ESMA derives its legal force from the'ESMA Regulation'.[4] This regulation governs ESMA's competencies and delimits its powers.
Objective
The ESMA regulation states in Article 1(5): "The objective of the Authority shall be to protect the public interest by contributing to the short-, medium- and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses."[4]
This mission is further specified in Article 1(6):
ESMA shall contribute to:
(a) improving the functioning of the internal market, including in particular a sound, effective and consistent level of regulation and supervision
(b) ensuring the integrity, transparency, efficiency and orderly functioning of financial markets,
(c) strengthening international supervisory coordination
(d) preventing regulatory arbitrage and promoting equal conditions of competition
(e) ensuring that the taking of investment and other risks are appropriately regulated and supervised
(f) enhancing customer and investor protection
(g) enhancing supervisory convergence across the internal market
Composition and Seat
ESMA is structured as follows: a Board of Supervisors; a Management Board, a Chairperson; an Executive Director; and a Board of Appeal - ESMA regulation Article 6. These roles are further specified in the Regulation.
Its seat is, by law, in Paris (Article 7).
Overview
Former French Telegraphic Lines Administration at 103, rue de Grenelle in Paris, seat of ESMA from 2011 to 2019
ESMA’s birth is intimately intertwined with the 2008 financial crisis and the 2010 Eurozone crisis. At the light of these major turmoils, the prevailing EU financial supervision framework put on place by Lamfalussy did not stand the shock and was replaced by De Larosière regulatory framework. Therefore, what was known as the level 3 Lamfalussy agencies, the 3L3 Committees (CESR, CEIOPS, CEBS) in this four level framework, were taken over by the current European Supervisory Authorities (ESA are composed of ESMA, EIOPA, EBA) in the European System of Financial Supervision (ESFS) launched in 2011 in answer to the debt crisis.[5]
However, this incremental change was subject to a whole new flow of criticism treating about the EU administrative landscape and, more specifically, the literature around agencification. In fact, scholars studied the rise of EU agencies with executive powers through a critical lens as it raised questions on the democratic principle of the delegation of these powers to external agents[5]), the threat toward the institutional balance of the EU,[6] the impact on the European Parliament and the council of the EU co-decision process,[7] the fragmentation it can cause within member states as capitals battle to host them.[7]
ESMA formally came into existence on 1 January 2011, per article 82 of the ESMA Regulation.[4] It started the first page of its history and enjoyed a succession of executive delegations from the commission starting with the Omnibus I (2010) and Omnibus II (2011), which made the ESA operational and gave ESMA the role of direct supervisor of Credit Rating Agencies and trade repositories. Similarly, ESMA's role in overseeing ESG rating providers can help ensure consistency in how these ratings are applied and interpreted across the European Union.In 2012, its competences were enhanced through the EU regulation on short selling and credit defaults swaps. The year 2014 marked an intensive regulatory pressure on financial markets. The MiFID II and MiFIR gave ESMA the responsibility of implementing technical standards in the financial market. Its mandate includes investor protection and financial integrity and transparency with the Market abuse regulation (MAR), which is increasingly tied to ESG factors. Ensuring that ESG ratings are reliable and not misleading is an essential part of this role.[8]
As of its growing power, they are heavily criticized by some member states. The most vocal of them were the former EU country: UK. As a matter of fact, the growing weight of the agency was seen as a threat to national sovereignty and the matter grew to a litigation process in front of the European Court of Justice on the particular case of the possibility of ESMA to block short-sellings in time of crisis. UK argument, based on the Meroni case (case 9-56[9]), was that this delegation of power was anti-constitutional and was a breach to national sovereignty. However, the ECJ held against UK in this matter reassuring ESMA of outmost trust in dealing with financial regulations in case of emergency.
Each of these regulations and judgements have served as a springboard and settled ESMA as a key player in the financial realm regulatory framework.However, if ESMA is said to be accountable, independent and competent in EU financial supervision, a glance on its relations and network signals potential conflict of interests while dealing with ESG investing. The surveillance of the ESMA is up the European parliament that still has a double discourse regarding agencification and might use this supervisory power for the sake of advancing a set of personal preferred policies. ESMA works in the field of securities legislation and regulation to improve the functioning of financial markets in Europe, strengthening investor protection and co-operation between national competent authorities.
