European Securities And Markets Authority Research Articles

Leverage constraints and investors' choice of underlyings

This paper investigates the impact of a 2018 intervention by the European Securities and Markets Authority (ESMA), which limits the amount of leverage that retail investors can take on their trading activities. While the intervention successfully reduced leverage-usage, investors shifted their trading activities to riskier assets in the process, consistent with the idea that leverage-constrained investors substitute leverage with riskier securities. Thus, the intervention was not as effective as the reduction in leverage suggests.

Soft Regulatory Capture and Supervisory Independence: A Case-Study on Wirecard

623The traditional view on regulatory capture focuses on capture as a distortion of public purpose through a malicious relationship, corruption and possible collusion between the regulator and the industry (hard capture). This paper argues that regulatory capture can arise from political and institutional conditions which do not allow or favour the supervisory independence of authorities from both the industry and the government (soft capture). This paper’s argument is illustrated through a case-study on the German Federal Financial Supervisory Authority’s (BaFin) handlining of the Wirecard AG case. The basis for the analysis are the findings from the Committee of Inquiry of the German Bundestag and the European Securities and Markets Authority (ESMA) Fast Track Peer Review (FTPR) through three lines of inquiry: (1) lack of balance sheet control; (2) the short selling ban; and (3) Wirecard AG’s stock trading by BaFin’s employees. This paper concludes that BaFin was not hard captured in the Wirecard AG case as de facto influence cannot be proven. Instead, its de jure dependency vis-à-vis the MoF (as implicitly endorsed by German law) might have contributed to a case of soft regulatory capture – especially in the aspect of the short selling ban. The paper then analyses the reforms enacted by Germany and promoted by Europe in post-Wirecard case.

EU financial market regulation a decade from the financial-crisis-era reforms: crisis, uncertainty, and capacity

Abstract This article reflects on the effectiveness of European Union (EU) financial market regulation, a decade or so after the closure of the EU’s massive financial-crisis-era reform programme. To do so, it considers the first significant test of the financial-crisis-era reforms: the March 2020 period of acutely elevated financial stability risk as the COVID-19 pandemic intensified, global markets roiled, and the investment fund sector experienced large-scale disruption. It relates the EU’s broadly successful management of this period to, first, the resilience of the legislative choices made and refined over the financial crisis era as regards investment fund regulation and, secondly, to technocratic action, by the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board (ESRB), that facilitated rule amplification, risk monitoring, supervisory coordination, and supervisory convergence and thereby supported the earlier legislative choices. Drawing on the March 2020 experience, the article goes on to consider the capacity of EU financial market regulation more generally to manage what are increasingly dynamic risks to financial market stability. It identifies a strengthening of the EU’s capacity in this regard, but also persistent and intractable risks to this capacity, including as regards legitimation.

Does the Level of Enforcement Shape the Complexity in Accounting Standards?

This paper examines whether the level of enforcement shapes the complexity in accounting standards. First, in order to identify the level of complexity in accounting standards, we calculated a new measure that conceptualizes accounting complexity based on the theoretical dimensions of multiplicity and diversity. To calculate this new measure, the content of each International Financial Reporting Standard and International Accounting Standard, in 2018, was analyzed. Second, we investigated whether the level of enforcement affects this score, using the number of enforcements published by the European Securities and Markets Authority (ESMA). Our results show that accounting standards with a higher number of enforcements by ESMA are also more complex, suggesting that enforcement is an important factor that explains the level of complexity of an accounting standard. This study is particularly relevant for regulators in the accounting, auditing, and enforcement fields, since it provides evidence of how enforcement contributes to increasing the level of complexity of accounting standards. This study contributes to the debate on the interdependence of enforcement and accounting regulation, showing that enforcement mechanisms can influence accounting standards. This study also calculates a new measure of complexity in accounting standards, rather than using a quantitative proxy.

Pat on the Shoulder or Real Empowerment? New ESMA Jurisdiction in No-Action Letters Compared with the SEC Experience

No-action letters have been in use in the US by the Securities and Exchange Commission (SEC) for over 50 years. Intrigued by the usefulness and the agility provided by the no-action letters, market participants have made calls to introduce a similar competence/power for the European Securities and Markets Authority (ESMA). ESMA was eventually given the possibility to issue no-action letters. Arguably, the new power stands to be an amalgam of the already existing powers of ESMA brought together under one article. This article proposes that the new power is not free from accountability and efficacy problems and that some amendments are needed to address this dangerous lack. The dearth of scholarship on the no-action letters in the EU coupled with ESMA starting to issue its first no-action letters makes analysing this issue all the more pressing. In setting the scene, the article describes the no-action letters used by the SEC. The article then analyses ESMA as an EU agency and sets out its regulatory remit. Thereafter the new no-action power of ESMA is explained and compared with the established practice in the US. The article finally concludes by pointing out the deficiencies of the new power of ESMA and makes suggestions to improve its efficacy and accountability. Central Securities Depositories, resolution, legal and policy considerations, resolution objectives, interaction with CSDR and other harmonisation initiatives

