What does ESMA do? One of three European Supervisory Authorities (ESAs),
ESMA was created at the beginning of 2011 to replace the Committee of European Securities Regulators (CESR). It has responsibility for the financial services and markets sector and operates alongside the European Banking Authority and the European Insurance and Occupational Pensions Authority.
ESMA’s aims include ensuring consistent interpretation of key concepts in EU legislation, and consistent supervisory treatment across member states and sectors.
The changes three years ago afforded the ESAs greater power in producing guidance and advice to the EC, and for the first time gave them certain direct regulatory powers over market participants.
How does ESMA differ from CESR, and what impact is the Authority having on financial services?ESMA does what CESR did and considerably more. There are three main differences between ESMA's powers and those of its predecessor. First, the Authority has greater involvement in suggesting to the EC how it should draft certain legislation and technical standards. Second, unlike its predecessor, ESMA has direct supervisory and recognition powers (including in relation to credit rating agencies, central counterparties and trade repositories). Third, the Authority has powers of investigation, which it can use autonomously or at the request of a national supervisor or EU institution.
"Some of ESMA's proposals may have far-reaching consequences if adopted"There is evidence that ESMA is being taken more seriously than CESR, and is seen as an entity with teeth. It does not quite possess the 'credible deterrence' attitude that the FSA and now the FCA have shown in the UK. But ESMA's new powers, combined with the strong views set out in its consultations and some of its public correspondence with the EC, make it clear that once the Authority has set standards or guidance, these will have to be followed, regardless of whether financial services firms – or indeed their regulators – agree with them.
It is still a little early to tell how much of a lasting effect ESMA's increased authority will have. Various EU measures provide it with powers to intervene immediately where required, not least on short selling and, under the second Markets in Financial Instruments Directive (MiFID II), product intervention.
The Authority's increased focus on the single rulebook and its mission to carry out regulatory peer reviews of competent authorities means it is taking convergence seriously. The problem that will continue to emerge as MiFID II implementation in particular gets closer, however, is the regulatory attitude on key investor protection issues in different countries, stemming from both the authorities themselves and the culture of the investor population. With less scope for national derogations, ESMA's resolve will be tested over the next couple of years.
Is there anything in particular that financial services firms need be aware of in relation to compliance and trading under ESMA? UK financial services firms will be keeping a watchful and worried eye on ESMA's proposals to develop the EU single rulebook through its work on advising on technical measures to implement MiFID II and Market Abuse Regulation (MAR).
1,000
The number of pages ESMA's consultation and discussion papers run to
MiFID II is of wide interest and significant concern, as the public hearings that resulted from ESMA's consultation and discussion papers on MiFID II implementation show – although in many respects, particularly as regards retail customers, the UK is ahead of the game.
Nevertheless, some of ESMA's proposals may have far-reaching consequences if adopted. The period for responding has just closed, but firms can still lobby through their trade associations if they are concerned about specific aspects of the potential MiFID II measures and technical standards.
From the
consultation and discussion papers ESMA issued on the myriad items requiring further EU-level clarification (which run to about 1,000 pages), there are likely to be particular concerns over certain investor protection measures, most notably around retail distribution and how to apply trading and transparency requirements proportionately.
In terms of trading, MiFID and its associated regulation (MiFIR) goes, to some extent, hand in hand with European Market Infrastructure Regulation (EMIR). Firms must constantly keep tabs on ESMA's plans and timetable for designating contracts and clearing houses as suitable for central clearing and attendant reporting requirements.
Generally, it is crucial for firms to focus on ESMA's consultations when they are published, so that they have the best chance of assessing the likely effects of ESMA's proposals and making their views known at the right time.
About the expertEmma Radmore is Managing Associate in the Financial Services and Funds team at Dentons, a global law firm. She advises UK and international clients, including banks, fund managers and investment firms, on compliance with all aspects of financial regulation and prevention of financial crime.