The idea behind ESMA is to establish an "EU-wide financial markets watchdog". One of its direct supervision tasks is to regulate credit rating agencies. In 2010, credit rating agencies were criticized for the lack of transparency in their assessments and for a possible conflict of interest. At the same time, the impact of the assigned ratings became significant not only for companies and banks but also for states.[10]
In October 2017, ESMA organised its first conference which was held in Paris. The event examined issues critical to European financial markets and was attended by 350 participants.[11]
ESMA's product intervention measures
On 1 August 2018, the ESMA implemented modified trading restrictions concerning contracts for difference (CFDs) and spread betting for retail clients. The most significant change was that binary options will be completely banned, while the CFD leverage that retail clients can trade with will be restricted to 30:1 and 2:1, depending on the volatility of the underlying asset traded.[12] These restrictions applied to traders categorized as retail investors only. Experienced traders, which fall under the category of professional clients, were excluded. This also meant that professional clients did not receive the same investor protections as retail investors.[13] The restrictions, initially imposed as a temporary measure, were renewed on 1 February 2019 ,for a further three-month period.[14] On 31 July 2019, the ESMA announced that it will not renew the restrictions after they expire on 1 August 2019, as all the EU member countries have managed to implement similar restrictions on the national level.[15]
ESMA's supervision of ESG rating activities
The addition of overseeing Environmental, Social, and Governance (ESG) rating providers to the European Securities and Markets Authority's (ESMA) responsibilities can be seen as a coherent extension of its existing mandate and expertise. Its association through the proposal of a regulation on ESG ratings activities integrity and transparency therefore aligns with the aim to concentrate a comprehensive EU Finance Single Rulebook on the hand of ESMA.[16][7] ESMA would have supervisory powers over ESG rating providers in addition to the supervision of credit rating agencies. Since there are similarities between supervisory functions, ESMA will have much more facilitated future supervision.[17]
Under the proposed regulations, any entity wishing to offer Environmental, Social, and Governance (ESG) rating services within the European Union must obtain official authorization. Entities based in the EU are obliged to seek this authorization from the European Securities and Markets Authority. ESMA will grant authorization upon determining that the applicant meets the criteria outlined in the Proposal and the right to apply fines in case of non-compliance to the set of requirements on quality, integrity, independence and transparency.[18]
ESMA's issuance of guidance
To ensure the consistent day-to-day application of Union law within ESMA's remit, ESMA issues and maintains "Guidelines (“GL”), Opinions (“OP”) and Q&As (“Q&As”)".[19] As for the legal basis,the ESMA regulation specifically empowers ESMA to issue and maintain Guidelines and recommendations (Article 16), Opinions (Article 16a), and Q&As (Article 16b).
As for Q&As, in February 2017 ESMA launched a process to allow stakeholders to submit a Q&A. Once scrutinised, if these Q&As are selected, they are published in English on ESMA's website.[20]
Single Rulebook
In a major initiative designed to facilitate access to information, ESMA created an interactive single rulebook. It stated, "The Interactive Single Rulebook is an on-line tool that aims at providing a comprehensive overview of and easy access to all level 2 and level 3 measures adopted in relation to a given level 1 text. The purpose of the Interactive Single Rulebook is to facilitate the consistent application of the EU single rulebook in the securities markets area. ESMA’s objective is to provide an interactive version for each key level 1 text under ESMA’s remit over time."[21]
Banking regulation and supervision refers to a form of financial regulation which subjects banks to certain requirements, restrictions and guidelines, enforced by a financial regulatory authority generally referred to as banking supervisor, with semantic variations across jurisdictions. By and large, banking regulation and supervision aims at ensuring that banks are safe and sound and at fostering market transparency between banks and the individuals and corporations with whom they conduct business.
Markets in Financial Instruments Directive 2014, is a directive of the European Union (EU). Together with Regulation No 600/2014 it provides a legal framework for securities markets, investment intermediaries, in addition to trading venues. The directive provides harmonised regulation for investment services of the member states of the European Economic Area — the EU member states plus Iceland, Norway and Liechtenstein. Its main objectives are to increase competition and investor protection, as well as level the playing field for market participants in investment services. It repeals Directive 2004/39/EC.
The Lamfalussy process is an approach to the development of financial service industry regulations used by the European Union. Originally developed in March 2001, the process is named after the chair of the EU advisory committee that created it, Alexandre Lamfalussy. It is composed of four "levels", each focusing on a specific stage of the implementation of legislation.
The Capital Requirements Directives (CRD) for the financial services industry have introduced a supervisory framework in the European Union which reflects the Basel II and Basel III rules on capital measurement and capital standards.
The European Insurance and Occupational Pensions Authority (EIOPA) is a European Union financial regulatory agency. It was established in 2011 under Regulation (EU) No 1094/2010.
Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. As of 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market.
The Committee of European Securities Regulators (CESR) was an independent committee of European Securities regulators, in place from 2001 to 2010. On 1 January 2011, it was replaced by the European Securities and Markets Authority (ESMA).
A securities commission, securities regulator or capital market authority is a government department or agency responsible for financial regulation of securities products within a particular country. Its powers and responsibilities vary greatly from country to country, but generally cover the setting of rules as well as enforcing them for financial intermediaries and stock exchanges.
The National Securities Market Commission (CNMV) is the Spanish government agency responsible for the financial regulation of the securities markets in Spain. It is an independent agency that falls under the Ministry of Economy.
The Danish Financial Supervisory Authority (DFSA) is the financial regulatory authority of the Danish government responsible for the regulation of financial markets in Denmark.
Alternative Investment Fund Managers Directive 2011 is a directive of the European Union on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers" (AIFMs) in the European Union. The Directive requires all covered AIFMs to obtain authorisation, and make various disclosures as a condition of operation. It followed the global financial crisis. Before, the alternative investment industry had not been regulated at EU level.
The European System of Financial Supervision (ESFS) is the framework for financial supervision in the European Union that has been in operation since 2011. The system consists of the European Supervisory Authorities (ESAs), the European Systemic Risk Board, the Joint Committee of the European Supervisory Authorities, and the national supervisory authorities of EU member states. It was proposed by the European Commission in 2009 in response to the financial crisis of 2007–08.
The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in La Défense, Île-de-France. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks' capital structures.
The Capital Requirements Regulation(EU) No. 575/2013 is an EU law that aims to decrease the likelihood that banks go insolvent. With the Credit Institutions Directive 2013 the Capital Requirements Regulation 2013 reflects Basel III rules on capital measurement and capital standards.
Rating-Agentur Expert RA GmbH is a credit rating agency established in Frankfurt am Main, Germany. The agency is a business unit of International group RAEX operating in the European Union since 2013. It is the first rating agency with Russian roots, officially recognized by European Union Supervisory Authority.
The Capital Markets Union (CMU) is an economic policy initiative launched by the former president of the European Commission, Jean-Claude Juncker in the initial exposition of his policy agenda on 15 July 2014. The main target was to create a single market for capital in the whole territory of the EU by the end of 2019. The reasoning behind the idea was to address the issue that corporate finance relies on debt (i.e. bank loans) and the fact that capital markets in Europe were not sufficiently integrated so as to protect the EU and especially the Eurozone from future crisis. The Five Presidents Report of June 2015 proposed the CMU in order to complement the Banking union of the European Union and eventually finish the Economic and Monetary Union (EMU) project. The CMU is supposed to attract 2000 billion dollars more on the European capital markets, on the long-term.
The principle of equivalence in financial services at the European Union (EU) level is one of the instruments the Commission has at its disposal to carry out its international strategy for financial services. The principle of equivalence is materialised through an equivalence decision issued by the European Commission to a targeted country that it judges fit to have access to the European Market in financial services. The decision is unilateral, non-reciprocal and affects the targeted third country in regard to particular activities or services to which the decision is intended. The equivalence decision is issued through an assessment of the third country regulations in relation to particular services or activities in the EU. In order to do so, the Commission bases its decision on 40 provisions of EU law. Important to note, perhaps is the fact that not all have been availed but over 250 equivalence decisions were made targeting more than 30 countries worldwide.
Sustainable finance is the set of practices, standards, norms, regulations and products that pursue financial returns alongside environmental and/or social objectives. It is sometimes used interchangeably with Environmental, Social & Governance (ESG) investing. However, many distinguish between ESG integration for better risk-adjusted returns and a broader field of sustainable finance that also includes impact investing, social finance and ethical investing.
The general notion of cryptocurrencies in Europe denotes the processes of legislative regulation, distribution, circulation, and storage of cryptocurrencies in Europe. In April 2023, the EU Parliament passed the Markets in Crypto Act (MiCA) unified legal framework for crypto-assets within the European Union.
Regulation of ESG rating in the European Union are proposed European Union regulations of environmental, social, and corporate governance (ESG) rating activities' transparency and integrity to improve clarity in the EU's ESG rating processes. The regulations were first designed after 2020 and an amended draft was published in 2023.
↑ Spendzharova, A. (2012), Is More ‘Brussels’ the Solution? New European Union Member States' Preferences about the European Financial Architecture. JCMS: Journal of Common Market Studies, 50: 315-334. doi:10.1111/j.1468-5965.2011.02208.x
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