How Do Supranational Regulators Keep Companies in Line? An Analysis of the Enforcement Styles of EU Agencies

AbstractNational governments have increasingly transferred enforcement powers to EU agencies that monitor and penalize non‐compliance by private actors. How do EU agencies apply enforcement competences in practice? Based on the Eurolegalism thesis, pressures for deeper integration have led to the emergence of a more adversarial enforcement style in Europe. Consequently, supranational regulators are expected to employ formal and coercive enforcement instruments. Conversely, studies of EU enforcement suggest that EU agencies may be reluctant to antagonize national governments by prosecuting private actors. In this study, we analyze the enforcement practices of supranational agencies with direct enforcement powers: the EU Aviation Safety Agency (EASA), European Securities and Markets Authority (ESMA) and European Medicines Agency (EMA). We find that EU agencies apply a legalistic approach, but they vary in coerciveness of enforcement. Whereas EU agencies tend to apply more coercive measures against non‐conform products, they are generally not adversarial toward non‐compliant organizations.

Share Classes in Investment Funds and Fair Treatment of All Investors

Against the backdrop of the US and EU academic debate on share classes or preferential treatments in investment funds, the paper focuses on an Italian case study. In this jurisdiction, ‘reserved’ alternative investment funds (AIFs) issue Class A and Class B shares, where Class A are granted preferential rights in the form of nonexposure to risk of losses (seniority privilege) and/or a guaranteed minimum interest related to the nominal value of contributions (minimum interest privilege). In details, the seniority privilege entails that, if the net asset value (NAV) of the fund at T1 is lower than at T0, this will only impact on the aggregate value of Class B shares. Thanks to the minimum interest privilege, if the fund at T1 has yielded no returns (or a return lower than the minimum interest), the aggregate value of Class A shares will nevertheless increase by an amount equal to the minimum interest (e.g., 10% of the value of the contributions to the fund). In either case, the aggregate value of Class B shares is correspondingly (proportionately) reduced. The paper analyses such preferential rights under the ‘non-contagion’ principle, according to which, features specific to one share class shall not have a potentially adverse impact on other share classes of the same fund. According to the European Securities and Markets Authority (ESMA) (as well as the International Organization of Securities Commissions (IOSCO)), such a principle is an expression of the broader fairness standard. The outcome of the analysis is that preferential treatment shall be permitted as long as it has the effect of increasing the overall welfare of the relevant fund’s investors, whereas any preferential treatment resulting in a ‘wealth shift’ from one investor (or class) to another runs counter to the ‘non-contagion’ principle and is therefore unfair. Investment funds, reserved AIFs, share classes, fair treatment, seniority privilege, minimum interest privilege, non-contagion principle, preferential treatment, shift of wealth

Central Counterparties are Too Big for the European Securities and Markets Authority (Alone): Constructive Critique of the 2019 CCP Supervision Regulation

Once seen as the solution to the systemic risk of over-the-counter derivatives, central counterparties (CCPs) have become a source of concern for the financial stability of the European Union (EU). Distress of a single CCP might be transferred to clearing members and others CCPs, thereby endangering EU monetary and fiscal stability. However, the European Market Infrastructure Regulation (EMIR) has left fiscal responsibility as well as day-to-day supervision of EU-based CCPs (EU-CCPs) at the national level, albeit cross-border colleges of authorities can overturn key decisions of national supervisors. The Commission concluded that these supervisory arrangements needed to be reformed because they hamper the development of a single coherent EU approach to CCP supervision. Although the Commission had proposed to centralise EU-CCP supervision in the European Securities and Markets Authority (ESMA), the final 2019 CCP Supervision Regulation seeks to improve EMIR’s ineffective collegial framework by establishing an internal CCP Supervisory Committee within ESMA. Nevertheless, the continuing lack of loss mutualisation would keep on hindering the development of a single approach to EU-CCP supervision. Moreover, the new regulation adds another layer of complexity to the EMIR framework and clashes with the European monetary constitution. If an agreement on loss mutualisation was reached, EU-CCP supervision should be centralised in two EU bodies along objective lines: while the European Central Bank should be tasked with EU-CCP prudential supervision, ESMA should be responsible for EU-CCP conduct of business supervision. This framework would improve EU-CCP supervision and fit in with the current EU governance at once.

