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I. RESETTING THE LOCATION OF REGULATORY AND SUPERVISORY CONTROL OVER EU FINANCIAL MARKETS: LESSONS FROM FIVE YEARS ON

Published online by Cambridge University Press:  31 October 2013

Niamh Moloney*
Affiliation:
Professor of Law, London School of Economics, n.moloney@lse.ac.uk.

Extract

Some five years on from the Autumn 2008 collapse of Lehmans, the regulatory dust from the Global Financial Crisis has settled. Significant regulatory policy debates are still underway internationally, notably with respect to the treatment of shadow banking.1 But the main contours of the crisis-era regulatory landscape are now clear. Internationally, most major economies, including the EU, have implemented the G20 reform agenda, set out initially in the 2008 Washington Declaration,2 and covering, inter alia: bank capital, liquidity and leverage; hedge funds; rating agencies; and the over-the-counter (OTC) derivatives markets. That major regulatory change would have followed the financial crisis is not, of course, a surprise.3 Observation of responses to major financial crises over the years from the 1929 Crash to the ‘dotcom bubble’ era and beyond4 makes clear that what Professor Coffee has vividly described as the ‘regulatory sine curve’5 leads to a regulatory boom after financial market bust.

Type
Current Developments: European Union Law
Copyright
Copyright © British Institute of International and Comparative Law 2013 

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References

1 Recent key developments include Financial Stability Board (FSB), Strengthening Oversight and Regulation of Shadow Banking (2013)Google Scholar and Commission Green Paper, Shadow Banking (COM (2012) 102)Google Scholar.

2 G20, Declaration, Washington G20 Meeting, 14–15 November 2009.

3 eg Romano, R, Regulating in the Dark (2012) Yale Law & Economics Research Paper No 442Google Scholar, available at <http://ssrn.com/abstract=1974148>.

4 Allen, F and Gale, D, Understanding Financial Crises (OUP 2007) 190215Google Scholar.

5 Coffee, J, ‘The Political Economy of Dodd-Frank: Why Financial Reform Tends to be Frustrated and Systemic Risk Perpetuated’ (2012) 97 CornellLRev 101Google Scholar.

6 This short review focuses for the most part on securities markets and not on the banking reforms. For further analysis of the crisis-era rulebook see Moloney, N, ‘The Legacy Effects of the Financial Crisis on Regulatory Design in the EU’ in Ferran, E et al. , The Regulatory Aftermath of the Global Financial Crisis (CUP 2012) 111CrossRefGoogle Scholar.

7 The European Markets Infrastructure Regulation 2012, eg, (Regulation (EU) No 648/2012 OJ (2012) L201/1 (EMIR)) is amplified by nine sets of BTSs.

8 Commission Proposals COM (2011) 651 and COM (2011) 654 (both bringing benchmark manipulation within the EU's market abuse regime); a wider regulatory reform is also in train.

9 The final banking rulebook takes the form of the 2013 Capital Requirements Directive (which covers governance, sanctions, capital buffers, supervision, and a reduction in reliance on rating agencies) and the Capital Requirements Regulation (which covers capital, liquidity, leverage and counterparty credit risk) (respectively, Directive 2013/36 OJ (2013) L176/338 and Regulation (EU) No 575/2013 OJ (2013) L176/1).

10 There are two elements to the reform; the harmonized rulebook governing bank recovery and resolution (COM (2012) 280) (a negotiating position was reached by the ECOFIN in June 2013); and the establishment of a Single Resolution Mechanism as part of Banking Union) (COM (2013) 520).

