The European System of Financial
Supervision and the European
Securities and Markets Authority
Dr Pierre Schammo (University of Manchester)@ Jean Monnet Center (Keio University)
8th January 2011

Overview• Historical context– Financial markets regulation/supervision until December
2010• The Lamfalussy process• The Committee of European Securities Regulators (CESR)• Financial markets regulation/supervision from January 2011
– The de Larosiere report and the EU reform agenda– The European System of Financial Supervision (ESFS)– The European Securities and Markets Authority (ESMA)Lamfalussy process• The Lamfalussy four‐level approach, as originally agreed:– Level 1: adoption of framework principles by way of
directives/regulations– Level 2: adoption of implementing measures• (Under Lisbon Treaty: L2 measures are adopted asdelegated or implementing acts (Arts 290/291 TFEU))– Level 3: cooperation between national securities authorities(e.g., UK FSA, French AMF, German BaFin) and adoption ofsoft law measures to ensure consistent application andtransposition of EU rules– Level 4: enforcement against non‐complying Member States

Lamfalussy Level 3 and CESR• Creation of the Committee of European Securities Regulators(CESR) in 2001; to foster cooperation and coordination among
national securities authorities• Situated in Paris• Members were national securities authorities (e.g. UK FSA,
French AMF, Italian Consob, etc.): competent authorities• Adopted non‐binding guidelines, recommendations, standards• Carried out peer reviews• Had non‐binding mediation powers• Decided by consensus in the shadow of a vote by way ofqualified majority

Problems with CESR
• Small committee• No legally binding powers• CESR was a collective securities actor– CESR’s preferences reflect those of itsmembers (i.e. national securities authorities)• Adverse behaviour on the part of its members– ‘No action’– Defection

The financial crisis in the EU• Banks in distress (Northern Rock, RBS, Fortis,Dexia, etc.)• Real economies affected (recession)• After initial hesitations, financial crisis prompts
EU leaders to consider overhaul to institutionalframework governing market supervision– Establishment of the de Larosiere group tomake proposals

De Larosiere Report• Makes regulatory/supervisory proposals• Need to deal with systemic risks to financial
stability (macro‐prudential proposals )– Creation of a European Systemic Risk Board• Need to review micro‐prudential supervision– Creation of new European Supervisory
Authorities; part of a new European System
of Financial Supervision (ESFS)ESFS• Main purpose is to ensure that ‘rules applicable to thefinancial sector are adequately implemented …’• Part of ESFS are three new EU bodies, called ‘European
Supervisory Authorities’ (ESAs)– Replace Level‐3 Committees: CESR, CEBS and CEIOPS• CESR is transformed into a new European Securities andMarkets Authority (ESMA)– Sister organisations: EBA, EIOPA• ESAs are collective securities actors: decision‐making is inhands of representatives of national securities authorities,
acting collectively within ESAs

Powers and scope of competence• ESMA’s Founding Regulation– Regulation EU No 1095/2010 [2010] OJ L331/84• ESMA’s ‘Framing Acts’– Various legislative acts and subordinate measures– Further binding acts which confer tasks on ESMA
• Can also act in the field of activities of market actors forissues not directly covered in above acts, if necessary toensure effective/consistent application of those acts
• ‘Appropriate action’ also for clearing/settlement, matterspertaining to derivatives and takeover bids

ESMA composition• Board of Supervisors (BoS)– Voting members and non‐voting members– Main decision‐making organ– Decides by simple majority or qualified majority.
• Management Board (MB)– Made of ESMA’s Chairperson and 6 (voting) members of theBoS for 2 ½ years• Commission and Executive Director can attend MB– Ensures that ESMA fulfills its mission/tasks (+ has various
specific tasks).
– Decides by majority of members present

ESMA composition (II)• Executive Director– Full time independent professional appointed for 5 years– In charge of day‐to‐day management of ESMA (+ has various
specific tasks)• Chairperson– Full time independent professional appointed for 5 years– Represents ESMA
– Prepares BoS work; chairs meetings of BoS and MB• Board of Appeal• Joint Committee: to ensure cooperation and cross‐sector
consistency among ESAs

