The Age of ESMA

Governing EU Financial Markets

Niamh Moloney

• Publisher: Hart Publishing
• Year: 2018
• ISBN:
  9781509921799
• Edition: 1
• Topic: Jura
• Subtopic: Völkerrecht

Since its establishment in 2011, the European Securities and Markets Authority (ESMA) has become a pivotal actor in EU financial market regulation and supervision. Its burgeoning influence extends from the rule-making process to supervisory convergence/coordination to direct supervision. Reflecting the now critical importance of ESMA to how the EU regulates and supervises financial markets, and with ESMA at an inflection point in its evolution, particularly in light of the Commission's 2017 proposals to reform ESMA and the UK's withdrawal from the EU, The Age of ESMA maps, contextualises, and examines ESMA's role and the implications for EU financial market governance.

1

Introducing ESMA

I.Introduction: Examining ESMA through an Institutional Lens

Since its establishment in January 2011 in response to the financial crisis, the European Securities and Markets Authority (ESMA) – based in Paris and with some 200 employees¹ – has established itself as a decisive technocratic influence on the governance of the European Union (EU) financial market, shaping how regulated firms and national regulators behave. It is not an exaggeration to suggest that EU financial market regulation can be divided into the pre- and post-ESMA periods, such is the scale of the influence it has come to exert in a relatively short time. ESMA is nonetheless a soft law-based, coordination-oriented EU agency. This book interrogates how it has come to occupy this central position in EU financial market governance and the ramifications of its expanding influence. It does so by providing an in-depth examination of ESMA’s role and whether ESMA’s burgeoning technocratic influence – and the related ‘agencification’² of EU financial market governance – raises challenges for ESMA’s effectiveness in delivering its mandates and for its legitimacy as a technocratic EU agency.

First, however, some scene-setting observations. European Union financial market governance, regarded as the superstructure of rules, supervisory arrangements, and institutional structures that governs the EU financial market,³ presents myriad questions and conundrums – from the nature of the impact of EU intervention on financial markets to the optimal design of institutional arrangements – which are canvassed in a rich and fast-expanding scholarship. Why focus on ESMA, and why do so now? The answer to this question lies in ESMA’s importance, distinctiveness, and dynamism. First, ESMA, operating in an often ambitious and expansionist manner, has positioned itself as an actor of central importance in EU financial market governance – despite its soft law/coordination orientation and the bounds placed on it by its organisational design as an EU agency. As at Spring 2018, ESMA was, for example, developing and overseeing a vast soft law rule-book; informally claiming a form of the ‘no action’ jurisdiction enjoyed by certain regulators internationally (the ‘no action’ power relates to the ability of a regulator to indicate that it will not take action against a regulated entity if that entity takes a specified course of action – it can lead to an informal disapplication of rules); sitting at the centre of an immense data-hub; deploying, for the first time, novel direct product intervention tools in the EU financial market (which led to a drop in the share price of certain leading platforms for the trading of Contracts for Differences (CfDs)); stress testing central clearing counterparties (CCPs) – the erstwhile ‘nuclear power houses’ of the EU financial system; adopting and overseeing contested Brexit-related opinions and other measures on the treatment of UK firms re-locating to the EU-27 market; directly supervising a small but not immaterial cohort of regulated actors; and facing the prospect of becoming a significantly more powerful direct supervisor following a series of Commission proposals over 2017/early 2018, including the pivotal 2017 European Supervisory Authorities Proposal (the ESA Proposal).⁴ None of this could have been easily or at least safely predicted in January 2011. The reasonable intuition that ESMA has come to occupy a central position in EU financial market governance needs, however, to be carefully unpacked and the nature of ESMA’s influence and the implications dissected. Second, ESMA’s institutional distinctiveness needs to be confronted. Part EU agency, part traditional financial market regulator, part international standard-setter, part EU network actor;⁵ part horizontal/peer coordinator of national regulators, part vertical/hierarchical supervisor of national regulators – ESMA is a creature of many parts and defies easy characterisation. Common to all these characterisations is the importance of the relationship between ESMA and the national financial market regulators (national competent authorities or NCAs), which currently carry out national supervision in the EU financial market and which form ESMA’s decision-making body – the Board of Supervisors. The pivotal ESMA/NCA relationship is primarily cooperative and coordinating in style, but it is becoming increasingly hierarchical as ESMA develops and as its different characterisations evolve. ESMA’s hybrid nature is unusual in financial market governance and so calls for assessment, but assessment is all the more necessary as ESMA’s hybridity bears on its ability to exert influence and the extent to which it poses challenges for effectiveness and legitimation. Finally, ESMA’s highly dynamic quality calls for assessment. Since its establishment in January 2011, ESMA has inserted itself into EU financial market governance through a purposeful and often ambitious exercise of its powers. Whether this dynamism has been contained within the legitimating mechanisms set out in its constitutive arrangements⁶ or posed effectiveness challenges to its mandates requires examination. Further, ESMA is reaching an inflection point. While its ability to shape regulator and regulated actor behaviour is now significant and its technocratic influence pervasive, it may be on the cusp of receiving additional powers. Over 2017 and early 2018 the Commission proposed a series of reforms, all concerning the conferral of additional powers on ESMA and all tilting it, slowly certainly but perhaps inexorably, in the direction of becoming the long-predicted ‘single supervisor’ for the EU financial market. The confluence of the completion of the EU’s Capital Markets Union (CMU) agenda and the UK’s withdrawal from the EU is, at the same time, constructing a reform crucible from which other ESMA reforms may emerge. ESMA’s acquisition of influence and any further empowerments may, however, place significant stress on its original constitutive arrangements.

