued to implement the 25 Measures on Providing Financial Support for the PrivateEconomy in a thorough and detailed manner.It launched the financial service capabilityenhancement program for MSMEs,conducted quarterly assessments of the effects ofboth the financial services for the private economy and the credit policy guidance forMSBs,thereby reinforcing the incentive and constraint mechanisms for financialinstitutions.Moreover,the PBOC continued to carry out five specialized campaigns forproviding financial support for all-round rural revitalization,ensuring sufficient fundingfor food security,rural industries,rural construction,rural governance,and other keyareas.Jointly with the Ministry of Agriculture and Rural Affairs,it optimized thematching system for the financing project database and promoted the integration ofrural-related information and the matching of services for agricultural production andbusinesses,thereby enhancing financial support for agricultural and rural infrastructures.In addition,the PBOC effectively implemented the policy on guaranteed loans forstartups,backing entrepreneurship and employment among key populations.It alsofulfilled the requirements to raise loan caps and lower interest rates on national studentloans,and it implemented interest exemptions and principal repayment deferrals on theseloans in 2025.At end-June,the outstanding inclusive MSB loans had grown by 12.3percent year-on-year to RMB35.6 trillion.Outstanding loans to the private economy andagriculture-related loans stood at RMB70.9 trillion and RMB 53.2 trillion,up 5.4 percentand 7.4 percent year on year,respectively.Outstanding guaranteed loans for startupsreached RMB261.6 billion and outstanding student loans totaled RMB267.7 billion.Steadily promoting the development of old-age finance.While comprehensivelyimplementing the Guidelines on Financial Support for Chinas Elderly Care Initiativesand High-quality Development of the Silver Economy,the PBOC established aprovincial-level working mechanism for old-age finance.Financial institutions wereguided to improve their internal departmental structures,fully utilize central bank lendingfacilities,increase credit support for the elderly care industry,and refine financial21products and services for elderly care,so as to continuously enhance the accessibility offinancial services for the aging population.Stepping up efforts to boost consumption and expand domestic demand.The PBOCguided financial institutions to leverage the central bank lending for service consumptionand elderly care,and reinforced financial support for hotels and catering,culture,sportsand entertainment,education,household services,tourism,and other key serviceconsumption sectors.In June,the PBOC issued the Guidelines on Reinforcing FinancialSupport for Boosting and Expanding Consumption,guiding financial institutions tostrengthen financial services on both the supply and demand sides,so as to meet thediverse financing needs of various entities,expand high-quality consumption supply,andcontinuously improve the quality and efficiency of financial services in the consumptionsector.Box 3 Continuous Optimization of the Credit Structure and Enhanced Quality andEfficiency of Financial Support for the Real EconomyAt present,Chinas outstanding aggregate financing to the real economy(AFRE)andbroad money supply(M2)have exceeded RMB430 trillion and RMB330 trillion,respectively.As high-quality economic development advances steadily,it is essential tocontinuously optimize the credit structure while maintaining reasonable growth infinancial aggregates.In recent years,the PBOC has consistently guided financialinstitutions to enhance the adaptability of financial services for economic restructuring,inparticular by focusing on the five major areas(technology finance,green finance,inclusive finance,pension finance and digital finance),as well as by supporting theexpansion of domestic demand.This effort aims to channel more credit resources towardmajor national strategies,key sectors,and weak links,thereby fostering a virtuous cyclebetween finance and the real economy.The credit structure has been continuouslyoptimized on several fronts.Support for the five major areas has increased,with loans related to science andtechnology,green development,inclusive finance,elderly care,and the digitaleconomy accounting for approximately 70 percent of all new loans.In recent years,the PBOC has continuously explored and refined policy arrangements for the five majorareas.On the one hand,it emphasizes leveraging market efficiency in resourceallocations to stimulate the internal motivation of financial institutions.On the other hand,it focuses on utilizing the guiding role of structural monetary policy tools to providepolicy support and incentive guidance within a reasonable and