Powers of ESMA• Three considerations:– Learning the lessons from failings in Level‐3committees (CESR, CEBS, CEIOPS)– Dealing with political limits to delegation ofpowers to regulatory agencies– Dealing with constitutional limits to delegationof powers• Case 9/56 Meroni [1958] ECR 133

Delegation of powers – Meroni• Case 9/56 Meroni– A delegation of powers cannot involve a‘discretionary power, implying a wide marginof discretion’– Delegation can only involve ‘clearly defined
executive powers’ which can be subject toreview ‘in the light of objective criteria’.
– Delegator cannot delegate powers different
from its own powers derived from the Treaty

Delegation of powers - Meroni (II)• Delegation of legislative powers– Ruled out by Meroni. Also by Romano (Case98/80 [1981] ECR 1241)• Delegation of binding individual decision‐makingpowers– Needs pre‐structuring to ensure thatdelegation does not involve a ‘wide margin ofdiscretion’Delegation of powers - ESMA
• How create more powerful collective securities
actors whilst making the delegation of powers toESMA constitutionally and politically acceptable?
• Levels and circuits– Meaning• Circuit‐switcher rules– Allows ESMA to take individual decisions against
competent authorities or market actors• Level‐switcher rules– To ensure constitutional compliance or politicalacceptance of delegation of powers

Powers of ESMA - Overview• Participates in adoption of binding technical standards(following endorsement by Commission)• Adopts guidelines and recommendations• Powers to act with respect to breaches of EU law• Conciliation and binding dispute settlement powers• Powers to act in crisis situations• Certain day‐to‐day supervisory powers (eg for credit agencies)• Power to temporarily ban or restrict market activities• Role in colleges• etc.

Technical standards• Participates in adoption of binding technical standards– Regulatory technical standards (RTS)• Adopted as delegated acts
– Implementing technical standards (ITS)• Adopted as implementing acts
• ESMA prepares draft standards• European Commission endorses draft standards– Limits to Commission powers?
• Powers reserved to Council and EP (for RTS)

Proper application of EU rules andsupervisory practices• ESMA issues guidelines and recommendations– Aim: foster ‘common, uniform and consistent
application’ of EU law + develop ‘consistent,
efficient and effective’ supervisory practices– Addressed to competent authorities/market actors• Non‐binding measures; but:
– Addressees meant to make ‘every effort to comply’– Procedural obligations meant to make it moredifficult to ignore measures

Policing breaches of EU law• ESMA plays a role in policing the application of its Framing
Acts, including the RTS and ITS– Where competent authorities (i) do not apply measuresor (ii) apply them in a manner which seems to breach EUlaw, especially by not making sure that a market actor
complies with its legal obligations• ESMA can issue a recommendation (non‐binding)– Commission can issue a formal opinion• ESMA can address an individual decision to a market actor
if comp. authority fails to comply with Commission opinion– Conditions apply; ‘last resort’ powerConciliation and dispute settlement• ESMA assists authorities from different M‐Ss in resolving disputes- ESMA acts as a mediator• ESMA can settle a dispute if authorities unable to reach agreement
in order to ensure compliance with EU law– ESMA addresses an individual decision to competent authority• ESMA can take individual decision against market actor ifcompetent authority fails to comply with ESMA’s decision• Safeguard clause: to protect ‘fiscal responsibilities’ of M‐Ss
• Powers also apply for cross‐sectoral disputes and disputes incolleges

Emergency (crisis) situations• Role in coordinating and facilitating actions of competentauthorities (CA) in crisis situations• Power to address individual decisions to CA– In exceptional circumstances where coordinated action
is needed to address events that endanger functioning/
integrity of markets or stability of financial system• Power to address individual decision to market actor– Strict conditions• Decision regarding the existence of a crisis situation• Safeguard clause to protect ‘fiscal responsibility’ of M‐Ss

Conclusion• ESMA vs CESR
– Resources– Decision‐making– Powers• More powers!
• ESMA has greater role at L2, L3 and L4 ofLamfalussy process!
– Accountability• Will ESMA succeed?

Source:• P Schammo, EU Prospectus Law – New
Perspectives on Regulatory Competition inSecurities Markets (Cambridge University
Press, Cambridge, 2011, forthcoming)
http://www.frcaq.com/uk/catalogue/
catalogue.asp?isbn=9780521517652