11 Directive 2011/61 OJ (2011) L174/1 (the AIFMD).

12 Regulation (EU) No 1060/2009 OJ (2009) L302/1.

13 Regulation (EU) No 513/2011 OJ (2011) L145/30.

14 Regulation (EU) No 462/2013 OJ (2013) L146/1.

15 Directive 2013/14 OJ (2013) L145/1.

16 Regulation (EU) No 236/2012 OJ (2012) L86/1.

17 On the ESAs see eg Everson, M, A Technology of Expertise: EU Financial Services Agencies (2012)Google Scholar LEQS Working Paper No 49/2012, available at <http://ssrn.com/abstract=2085233>; Ferran, EUnderstanding the Shape of the New Institutional Architecture of EU Financial Market Supervision’ in Ferrarini, G, Hopt, K and Wymeersch, E (eds), Rethinking Financial Regulation and Supervision in Times of Crisis (OUP 2012)Google Scholar; Schammo, P, ‘EU Day-to-Day Supervision or Intervention-based Supervision: Which Way Forward for the European System of Financial Supervision?’ (2012) 32 OJLS 771CrossRefGoogle Scholar; Moloney, N, ‘The European Securities and Markets Authority: A Tale of Two Competences. Part (1) Rule-Making’ (2011) 12 European Business Organization Law Review 521Google Scholar; and Moloney, NThe European Securities and Markets Authority: A Tale of Two Competences: Part (2) Rules in Action (2011) 12 European Business Organization Law Review 177CrossRefGoogle Scholar.

18 See eg Alexander, K and Ferran, E, ‘Can Soft Law Bodies be Effective? The Special Case of the European Systemic Risk Board’ (2010) European Law Review 751Google Scholar.

19 Banking Union is composed of a number of elements, including a harmonized banking rulebook (contained in the 2013 CRD reforms), harmonized national deposit protection schemes (the related proposal is currently stalled), a Single Resolution Mechanism and a Single Supervisory Mechanism based on ECB supervision of Euro Area banks: Commission, A Roadmap towards a Banking Union (2012) (COM (2012) 510)Google Scholar.

20 See further Ferran, E and Babis, V, The European Single Supervisory Mechanism (2013) University of Cambridge Faculty of Law Research Paper No 10/2013Google Scholar, available at <http://ssrn.com/abstract=2224538>.

21 Commission, Green Paper. ‘Long-Term Financing of the European Economy’ (2013) (COM (2013)Google Scholar 150/2).

22 Directive 2004/39 OJ (2004) L145/1.

23 COM (2011) 656 (MiFID II) and COM (2011) 652 (MiFIR). The European Parliament and Council reached negotiating positions in October 2012 and June 2013 respectively.

24 Respectively, Regulation (EU) No 345/2013 OJ (2013) L115/1; Regulation (EU) No 346/2013 OJ (2013) L115/18; and COM (2013) 462.

25 COM (2012) 352.

26 The cornerstone Prospectus Directive has been reformed (Directive 2010/73 OJ (2010) L327/1) as has the Transparency Directive, which governs ongoing disclosure (COM (2011) 683; the Council and Parliament reached political agreement in May 2013), and the related accounting regime (Directive 2013/34/EU OJ (2013) L182/19). These reforms are broadly designed to streamline the relevant regulatory regimes and bring greater efficiencies to the capital-raising process.

27 COM (2011) 651 (Market Abuse Regulation) and COM (2011) 654 (Market Abuse Directive – on criminal sanctions). Political agreement was reached between the Council and Parliament in June 2013.

28 COM (2012) 350 (the ‘UCITS V’ reforms, which focus in particular on the UCITS depositary). A wide-ranging UCITS VI reform agenda has also been presented: Commission, ‘UCITS. Product Rules, Liquidity Management, Depositary, Money Market Funds and Long-term investments’ (2012).

29 Leading the European Parliament to criticize the lack of progress on key proposals, including those relating to deposit protection schemes: European Parliament, Resolution on European Parliament Priorities for the Commission's Work Plan 2014, 26 June 2013 (B7-0325/2013).

30 ESMA has published its review: ESMA/2013/614.

31 The cumulative impact of the G20 reform programme on the stock of global high-quality collateral has become a recurring theme in the international policy debate. The Commission has also raised concerns: Commission, Financial Stability and Integration Report (2012) (SWD (2013) 156)Google Scholar 26.

