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The European Securities and Markets Authority and Institutional Design for the EU Financial Market — A Tale of Two Competences: Part (1) Rule-Making

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Abstract

The purpose of this article, and its companion article, is to examine the implications of the new European Securities and Markets Authority, established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any design for institutional reform of EU financial market regulation and supervision would have struggled to deliver an optimum model, given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body’s powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision/enforcement, even if there is considerable symbiosis between these different activities.

This article considers ESMA’s rule-making powers; it is accompanied by a companion piece on ESMA’s supervisory powers. It examines the considerable powers which ESMA has been granted in the rule-making sphere and argues that ESMA is likely to lead to significant intensification of the EU rule-book for financial markets. While a uniform rule-book carries risks, there are countervailing benefits. There are also promising signs that ESMA may become an effective rule-maker and may prove an effective mechanism for managing the risks of the intensifying rule-book. But the institutional design model is flawed. Treaty restrictions have led to a troublesome compromise in terms of ESMA’s design, particularly with respect to Commission control and ESMA independence. Overall, ESMA’s design is under-ambitious with respect to rule-making.

By contrast, as the companion piece argues, the extent of ESMA’s supervisory powers, real and potential, may have pushed ESMA too high up the spectrum towards EU powers. Local supervision of the EU rule-book represents an important safety valve for the EU financial market, and should not be obstructed by over-centralisation. Once supervision was placed on the reform agenda, however, it was always going to be a challenge to draw the dividing line between ESMA’s powers and those of national competent authorities. The line may, however, have been drawn too far on the side of operational centralisation.

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  110. Although the Chairperson is appointed by the Board of Supervisors on the basis of merit, skills, knowledge and experience, based on an open selection procedure (Art. 48), the Parliament may object to the appointee following a hearing, and the first Chairperson was to be selected from a shortlist drawn up by the Commission (rec. 55); the shortlist review procedure is, however, to be reviewed.

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  123. It suggested, in the context of the MiFID Q and A project, that while its guidance was not legally binding, its ‘legal effects’ could include: being used by courts and tribunals in interpreting level 1 and 2 measures; being ‘of relevance’ in enforcement action taken by a competent authority; and ‘creating relevant considerations and legitimate expectations’, particularly with respect to the predictability of actions taken by competent authorities: CESR, MiFID Level 3 Work Plan for Q4 2007–2008 (2008) (CESR/07-704c), at p. 3.

  124. ESMA FAQ, at p. 5.

  125. From the crisis-era measures, e.g., OTC Derivatives Proposal, Art. 50 (on interoperability), Rating Agency Proposal, Art. 21 (on the endorsement regime), and AIFMD Proposal, Art. 9a (on the remuneration regime applicable to alternative investment fund managers). Under the Omnibus Directive, rec. 34 (MiFID) (with respect to the reputation and experience requirements which apply to investment firm management).

  126. For further detail on the endorsement process, see Moloney, supra n. 20, and Ferran, supra n. 1.

  127. Art. 290 TFEU delegations are governed by the provisions set out in the relevant delegating measure. The Commission’s 2009 Communication on Art. 290 reinforces the discretion of the co-legislators with respect to each measure, but sets out appropriate model language. It also acknowledges the Commission’s practice of consulting with experts appointed by the Member States in the financial services area: COM(2009) 673.

  128. The Short-Selling Proposal, e.g., confers on the Commission power to adopt rules which amplify key definitions, subject to a European Parliament and Council veto and assistance by the European Securities Committee (Arts. 2(2), 37 and 38). The Rating Agency Proposal confers the Commission with power to adopt rules with respect to equivalence decisions, fees, fines and penalties, and revisions to the Annexes to the Regulation, and in accordance with the same procedures (Arts. 37–38c). The 2010 Prospectus Directive model for Commission rule-making is similarly based on advice from ESMA, consultation with the ESC, and Council/Parliament veto powers: supra n. 67.

  129. COM(2010) 83.

  130. E.g., ECON Report on the 2010 Rating Agency Proposal (Amendment 37).

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  132. The Proposal argues that it is ‘important that in the authorisation process a central role is played by ESMA. This will be achieved in the following ways … ESMA will be required to develop a number of draft technical standards’: supra n. 59, at p. 9.

