By John Filar Atwood
In a comment letter to the European Commission (EC), the Futures Industry Association. (FIA) and International Swaps and Derivatives Association. (ISDA) said that any consideration of expanding the direct supervisory powers of the European Securities Markets Authority (ESMA) should require an in-depth assessment, including a cost/benefit analysis and a consultation with concerned entities. FIA and ISDA said that the value of supervision by national authorities should be recognized, given their knowledge of local markets, best practices and national legal frameworks.
The comment letter responded to the EC’s consultation on a draft implementing regulation on the operations of the European Supervisory Authorities (ESAs) and a proposed supervisory framework. There are three ESAs—the European Banking Authority, the European Insurance and Occupational Pensions Authority, and ESMA—but the FIA and ISDA focused their suggestions on ESMA.
The FIA and ISDA support the goals of the ESA proposals, which include: (1) reinforcing coordination of supervision across the EU; (2) extending direct capital markets supervision by ESMA where appropriate; (3) increasing engagement and creating a culture of continuous dialogue with market participants; (4) improving governance and funding of the ESAs; and (5) promoting sustainable finance and fintech.
In the letter, the FIA and ISDA stated that increased supervisory convergence would help to deepen capital markets in Europe. They also believe there is an opportunity to increase the efficiency and competitiveness of Europe’s capital markets through initiatives to streamline and simplify supervisory processes and remove duplication. In their view, the proposed recalibration of supervisory structures should be considered carefully to ensure structural stability, given that relevant EU legislation is still in the process of implementation.
Executive board. The FIA and ISDA said that they welcome the introduction of an independent executive board with full-time members replacing the current management board. However, they recommend that further clarification be provided regarding the role of the full-time members of the executive board in the management of the ESAs. They agreed that the Board of Supervisors should continue to be the main decision-making body of the ESAs.
ESA funding. With respect to funding, the EC proposals state that the funding levels of the ESAs should be stable and commensurate to what is necessary to fulfill the objectives and tasks set out in their founding regulations. Currently, the ESAs’ revenues are based on contributions from national regulators (60 percent) and from the EU budget (40 percent). In addition, ESMA receives some funding from the private entities it directly supervises such as credit rating agencies and trade repositories.
The FIA and ISDA said that given the need to increase resources of the ESAs, they would accept a funding system partly funded by the industry, subject to a dedicated industry consultation and within certain parameters. They believe there is a need for fees and contributions to be commensurate as a reasonable level of fees will ensure that the provisions of financial services remains cost effective and that the competitiveness of the EU marketplace is not affected.
They recommended that fees be fairly allocated across the regulated population. It would be inappropriate to carve out specific categories of entities just because they are smaller in size than the largest financial institutions, they said. In their view, proportionality should be at the heart of the allocation.
The FIA and ISDA recommended that the EC further clarify how the proposed executive board would work with the proposed central counterparty executive session on the authorization of central counterparties. They also suggested that ESMA and national competent authorities take a differentiated approach to supervision with regards to wholesale and retail customers.
Suspension powers. The associations recommended that the ESAs be provided with powers to temporarily suspend the application of certain regulatory requirements in certain circumstances and within a reasonable time frame. The suspensions would effectively relieve firms from any enforcement action during that time period.
The FIA and ISDA also said that they support ESMA supervision for pan-European crucial IBOR benchmarks such as EURIBOR and EONIA. They believe that national competent authorities should retain the supervisory authority over benchmarks at national level and retain the ability to determine if their local benchmarks are critical.