Capital markets union endgame raises chance to upgrade ESMA power

23 May 2018 8:31am
Euro coins

27 April 2018. By John Rega.

Few things generate more enthusiasm among EU officials than the “institutional framework.”

After half century of creating an economic and political union step by step, European policymakers are long practiced in setting up bureaucracies, committees — and, in the past decade, financial regulators.

A debate on the capital markets union today gives the bloc’s finance ministers another chance to explore the setup of its agencies, particularly the European Securities and Markets Authority.

The CMU, dreamed up by European Commission President Jean-Claude Juncker in 2014 to help generate more money for growing businesses, is entering a critical and possibly final phase.

Legislators face a rush to finish off the remaining initiatives before European Parliament elections next year. Pending measures include bills to help expand investment funds, covered bonds and crowdfunding around the region. The last proposals under the Juncker commission are planned in May, to help small companies more easily list their securities on public markets.

Economy and finance ministers, meeting today in Sofia, are due to give input on the CMU’s endgame. They can lend support to the remaining items, try to head off unwanted proposals, or raise new ideas for the next European commissioners arriving in late 2019.

The finance chiefs also are being asked, in a note drafted by Bulgarian officials to prepare the discussion, “What institutional framework should underpin the CMU?”

‘Efficient supervision’

The question looks beyond the small-bore measures of the CMU to date, toward a wider view of how to achieve “more efficient supervision of EU capital markets,” the memo says.

In plans not born of the CMU, but thematically linked to it as well as to Brexit, the commission has proposed to upgrade the powers of the ESMA over clearinghouses — a critical part of market infrastructure.

The Paris agency could take over supervision of some benchmark indexes, investment funds and securities prospectuses, in another proposal now before lawmakers. That legislation also would assign ESMA, plus its counterparts for banking and insurance, an expanded role in aligning the work of national regulators.

That’s not exactly turning ESMA into a sort of EU Securities and Exchange Commission. Still, it raises what could be difficult questions for politicians about giving up national responsibility.

In earlier discussions, finance ministers have cast doubt on several elements of the proposals for the financial agencies, particularly where they encroach on the authorities back home.

Several countries suggested that the EU authorities go no further than issuing guidelines, peer reviews and the like, to converge practices with only the softest of regulatory powers.

Today’s discussion, as teed up in the Bulgarian memo, aim to cast the measures more clearly in the light of the CMU, by “enhancing the effectiveness of supervision . . . in order to accelerate market integration.”

‘Essential’ reshaping

“Shaping the institutional framework in order to achieve a fully functioning CMU is essential,” the note says.

“The current institutional framework could be improved by ensuring more consistency in supervision,” the document argues. Greater alignment “would contribute to eliminating barriers to cross-border investment and to reducing compliance costs for firms.”

EU figures have a point when they argue that national watchdogs can, even accidentally, create barriers within the region. That’s why European governments have harmonized the rules in so many financial-market directives.

“It would also enhance investor protection and preserve financial stability,” the Bulgarian note adds, in its pitch for more integrated oversight.

Governments have long argued to the contrary: national officials are closer to their markets and local consumers. Perhaps the mood will change after recent cases of risky financial products being sold across borders.

In any case, the CMU debate raises another chance for the ministers to think about ESMA’s role. There’s little time left to generate new industry-specific initiatives, but at least the EU can fall back on thinking about the setup of its agencies.

Fintech Regulation in 2018