appropriate scope,enhancing the capacity and willingness of financial institutions to support key sectors.Additionally,it emphasizes the synergy of monetary and credit policies with measuressuch as fiscal interest subsidies and risk compensation,continuously strengthening theeffectiveness of financial support for key areas.Over the past decade,the structure ofcredit allocations has undergone profound changes,with the main drivers shifting fromheavy-asset industries to sectors aligned with high-quality development.The structureof new loans has evolved significantly since 2016.Back then,real estate andinfrastructure made up over 60 percent of new lending.Today,loans in the five22major areas account for approximately 70 percent.Figure:Structural Changes in Loan Increments Over the Past DecadeSource:The Peoples Bank of China.In terms of the allocation of new loans,loans to new growth drivers and domesticdemand sectors have maintained relatively rapid growth.Technology financeprovides higher-quality credit support for technological innovation,with sci-tech loanssustaining double-digit growth for many years.In June 2025,sci-tech loans increased by12.5 percent year on year,5.8 percentage points higher than the growth rate of loans indomestic and foreign currencies during the same period.Green finance strongly supportssustainable economic development and the achievement of the 30/60 decarbonizationgoals.The outstanding balance of green loans grew from RMB9.9 trillion at the end of2019 to RMB36.6 trillion at the end of 2024,with an average annual growth rate of over20 percent.Inclusive finance has expanded in both volume and coverage,with inclusiveMSB loans maintaining an average annual growth rate of over 20 percent since the end of2018.By the end of 2024,the number of inclusive MSB credit recipients reached 60.99million,approximately three times the number at the end of 2018.Loans to the elderlycare and digital economy industries have also grown faster than the overall loan growthrate.Figure:Year-on-Year Growth Rate of Loans in the Five Major Areas as of the Endof June 202523Source:The Peoples Bank of China.In terms of the maturity structure of loans,the proportion of medium-and long-termloans has increased,helping to provide stable funding support for high-qualitydevelopment of the real economy.Expanding production and technological research anddevelopment typically require an extended period of time,which is particularly evident inthe manufacturing and high-tech industries.In recent years,the PBOC has continuouslyguided financial institutions to optimize the maturity structure of credit,increasing theallocation of medium-and long-term loans to support the high-quality development of thereal economy.Over the past decade,the growth rate of medium-and long-term loans inthe manufacturing sector has consistently outpaced the growth rate of overall loans.Theproportion of medium-and long-term loans in RMB loans rose from 56 percent to 67percent,an increase of nearly 11 percentage points.In terms of the borrower structure of loans,the proportion of enterprise loans hasincreased.As Chinas economy has grown in size and the market-oriented reforms havedeepened,the number of business entities has expanded and enterprise financing hasaccounted for a larger share of financing.Over the past decade,the proportion of loans toenterprises and public institutions in the annual increment of RMB loans has increased byabout 16 percentage points to 79 percent.While the credit structure is being optimized,Chinas overall financing structure is alsoimproving,with the proportion of direct financing rising steadily.In recent years,thefinancial system has deepened reforms,improved capital market functions,acceleratedthe development of capital markets such as stocks and bonds,and increased theproportion of direct financing.These efforts have yielded sustained results.In terms ofthe composition of the outstanding AFRE,the share of direct financing,includingenterprise bonds,government bonds,and domestic equity financing for non-financialenterprises,has steadily increased from 26.7 percent at the end of 2018 to 31.1 percent atthe end of June 2025,a rise of 4.4 percentage points.24Figure:Share and Growth Rate of Direct Financing in the Outstanding AFRESource:The Peoples Bank of China.In the next stage,the financial system will continue to adhere to the fundamental purposeof serving the real economy.It will focus on major national strategies,key sectors,andweak links,with an emphasis on supporting technological innovation and expandingconsumption.Efforts will be made to continuously optimize the credit structure,aligncredit supply more closely with economic restructuring and a dynamic economic balance,further meet the effective financing needs of the real economy,and provide stronger andmore