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ESAs: new powers

The Reform of EU Financial Market Supervision The powers of the ESAs (and, in particular , of the ESMA). ESAs: new powers. It is in respect of their entirely new powers to take action with binding legal effect that the ESAs differ most from the predecessor Level 3 Committees

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ESAs: new powers

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  1. The ReformofEU Financial Market SupervisionThe powersof the ESAs(and, in particular, of the ESMA)

  2. ESAs: new powers • It is in respect of their entirely new powers to take action with binding legal effect that the ESAs differ most from the predecessor Level 3 Committees • development of binding technical standards in specified EU financial markets legislation • enforcement of EU law • action in emergency situations • resolution of disputes between supervisors in cross-border situations • direct supervision of financial market participants and direct control over market activity

  3. ESAs’ binding technical standards • Drafting technical standards requires the qualified majority vote from an ESA’s Board of Supervisors and acquires binding force through endorsement by the Commission • Their adoption implies a rather complicated procedure • (in order to comply with the prohibition in EU constitutional law against the delegation to agencies of the general regulatory powers that have been conferred by Treaty on the EU Institutions) • Once endorsed by the Commission, binding technical standards have the status of Regulations or Decisions in EU law • (which means that they apply directly to financial firms and other private actors as well as to member States and their public authorities) • The direct effect of binding technical standards has implications for ESAs enforcement

  4. Procedure for the adoption of binding technical standards (Artt. 10-15 ESAs Reg.) • Drafting binding technical standards • Public consultations on draft regulatory technical standards • Submission of the draft standards to the Commission for endorsement • Within 3 months of receipt of a draft regulatory technical standard, the Commission shall decide whether to endorse it • (the Commission may amend the draft, but in such case must previously liaise with the ESAs)

  5. ESA enforcement of EU law (Art. 17, ESAs’ Regulations) In case of an alleged breach of, or failure to apply, specified EU financial market laws (including binding technical standards) by a national supervisor: ESA enforcement process. • The ESA may act on its own initiative or upon request from • one or more national supervisors, • the European Parliament, • the Council, • the Commission • or the relevant Stakeholder Group.

  6. 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 comply within one month; • Commission compliance formal opinion addressed to the national supervisor; formal opinion to be issued within 3 months (extendable to 4) of the ESA’s adoption of a recommendation; • national supervisor has 10 working days to respond to the Commission’s formal opinion and must comply within period specified in that opinion; • ESA compliance decision in conformity with the Commission’s formal opinion addressed directly to financial market participant; • decision to be made public unless such publication would be in conflict with the legitimate business interests of financial market participants in the protection of their business secrets or could seriously jeopardise the orderly functioning and integrity of financial markets or the stability of the EU’s financial system.

  7. 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 in existence, 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 enforcement under 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

  8. Resolution of disputes between supervisors in cross-border situations (“Binding mediation”, Artt. 19 - 20 ESA Regs.) • The mediation function that was performed by the Level 3 Committees is reinforced: the ESAs are granted a new power allowing them in certain cross-border situations: • to impose a binding settlement decision on national supervisors if attempts to resolve a disagreement through conciliation fail; and, • to direct a decision to a financial market participant. • the cross-border disagreement must relate to the procedure followed by or the content of the action/inaction required of a national supervisor in particular cases identified in specified EU financial markets law • the final decision is made by the Board of Supervisors on the basis of a one-Member, one-vote simple majority • the creation of a binding mechanism to resolve disagreements between supervisors means that a supervisor’s judgment on what EU law requires could be overridden, potentially even on a matter in which the relevant EU legislation confers supervisory discretion

  9. ESA’s 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 analysis provides 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.

  10. 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. It serves as a forum in which the ESAs cooperate and ensure cross-sectoral consistency 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 between the 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 different sectors, the Joint Committee shall resolve disagreements

  11. ESAs joint bodies (Art. 58 ss. f the ESAs Regs): Board of Appeal • An appeal system will ensure that any person, including national supervisory authorities, may in first instance appeal to a Board of Appeal against a decision by the ESAs to ensure the coherent application of EU rules, action in emergency situations, and the settlement of disagreements; • Proceedings may be brought before the Court of Justice of the European Union, in accordance with Article 263 TFEU, contesting a decision taken by the Board of Appeal or, in cases where there is no right of appeal before the Board of Appeal, by the Authority.

