Esma Fights Its Corner Over Regulation

Terry Flanagan

The European Securities and Markets Authority (Esma), the relatively new pan-European regulator that was formed last year to implement the avalanche of new regulations that are set to descend on the region, has reaffirmed its vision on how it intends to safeguard the financial markets.

Market participants in Europe are facing an alphabet soup of new financial regulations to deal with ranging from AIFMD, Emir and MAD to MiFID II and Ucits, as well as capital adequacy regimes such as Solvency II and Basel III.

“Europe’s capital markets are experiencing unprecedented levels of regulatory change,” said Gaёl de Boissard, chairman of the Association for Financial Markets in Europe, a sell-side industry body.

Esma, which is based in Paris, was formed in January 2011 to report on financial supervision for the European Union and follow up on any primary legislation adopted by Brussels. It has also taken on a significant amount of new staff in recent months to cope with the testing demands of drafting technical standards for the many new financial regulations that are in the offing.

“In face of the difficult economic situation in Europe and elsewhere concerns are being raised that financial market reforms may hamper our economic recovery,” Steven Maijoor, chair of Esma, told an AFME roundtable in Brussels this week.

“I am not convinced of that logic. Poor regulation and supervision were among the reasons for the crisis and the current state of the banking sector, and the financial markets.

“Keeping this in mind, we need to focus on what we want to achieve for the future: strong and sustainable growth requires stable markets. But stable financial markets need good regulation and effective supervision.

“The financial reforms undertaken in the EU, but also in the U.S. and elsewhere, serve this important overriding objective—they provide a stable and predictable regulatory framework for financial markets and in Europe support competition by safeguarding and enhancing the European single financial market.”

Trading glitches, such as the Knight Capital and Facebook IPO debacles, as well as banking scandals, such as the manipulation of Libor, and the significant drop-off in volumes in recent months have all added to the malaise felt by market participants.

“Confidence of financial consumers and retail investors in the financial services sector are at very low levels,” said Maijoor. “Good regulation needs to restore trust into financial markets and institutions.

“Esma contributes to this target in multiple ways [by] promoting market confidence as a result of more transparency, better financial services and the right risk-adequate behavior of market participants.”

Esma is also fully supportive of the conscious switch by Brussels in recent times to introduce its new finance laws mainly as regulations and not as directives, as in the past. A regulation is binding and has to be adopted by the 27 member states, whereas legislation can be interpreted in different ways by each nation.

“Esma co-ordinates the implementation of consistent regulations throughout the member states,” said Maijoor. “The general move away from directives towards regulations and common technical standards importantly contributes to the single market.

“[This] achieves consistent supervisory practices across the EU. We also closely co-operate and communicate with national authorities in order to avoid and mitigate cross-country differences which would generate regulatory arbitrage and the fragmentation of financial markets.”

Steve Grob, director of group strategy, Fidessa

Steve Grob, director of group strategy, Fidessa

Maijoor added: “Efficient and effective regulation and supervision safeguard and enhance financial stability and efficiency, in particular through the preservation of the European single financial market. It thereby also promotes economic growth. I hope that Esma can make an effective contribution to this important mission.”

Some market participants, though, are fearful that Esma is being swamped by all of this work.

“Esma is doing a valiant job,” Steve Grob, director of group strategy at Fidessa, a trading and technology company, told Markets Media in July. “But they are being hit by wave after wave of regulation; it is probably getting harder for them.

“It is not when one bit of regulation is implemented that they are done with it. They have to sit and look for all the unintended consequences and fix those. So every bit of regulation they produce causes more work for them, not less.”

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