32 Ferran, E, ‘Crisis-driven regulatory reform: where in the world is the EU going’ in Ferran, E et al. , The Regulatory Aftermath of the Global Financial Crisis (CUP 2012) 1CrossRefGoogle Scholar and Quaglia, L, ‘The ‘‘Old’’ and ‘‘New’’ Political Economy of Hedge Fund Regulation in the EU’ (2011) 34(3) West European Politics 665CrossRefGoogle Scholar.

33 ESMA has reported that the Short Selling Regulation, despite some febrile speculation as to its potentially prejudicial effects, did not have material adverse effects on market liquidity and price discovery: see (n 30).

34 Which typically set a date (usually within two to three years of the measure coming into force) within which the measure must be reviewed and identify the particular issues which the review must address; these issues usually include contested measures at the time of the original negotiations as well as proposals for future action.

35 This was particularly evident from the EMIR BTS process which required ESMA to engage with highly complex regulatory design questions given the regulatory terra nullius which the EMIR delegations to BTS preparation represented.

36 This was particularly the case with ESMA's guidelines on the operation of the Short Selling Regulation's exemption for market makers (ESMA/2013/158).

37 Moloney, N and Ferrarini, G, ‘Reshaping Order Execution in the EU and the Role of Interest Groups: From MiFID I to MiFID II’ (2012) 13 European Business Organization Law Review 557Google Scholar.

38 Hall, P and Soskice, D, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (OUP 2001)CrossRefGoogle Scholar.

39 For an application in the context of the financial crisis reform programme see Mügge, D, Financial Regulation in the European Union: A Research Agenda (2012) Center for European Studies, Harvard UniversityGoogle Scholar.

40 COM (2011) 594.

41 COM (2013) 71. Article 20 TEU and Articles 326–334 TFEU allow Member States to establish ‘enhanced cooperation’ between themselves within the framework of the EU's non-exclusive competences and to use the EU's institutions and competences to do so, as long as the related Treaty conditions are met.

42 Case C-209/13.

43 Case C-270/12.

44 Exemplified at international level by the FSB's peer review programme which monitors compliance with the G20 reform agenda: FSB, Framework for Adherence to International Standards (2010)Google Scholar. The FSB monitoring programme is based on a novel ‘score card’ rating system.

45 On the UK and US institutional reforms, see eg, respectively, Ferran, E, ‘The Break-up of the Financial Services Authority31 OJLS (2011) 455CrossRefGoogle Scholar and Skeel, D, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences (Wiley 2011)Google Scholar.

46 The new UK regulatory authorities, for example, have adopted a new ‘judgment-based’ supervisory model, which is based on a more proactive, intrusive and ex-ante approach to financial market intervention, and which deploys sector-based approaches, forward-looking and business model analysis, greater use of intelligence and data, greater use of thematic reviews, and more responsive and flexible use of resources. See eg FSA, Journey to the Financial Conduct Authority (2012)Google Scholar and Bank of England and FSA, The Prudential Regulation Authority's Approach to Banking Supervision (2012)Google Scholar.

47 The MiFID II/MiFIR process, for example, is likely to specify an extensive range of sanctions, including warnings, injunctions, prohibitions on the exercise of management functions, and pecuniary sanctions, and to require that the determination of the type and level of administrative sanction take into account the gravity and duration of the breach, the degree of responsibility of the person concerned, the financial strength of the responsible person, the importance of the profits gained or losses avoided, the level of cooperation by the responsible person with the competent authority and previous breaches by the responsible person.

48 Moloney, N, ‘Liability of Asset Managers: A Comment’ (2012) 7 Capital Markets Law Journal 414CrossRefGoogle Scholar.

49 Regulation (EU) No 1095/2010 OJ (2010) L331/84.

50 See eg the references at n 17.

51 Tentative steps are being made towards harmonized resolution processes for systemically significant non-bank institutions, including CCPs: Commission, Consultation on a Possible Framework Recovery and Resolution Framework for Financial Institutions other than Banks (2012)Google Scholar.

52 Case C-9/56 and 10/56 [1957/1958] ECR 133.

53 See n 43.