efficient support for high-quality economic development.VII.Improving the formation and transmission mechanism for market-orientedinterest ratesDeepening the market-oriented interest rate reform to promote a reduction inoverall financing costs.First,the effectiveness of the LPR reform was continuouslyleveraged,driving a steady decline in loan rates.In May,the PBOC lowered the 7-dayopen market reverse repo rate by 0.1 percentage points,guiding both the one-year andover-five-year LPRs to decline by 0.1 percentage points,respectively.The PBOC alsoreduced the interest rates on housing provident fund loans by 0.25 percentage points.Consequently,policy effects continued to emerge.In June,the average rates on newcorporate loans and new personal housing loans stood at approximately 3.2 percent and3.1 percent,respectively,maintaining historically low levels and representing declines ofabout 2.4 percentage points and 2.7 percentage points,respectively,from their highs inthe second half of 2018 when the rate-cutting cycle began.Second,the linkageadjustment mechanism for deposit rates was effectively utilized to guide deposit ratesdownward.In May,once again major banks proactively cut deposit rates in response tochanges in market interest rates,and small-and medium-sized banks followed suit withtheir own rate reductions.These measures helped stabilize the banks liability costs andcreated favorable conditions for reducing overall financing costs.25Strengthening implementation and supervision of interest rate policies to smooth thetransmission mechanism for interest rates.First,the PBOC conducted speciallaw-enforcement inspections of interest rate policies,performing on-site inspections ofthe implementation of interest rate policies and the fulfillment of interest rateself-regulatory agreements by relevant financial institutions.To smooth the transmissionof interest rates,the PBOC urged banks to adhere to the risk-based pricing principle,toset reasonable deposit and loan rates,and to maintain orderly market competition.Second,the interest rate self-regulatory mechanism was fully leveraged to effectively implementvarious initiatives,including prohibiting irregular manual interest subsidies,establishinga reporting mechanism for deposit bidding rates,and optimizing the self-regulation ofinterbank deposit rates for non-banking financial institutions,thereby reinforcing theeffects of the deposit rate adjustments and stabilizing the banks liability costs.VIII.Deepening the market-based reform of the RMB exchange rateThe PBOC has continued to improve the managed floating exchange rate regimebased on market supply and demand with reference to a basket of currencies.ThePBOC is committed to the principle that the market plays a decisive role in the formationof the exchange rate,and the exchange rate plays the role of both an auto stabilizer and ashock absorber for macroeconomic management as well as for the balance of payments.The PBOC has taken comprehensive measures and strengthened expectation guidance tobalance supply and demand in the foreign exchange market and to guard against the risksof an exchange rate overshooting.As a result,the RMB exchange rate has remainedbasically stable at an adaptive and equilibrium level.In H1 2025,the highest and lowestRMB central parities against the U.S.dollar were 7.1586 and 7.2133,respectively.During the 117 trading days,the RMB appreciated on 61 days and depreciated on 56 days.The biggest intraday appreciations and depreciations were 0.26 percent(183 bps)and0.13 percent(96 bps),respectively.The RMB witnessed both appreciations anddepreciations against the major international currencies,with two-way fluctuations.Fromthe beginning of the reform of the RMB exchange rate formation regime in 2005 toend-June 2025,the RMB appreciated by a cumulative 15.6 percent,19.2 percent,46.6percent,and 47.3 percent,respectively,against the U.S.dollar,the euro,the poundsterling,and the Japanese yen.Direct RMB trading is buoyant in the interbank foreignexchange market and liquidity remains stable,reducing the exchange costs for enterprisesand promoting bilateral trade and investment.Table 8 The Trading Volume of the RMB Against Other Currencies in theInterbank Foreign Exchange Spot Market in H1 2025Unit:RMB100 millionCurrencyUSDEURJPYHKDGBPAUDTradingvolume374529.463527.942031.311600.60188.52172.59CurrencyNZDSGDCHFCADMOPMYR26Tradingvolume51.93173.04170.02134.300.6918.77CurrencyRUBZARKRWAEDSARHUFTradingvolume10.872.5617.0260.454.700.63CurrencyPLNDKKSEKNOKTRYMXNTradingvolume0.632.9814.8420.27032.78CurrencyTHBIDRKHRKZTMNTVNDTradingvolume95.8232.180000Source:China Foreign Exchange Trade System.IX.Forestalling and defusing financial risksRefining the system for monitoring and assessing financial stability risks,andimproving the capacity to identify,to issue