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  137. Kokott AG, by contrast, advised that the ENISA Regulation be annulled as ENISA’s contribution to the approximation of laws was not clear.

  138. Art. 114 also allowed a more ambitious model to be pursued given that veto powers did not apply: K. Lannoo, ‘The Road Ahead after de Larosière’, CEPS Policy Brief No 195/7 (2009).

  139. See Ferran, supra n. 1, at pp. 9–11, examining national reforms and the trend towards ‘twin peak’ supervisors.

  140. Ferran highlights the emergence of a post-crisis trend towards twin peaks supervision (based on an institutional separation between conduct of business and prudential supervisors; ibid., at p. 11.

  141. HM Treasury, A New Approach to Financial Regulation: Judgement, Focus and Stability (2010). 160 Turner Review, supra n. 24, at p. 101. Although the Review called for primary responsibility for supervision to be retained at national level, it supported more intense cooperation with respect to cross-border firms and processes for defining supervisory standards and for peer review.

  142. Although fears have been expressed that fragmenting the FSA into two authorities could ‘leave the UK with a muted voice in Europe’: P. Jenkins, ‘FSA Reform Risks Nation’s Voice in Europe, Says MEP’, Financial Times, 5 October 2010, p. 2.

  143. Moloney, supra n. 1.

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  145. E.g., D. Curtin, ‘Holding (Quasi-)Autonomous EU Administrative Actors to Public Account’, 13 European Law Journal (2007) p. 523, and D. Geradin and A. Petit, ‘The Development of Agencies at EU and National Levels: Conceptual Analysis and Proposals for Reform’ (2004), Jean Monnet Working Paper 01/04, at pp. 42–43.

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  146. The ESAs have been characterised as agencies in that they will have legal personality, be ‘relatively independent’, and will be established under secondary EU law: S. Griller and A. Orator, ‘Everything in Control? The Way Forward for European Agencies in the Footsteps of the Meroni Doctrine’, 35 European Law Review (2010) p. 3, at pp. 7–9. They have, however, been characterised as a ‘genuinely different arrangement’: E. Chiti, ‘An Important Part of the EU’s Institutional Machinery: Features, Problems and Perspectives of European Agencies’, 46 Common Market Law Review (2009) p. 1395, at p. 1431.

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  147. This formula recurs across the main policy discussions, e.g., 2010 Rating Agency Proposal Impact Assessment, supra n. 102, at p. 13.

  148. Griller and Orator, supra n. 167, at p. 13.

  149. J.-C. Piris, The Lisbon Treaty. A Legal and Political Analysis (Cambridge, CUP 2010), at p. 103.

  150. See supra n. 56.

  151. Well illustrated by the institutional fracas concerning CESR’s adoption of ‘standards’ concerning clearing and settlement in 2004: Moloney, supra n. 30, at pp. 891–894.

  152. J. Chaffin and P. Spiegel, ‘MEPs Turn New Clout at Fiscal Reform’, Financial Times, 27 October 2010, p. 12.

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  153. European Parliament Press Release, 20110203IPR13128. The release noted that the Council was ‘roundly criticised’ during the plenary debate.

  154. Notably with respect to the CESR Guidance on Inducements, in respect of which CESR faced considerable industry opposition: Moloney, supra n. 30, at pp. 518–519.

  155. The Commission hoped for a ‘long standing and successful cooperation record in working together’: supra n. 67.

  156. The Commission suggested that ESMA, where ESMA found it appropriate, might indicate the particular guidelines and recommendations which would support its advice to the Commission on level 2 rules, and indicate how BTSs might relate to the level 2 rules: ibid.

  157. Omnibus Directive, recs. 11–13.

  158. ESMA FAQ, at pp. 4–5.

  159. ESMA FAQ, at p. 5.

  160. On the likely dynamics of the Commission/ESMA relationship, see also Moloney, supra n. 20, on which this discussion is, in part, based.

