European Securities Regulators Research Articles

Does the Value-at-Risk legal framework lead to inaccurate and procyclical risk estimations? Empirical Evidence from the EU countries.

This analysis tests whether the quantitative requirements of the law (Basel and Committee of European Securities Regulators) regarding the Value at Risk (VaR) framework may lead to inaccurate and procyclical VaR estimations. We apply two of the most popular VaR models, the Historical (HVaR) and the Exponential Weighted Moving Average (EWMA VaR) models, to a wide sample of 13 European Indices during the period 2002-2019. The empirical evidence confirms our assumptions that the legal framework in many cases leads to inaccurate and procyclical VaR estimations. Moreover, we show that the limitation on the required data inputs does not really contribute to a more stable financial environment. Further, we show that the current framework does not examine the procyclicality issue. The evidence in this study shows that the current legal framework needs some reforms: (a) the guideline on the minimum number of data inputs for the VaR estimations should be removed, taking provided that the accuracy of the applied VaR model is often evaluated, and (b) the current backtesting procedure does not examine whether VaR estimations are representative of the financial conditions. An additional backtesting procedure at a lower that the 99% confidence level could resolve this issue.

How to tame the beast: the diverse development of European networks regulating finance and competition

ABSTRACT European regulatory networks are increasingly becoming crucial venues for European governance. They typically emerged as relatively loose groups of national authorities in charge of meta-regulating sectoral policies. However, in the medium term, they experienced dissimilar developmental patterns. On the one hand, some networks (such as the Committee of European Securities Regulators – CESR) have been progressively institutionalized, transformed into European agencies, and acquired considerable regulatory powers, including enforcement. On the other hand, other networks (such as the European Competition Network – ECN) remained more flexible networked organizations embodying a soft coordination approach. This article aims at mapping these divergent patterns and explore their determinants. To do so, we investigate the cases of CESR and ECN with a documentary and interview-based comparative inquiry. Results indicate that agencification has also been a strategy enacted by European institutions, using the financial crisis as a window of opportunity, to regain control over a powerful network – CESR – that came to constitute an increasingly autonomous layer of governance. Contrariwise, as ECN did not spin out of control, its trajectory exhibits a remarkable stability.

What do the value-at-risk measure and the respective legislative framework really offer to financial stability? Critical views and pro-cyclicality

In this paper, we examine how value at risk (VaR) contributes to the financial market's stability. We apply the Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS of the Committee of European Securities Regulators (CESR 2010) to the main indices of the 12 stock markets of the countries that have used the euro as their official currency since its initial circulation. We show that gaps in the legislative framework give incentives to investment funds to adopt conventional models for the VaR estimation in order to avoid the increased costs that the advanced models involve. For this reason, we apply the commonly used historical simulation VaR (HVaR) model, which is: (i) taught at most finance classes; (ii) widely applied in the financial industry; and (iii) accepted by CESR (2010). The empirical evidence shows the HVaR does not really contribute to financial stability, and the legislative framework does not offer the appropriate guidance. The HVaR model is not representative of the real financial risk, and does not give any signal for trends in the near future. The HVaR is absolutely backward-looking and this increases the stock market's overreaction. The fact that the suggested confidence level in CESR (2010) is set at 99 percent leads to hidden pro-cyclicality. Scholars and researchers should focus on issues such as the abovementioned, otherwise the VaR estimations will become, sooner or later, just a formality, and such conventional statistical measures rarely contribute to financial stability.