warnings,to expose,and to address risksat an early stage.Banking sector risks were monitored through tools such as the PBOCsCentral Bank Rating of Financial Institutions,stress testing,major event reporting,andrisk monitoring and early warnings.The PBOC applied tools like stress testing for stockpledge financing,stress testing for liquidity in public funds,and financial market stressindices to closely track abnormal fluctuations in the capital market and risks fromexternal shocks.It enhanced risk monitoring and assessments of nonbank financialinstitutions,including insurance and trust companies.Continuously advancing comprehensive reforms in the financial sector to build astronger and more effective financial safety net.The PBOC urged policy anddevelopment financial institutions to implement business categorization and separateaccounting reforms,and guided them to strengthen their functional positioning,to clarifytheir business boundaries,and to further optimize key support areas and product systems.It supported global systemically important banks(G-SIBs)in issuing total loss-absorbingcapacity(TLAC)bonds and large state-owned banks in replenishing their core Tier 1capital.It guaranteed the smooth operation of the deposit insurance mechanism,effectively delivering its core functions such as preventing bank runs,applyingdifferential premium rates,conducting prompt corrective actions,and facilitating riskresolution.X.Enhancing cross-border trade,investment,and financing servicesFacilitating fund settlement for cross-border trade.Trade facilitation policies wereoptimized and expanded.Banks were supported to improve review approaches and to27simplify procedures when handling foreign exchange receipts and payments for trade byenterprises with good credit.Settlement channels for new forms of trade were broadened,enabling more institutions to provide foreign exchange settlement services forcross-border e-commerce based on electronic transaction information.Continuously facilitating cross-border investment and financing.In H1 2025,thepilot program for integrated RMB and foreign currency cash pooling for multinationalcompanies was expanded to include many mega multinational companies in Tianjin,Hebei,Inner Mongolia,Heilongjiang,Anhui,Fujian,Shandong,Hubei,Hunan,Guangxi,Chongqing,Sichuan,Guizhou,Yunnan,Xinjiang,and Xiamen.More than half of themcompleted registration and began the relevant operations,with some facilitation measuresreducing business processing time by 50 percent.Deepening international monetary and financial cooperation.Steady progress wasmade in advancing bilateral local currency swap arrangements and improving the localcurrency swap framework to support development of the offshore RMB market and tofacilitate trade and investment.Focusing on neighboring countries and partner countriesalong the Belt and Road,the PBOC strengthened central bank cooperation for localcurrency settlements and improved the conditions for using offshore RMB.By the end ofJune,under the bilateral local currency swap agreements signed between the PBOC andoverseas monetary authorities,overseas monetary authorities had drawn RMB with anoutstanding balance of RMB80.7 billion,and the PBOC had drawn foreign currencieswith an outstanding balance equivalent to about RMB0.4 billion,playing a positive rolein promoting bilateral trade and investment.Part 3 Financial Market ConditionsIn H1 2025,the financial market functioned in an overall stable manner.Money marketinterest rates declined,and market trading slowed down.Corporate bond issuance ratesfell,and the volume of bond issuances increased year on year.The stock market edged up,while the trading volume and equity financing expanded significantly.I.Financial market overview1.Money market interest rates declined,and market trading slowed downMoney market interest rates declined.In June 2025,the monthly weighted averageinterest rate for overnight interbank lending stood at 1.42 percent,and that for overnightpledged repos was 1.47 percent,42 bps and 39 bps lower than that in the same period oflast year,respectively.The monthly weighted average interest rate for overnight pledgedrepos backed by interest rate bonds among depository institutions posted 1.39 percent.Atthe end of June,the overnight and 7-day Shanghai Interbank Offered Rate(Shibor)stoodat 1.42 percent and 1.76 percent,down 3 bps and 21 bps from end-2024,respectively.Repo transactions slowed down.In H1 2025,cumulative bond repo transactions in the28interbank market totaled RMB748.6 trillion,with a daily average of RMB6.2 trillion,down 3.5 percent year on year.Cumulative interbank lending transactions reachedRMB37.6 trillion,representing a daily average of RMB313.7 billion,down 24.7 percentyear on year.In terms of the maturity structure,overnight repos accounted for 83.8percent