European Regulator Weighed Down By Acronyms
The European Securities and Markets Authority (Esma) is facing an alphabet soup of new financial regulations to deal with and market participants are worried that the pan-European regulator will not be able to spend enough time on each one—bringing new dangers to the market.
Based in Paris, the regulator was formed in January 2011 to report on financial supervision in the European Union and hopes to have a staff of 100 on board by the end of the year. It is also Esma’s job to write technical standards on a host of regulations that are becoming either directives or regulations. From Emir to MiFID II and MAD to AIFMD, among others, it will have a big say on how the EU regulatory landscape will look in the coming years.
“Esma is in a rush,” said David Lewis, senior vice-president of capital markets business Astec Analytics at SunGard in London, a trading and technology company. “And the need to write these regulations quickly poses potential risks of creating unintended consequences for the wider market.”
While many firms are struggling to plan ahead as many of the new regulations have yet to be fully formulated.
“Whether Esma is fully equipped and has the staff and the time to design the new regulatory framework has already been hotly debated,” Philippe Carré, global head of client connectivity of SunGard’s Global Trading business in London, told Markets Media at WBR’s recent Trade Tech Europe 2012 industry event in London.
“One of the key differences this time round is that when MiFID I arrived, everyone knew well ahead what was happening and started thinking, ‘this is how I am going to operate—I am going to become a broker-crossing network, or a systematic internalizer, or I will open up an MTF’. One could plan ahead.
“Now you are confronted with a raft of regulations but yet little idea whether at the end a certain business line will still really make sense for you. In 2007, when MiFID I arrived, we were at the peak of the equities game so things were different. This time firms are asking themselves, ‘I need to adapt, but do I really want to? Is this business still relevant to me? Do I really want to be in that business, can I afford it?’”
In addition to the revised Markets in Financial Instruments Directive (MiFID II), which is aimed at making financial markets more efficient, resilient and transparent in response to the global financial crisis of 2008, Esma is having to or has dealt with the European Market Infrastructure Regulation (Emir), which will require all over-the-counter traded derivatives to be processed through clearing houses by the end of the year to add greater transparency to the process; the Market Abuse Directive (MAD), which intends to guarantee the integrity of European financial markets; and the Alternative Investment Fund Managers Directive (AIFMD), which will regulate hedge funds more closely. It has also been tasked with working on Europe’s short-selling legislation as well as the latest update of the Ucits framework, rules for packaged retail products and a revision of the Transparency Directive.
Steven Maijoor, chair of Esma, said: “Esma has two key objectives as an organization, contributing to its overall mission, which are the building of a single rulebook for the regulation of the EU’s financial markets and ensuring its consistent application by establishing a consistent supervisory framework.
“While these are ambitious objectives, presenting significant challenges, I feel that Esma has already demonstrated substantial progress over its first 15 months, particularly when seen against the background of a further deterioration in Europe’s financial markets and the continuation of the regulatory change agenda.”
Maijoor joked that “at times if feels like being the regulator for acronyms”, but said that Esma was focused on doing its “utmost to ensure that we achieve our goals”.
Esma, though, defended claims by some in the industry that it is overstretched in dealing with this mass of regulation.
“For the time being, Esma’s current staffing and its envisaged growth seems reasonable for the tasks at hand,” Reemt Seibel, communications officer for Esma, told Markets Media.
“The overall number of people Esma employs may seem small but one should not forget that we also can, and do, rely on the resources of the EU national regulators whose technical experts regularly participate in Esma’s policy work (such as Emir, MiFID, Ucits etc), which is conducted within our many standing committees, working groups and task forces. Should, however, further new tasks be assigned to Esma, one would expect this to be reflected in additional resources.”
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.