With its legal gestation period almost complete, the planned new European Securities and Markets Authority (ESMA) is entering a critical phase in which its modus operandi will be finalised.
This transformation of the Committee of European Securities Regulators (CESR) to a more interventionist pan-European securities markets regulator is scheduled for 1 January 2011, but many loose ends remain.
“The next months will be crucial,” said Carlo Comporti, secretary general of CESR. “Firstly for us in making sure that we are fully operational by 1 January, and secondly for ensuring that the rules that apply to us as a body are understood.”
The legislation that created ESMA and the other entities needed to run the new European financial regulatory regime were voted through on 22 September by the European Parliament. It is now undergoing jurist linguist for four to six weeks to ensure that the agreed text is unambiguous and clear. Only once it is published in the Gazette of the Record of the European Union, does it become law. The process should be complete in November.
But the question of how ESMA exerts its powers on a daily basis is “a matter that still needs to be fully understood”, according to Comporti.
CESR currently operates as an advisory group to the European Commission (EC) with responsibility for coordinating activities between national securities market regulators and oversight of the implementation of European legislation in member states. ESMA will take over the majority of these functions, but will have greater powers to determine rules for Europe's securities markets and impose restrictions on market participants.
The change is part of a new regime designed to foresee and react to crises such as that which has blighted the financial industry for the last two years after the previous structure of regulators was labelled “not fit for purpose” in a report commissioned by the EC in 2009.
ESMA is one of three European Supervisory Authorities, the others cover insurance and banking, which along with a new European Systemic Risk Board (ESRB) were developed from recommendations made by the report and formalised in proposals made to the EC on 23 September 2009, to create pan-European supervisory bodies that had decision making powers. The ESRB was created to provide an early warning system for potential risks that threaten the eurozone's economic and financial stability.
Under the agreed legislation the ESAs are empowered to develop common standards for their respective industries and see that these are adhered to. In addition to the responsibility for coordination that CESR had, ESMA will be able to check the implementation of EU rules and where breaches are found recommend ways in which they should be fixed e.g. by mediating with competent authorities. If EU member states declare a state of crisis in their forum, the European Council, ESMA will have additional powers to impose rules that would normally be restricted to national regulators, for example imposing a pan-European ban on short selling.
In June 2010, CESR asked that ESMA be given the capacity to impose technical standards and sanctions on entities over which it has a direct supervisory role, currently credit rating agencies (CRA) and potentially trade repositories used for OTC derivative trade reporting. “At the moment the power in the proposal to amend the CRA Regulation remains in the hands of the EC,” says Comporti. “I know that this issue is heavily debated in Council and in Parliament – I do not know what the outcome will be but in terms of consistency with other regulatory authorities I think it would be appropriate for ESMA to be able to impose sanctions on bodies for which it is the competent authority.”
Mandatory registration and supervision of credit rating agencies on a pan-European basis will come into force in December 2010, but currently there is no schedule for confirming ESMA's expanded role.
Some of ESMA's other functions will be have to be determined in the new year, for example by the draft legislation that the EC is due to deliver in January 2011 on MiFID. ”MiFID II', for which CESR provided technical advice, is expected to update the original directive and assign responsibility for some of its implementation and supervision to ESMA.
“The first key new power that ESMA will be granted [under MiFID II] is that of adopting binding technical standards which national regulators must use to determine the proper implementation of MiFID. The second power is to ensure conformity at a national level with the European rules,” said Comporti.
These powers will give CESR greater scope for laying down the law at the local level. For example, CESR currently screens the pre-trade transparency waiver requests made by trading venues to national regulators and publishes its decision as to whether the waiver is in line with the directive. The national regulator then makes its own decision on whether to grant the request.
If CESR's MiFID review recommendations are followed, ESMA will have the power to specify the criteria for the approval of waivers and their implementation. Under this system the national regulator still makes its own decision, but it must be made according to rules that ESMA decides, and its compliance with these is determined by ESMA.
CESR's recommendations on the creation of a European consolidated tape must also be decided upon. Under proposals ESMA will be charged with fixing the technical details and monitoring development. But the new body may also be able to intervene directly if progress is not satisfactory. “If the objectives are not achieved then ESMA can impose the establishment of the tape but it is not something that we want to run on our own,” explained Comporti.
CESR has also recommended that the EC amend MiFID to allow ESMA to develop binding technical standards on multilateral trading facilities and registered markets, and that ESMA should publish a list of broker crossing networks.
These important issues not withstanding, many of the logistics for the transformation of CESR to ESMA are being put in place and ”road-tested'. In January 2010, in preparation for the transformation CESR cut its existing 70 working groups down to nine standing committees, two technical support groups, two operational networks and three temporary groups. The main decision making body of ESMA will be a new supervisory committee made up of heads of relevant national supervisors and the ESMA chairperson. The chairperson and executive director (the latter role will replace the role of secretary general) will be appointed by the EC in 2011. For the time being Comporti and CESR chair Carlos Tavares are expected to continue to hold their existing responsibilities into the new year.
Current CESR staff will move into the new organisation to provide continuity, and will be supplemented over the coming three to four years by additional staff to match the expanded organisational responsibilities. The 2011 budget, which will determine the growth in staffing for next year is, like many other things, currently being discussed by the European Council, with a decision to be made in December.
“Despite the numerous issues that are still to be dealt with, and despite their complexity, I am optimistic,” says Comporti.