of the total trading volume of bond repos,down 0.8 percentage points year onyear,while overnight interbank lending constituted 79.4 percent of the total interbanklending,down 5.0 percentage points year on year.Cumulative exchange-traded bond repotransactions totaled RMB292.4 trillion,up 24.8 percent year on year.Table 9 Fund Flows of Repos and Interbank Lending Among Financial Institutionsin H1 2025Unit:RMB100 millionReposInterbank lendingH1 2025H1 2024H1 2025H1 2024Chinese-funded large banks-2718317-3515461-123688-209002Chinese-funded medium-sizedbanks-376662-5102171173621621Chinese-funded small-sizedbanks217527370643-449425186Securities institutions12488761189255114012149058Insurance institutions1285461395556571054Foreign-funded banks-3211311852-7753-12502Other financial institutions andproducts15321432314374953124585Notes:Chinese-funded large banks include the Industrial and Commercial Bank of China,Agricultural Bank of China,Bank of China,China Construction Bank,China Development Bank,Bank of Communications,and Postal Savings Bank of China.Chinese-funded medium-sized banksrefer to policy banks,China Merchants Bank and eight other joint-equity commercial banks,Bank ofBeijing,Bank of Shanghai,and Bank of Jiangsu.Chinese-funded small-sized banks refer to theHengfeng Bank,China Zheshang Bank,China Bohai Bank,other city commercial banks,ruralcommercial banks,rural cooperative banks,private banks,and village and township banks.Securities institutions include securities firms,fund management companies,and futures companies.Insurance institutions include insurance firms and corporate annuities.Other financial institutionsand products include urban credit cooperatives,rural credit cooperatives,finance companies,trust andinvestment companies,financial leasing companies,asset management companies,social securityfunds,mutual funds,wealth management products,trust plans,and other investment products.Someof these financial institutions and products do not participate in the interbank lending market.Anegative sign indicates net lending and a positive sign indicates net borrowing.Source:China Foreign Exchange Trade System.29Interbank Certificates of Deposits(CDs)and negotiable CDs developed in an orderlymanner.In H1 2025,11,000 interbank CDs were issued in the interbank market,totalingRMB17.4 trillion.The volume of secondary market trading totaled RMB108.5 trillion,and the outstanding balance stood at RMB21.1 trillion at end-June.The weighted averageissuance rate of 3-month interbank CDs was 1.83 percent,8 bps above the 3-monthShibor.Financial institutions issued 49,000 negotiable CDs during the period,with thetotal issuance reaching RMB16.3 trillion,up RMB5.5 trillion year on year.The interest rate swap(IRS)market remained stable.In H1 2025,the RMB IRS marketrecorded 207,000 transactions(including standard swaps),with a notional principal ofRMB25.3 trillion,up 60.9 percent year on year.In terms of the term structure,contractswith maturities of one year or less were most actively traded,with a notional principal ofRMB19.1 trillion,accounting for 75.7 percent of the total volume.The floating leg ofRMB IRS transactions is primarily benchmarked to the 7-day repo fixing rate,the PrimeNegotiable Certificate of Deposit(Prime NCD)issuance rate of major nationwide banks,and the Shibor.The shares of the notional principal linked to these benchmarks were 81.4percent,16.7 percent,and 1.5 percent,respectively.In H1,a total of 391 IRS contractswith the LPR as the underlying asset were traded,with a combined notional principal ofRMB65.64 billion.Table 10 Interest Rate Swap Transactions(including Standard Swaps)in H1 2025TransactionsNotional principal(RMB100 million)H1 2025207146252729H1 2024156495157116Source:China Foreign Exchange Trade System.The interest rate options business developed steadily.In H1 2025,a total of 300 interestrate option transactions were concluded,totaling RMB63.23 billion,all of which wereLPR-linked interest rate cap/floor options.2.Corporate bond issuance rates declined,and issuance volumes increasedIssuance rates on government bonds remained generally stable,while those on corporatebonds declined.In June 2025,the issuance rate on 10-year government bonds issued bythe Ministry of Finance stood at 1.66 percent,up 5 bps from March 2025;the averagerate on 1-year short-term financing bills issued by AAA-rated enterprises was 1.82percent,down 50 bps from March 2025.Government bond yields marked a downward trend.At end-June 2025,yields on 1-year,3-year,5-year,7-year,and 10-year government bonds declined by 20 bps,21 bps,14 bps,13 bps,and 16 bps from end-March 2025,reaching 1.34 percent,1.40 percent,1.51percent,1.61 percent,and 1.65 percent,respectively.The term spread between 1-year and10-year government bonds widened to 31 bps,up 4 bps from end-March 