Multi-level Administration, Inspections and Fundamental Rights: Is Judicial Protection Full and Effective?

AbstractIn the last decades, an increasing number of EU institutions and agencies have been given the power to conduct administrative inspections. While the legal literature has traditionally focused on the Commission’s inspection powers in competition proceedings, the European Anti-Fraud Office (OLAF), the European Central Bank (ECB), the European Securities and Markets Authority (ESMA), the European Aviation Safety Agency (EASA), and the European Fisheries Control Agency (EFCA) are also entrusted with such powers. The Commission has also been granted inspection powers in the field of Food Safety. Inspection powers can have a crucial impact on the fundamental right of the inviolability of the home, recognized by the Court of Justice as a general principle of EU law, and protected under Article 8 of the European Convention of Human Rights (ECHR) and Article 7 of the EU Charter of Fundamental Rights (ECFR). This Article argues that the current remedies do not fulfill all the criteria set forth by the Strasbourg Court for ex post judicial control vis-à vis inspections to be full and effective, in particular when these powers are used in the context of composite procedures, and suggests remedies to improve the system of review, in order to effectively protect fundamental rights.

Corporate Reporting in the Time of COVID-19: Analysis of Information Disclosed by Selected Companies Listed on the Warsaw Stock Exchange

Purpose: The aim of the paper is to present the most important changes introduced in the balance sheet in the field of financial reporting and the impact of Sars-Cov-2 on the operating activities and financial results of selected companies from the Warsaw Stock Exchange (WSE). Design/Methodology/Approach: The article was prepared based on a review of domestic and foreign literature, market analyses of consulting companies such as Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers, reports, and recommendations issued by the Polish Financial Supervision Authority (UKNF), guidelines of the European Securities and Markets Authority (ESMA) and financial statements of selected stock exchange companies from the Warsaw Stock Exchange. Findings: The conducted research showed that Covid-19 had a significant impact on the financial data presented in the financial statements of selected companies from the Warsaw Stock Exchange. In the case of CCC SA, the management board was forced to issue shares to maintain liquidity. The results of banks show that individuals and enterprises repay their loans to a high degree, which may prove their good financial condition. The dangers of the coronavirus pandemic are still there. The analysis of the financial statements also showed that some companies ignored the risks associated with the pandemic. Practical Implications: The article presents the impact of changes made in legal regulations and accounting regulations on the reported results and financial information. Originality/value: The studies attempted to demonstrate the impact of COVID on the financial performance of enterprises.

The EU Policy on Sustainable Finance: A Discussion on the Design of ESG-Fit Suitability Requirements

The suitability requirements (SRs) regulated in the Markets in Financial Instruments Directive (MiFID) II have attained a new, additional role. Traditionally used to protect investors from abusive conduct perpetrated by advisers and portfolio managers, the SRs have now become a critical component of the EU policy on sustainable finance. In this new role, the SRs are expected to provide a unique setting for advisers and portfolio managers to identify, negotiate, and treat the environmental, social and governance (ESG) preferences of their clients. Reshaped SRs will empower those clients willing to allocate their savings to fund ESG-friendly projects and companies, and thereby, directly infuse sustainability into the financial system. The success of this policy, however, has required reform. This Article addresses the problem of how to design SRs that are adequate to the ESG context. The first part of the Article explains the rules governing the SRs in the MiFID II regime and outlines the European Commission’s proposed amendments to such rules. The second part of the Article identifies and critically analyzes various solutions suggested by the industry. The investigation relied upon European Union (EU) law and policy documents. Importantly, the content of sixty-four responses submitted by industry actors to the public consultation on this subject launched by European Securities and Markets Authority (ESMA) was also analyzed. The findings shed light on the contours and implications of the suitability obligation of investment advisers and portfolio managers in the realm of sustainable finance.

Clearing away after Brexit?

A new legal framework for the regulation of non-European Union (non-EU) central counterparties (CCPs) operating in the EU came into force in 2020, which empowers the European Securities and Markets Authority (ESMA) in a supervisory role and allows it to recommend the relocation of systemically important CCPs. Brexit will require reclassification of the systemically important CCPs of the United Kingdom. This paper analyzes, from a legal perspective, the new framework, the roles and responsibilities of the European Central Bank, ESMA and the European Commission, and the possible outcomes for UK CCPs once Brexit is complete.

