the-reform-of-financial-market-supervision_2 (powers-of-the-esas).ppt

8/10/2019 The-Reform-of-Financial-Market-Supervision_2 (powers-of-the-ESAs).ppt

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The Reform of

EU Financial Market Supervision

The powers of the ESAs(and, in particular, of the ESMA)


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ESA enforcement of EU law

(Art. 17, ESAs Regulations)

The stages of the process are as follows:

ESA investigation(can take up to two months);

ESA compliance recommendation addressed to the national supervisor;national supervisor must give its initial response within 10 days and complywithin one month;

Commission compliance formal opinion addressed to the national supervisor;formal opinion to be issued within 3 months (extendable to 4) of the ESAsadoption of a recommendation;

national supervisor has 10 working days to respond to the Commissionsformal opinion and must comply within period specified in that opinion;

ESA compliance decision in conformity with the Commissions formal opinionaddressed directly to financial market participant;

decision to be made public unless such publication would be in conflict withthe legitimate business interests of financial market participants in theprotection of their business secrets or could seriously jeopardise the orderlyfunctioning and integrity of financial markets or the stability of the EUsfinancial system.


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Action in emergency situations

(Art. 18, ESAs Regulations)

This new power is triggered by a determination by the Council in

consultation with the Commission, ESRB and, where appropriate, the

ESAs, that an emergency situation is in existence (ESA Regs, art 18.2)

Where the Council has declared that an emergency situation is inexistence, the ESA may adopt individual decisions requiring national

supervisorsto take the necessary action in order to ensure that operators

and competent authorities comply with EU financial market laws

There is some overlap between this procedure and the direct enforcementunder art. 17 of the Regs.: the key difference is that in an emergency

situation ESA can intervene on a more expedited basis and without the

need to go through the Commission


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ESAs assessment of market developments

(Art. 32 ESAs Regs)

although the ESRB will be responsible for macro-prudential analysis of the

EU financial sector, the ESAs should continue the work of the Level 3

Committees in this area as:

the focus of their analysis is different, i.e., micro-prudential analysisprovides a bottom-up analysis, rather than macro-prudential analysis

which is top-down, and;

their analysis may serve as helpful input into the work carried-out by

the ESRB.


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ESAs joint bodies (Art. 54 ss. f the ESAs Regs):

Joint Committee

The Joint Committee of the ESAs is the body that will take forward cross-sectoral work under the new arrangements.

It is the Joint Committee that will settle cross-sectoral disagreements. Itserves as a forum in which the ESAs cooperate and ensure cross-sectoralconsistency on the following matters: financial conglomerates, accounting and auditing, micro-prudential analyses

of cross-sectoral developments, risks and vulnerabilities for financial stability,retail investment products, measures combating money laundering; and,information exchange with the ESRB and developing the relationship betweenthe ESRB and the ESAs

The Joint Committee have a dedicated staff provided by the ESAs

In the event that a financial market participant reaches across differentsectors, the Joint Committee shall resolve disagreements


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Budget

The transformation of the Level 3 Committees into effective

ESAs, enhanced resources are needed - both personnel and

budgetary.

For the EBA, the total operational expenditure from the EU

budget in commitment and payment appropriations for the

years 2011-2013 is EUR 21.527 million.

In addition, member States (national supervisory authorities

or ministries of finance) will contribute EUR 32.290 million

over the three year period.

This gives a total of EUR 53.816 million from 2011 to 2013.


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ESMAs powers in relation to CRA

Regulation (EC) No 1060/2009 on credit rating agencies

Regulation (EC) No 513/2011 amending Regulation (EC) No 1060/2009 oncredit rating agencies and conferring powers to ESMA

ESMA is exclusively responsible for the registration and supervision ofCredit Rating Agencies registered in the European Union.

To the above end, a registry of all CRAs currently registered in the EU iskept by the ESMA

In addition, ESMA also carries out policy work to prepare future legislation(such as regulatory technical standards and guidelines). This work isundertaken through the CRA technical committee, which hasrepresentatives from all the national competent authorities


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CRAs Regulations

On 30 May 2012, four Commission Delegated Regulations

establishing regulatory technical standards for credit rating

agencies have been published. These technical standards set

out (Regs 446/2012; 447/2012; 448/2012; 449/2012): the information to be provided by a CRA in its application for

registration to the ESMA;

the presentation of the information to be disclosed by credit rating

agencies in a central repository (CEREP) so investors can compare the

performance of different CRAs in different rating segments; how to assess rating methodologies;

the information CRAs have to submit to ESMA and at what time

intervals in order to supervise compliance.


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European Market Infrastructure

Regulation (EMIR) The lack of counterparty risk management and the lack of

transparencywithin the over the counter (OTC) derivatives

market were highlighted during the financial crisis in 2008

(Lehman and Bear Stearns).