2025.30Figure 4 Yield Curves of Government Bonds in the Interbank MarketSource:China Central Depository&Clearing Co.,Ltd.Bond issuances increased year on year,with government bond issuances growing at afaster pace.In H1 2025,the volume of cumulative bond issuances reached RMB44.5trillion,up 16.7 percent year on year and RMB6.4 trillion more than that during the sameperiod of last year,mainly driven by the increase in issuance of government bonds,localgovernment bonds,and financial bonds,showing that the more proactive fiscal policiesimplemented early on have achieved good results.At end-June 2025,the outstandingbalance of domestic bonds stood at RMB188.5 trillion,up 14.3 percent year on year.Spot bond trading volume declined year on year.In H1 2025,the total trading volume ofspot bonds reached RMB206.5 trillion,down 5.6 percent year on year.Specifically,transactions in the interbank market amounted to RMB187.8 trillion,a decrease of 5.2percent year on year,while transactions on the stock exchanges totaled RMB18.7 trillion,a decrease of 8.7 percent year on year.Table 11 Bond Issuances in H1 2025Unit:RMB100 millionType of bondIssuanceYOY changeGovernment bonds7880420637Local government bonds5359219760Central bank bills00Financial bonds23554919422Of which:Financial bonds issued by the ChinaDevelopment Bank(CDB)and policy financial349685741Maturity31bondsInterbank certificates of deposits17385310478Corporate credit bonds764894185Ofwhich:Debt-financinginstrumentsofnon-financial enterprises47528-2261Enterprise bonds1043652Corporate bonds209603575Bonds issued by international institutions894-160Total44532763844Notes:Including financial bonds issued by the CDB,policy financial bonds,bonds issued bycommercial banks(including ordinary bonds,subordinated bonds,and hybrid bonds),bonds issued bysecurities firms,and interbank certificates of deposit.Including debt-financing instruments issuedby non-financial enterprises,enterprise bonds,corporate bonds,convertible bonds,bonds withdetachable warrants,privately offered SME bonds,and asset-backed securities on the Shanghai StockExchange and the Shenzhen Stock Exchange issued by non-financial enterprises.Sources:The Peoples Bank of China,China Securities Regulatory Commission,and China CentralDepository&Clearing Co.,Ltd.Updated with the latest data from the providers.3.The bill market operated in a stable manner,while the issuance of bills grewrapidlyThe bill market operated smoothly.In H1 2025,commercial drafts issued by enterprisestotaled RMB20.1 trillion.At end-June,outstanding commercial drafts stood at RMB18.6trillion.Bankers acceptances issued by MSMEs accounted for 72.9 percent.Totaldiscounts by financial institutions amounted to RMB32.2 trillion.At end-June,thebalance of bill financing stood at RMB14.7 trillion,up 0.4 percentage points year on yearand accounting for 5.5 percent of total outstanding loans.Interest rates in the bill marketshowed an upward and then downward trend in H1 2025.4.The stock market witnessed anupward trend and turnover increasedsignificantlyMajor stock indices edged up.At end-June 2025,the Shanghai Stock ExchangeComposite Index closed at 3,444 points,up 2.8 percent from end-2024,while theShenzhen Stock Exchange Component Index closed at 10,465 points,up 0.5 percent fromend-2024.Both the turnover and fundraising increased.In H1 2025,total turnover on theShanghai and Shenzhen Stock Exchanges reached RMB159.4 trillion,with an averagedaily turnover of RMB1.3621 trillion,up 58.8 percent year on year.A total of RMB854.4billion was raised through equity financing.5.Insurance premium income and assets increased year on yearIn H1 2025,total premium income in the insurance sector amounted to RMB3.7 trillion,up 5.3 percent year on year,5.9 percentage points lower than the growth rate at end-2024.Claim and benefit payments totaled RMB1.3 trillion,an increase of 9.4 percent year on32year,with property insurance payouts down 1.5 percent and personal insurance payoutsup 15.7 percent year on year.Table 12 Asset Allocations in the Insurance Sector at end-June 2025Units:RMB100 million,lanceAs a share of total assetsEnd-June2025End-June2024End-June2025End-June2024Total assets392214337964100.0100.0of which:Bankdeposits33372299158.58.9Investments32897227875283.982.5Source:National Financial Regulatory Administration.Insurance assets increased year on year.At end-June 2025,total assets in the insurancesector rose 16.1 percent year on year to RMB39.2 trillion,the growth rate was 3.8percentage points lower than that at the end of last year.Specifically,bank deposits grewby 11.6 percent,while investment assets increased by 18.0 percent year on year.6.The trading volume of foreign exchange spot,forward,and swap transactionswent upIn H1 2025,the turnover of spot RMB/foreign exchange transactions reached USD5.3trillion,up 