Friday, January 24, 2014

E.U. Court of Justice Rules ESMA Powers under Short-Selling Directive are Proper

The Court of Justice of the European Union ruled that Article 28 of the Short Selling Regulation authorizing the European Securities and Markets Authority (ESMA) to adopt measures under the Regulation is a proper delegation under E.U. treaty law. ESMA’s authority under Article 28 was challenged by the U.K. United Kingdom v. European Parliament, No. C-270/12, January 22, 2014.

In reaching its decision, the Court noted that ESMA’s exercise of power under the Regulation is circumscribed by various conditions and criteria which limit ESMA’s discretion. For example, ESMA can only adopt measures under the provision that address a threat to the financial markets or the stability of the E.U. financial system and that raise cross-border implications. Moreover, all ESMA measures are subject to the condition that no competent national authority has taken measures to address the threat or one or more of those authorities have taken measures which have proven not to address the threat adequately.

In addition, ESMA is required to take into account the extent to which such measures address the threat to the financial markets or the stability of the financial system or significantly improve the ability of the competent national authorities to monitor the threat. ESMA must also ensure that such measures do not create a risk of regulatory arbitrage and do not have a detrimental effect on the efficiency of financial markets, including by reducing liquidity in those markets or creating uncertainty for market participants which is disproportionate to the benefits of the measure.

Even more, ESMA is required to consult the European Systemic Risk Board and, if necessary, other relevant bodies. ESMA must notify the competent national authorities concerned of the measure it proposes to take. ESMA is also under a duty to review the measures at appropriate intervals that must be at least quarterly.

In 2012, the E.U. adopted a regulation aimed at harmonizing short selling, against the background of the financial crisis. Short selling is a practice consisting in the sale of shares and securities not owned by the vendor at the time of the sale with a view to benefiting from a fall in the price of the shares and securities. In the event of disturbance on the financial markets, the Regulation seeks to prevent an uncontrolled fall in the price of financial instruments as a result of the effect of short selling.