The 2009 G20 passed a resolution stating: that all OTC

derivativecontracts should be traded on exchanges or

electronic trading platforms, where appropriate, and cleared

through central counterparties and that OTC derivative

contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital

requirements.


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Who does it apply to?

It is relevant to anyone who trades

derivatives,

whether on an exchange or otherwise,

whether regulated or not; and

whether within the EU or outside.

It is also relevant to central counterparties

(CCP)and trade repositories (TR) or those

who wish to become such entities.


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Purposes of EMIR regulation

Central Clearing for certain classes of OTC

derivatives

standardised derivative contracts are to be cleared

through central counterparties in order to reduce therisk in the financial system

Application of risk mitigation techniques for

non-centrally cleared OTC derivatives

Reporting to trade repositories


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Short selling

Short selling is a practice which involves

selling assets, and usually securities, that are

not owned by the seller at the moment of

sale, with the intention of profiting from adecline in the price of the assets before the

transaction is settled.


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Short selling

is therefore used in order to profit from thefalling priceof securities.

E.g.

Someone wishes to sell short 100 shares of a company

because he believes sales are slowing and earnings will drop.

Then he borrows the shares from someone who owns them

with the promise that he will return them later. He

immediately sells the borrowed shares at the current market

price. When the price of the shares drops (and if drops), the

seller will cover his short position by buying back the shares

and by returning them to the lender.

The profit is the difference between the price at which the

short seller sold the securities and his cost to buy them back


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UE 2012 response

In 2012, in order to harmonize Member

States responses to the shortcomings of short

selling in light of the financial crisis, the E.U.

adopted a Regulation.

The Regulation was adopted on the basis of

Article 114 TFUE, which allows for the

adoption of harmonizing measures wherenecessary for the achievement and

functioning of the internal market.


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Short Selling Regulation

The EUs Regulation on came into force on 1 November 2012 with the aim of

achieving the following:

increasing the transparency of short positionsheld by investors in certain EU

securities;

reducing settlement risks and other risks linked with uncovered or naked short

selling. reducing risks to the stability of sovereign debt markets posed by uncovered

(naked) CDS positions, while providing for the temporary suspension of

restrictions where sovereign debt markets are not functioning properly;

ensuring Member States have clear powers to intervene in exceptional

situations to reduce systemic risks and risks to financial stability and market

confidence arising from short selling and credit default swaps; and

ensuring co-ordination between Member States and the European Securities

Markets Authority (ESMA) in exceptional situations.


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Regulation No 236/2012

Regulation No 236/2012 vested ESMA with

extensive

advisory,

notification, and

regulatory powers with respect to short selling

Art. 28 of the Regulation, however, confers uponESMA some direct powers


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Case C-270/12

Case C-270/12 United Kingdom of Great

Britain and Northern Ireland v Council of the

European Union and European Parliament


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The case

Article 28 of Regulation No 236/2012 does not

entail a delegation of authority by either of

the EU executive institutions (Commission,

Council) to an agency, but is rather concernedwith a direct conferral of power to an agency

by the legislature pursuant to an Article 289(3)

TFEU legislative act. The case is still pending, but the Advocate

General has already issued his opinion.


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Advocate Generals opinion

in the light of amendments wrought by the Lisbon

Treaty, and particularly the confirmation in primary

law that the acts of agencies are subject to judicial

review in EU law, the principles established inRomano and Meroni do not support the conclusions

the United Kingdom draws from these

rulings. However, in my opinion the United

Kingdoms action should nonetheless succeed, buton its fourth ground of challenge. This is so because

Article 114 TFEU is not an appropriate legal basis

for Article 28 of Regulation No 236/2012


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Open issues

ESMA intervention under Article 28(1)(a) of

Regulation No 236/2012 may entail disclosure

obligations on natural or legal persons with

respect to their net short positions in relationto a specific financial instrument or a class

thereof.

Furthermore, ESMA may impose prohibitions,or conditions related to short selling and

similar transactions as provided in Article

28(1)(b) of Regulation No 236/2012.


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Open issues

in this context ESMA is not developing specific and more

detailed rules (i.e. binding technical standard) applicable to a

given financial product or service under Article 114 TFEU.

Rather ESMA is intervening on the conditions of competition

in a particular financial market, falling within the remit of anational competent authority, when it is confronted with

certain exceptional circumstances.

Therefore, it is disputed whether art. 114 TFUE is the

appropriate legal basis for such powers!


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Solution?

Would article 352 TFEU have been the appropriate

legal basis for Article 28 of Regulation No 236/2012?

It provides a flexibility clausewith regard to the European

Union's areas of competence.

This clause allows the Unions competences to be adjusted

to the objectives laid down by the Treaty and can be legal

basis for acts:

"necessary to attain

,in the context of the policies

defined by the Treaties one of the Unions

objectives

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