29.7 percent year on year.Swap RMB/foreign exchange transactions totaledUSD11.6 trillion,up 0.9 percent year on year.Specifically,overnight RMB/USD swaptransactions posted USD7.5 trillion,accounting for 64.5 percent of the total swapturnover.RMB/foreign exchange forward transactions totaled USD110.1 billion,up 14.7percent year on year.Foreign-currency pair transactions totaled USD1.5 trillion,up 23.1percent year on year,with the EUR/USD pair being the most traded,accounting for 32.6percent of total market share.7.Gold prices went up,and the trading volume expandedAt end-June 2025,international gold prices closed at USD3287.5 per ounce,up 5.5percent from end-March 2025.The Au99.99 contract on the Shanghai Gold Exchangeclosed at RMB764.4 per gram,up 4.6 percent from end-March 2025.In Q2 2025,thevolume of gold trading on the Shanghai Gold Exchange totaled 18,000 tons,an increaseof 21.3 percent year on year,with total turnover reaching RMB13.5 trillion,up 69.2percent year on year.II.Development of institutional arrangements in the financial markets1.Institutional Arrangements in the Bond MarketContinuously optimizing bond market connectivity.In January,the PBOC announced33improvements to the operational mechanisms of the Southbound Bond Connect,enablingdomestic investors to purchase multi-currency bonds more conveniently,extendingsettlement hours,and launching a service that allows overseas institutions to use bondsunder the Bond Connect as margin collateral for the Swap Connect.In March,the PBOCcollaborated with the Hong Kong Monetary Authority(HKMA)to support the use ofChinese government bonds and policy financial bonds under the Northbound BondConnect as eligible margin collateral at the OTC Clearing Hong Kong Limited(OTCC),further expanding the collateral function of RMB bonds in offshore markets.Thesemeasures contribute to steady progress in the internationalization of the RMB andreinforce Hong Kongs status as an international financial center.Announcing the establishment of a trade report repository for the interbank market.InJune,the PBOC announced the establishment of a trade report repository for theinterbank market to collect and systematically analyze trading data in the interbank bond,currency,derivative,gold,and commercial paper markets on a high-frequency basis,soas to serve financial institutions,macro regulation,and financial market supervision.Efforts were made to promote the acceptance of offshore Chinese government bonds aseligible collateral by the London Clearing House(LCH).Initially launching the“sci-tech board”in the bond market.In May,the PBOC and theCSRC jointly issued the Announcement on Matters Concerning Supporting the Issuanceof Sci-tech Innovation Bonds(Announcement No.8 2025 of the PBOC and CSRC).Theannouncement introduces several measures to support three types of entitiesfinancialinstitutions,technology-based enterprises,and private equity investment institutionsinissuing sci-tech innovation bonds.Additionally,a risk-sharing tool for sci-tech innovationbonds was created to support equity investment institutions with extensive investmentexperience,outstanding management performance,and high-caliber management teamsin securing long-term,low-cost bond financing.2.Institutional Arrangements in the Securities MarketImproving the capital market institutional system.In May,the CSRC amended theAdministrative Measures for Major Asset Restructuring of Listed Companies.Themeasures aim to establish a phased payment mechanism for restructuring shareconsideration,to increase tolerance for changes in financial conditions,horizontalcompetition,and supervision of related-party transactions,to introduce a simplifiedrestructuring review procedure,and to clarify lock-up period requirements for absorptionmergers between listed companies.In June,the CSRC released the Guidelines onEstablishing a Science and Technology Innovation Growth Tier on the STAR Market toEnhance Institutional Inclusiveness and Adaptability.By creating a dedicated market tier,the guidelines reinstate the listing of unprofitable enterprises under the fifth set of STARMarket listing criteria and roll out a package of more inclusive and adaptive institutionalreforms.These efforts aim to address bottlenecks and challenges in supporting thedevelopment of high-quality technology-based enterprises and to further strengthen theprotection of investors legitimate rights and interests.Promoting the two-way opening of the capital market.In June,the CSRC released the34Announcement on Qualified Foreign Institutional Investors(QFII)and RMB QualifiedForeign Institutional Investors(RQFII)Participating in Stock Options Trading,allowingQFIIs and RQFIIs to trade Exchange-Traded Fund(ETF)options solely for hedgingpurposes,to enter into effect on October 9,2025.3.Institutional Arrangements