What do the value-at-risk measure and the respective legislative framework really offer to financial stability? Critical views and pro-cyclicality

In this paper, we examine how value at risk (VaR) contributes to the financial market's stability. We apply the Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS of the Committee of European Securities Regulators (CESR 2010) to the main indices of the 12 stock markets of the countries that have used the euro as their official currency since its initial circulation. We show that gaps in the legislative framework give incentives to investment funds to adopt conventional models for the VaR estimation in order to avoid the increased costs that the advanced models involve. For this reason, we apply the commonly used historical simulation VaR (HVaR) model, which is: (i) taught at most finance classes; (ii) widely applied in the financial industry; and (iii) accepted by CESR (2010). The empirical evidence shows the HVaR does not really contribute to financial stability, and the legislative framework does not offer the appropriate guidance. The HVaR model is not representative of the real financial risk, and does not give any signal for trends in the near future. The HVaR is absolutely backward-looking and this increases the stock market's overreaction. The fact that the suggested confidence level in CESR (2010) is set at 99 percent leads to hidden pro-cyclicality. Scholars and researchers should focus on issues such as the abovementioned, otherwise the VaR estimations will become, sooner or later, just a formality, and such conventional statistical measures rarely contribute to financial stability.

Blockchain Startups and Prospectus Regulation

Initial coin offerings are a new way for blockchain startups to finance project development by issuing coins or tokens in exchange for fiat money or Bitcoin or other cryptocurrencies. In this article, we start from the current distinction between different types of tokens and argue that it can create confusion and should be at least partially abandoned. We believe that the conceptual difference between a currency token and a tradable utility token is just the dimension of the crypto environment in which the token is spent. More specifically, ‘utility tokens’ combine the customer payment mechanism with the utility component and, when tradable on a secondary market, the investment one. We argue that they blur the traditional distinctions between currencies, financial assets and consumption goods. Moreover, we stress the increasing importance of online crypto exchanges. Recently some exchanges have also taken up the role of trusted intermediaries and staked their reputation on token offerings, which are termed initial exchange offerings and have gained in popularity. We therefore argue that the crypto market increasingly looks like a segment of the capital market and behaves as such. Given that tokens have a clear investment component, we show that they are tradable securities under the Prospectus Regulation. We compare the European securities regulation with its US counterpart and focus on prospectus exemptions, highlighting the great differences between Europe and the US which make Europe less amicable to blockchain startups.

The New Internationalism? IOSCO, International Standards and Capital Markets Regulation

The international reach of the financial crises of the last 20 years has triggered an explosion in international standards setting, creating a complex dynamic between national (or regional) regulation and international norms, between hard and soft law. This paper explores this phenomenon as it relates to capital markets by looking at the changing role of the International Organization of Securities Commissions (IOSCO), the standard setting process itself, issues associated with implementation of international standards and possible alternatives. In deciding that standard setting is its primary mission, IOSCO has assumed a role internationally of “quasi-regulator”, in much the same way (and for the same reasons) as the now defunct EU Committee of European Securities Regulators (CESR). Potentially, this new role puts IOSCO on a collision course with powerful state-level regulators. A further complication is the standard setting process itself. The academic discourse has focussed on the normative force of international standards, without paying much attention to the actual content of the standards or the process by which they come into being. Hegemonic powers, of course, play a disproportionate role, but there are a large number of other factors which determine their shape and substance. In order to shed new light on the standard setting process, this paper takes a close look at how one specific set, those relating to credit rating agencies (CRAs), has come into being. The results are surprising: in the face of a particular domestic regulatory failure, a series of international codes and principles concerning CRAs were developed by IOSCO. These international standards apply virtually exclusively to three US corporations - S&P, Moody's and Fitch - which together control over 95% of the international and 98% of their domestic market. Even more curiously, the CRA codes and principles, despite their inapplicability in most parts of the world, have been widely adopted and implemented. The responsibility for this waste of time and regulatory resources can be laid, in part, at the door of the IMF and the World Bank. Together with IOSCO and its taskmasters, the Financial Stability Board and the G20, the IMF and the World Bank appear to ignore the selective nature of globalization. Yet, there remains a great demand for international financial standards, especially among smaller or emerging economies. The paper concludes with some suggestions on future courses of action, in the face of the new internationalism.