Towards a European Green Bond: A Commission’s proposal to promote sustainable finance

The green bond market has demonstrated a significant expansion over the previous years. Nonetheless, it remains only a very small fraction of the overall bond market. Further growth in the green bond market would provide significant green investment, thereby helping to close the European Green Deal investment gap and achieve the EU’s environmental objectives. In July 2021, the European Commission adopted a legislative proposal for the introduction of a European Green Bond Standard seeking to promote sustainable finance by making it easier for market participants to raise large-scale financing for climate and environmentally-friendly investments. The Commission’s proposal aspires to set a new benchmark for green bonds through the standardization of market practices and the introduction of high standards both for issuers and external reviewers. In this context, it sets out i) a framework of rules for bonds that pursue environmentally sustainable objectives, as per the Taxonomy Regulation, and ii) a system for the registration and supervision of external reviewers. The Commission’s proposal aims to address the existing deficiencies in the green bond market, namely the lack of a uniform framework regarding the definitions of green assets/projects, the disclosure requirements and the performance of external reviews. To this end, it links the allocation of proceeds from a European Green Bond to the EU Taxonomy, introduces enhanced disclosures for issuers based on standardized templates and requires external reviewers to be registered with and supervised by the European Securities and Markets Authority (ESMA).

EU Financial Market Governance and the Covid-19 Crisis: ESMA’s Nimble, Responsive, and Speedy Response in Coordinating National Authorities through Soft-Law Instruments

The initial evidence indicates that EU financial market governance has performed well in its response to the Covid-19 crisis. In the European Union (EU), the need for coordination and cooperation over this crisis has been a particular concern given that national competent authorities (NCAs) operate under the single rulebook and supervisory action must, accordingly, be consistent. The European Securities and Markets Authority (ESMA) has, however, shown itself to be nimble, responsive, and speedy in deploying its supervisory powers, including those additional powers it has recently been granted under the 2019 ESA Reform Regulation. This has particularly been the case as regards the application by NCAs of ‘supervisory forbearance’ and as regards the application of market disclosures rules, notably the financial reporting standard IFRS 9. ESMA has also been successful in coordinating the few NCAs which decided to impose restrictions on short selling. ESMA’s actions during the Covid-19 crisis underline the de facto power it wields through its soft supervisory convergence powers and the entrepreneurial but effective approach it deploys in their use.See generally, Niamh Moloney, the Age of ESMA. Governing EU Financial Markets (Hart Publishing, 2018), chapter 4.

Asset managers and financial market data procurement: Pay or die!

This paper describes the issues asset managers are facing in financial market data procurement. It discusses possible short- and medium-term regulatory measures in the European Union’s Markets in Financial Instruments Directive/Regulation (MiFID/R), benchmark regulation and credit rating agency regulations (CRAR) to deal with the associated exchanges price, index and ratings data-procurement and usage issues, collectively referred to as financial market data (FMD). As first step, in the near term, increased supervision and enforcement of existing MiFID/R market data cost regulation by both European Securities and Markets Authority (ESMA) and National Competent Authorities (NCAs) could help to address somewhat the ongoing dispute between market data users on the buy- and the sellside and market data providers, mainly exchanges and market data distributors. Additionally, changes to applicable supervisory laws across the different regulated data providers, namely exchanges, benchmark providers and credit-rating agencies, are suggested to be implemented during the mandate of the new European Commission, which operates until 2024, to achieve a coherent regulation of FMD cost and transparency rules.

Reflections on the EU Third Country Regime for Capital Markets in the Shadow of Brexit

This article considers the recent evolution of the EU’s third country regime for capital market access in light of Brexit, the important series of legislative reforms adopted in March 2019 as the 2014-2019 European Parliament/Commission term closed, and the emergence of the European Securities and Markets Authority (ESMA) as a material technocratic influence. The article suggests that while the capital market third country regime is changing (with Brexit a key but not exclusive driver of change), it is not being radically recast, although it is tightening. The regime remains broadly based on the more-or-less liberal ‘deference’ model which has long characterised EU third-country financial services policy. But it is becoming increasingly ‘on-shored’ by means of the direct application of EU rules and by ESMA’s oversight/supervision of certain third country actors. The significantly more restrictive approach being taken to third country central clearing counterparties is a marked development, but here the political and economic context is distinct. The implications of the overall shift towards a more ‘on-shore’, centralised, and potentially restrictive access regime are considered, and a modest reform prescription is offered.