in the Insurance MarketAdvancing the development of old-age finance.In March,the NFRA released theImplementation Plan for High-Quality Development of Pension Finance in the Bankingand Insurance Industries,clarifying the requirements for banking and insuranceinstitutions to better contribute to the development of a multi-layered and multi-pillarpension insurance system and to increase financial support for the silver economy.Theplan also outlines systematic arrangements to enhance the capacity and efficiency offinancial services in supporting the overall context of Chinese modernization and thechallenges of the aging population.Advancing the development of technology finance.In April,the NFRA,the Ministry ofScience and Technology,and the National Development and Reform Commission jointlyreleased theImplementation Plan for High-Quality Development of Technology Financein the Banking and Insurance Industries,guiding financial institutions to strengthenfull-life-cycle financial services for technology-based enterprises,to advance technologyfinance,and to contribute to high-level technological self-reliance and the construction ofa technology powerhouse.Regulating major equity investments in unlisted enterprises by insurance funds.In April,the NFRA released theNotice on Major Equity Investments in Unlisted Enterprises byInsurance Funds,which clarifies the definition of major equity investments,adjusts thescope of eligible investment sectors based on the five major areas in financial sector,standardizes governance constraints and internal controls,and specifies the“grandfather”rule.Increasing insurance fund support for capital markets and the real economy.In April,theNFRA released theNotice on Matters Concerning Adjusting the Regulatory Ratios forEquity Asset Allocations of Insurance Funds,which raises the upper limit of theallocation ratio for equity assets,increases the concentration ratio for investments inventure capital funds,relaxes regulatory requirements for the ratio of tax-deferredpension products,and enhances insurance funds support for capital markets and the realeconomy.Promoting the return of universal life insurance to its protection-oriented nature.In April,the NFRA released theNotice on Strengthening the Supervision of Universal LifeInsurance,which standardizes the development of universal life insurance products,further enhances their protection levels,strengthens oversight of account managementand fund utilization,further regulates order in the universal life insurance market,andpromotes the sustainable and healthy development of universal life insurance.Part 4 Macroeconomic Overview35I.Global economic and financial developmentsGlobal economic growth is sluggish,and the pathway for a recovery remains uncertain.Since Q2,growth expectations have improved slightly.Labor market conditions in theadvanced economies are still solid.It remains to be seen whether prices will fallsubstantially.The U.S.tariff policy has increased global recession risks.Global fiscalsustainability merits attention.Financial market volatility may increase.1.Economic and financial market performance in the major economiesThe global economy rebounded at a sluggish pace.The U.S.economy recovered withstrong resilience.In Q2 2025,the U.S.GDP grew at a 3 percent annualized pace,compared with a quarter-on-quarter decline of 0.5 percent in Q1.The strong recoverywas mainly driven by plunging imports and rising personal consumption expenditures.Since Q2,the manufacturing Purchasing Managers Index(PMI)has weakened comparedwith Q1,but the Consumer Confidence Index and the Investor Confidence Index havestrengthened marginally.The European economy has seen steady growth.In Q2,theGDP expanded by 1.4 percent in the euro area,and by 1.2 percent in the UK,both fasterthan that during the same period of last year.The Japanese economy continued to recover.In Q1,its GDP grew by 1.7 percent year on year.Both the Consumer Confidence Indexand the Investor Confidence Index have improved marginally since Q2.Inflation is not yet back to target.In June 2025,the U.S.Consumer Price Index(CPI)was up by 2.7 percent year on year,up 0.3 percentage points from end-Q1.TheHarmonized Index of Consumer Prices(HICP)in the euro area was up by 2.0 percent,down 0.2 percentage points from end-Q1.The CPI in the UK posted 3.6 percent,up 1percentage point from end-Q1.The Japanese CPI fell by 0.3 percentage points fromend-Q1,coming in at 3.3 percent.The labor market remained resilient.In June 2025,the U.S.unemployment rateremained at low levels,posting 4.1 percent,and the labor force participation rate was62.3 percent,a slight decline compared with the end of Q1.Nonfarm payrolls increasedby 14,000,significantly lower than the past years average.The number of job 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