What Do the Value at Risk Measure and the Respective Legislation Framework Really Offer to Financial Stability? Critical Views, Empirical Evidence and the Overreaction Issue

In this paper, we examine how Value at Risk (VaR) contributes to the financial market’s stability. We apply the Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS of the Committee of European Securities Regulators (CESR (2010)) to the main indices of the 12 stock markets of the countries that have used the Euro as their official currency since its initial circulation. We show that gaps in the legislation framework give incentives to investment funds to adopt conventional models for the VaR estimation in order to avoid the increased costs that the advanced models involve. For this reason, we applied the commonly used historical simulation VaR model (HVaR), which is: (a) taught at most finance classes, (b) widely applied in the financial industry, and (c) accepted by CESR (2010). The empirical evidence shows the HVaR does not really contribute to financial stability, and the legislative framework does not offer the appropriate guidance. The HVaR model is not representative of the real financial risk, and it does not give any signal for trends in the near future. HVaR is absolutely backward-looking and this increases the stock market’s overreaction. The fact that the suggested confidence level in CESR (2010) is set at 99% leads to hidden procyclicality. Scholars and researchers should focus on issues such as the abovementioned, otherwise the VaR estimations will become, sooner or later, just a formality, and conventional statistical measures like that rarely contribute to financial stability.

Dismantling the EU insider dealing regime: the Supreme Court of Greece's muddled interpretation of “inside information”

In Case 317/2014, the Supreme Court of Greece ruled that information contained in a domestic bank's (non-binding and binding) offer for the acquisition of a Turkish bank was not precise enough to qualify as inside information. The article argues that the Court's line of reasoning is misguided in at least three core respects: first, it neglects the Committee of European Securities Regulators advice and guidance as well as the relevant EU Court of Justice case law; second, it fails to incorporate the interpretative assistance offered by empirical research on the market effects of M&As and the price impact of relevant pre-announcement information; and third, it has a contagious, distortive effect on the effective implementation of the insider dealing prohibition. As a result, the Supreme Court's ruling fails to interpret the national law in light of the wording and purpose of the EU insider dealing regime so as to achieve the objectives and result sought by Directive 2003/6/EC.

Render Unto Caesar: EU Financial Market Regulation Meets Political Accountability

This paper posits three phases in EU financial market regulation. First, for the 1990s, established scholarship suggests leadership by public actors in the context of development of the single market and relations with the USA. We adopt this analysis, characterising it as ‘public–private’ regulation. Second, in the new millennium regulation shifted towards ‘private–public’, with regulators paying more attention to the demands of large financial firms. This tendency is explored through a critical study of ‘technical’ decision‐making by EU regulators, focusing upon the Committee of European Securities Regulators and rating credit agencies. Third, as from 2010 EU policy‐makers react to the spillover of the financial crisis from markets to member states, some limits to private–public governance have been underlined. The paper concludes with a discussion of positions taken by the European Parliament, moderating claims made for ‘technical’ rule‐making and opening up the possibility of wider intellectual and policy debate.

The policy-making structure of European regulatory networks and the domestic adoption of standards

European regulatory networks (ERNs) constitute the main governance instrument for the informal co-ordination of public regulation at the European Union (EU) level. They are in charge of co-ordinating national regulators and ensuring the implementation of harmonized regulatory policies across the EU, while also offering sector-specific expertise to the Commission. To this aim, ERNs develop ‘best practices’ and benchmarking procedures in the form of standards, norms and guidelines to be adopted in member states. In this paper, we focus on the Committee of European Securities Regulators and examine the consequences of the policy-making structure of ERNs on the domestic adoption of standards. We find that the regulators of countries with larger financial industries tend to occupy more central positions in the network, especially among newer member states. In turn, network centrality is associated with a more prompt domestic adoption of standards.