A word on the book’s approach is warranted. It is concerned with legal and institutional matters – with ESMA as a technocratic financial market agency situated within the EU’s administrative governance arrangements, how it operates, and the nature and implications of its influence.⁷ Its focus is on ESMA’s design and behaviour and not on normative questions as to the optimal design and structure of EU financial market governance generally, or on empirical questions as to the transformative effects of EU financial market governance choices on markets.⁸ Its approach can be situated within the financial regulation literature that explores institutional governance⁹ and the cognate literature on EU administrative governance,¹⁰ particularly recent scholarship on the nature of and constraints on EU executive power in the wake of the financial crisis¹¹ and on experience with the crisis-era institutional reforms.¹² Adopting a legal/institutional perspective places the analysis at the intersection of a number of rich and burgeoning bodies of work. The EU agency literature provides explanations for how agencies such as ESMA develop and the challenges that can arise, and is also coming to focus on ESMA’s distinct features.¹³ Political economy analyses of EU financial governance shed light on the preferences that shape ESMA’s operating environment.¹⁴ The recently-emerging scholarship on international financial law provides lessons on how innovative financial governance arrangements and institutional designs can be applied to cross-border settings, such as ESMA’s setting, and their challenges.¹⁵ Regulatory theory offers productive insights into the tools ESMA uses and how it can accordingly exert influence.¹⁶ The book’s analysis accordingly draws on the insights and lessons of a rich composite literature to probe the central position ESMA now occupies in EU financial market governance.

The interrogation of ESMA that follows exposes the scale of the influence ESMA has come to exert and does not underestimate the effectiveness and legitimacy risks. Its approach is primarily diagnostic, although it identifies areas where reforms would, within the current institutional settlement within which ESMA operates, enhance effectiveness or legitimacy. Its conclusion is, however, optimistic. ESMA emerges as a technically expert, responsive, and agile actor, often deploying ‘state of the art’ tools and approaches; and the arrangements that support ESMA’s effectiveness in delivering its mandates and its legitimacy as a technocratic actor appear resilient and adaptive, if coming under some pressure in places. A wider point can be made, if more tentatively: ESMA’s development suggests that EU financial market governance has now acquired a capacity to adapt and flex over time in response to environmental change in a manner that bodes well for effectiveness but does not – so far at least – raise undue challenges for legitimation.

This chapter anticipates the structure of subsequent chapters by introducing ESMA as an actor in EU financial market governance and examining why its characterisation matters but can be elusive (section II); the context within which ESMA operates and how its role and powers have evolved (section III); and the nature of the influence it has come to exert, and why effectiveness and legitimation challenges may arise (section IV).

II.Characterising ESMA: ESMA’s Setting and its Role

A.Capturing ESMA: A Hybrid Actor in a Distinct Setting

ESMA is formally an EU agency charged with delivering its mandates under its constitutive 2010 ESMA Regulation and subsequent legislative empowerments. Behind this straightforward description lies considerable hybridity and complexity. ESMA can be characterised in multiple ways, but these can be boiled down to: a component of the European System of Financial Supervision (ESFS); a form of financial market regulator, familiar from financial market governance; an EU agency, directed to single market support; and an EU/international network actor. This hybridity matters as it bears on diagnosis of ESMA’s influence and of the implications. Identification of ESMA’s different characterisations is a slippery business, however, and is becoming more so as ESMA moves to an inflection point; as subsequent chapters discuss, ESMA’s role is ‘hardening’ and its character is becoming more hierarchical as it pushes deeper into territory currently held by NCAs.

B.ESMA as a Component of the European System of Financial Supervision

i.The Single Financial Market and the ESFS

ESMA sits within the wider system of EU financial governance that supports the EU’s single or integrated financial services market: it forms part of the ESFS and must act in the interest of the EU alone.¹⁷ This single market setting, and the at times conflicting liberalising and risk management demands it makes of EU financial governance, was the crucible within which ESMA was forged over 2009–10. It continues to shape ESMA’s role and how it exerts influence. The 2017 ESA Proposal places its proposed ESMA reforms squarely within this setting, relating them to the benefits a single financial market is asserted to bring and to the role of ESMA in supporting this aspect of the EU single market in financial services.¹⁸

The EU has long sought to construct a single financial market through different governance means.¹⁹ This project is designed to secure for the EU economy a series of benefits, including easier and cheaper access to capital for firms; a deep and liquid financial market in which major investors and capital suppliers such as asset managers, pension funds, and insurance companies can access a range of investment opportunities and diversify their risks effectively; and lower cost and easier access by households to long-term savings products. It is also designed to wean the EU financial system from its long and persistent dependence on bank-based funding²⁰ (funding based on banks intermediating between depositors and borrowers) and to promote market-based funding (funding through marketable securities such as shares and bonds, intermediated for investors seeking returns and firms seeking capital through actors such as investment funds and investment firms). Whatever the merits of this project and the means deployed to execute it,²¹ it is has long been a mainstay of EU financial policy. The current CMU...

Table of contents

• Cover
• Dedication
• Title Page
• Preface
• Contents
• Table of Treaties, Regulations, and Directives
• Table of Abbreviations
• 1. Introducing ESMA
• 2. ESMA’s Governance
• 3. ESMA and Regulatory Governance
• 4. ESMA and Supervisory Convergence
• 5. ESMA and Direct Supervision/Market Intervention
• 6. ESMA as a Network Actor
• Postscript
• Index
• Copyright Page