By John Filar Atwood
Steven Maijoor, the chair of the European Securities and Markets Authority (ESMA), believes that ESMA needs to have an instrument similar to no-action letters to improve the speed with which it can respond to pressing issues. In remarks before the European Parliament, Maijoor focused on improvements that are needed to assist ESMA, and recommended that the regulatory framework for third countries be overhauled.
Maijoor noted in his speech that no-action letters are available to most other financial markets regulators. He said that while changing EU technical standards is quicker than amending a directive or a regulation, it is still not fast enough to handle some situations. In the case of quickly evaporating liquidity, for example, it is important to have an instrument to allow the rapid termination of a clearing or trading requirement, he said.
Higher fines. Maijoor told the Parliament that ESMA also would be more effective if it could impose higher fines on supervised entities. In the last four years ESMA has issued one censure and three fines on supervised entities, he noted. The fines ESMA can impose must be higher to ensure that ESMA’s enforcement is seen as a credible support to its supervision, in his opinion.
On the issue of the regulation of third countries, Maijoor acknowledged that the existing framework tries to achieve consistent supervision of global financial markets and to improve the EU’s position as a stable region where it is attractive to conduct financial activities. However, in his view the EU third-country framework needs to be overhauled.
Patchwork supervision. He pointed out that there is no real third-country framework, but simply a patchwork of arrangements that vary across the numerous pieces of legislation. No country’s arrangement is identical to another’s, he said, and the arrangements are a mixture of equivalence, endorsement, recognition, third-country passporting, or nothing at all. Some differentiation is inevitable to respond to the different nature of various financial market activities, he noted, but he believes markets would benefit from greater consistency.
The third-country system also is time and resource intensive, in Maijoor’s opinion. It requires assessments of the regulatory regimes of third countries, negotiations if a third country is not equivalent, and the assessment of applications for third country entities that need to be recognized. At a minimum, ESMA should be allowed to charge fees to third country entities requiring recognition to cover some of the resources involved, he recommended.
Other fundamental problems with the EU third-country framework can be seen through the equivalence system as applied under EMIR, according to Maijoor. When the regulatory and supervisory outcomes are determined to be equivalent, a third country central counterparty (CCP) can be recognized and provide its services to EU clients. However, under this regime there is a heavy reliance on the home regulator, which can be a problem, he said.
In his view, the equivalence system works best when all main jurisdictions apply the approach that an internationally active CCP would mainly be supervised by its home regulator. This would help avoid duplications and inconsistencies in supervision and regulation, he noted.
The problem is that the EU has mostly opted for individual registration of CCPs that want to do cross-border business, Maijoor stated. As a result, third country CCPs have benefited from the EU’s system, while internationally active EU CCPs must be authorized and are subject to the supervision of third country regulators.
Home country reliance. Another concern with strong reliance on the home country regulator, in his opinion, is the lack of assurance that a third country regulator has the right incentive to appropriately assess and address the risks associated with the activities of its supervised entities outside its jurisdiction. In addition, ESMA has very limited opportunities to see the specific risks that third country CCPs might be creating in the EU, he noted, since it has limited powers regarding information collection and risk assessment, and no regular supervision and enforcement tools.
Maijoor recommended that the EU overhaul the framework for third countries in financial markets legislation. The goals should remain consistent regulation of global financial markets and strengthening the EU as a stable global financial region, he said, while ensuring that risks posed by the activities of third country entities in the EU can be adequately assessed and addressed.