I. REFORM OR REVOLUTION? THE FINANCIAL CRISIS, EU FINANCIAL MARKETS LAW, AND THE EUROPEAN SECURITIES AND MARKETS AUTHORITY

Since the outset of the financial crisis, the EU financial markets regime1has been undergoing a period of turbulence which contrasts sharply with the period of relative stability which it briefly enjoyed over 2005–2007 and post-FSAP (Financial Services Action Plan2). The FSAP reforms had been adopted. The Committee of European Securities Regulators (CESR) had emerged as an influential actor, driving some degree of supervisory coordination and co-operation and constructing a significant soft law ‘rule-book.’ And the 2007 Lamfalussy Review suggested broad political, institutional and stakeholder satisfaction with the Lamfalussy process. There was little enthusiasm for grand adventures in institutional design, albeit that supervision, an institutionally-driven concern, was presciently if belatedly emerging as a concern of the EU institutions. The Review's main concern, however, was with strengthening the pragmatic, if somewhat haphazard, network-based, ‘supervisory convergence’ model as the means for supervising the integrating EU financial market. With respect to regulation, reflecting the wider internationalzeitgeistpre-crisis,3‘Better Regulation’ and the need for a ‘regulatory pause’ were the watchwords of a Commission which, once the massive FSAP regime was safely in place, espoused the benefits of self-regulation and highlighted the risks of intervention without impact assessment, extensive consultation and evidence of market failure.4This was most apparent with respect to credit rating agencies,5debt market transparency,6hedge funds,7and clearing and settlement.8Institutionally, a relatively sophisticated law-making apparatus, in the form of the Lamfalussy structures, a plethora of advisory bodies and stakeholder bodies (notably FIN-NET which represents the consumer and SME interest), had been established.

The European Securities and Markets Authority: the beginnings of a powerful European securities authority?

This article discusses the powers of the newly created European Securities and Markets Authority (ESMA), which took over from the Committee of European Securities Regulators (CESR) on 1 January 2011, as well as its governance and functioning. Although initially modest in size, ESMA will play a significantly more important role than CESR has had in the past in shaping European financial regulation, by virtue of its involvement in regulatory and technical implementing rulemaking and its supervisory powers, which in certain cases allow it to issue binding decisions to competent authorities of Member States and to financial firms directly.

Sources of Law in European Securities Regulation — Effective Regulation, Soft Law and Legal Taxonomy from Lamfalussy to de Larosière

The four Framework Directives ofthe Lamfalussy Process constituted afurther step towards guaranteeing an efficient and dynamic functioning of the EU's securities market. Since then, a number of implementing directives and regulations have been passed andfurther changes have already been suggested. Regarding the existing system from a German point of view, this article focuses on the role of the Committee of European Securities Regulators (CESR) and the legal nature of its guidelines and recommendations. It establishes the claim that the CESR's statements have a binding effect despite their character set out in the Framework Directives and argues that the traditional dichotomy of legal sources needs to be substituted by a trichotomy of hard law, soft law and a third kind of secondary law. This so-called third kind of secondary law has three consequences: first of all, it needs to be recognised; secondly, it needs to be complied with; and thirdly, in case of non-compliance, extensive reasons must be given. This puts the third kind of secondary law in a position similar to that ofpersuasive authorities. Regulation (EC) No. 1060/2009, which was adoptedfollowing the financial crisis, confirms this notion by requiring that the nationalfinancial supervisors consider the CESR's advice but that they can deviate if they give full reasons for their decision. Lastly, the creation of a European Securities and Markets Authority (ESMA), which has already been proposed, is discussed and compared with the existing system. The ESMA's expanded supervisory powers over national authorities are a step in the right direction. It remains to be seen, however, whether the Proposal for a Regulation creating the ESMA will achieve the goal of establishing a common supervisory culture for European financial markets.

The Role of the IASB and Auditing Standards in the Aftermath of the 2008/20091 Financial Crisis