Will the EU Commission Successfully Integrate Sustainability Risks and Factors in the Investor Protection Regime? A Research Agenda

Building a common EU framework for sustainable finance undoubtedly implies the integration of sound and sustainable processes and skills across the whole structure and governance of financial institutions. Consequently, a new financial paradigm is going to be needed, which will require the strengthening of investor care and protection, so contributing to the restoration of trust in the financial sector. In particular, on 18 December 2018, the European Securities and Markets Authority (ESMA) launched two public consultations on draft technical advice for the integration of sustainability risks and factors into the Directive on Markets in Financial Instruments (MiFID), the Alternative Investment Fund Managers Directive (AIFMD), and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) regimes, with the aim to clarify the so-called fiduciary duties and to increase transparency in the financial services industry. However, the success of the EU initiatives on investor protection regulation may be seriously endangered by the existence of many challenges, weaknesses, and contradictions raised by economists and stakeholders in relation to the definition of sustainability, ESG data availability and reliability, the development of an EU taxonomy, conflicts of interest, product governance, and suitability assessment. This paper starts by briefly analyzing the recent developments of the regulation of sustainable finance at the global level, then offers a more detailed view on the establishment of a common regime on sustainable finance in the EU, with particular reference to the action plan ‘Financing Sustainable Growth’. Then, it examines the recent proposals for regulation on sustainable finance, specifically considering the barriers to the integration of sustainability risks and factors in the EU investor protection regulation—with particular reference to investment services—with respect to its four main dimensions: (1) disclosure of product information, (2) conduct of business (COB) rules, (3) product governance and intervention, and (4) financial education. The paper concludes that the EU reforming proposals, though admirable, risk oversimplifying a complex issue that cannot be easily solved without considering its practical implications on each category of financial operators in the performance of different financial services.

The Annual Reports Becoming Digital - An Initial Field Analysis of the NYSE Listed IFRS-Filers

It was a very long way from the initial development of the XBRL (eXtensible Business Reporting Language) standard in 1998 to the initial release of digital structured business reports based on International Financial Reporting Standards (IFRS). The US Securities and Exchange Commission's recognition of the IFRS taxonomy in March 2017 with the origin of a law issued in 2014 also introducing the Interactive Rule for all non-US companies, for the first time, the IFRS taxonomy of approximately 10,000 non-domestic (non-domestic) company was applied. To the surprise of many market participants, the SEC's initial phased implementation, which included a two-year implementation, was replaced by a complete one-time implementation, including detailed tagging. The European Securities and Markets Authority (ESMA) has begun to implement provisions contained in the new EU Transparency Directive of 2013. The aim is to develop a European electronic standard for financial reporting. With effect from 1 January 2020 all stock-listed companies have to prepare their Annual Financial Reports in the European Single Electronic Format (ESEF). The aim is to build on the IFRS taxonomy. This article gives a first overview of the results of the analysis of these electronic annual reports of the NYSE listed IFRS-filers. This will also provide relevant insights for the preparation for ESEF.

The Responsible Consumer in the Digital Age: On the Conceptual Shift from ‘Average’ to ‘Responsible’ Consumer and the Inadequacy of the ‘Information Paradigm’ in Consumer Financial Protection

The article 1 argues that the ‘information paradigm’, within which the concept of ‘average’ consumer operates, is unfit to provide adequate financial protection to consumers in the aftermath of the 2008 financial crisis and in the wake of the digital age. As the complexity of financial and digital financial services increases, consumers are expected to educate themselves and become financially literate, while traders’ liability and state intervention are reduced to a minimum. ‘Average’ consumers are turned into ‘responsible’ ones. Using as examples the Mortgage Directive and European Securities and Markets Authority (ESMA)’s position on Initial Coin Offerings (ICOs), the article shows that the former ‘paternalistic’ attitude towards consumer protection in both EU legislation and policy making was replaced with a ‘self-help’ approach and contests the general wisdom regarding consumers’ ability to participate in financial markets or understand the risks posed by novel products and services facilitated by technical innovation and digitization. The article calls for a reconsideration of the information paradigm and for a pro-active approach of the EU regulatory bodies to provide consumers with efficient protection.

Securities Financing Transaction Regulation: Implementation and impact on the securities finance post-trade reconciliation

As part of the policies identified by the Financial Stability Board (FSB) to increase transparency across Securities Financing Transactions (SFTs), the European Union (EU), under the guidance of the European Securities and Markets Authority (ESMA), introduced the Securities Financing Transaction Regulation (SFTR). The regulation includes a number of new rules for market participants, including a requirement to report all SFTs to an approved trade repository (TR). The transaction reporting regulation mandated under article 4 of the draft SFTR legislation will compel the securities finance industry to radically restructure its data architecture — integrating numerous and often disparate data sources to enhance transparency — and challenge some of the industry practices. This paper provides an overview of the SFTR regulation, focusing on the trade reporting (article 4) along with highlighting the challenges faced by the securities finance industry when implementing this regulation. It outlines as well the impact such regulation will have on the securities finance trade reconciliation and matching.