  161. Moloney, supra n. 30, at p. 1068.

  162. Chiti, supra n. 167, at pp. 139 and 139–140.

  163. Ferran, supra n. 1, at p. 46.

  164. E. Avgouleas, ‘A New Framework for the Global Regulation of Short Sales: Why Prohibition Is Inefficient and Disclosure Insufficient’ (2009), available at: <http://ssm.com/abstract=1411615>.

  165. Enriques, supra n. 39.

  166. The information transmittal obligations are extensive. Under the Short-Selling Proposal, for instance, ESMA must be notified of: the short-selling and CDS notifications made to competent authorities (Art. 11); prohibition decisions and other enforcement measures, before the decision is intended to take effect (Art. 22); and cooperation agreements with third countries (Art. 32). Under earlier measures, the Prospectus Directive, e.g., now requires, inter alia, that prospectus approval decisions and transfers of home authority approval powers are notified to ESMA (Omnibus Directive, Art. 5(5)).

  167. The MAD, e.g., now requires that ESMA be provided with aggregated information concerning all administrative measures and sanctions imposed (Omnibus Directive, Art. 3(4)), as does MiFID (Omnibus Directive, Art. 6(18)).

  168. ESMA’s initial activities in January 2011 suggest a concern to establish a strong international presence. It wrote to the SEC to express its concerns at proposed SEC rules concerning Swap Data Repositories (ESMA/2011/16). While this work stream represents a continuation of CESR’s activities, it nonetheless also suggests a concern to maintain a high profile for ESMA internationally.

  169. For a recent discussion, and with reform proposals, see L. Enriques and G. Hertig, ‘The Governance of Financial Supervisors, Improving Responsiveness to Market Developments’ (2010), available at: <http://ssm.com/abstract=711230>.

  170. ESA Impact Assessment, at pp. 6 and 53.

  171. ESMA FAQ, at p. 13.

  172. ESMA FAQ, at p. 11.

  173. D. Langevoort, ‘The SEC as a Lawmaker: Choices about Investor Protection in the Face of Uncertainty’, 84 Washington University Law Review (2006) p. 1591.

  174. 2009 UCITS Directive 2009/65/EC, OJ 2009 L 302/32, and Commission Regulation 583/2010/EU, OJ 2010 L 176/1.

  175. Moloney, supra n. 112, at pp. 316–322.

  176. E.g., 12th CESR Prospectus FAQ, November 2010 (CESR/10-1337), Q. 56.

  177. For an analysis of similar deterrent factors, or the ‘shadow of hierarchy’ in the EU environmental law factor sphere, see A. Héritier and D. Lehmkuhl, ‘The Shadow of Hierarchy and New Modes of Governance’, 28 Journal of Public Policy (2008) p. 1.

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  178. Black, supra n. 49.

  179. CESR/10-802. This approach has been reflected in the MiFID Review (at pp. 32–36).

  180. As illustrated by recent versions of the CESR FAQ on prospectuses, which show an increasing tendency for supervisory authorities to adopt a uniform approach: CESR, Annual Report (2009), at p. 50.

  181. Supra nn. 189 and 190.

  182. E.g., Wymeersch, supra n. 19, at pp. 259–286.

  183. E.g., Pan, supra n. 85.

  184. E.g., Turner Review, supra n. 24, at pp. 91–92, defending the consolidated model.

  185. On the models currently adopted in the EU, see Wymeersch, supra n. 19, and Ferran, supra n. 1, at pp. 5–9.

  186. The 2009 CESR Annual Report, e.g., details the extensive 3L3 work plan, including a joint submission to the Commission on the packaged retail investment products reform: at pp. 72–80.

  187. The ESMA FAQ notes its role in fostering supervisory convergence by working closely with the other ESAs: at p. 3.

  188. See further, Alexander and Ferran, supra n. 3.

  189. The DLG Report notes the possibility of movement towards a twin peaks model (supra n. 20, at p. 58), while the ESMA Regulation provides for a review of the sectoral model (Art. 81).

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    Niamh Moloney

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Moloney, N. The European Securities and Markets Authority and Institutional Design for the EU Financial Market — A Tale of Two Competences: Part (1) Rule-Making. Eur Bus Org Law Rev 12, 41–86 (2011). https://doi.org/10.1017/S1566752911100026

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