AbstractThe primary argument of this article is, namely, that the International Accounting Standards Board (IASB) is in need of an enforcement mechanism. In drawing attention to this argument, the article not only proposes considerations which are to be taken into account if such a mechanism is to be implemented, but also considers areas in which the regulation of accounting standards, and auditing standards in particular, have contributed to the recent global financial crisis. The impact of such standards on pro‐cyclicality, the level of success achieved by the IASB and other international standard setters, such as the Basel Committee on Banking Supervision, relates to how effectively the accounting and audit standard setting is implemented. As well as identifying the importance of convergence in contributing towards high quality audits and the consistent application of auditing and accounting standards, this article also acknowledges the difficulties and challenges encountered in attempting to achieve a convergent framework. Furthermore, through a discussion of recommendations aimed at consolidating transparency and accounting, as proposed by the G20, ways in which accounting standards, and, consequently, the IASB, could contribute further to the improvement of transparency and accountability of the framework for fair value measurements and evaluation, are considered. The absence of enforcement mechanisms, the fact that enforcement actions are carried out at national level in various EU Member States, present sources of obstacles to attempts to realise the proposals put forward by the G20. This article not only attempts to address such factors, but also to suggest ways in which the IASB, to an extent, could realise its goals. Through a consideration of two enforcement regimes in Europe, namely Germany and the UK, two related standards which govern enforcement in Europe, principles on which harmonisation of the institutional oversight systems in Europe may be achieved , and the vital contribution made by the Committee of European Securities Regulators and the European Financial Reporting Advisory Group, this article will consider how enforcement could be implemented by the IASB at a European level.

Press Release Disclosure of ‘Pro Forma’ Earnings Metrics by Large German Corporations – Empirical Evidence and Regulatory Recommendations

This paper is set against the background of recent regulatory action and standard-setting activities pertaining to the disclosure of so-called ‘pro forma’ earnings. For a sample of large corporations listed on the Frankfurt stock exchange, I individually analyze quarterly earnings announcements published for the fiscal years 2005 and 2006. Given voiced concern about the potential of pro forma metrics to misrepresent firm performance and thus to potentially mislead investors, research questions pertain to the use, the calculation and the presentation of pro forma earnings, and the impact of recent recommendations issued by European securities commissions. The results indicate that firms make extensive use of so-called ‘EB’ (earnings before) metrics and, more importantly, of pure non-GAAP performance measures, both in terms of frequency and reporting emphasis. The transparency of adjustments to GAAP earnings turns out to be low. Year-to-year analysis suggests that recent recommendations by European securities regulators have had no discernible impact on these disclosure patterns. Taken together, this evidence suggests that regulatory concern may be warranted. At the same time, it points out the need for more research into the determinants and the investor reception of pro forma earnings disclosures in EU jurisdictions.

Against Mandatory Disclosure of Economic-only Positions Referenced to Shares of European Issuers — Twenty Arguments against the CESR Proposal

Following recent developments in some European jurisdictions, the Committee of European Securities Regulators (CESR) proposed, on 9 February 2010, ‘to extend major shareholding notifications to instruments of similar economic effect to holding shares and entitlements to acquire shares’. This initiative pushes for mandatory Economic-only Disclosure of Major Shareholdings in Europe (EOD). By providing twenty arguments against the CESR proposal, this paper seeks to spur a lively discussion as to whether mandatory EOD is desirable. It puts forward that European institutions are well advised to refrain from implementing the CESR proposal in its current form. If at all, implementing a requirement to report to regulators (Economic-only Reporting — EOR) and limiting EOD to very large positions serves social welfare better than EOD and avoids major differences between European securities law and US securities regulation.

Global and Regional Financial Regulation: The Viewpoint of a European Securities Regulator

Abstract This article gives an overview of the efforts, worldwide and on a regional, that is, European, basis for introducing more effective and better harmonised financial regulation. Recent initiatives, especially the work of the G20 and the creation of the Financial Stability Board (FSB), indicate greater interest in worldwide coordination of financial regulatory intervention. The financial crisis has however dealt a serious blow to the previously existing international dialogue, and a fear exists that the main regulators may withdraw to their national battlefields. Major changes in the supervisory architecture are planned in the European Union: a more detailed coordinated app-roach to regulation and to monitoring the application of existing regulations is proposed by creating a European System of Financial Supervisors. A European Systemic Risk Board will also be introduced. These and comparable changes in the US may contribute to reactivating the regulatory dialogue. The core challenge remains that of effective application of the agreements, both at the regional and the international level, and there is no ready answer to this. Policy Implications • International and local regulation should be coordinated. • Regulators should coordinate better, as markets are international, and regulatory arbitrage may undermine effectiveness. • Macro and micro supervision have to be integrated without losing their specificity. • The present cooperation mechanisms have been conceived for fair weather. • Adequate instruments have to be developed to deal with a financial crisis, at both regional and international levels.