  12. 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.

  13. ESMA • ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union's financial system by ensuring • the integrity, transparency, efficiency and orderly functioning of securities markets; • as well as enhancing investor protection.

  14. ESMA’s specific powers • CRA • Short selling • EMIR (European Market Infrastructure Regulation)

  15. ESMA’s 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 on credit rating agencies and conferring powers to ESMA • ESMA is exclusively responsible for the registration and supervision of Credit Rating Agencies registered in the European Union. • To the above end, a registry of all CRAs currently registered in the EU is kept by the ESMA • In addition, ESMA also carries out policy work to prepare future legislation (such as regulatory technical standards and guidelines).  This work is undertaken through the CRA technical committee, which has representatives from all the national competent authorities

  16. 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.

  17. European Market Infrastructure Regulation (EMIR) • The lack of counterparty risk management and the lack of transparency within 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 derivative contracts 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”.

  18. European Market Infrastructure Regulation (EMIR) • The Regulation (EU) No 648/2012 on OTC derivatives, central counterparties (CCPs) and trade repositories (TRs) entered into force on 16 August 2012. • The Commission Delgated Regulations(No. 148/2013 to 153/2013 of 19 December 2012) entered into force on 15 March 2013. • Similar rules have been adopted in the US (Dodd Frank Act)

  19. 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.

  20. EMIR imposes 3 new requirements on derivatives’ traders: • To clear OTC derivatives that have been declared subject to the clearing obligation through a central counterparty (CCP) • To put in place certain risk management procedures for OTC derivatives transactions that are not cleared • To report derivatives to a trade repository

  21. 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 the risk in the financial system • Application of risk mitigation techniques for non-centrally cleared OTC derivatives • Reporting to trade repositories

  22. Purposes’ of EMIR regulation • Application of organisational, conduct of business and prudential requirements for CCPs; • Application of requirements for Trade repositories, including the duty to make certain data available to the public and relevant authorities.

  23. 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 a decline in the price of the assets before the transaction is settled.

  24. Short selling… • … is therefore used in order to profit from the falling price of 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

  25. Short selling and crisis • Many short selling restrictions were adopted - on an emergency basis – between July 2008 and June 2010 in 56 countries around the world. • According to common sentiment short sellers played a role in depressing stock prices during the financial crisis

  26. 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 where necessary for the achievement and functioning of the internal market.

  27. ESMA Reg. on short selling and CDS • Regulation on short selling and certain aspects of credit default swaps (EU) No 236/2012 became applicable from 1 November 2012 • According to the provisions of the Regulation, ESMA has to provide for public access to certain types of information: • Significant net short position notification thresholds for each sovereign issuer (Article 7(2)); • Links to central websites operated or supervised by competent authorities where the public disclosure of net short positions is posted (Article 9(4)); • The list of shares for which the principal trading venue is located in the third country (Article 16(2)); • A list of market makers and authorised primary dealers (Article 17(3)); • A list of existing penalties and administrative measures applicable in Member States (Article 41).

  28. Short Selling Regulation • The EU’s Regulation on came into force on 1 November 2012 with the aim of achieving the following: • increasing the transparency of short positions held 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.

  29. 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 upon ESMA some direct powers…

  30. 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

  31. 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 concerned with 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.

  32. Advocate General’s 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 in Romano and Meroni do not support the conclusions the United Kingdom draws from these rulings. However, in my opinion the United Kingdom’s action should nonetheless succeed, but on 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”

  33. 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 relation to 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.

  34. 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 a national 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!

  35. Solution? • Would article 352 TFEU have been the appropriate legal basis for Article 28 of Regulation No 236/2012? • It provides a flexibility clause with regard to the European Union's areas of competence. • This clause allows the Union’s 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 Union’s objectives”

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