Financial market regulation in Europe could take a new course in the wake of recent European Parliament elections that increased the representation of unaligned and extremist parties, say experts.
The European Parliament (EP) elections at the end of May saw the established political order challenged by the electoral success of Eurosceptic parties like Marine Le Pen’s Front National in France, Britain’s UKIP, and Italy’s Five Star Movement.
The 2014 vote left the centre-right European People’s Party (EPP) in place as the largest party with 214 seats in the 751-seat parliament, losing 51 seats. The second-largest party, the centre-left S&D, gained four to hold 189, but neither commands a majority.
UKIP gaining 12 seats to hold 24, the Front National gaining 21 seats to hold 24, and the Five Star Movement took 17 seats for the first time, leading to a new parliamentary landscape.
In addition to a new parliament, there will also be new appointments to the European Commission (EC), the EU’s executive body.
Financial markets legislation played a central part in the EU’s legislative agenda during the previous parliamentary term. The major piece of post-crisis financial markets reform was the European market infrastructure regulation (EMIR), which among other things aims to improve transparency in the derivatives markets, and establish common organisation and prudential standards for central counterparties and trade repositories. EMIR’s companion in some respects, MiFID II, extends transparency rules from equities to other financial markets rules; while other major directives have focused on central securities depositories, alternative investment funds and credit rating agencies.
MiFID II was one of the last pieces of legislation to be passed by the EP before the election. Its level two rules are now being formulated by the European Securities and Markets Authority (ESMA).
Changes in the EC could see a change of course, said PJ Di Giammarino, CEO at London-based think-tank JWG. “There are big opportunities for shifts in direction, particularly where new individuals are occupying seats that control sensitive agendas.
“From a financial regulation perspective, the new parliament will be steered by new ECON committee members, rapporteurs for key briefs and the DG internal market. A number of the previous players inclined to take a pro-UK stance are no longer there.”
For Di Giammarino, there are also potential pitfalls for legislation that has already been passed by MEPs.
He said, “The reform programme is at various stages of implementation. Some has passed but technical standards are not final and other parts of it are on the books and mostly done. However, there are a number of critical areas that are under discussion, but on which parliament has not yet taken a view.
He added, “There’s a series of feedback loops that we have yet to get through in the trading space. For MiFID II, there are 860 questions which ESMA has posed on the EC’s behalf and fundamental issues like the definition of instruments, including FX, are open for discussion in Brussels. The answers to these questions could have big implications not only for new rules like benchmarks and the financial transaction tax but also for largely complete rules like EMIR.”
Dr Diego Valiante, head of capital markets research at the Centre for European Policy Studies in Brussels, believes the increased representation of extremist parties is going to affect the balance of coalitions within the EP.
Valiante said, “It is most likely that the Socialists and the EPP have to find agreements on several areas. This means there is no strong majority. There will need to be political compromise between the major parties.
“It will be interesting to see if the extremist parties will build a common block. So far there does not seem to be a clear agreement between, for instance, UKIP, the Front National, or the Five Star Party and Le Pen.
“If they decide to converge in one group it might create a problem.”
But one of the pressing issues for Valiante was the need for the EC to set a clear agenda on legislation, whose direction has so far been “disorderly”.
He said, “In response to mandates from the G-20 group of nations, the EC had been crafting legislation with bits and pieces in different areas yet no clear statement on what the objectives were for a single European market.”
This will be a major task for the EC, with a white paper needed to give perspective to reforms already approved, said Valiante.