TheEuropeanSystemofFinancialSupervisionandtheEuropean

SecuritiesandMarketsAuthorityDrPierreSchammo(UniversityofManchester)

@JeanMonnetCenter(KeioUniversity)

8thJanuary2011

Overview

•  Historicalcontext–  Financialmarketsregulation/supervisionuntilDecember2010

• TheLamfalussyprocess

• TheCommitteeofEuropeanSecuritiesRegulators(CESR)

•  Financialmarketsregulation/supervisionfromJanuary2011

–  ThedeLarosierereportandtheEUreformagenda

–  TheEuropeanSystemofFinancialSupervision(ESFS)

–  TheEuropeanSecuritiesandMarketsAuthority(ESMA)

Lamfalussy process •  TheLamfalussyfour‐levelapproach,asoriginallyagreed:

–  Level1:adoptionofframeworkprinciplesbywayofdirectives/regulations

–  Level2:adoptionofimplementingmeasures

•  (UnderLisbonTreaty:L2measuresareadoptedasdelegatedorimplementingacts(Arts290/291TFEU))

–  Level3:cooperationbetweennationalsecuritiesauthorities(e.g.,UKFSA,FrenchAMF,GermanBaFin)andadoptionofsoftlawmeasurestoensureconsistentapplicationandtranspositionofEUrules

–  Level4:enforcementagainstnon‐complyingMemberStates

Lamfalussy Level 3 and CESR •  CreationoftheCommitteeofEuropeanSecuritiesRegulators

(CESR)in2001;tofostercooperationandcoordinationamongnationalsecuritiesauthorities

•  SituatedinParis•  Memberswerenationalsecuritiesauthorities(e.g.UKFSA,

FrenchAMF,ItalianConsob,etc.):competentauthorities

•  Adoptednon‐bindingguidelines,recommendations,standards

•  Carriedoutpeerreviews•  Hadnon‐bindingmediationpowers

•  Decidedbyconsensusintheshadowofavotebywayofqualifiedmajority

Problems with CESR

•  Smallcommittee

•  Nolegallybindingpowers•  CESRwasacollectivesecuritiesactor

– CESR’spreferencesreflectthoseofitsmembers(i.e.nationalsecuritiesauthorities)

•  Adversebehaviouronthepartofitsmembers

–  ‘Noaction’– Defection

The financial crisis in the EU

•  Banksindistress(NorthernRock,RBS,Fortis,Dexia,etc.)

•  Realeconomiesaffected(recession)

•  Afterinitialhesitations,financialcrisispromptsEUleaderstoconsideroverhaultoinstitutionalframeworkgoverningmarketsupervision

– EstablishmentofthedeLarosieregrouptomakeproposals

De Larosiere Report

• Makesregulatory/supervisoryproposals•  Needtodealwithsystemicriskstofinancialstability(macro‐prudentialproposals)– CreationofaEuropeanSystemicRiskBoard

•  Needtoreviewmicro‐prudentialsupervision

– CreationofnewEuropeanSupervisoryAuthorities;partofanewEuropeanSystemofFinancialSupervision(ESFS)

ESFS •  Mainpurposeistoensurethat‘rulesapplicabletothe

financialsectorareadequatelyimplemented…’

•  PartofESFSarethreenewEUbodies,called‘EuropeanSupervisoryAuthorities’(ESAs)

–  ReplaceLevel‐3Committees:CESR,CEBSandCEIOPS

•  CESRistransformedintoanewEuropeanSecuritiesandMarketsAuthority(ESMA)

–  Sisterorganisations:EBA,EIOPA•  ESAsarecollectivesecuritiesactors:decision‐makingisin

handsofrepresentativesofnationalsecuritiesauthorities,actingcollectivelywithinESAs

Powers and scope of competence

•  ESMA’sFoundingRegulation

–  RegulationEUNo1095/2010[2010]OJL331/84•  ESMA’s‘FramingActs’

–  Variouslegislativeactsandsubordinatemeasures

–  FurtherbindingactswhichconfertasksonESMA

•  Canalsoactinthefieldofactivitiesofmarketactorsforissuesnotdirectlycoveredinaboveacts,ifnecessarytoensureeffective/consistentapplicationofthoseacts

•  ‘Appropriateaction’alsoforclearing/settlement,matterspertainingtoderivativesandtakeoverbids

ESMA composition •  BoardofSupervisors(BoS)

–  Votingmembersandnon‐votingmembers

–  Maindecision‐makingorgan

–  Decidesbysimplemajorityorqualifiedmajority.•  ManagementBoard(MB)

–  MadeofESMA’sChairpersonand6(voting)membersoftheBoSfor2½years•  CommissionandExecutiveDirectorcanattendMB

–  EnsuresthatESMAfulfillsitsmission/tasks(+hasvariousspecifictasks).