A Common Definition of European Money Market Funds: More Clarity or More Confusion?

Money market funds (MMFs) that started as a U.S. phenomenon in 1971, in nearly forty years have grown into a $5.8 trillion global industry. In the early 1980s the European investment management community adopted MMFs with certain variations to fit the local legislations and practices. The market dislocation of 2007–2009 exacerbated by the liquidity crisis that followed the bankruptcy of the Lehman Brothers have led financial regulators in all major jurisdictions to review the existing policies. The European Union now is facing even greater challenges due to the fragmented nature of the local markets and the lack of regulatory consistency. The de Larosiere report published in February 2009 pointed out that an efficient Single Market should have a harmonized set of core rules. This article focuses on the recent initiative undertaken by the Committee of European Securities Regulators (CESRs) to follow up on the de Larosiere’s report recommendations in introducing a common definition for European MMFs. Section I of the article is an introduction into the past and the present of the MMF industry in the U.S. and Europe. Section II reviews existing definitions of MMFs. Section III analyses regulated elements of investment management and operational practices applicable to MMFs including risk-limiting provisions of the recent MMF Reform implemented by the U.S. Securities and Exchange Commission (SEC). While I support the CESRs’ efforts in introducing a common EU definition of MMFs, the diversities of the European financial markets call for a better delineation of seemingly homogenous investment schemes. The article concludes by re-emphasizing the importance of a consistent regulatory guidance for the creation of an efficient and transparent Single Market. The paper is an initial step in a much larger research project on comparative regulation of the global money markets and cash management. Even further, I study the impact of financial markets on law and regulation and vise versa regulatory response to market developments in the narrow focus of money market fund industry. The historical record supports the thesis that the law matters to the development of the transparent and efficient global financial markets. My approach is historical in orientation and starts with an attempt to define MMFs as a subject of regulation.

Information versus adverse Anlegerbeeinflussung: Befund und Implikationen der empirischen Rechnungswesenforschung zur Publizität von Pro-forma-Ergebnisgrößen

Pro forma earnings represent voluntarily disclosed performance metrics that modify the mandatory (GAAP) income number. Motives discussed to explain this disclosure phenomenon are to increase the informativeness of earnings (information), or to influence investors in an adverse fashion (opportunism). The objective of this paper is to survey the extant US and German literature pertaining to pro forma earnings disclosures, with a special emphasis on the ensuing regulatory discussion, to point out promising avenues for future research. Extant studies, on the one hand, demonstrate evidence in favour of (incremental) informativeness (value relevance, information content) of pro forma earnings. On the other hand, they find evidence that small investors in particular tend to process pro forma earnings information in an undue fashion. In the light of evidence that demonstrates extensive use of pro forma earnings disclosures by large German corporations, this research literature lends support to recent concerns voiced by European securities regulators, and points at avenues for future research into capital markets reception of pro forma earnings disclosures both on the German capital market and in an EU/IFRS context.

Short‐selling: progress on international harmonization and forthcoming changes in the UK

PurposeThe purpose of this paper is to highlight a number of important developments regarding the regulatory framework for the short‐selling of securities.Design/methodology/approachThe authors consider steps being taken at a global, EU, and UK level to enhance controls on short‐selling, namely: the International Organization of Securities Commissions' principles of effective regulation of short‐selling; the Committee of European Securities Regulators' proposals for an EU‐wide harmonized short‐selling regime; and the UK Financial Services Authority's planned new rules.FindingsThe paper reveals that firms will need to track these developments and, in due course, establish and adapt systems to ensure compliance. That task should be less onerous if a greater degree of harmonization can be achieved.Originality/valueThis paper raises awareness of these important developments and provides a helpful update on progress.