–  Decidesbymajorityofmemberspresent

ESMA composition (II) •  ExecutiveDirector

–  Fulltimeindependentprofessionalappointedfor5years

–  Inchargeofday‐to‐daymanagementofESMA(+hasvariousspecifictasks)

•  Chairperson–  Fulltimeindependentprofessionalappointedfor5years–  RepresentsESMA

–  PreparesBoSwork;chairsmeetingsofBoSandMB

•  BoardofAppeal•  JointCommittee:toensurecooperationandcross‐sector

consistencyamongESAs

Powers of ESMA

•  Threeconsiderations:– LearningthelessonsfromfailingsinLevel‐3committees(CESR,CEBS,CEIOPS)

– Dealingwithpoliticallimitstodelegationofpowerstoregulatoryagencies

– Dealingwithconstitutionallimitstodelegationofpowers

• Case9/56Meroni[1958]ECR133

Delegation of powers – Meroni

•  Case9/56Meroni

– Adelegationofpowerscannotinvolvea‘discretionarypower,implyingawidemarginofdiscretion’

– Delegationcanonlyinvolve‘clearlydefinedexecutivepowers’whichcanbesubjecttoreview‘inthelightofobjectivecriteria’.

– DelegatorcannotdelegatepowersdifferentfromitsownpowersderivedfromtheTreaty

Delegation of powers - Meroni (II)

•  Delegationoflegislativepowers– RuledoutbyMeroni.AlsobyRomano(Case98/80[1981]ECR1241)

•  Delegationofbindingindividualdecision‐makingpowers

– Needspre‐structuringtoensurethatdelegationdoesnotinvolvea‘widemarginofdiscretion’

Delegation of powers - ESMA

•  HowcreatemorepowerfulcollectivesecuritiesactorswhilstmakingthedelegationofpowerstoESMAconstitutionallyandpoliticallyacceptable?

•  Levelsandcircuits– Meaning

•  Circuit‐switcherrules– AllowsESMAtotakeindividualdecisionsagainstcompetentauthoritiesormarketactors

•  Level‐switcherrules–  Toensureconstitutionalcomplianceorpoliticalacceptanceofdelegationofpowers

Powers of ESMA - Overview

•  Participatesinadoptionofbindingtechnicalstandards(followingendorsementbyCommission)

•  Adoptsguidelinesandrecommendations•  PowerstoactwithrespecttobreachesofEUlaw•  Conciliationandbindingdisputesettlementpowers

•  Powerstoactincrisissituations•  Certainday‐to‐daysupervisorypowers(egforcreditagencies)•  Powertotemporarilybanorrestrictmarketactivities•  Roleincolleges•  etc.

Technical standards

•  Participatesinadoptionofbindingtechnicalstandards–  Regulatorytechnicalstandards(RTS)

• Adoptedasdelegatedacts–  Implementingtechnicalstandards(ITS)

• Adoptedasimplementingacts

•  ESMApreparesdraftstandards

•  EuropeanCommissionendorsesdraftstandards

–  LimitstoCommissionpowers?

•  PowersreservedtoCouncilandEP(forRTS)

Proper application of EU rules and supervisory practices

•  ESMAissuesguidelinesandrecommendations

–  Aim:foster‘common,uniformandconsistentapplication’ofEUlaw+develop‘consistent,efficientandeffective’supervisorypractices

–  Addressedtocompetentauthorities/marketactors

•  Non‐bindingmeasures;but:

–  Addresseesmeanttomake‘everyefforttocomply’

–  Proceduralobligationsmeanttomakeitmoredifficulttoignoremeasures

Policing breaches of EU law

•  ESMAplaysaroleinpolicingtheapplicationofitsFramingActs,includingtheRTSandITS

– Wherecompetentauthorities(i)donotapplymeasuresor(ii)applytheminamannerwhichseemstobreachEUlaw,especiallybynotmakingsurethatamarketactorcomplieswithitslegalobligations

•  ESMAcanissuearecommendation(non‐binding)

–  Commissioncanissueaformalopinion

•  ESMAcanaddressanindividualdecisiontoamarketactorifcomp.authorityfailstocomplywithCommissionopinion

–  Conditionsapply;‘lastresort’power

Conciliation and dispute settlement

•  ESMAassistsauthoritiesfromdifferentM‐Ssinresolvingdisputes

-  ESMAactsasamediator

•  ESMAcansettleadisputeifauthoritiesunabletoreachagreementinordertoensurecompliancewithEUlaw

–  ESMAaddressesanindividualdecisiontocompetentauthority

•  ESMAcantakeindividualdecisionagainstmarketactorifcompetentauthorityfailstocomplywithESMA’sdecision

•  Safeguardclause:toprotect‘fiscalresponsibilities’ofM‐Ss

•  Powersalsoapplyforcross‐sectoraldisputesanddisputesincolleges

Emergency (crisis) situations

•  Roleincoordinatingandfacilitatingactionsofcompetentauthorities(CA)incrisissituations

•  PowertoaddressindividualdecisionstoCA–  Inexceptionalcircumstanceswherecoordinatedactionisneededtoaddresseventsthatendangerfunctioning/integrityofmarketsorstabilityoffinancialsystem

•  Powertoaddressindividualdecisiontomarketactor

–  Strictconditions•  Decisionregardingtheexistenceofacrisissituation•  Safeguardclausetoprotect‘fiscalresponsibility’ofM‐Ss

Conclusion

•  ESMAvsCESR–  Resources–  Decision‐making

–  Powers• Morepowers!

• ESMAhasgreaterroleatL2,L3andL4ofLamfalussyprocess!

–  Accountability•  WillESMAsucceed?

Source:

•  PSchammo,EUProspectusLaw–NewPerspectivesonRegulatoryCompetitioninSecuritiesMarkets(CambridgeUniversityPress,Cambridge,2011,forthcoming)

http://www.frcaq.com/uk/catalogue/catalogue.asp?isbn=9780521517652