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The Age of ESMA: Governing EU Financial Markets
9781509921775, 9781509921805, 9781509921782

Author / Uploaded
Niamh Moloney

Table of contents :
Preface
Contents
Table of Treaties, Regulations, and Directives
Table of Abbreviations
1. Introducing ESMA
I. Introduction: Examining ESMA through an Institutional Lens
II. Characterising ESMA: ESMA’s Setting and its Role
III. Contextualising ESMA
IV. Technocratic Influence, Effectiveness, and Legitimacy
V. Roadmap
2. ESMA’s Governance
I. Assessing ESMA and its Governance Arrangements
II. Examining ESMA’s Governance Arrangements
III. Contextualising ESMA’s Governance Arrangements: Influence, Effectiveness, and Legitimacy
IV. ESMA’s Institutional Design
V. ESMA’s External Governance Arrangements
VI. ESMA’s Funding Arrangements
VII. Conclusion
3. ESMA and Regulatory Governance
I. Assessing ESMA and the Regulatory Governance Setting
II. Examining ESMA’s Role in Regulatory Governance
III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy
IV. Building the Single Rule-book: ESMA as Architect of EU Administrative Financial Market Regulation
V. Building the Soft Law Rule-book: ESMA as the Designer and Custodian of EU Financial Market Soft Law
VI. The Legislative Process: Shaping Regulatory Governance from the Bottom Up
VII. Conclusion
4. ESMA and Supervisory Convergence
I. Assessing ESMA and the Supervisory Convergence Setting
II. Examining ESMA’s Role in Supervisory Convergence
III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy
IV. Supervisory Convergence in Practice
V. Conclusion
5. ESMA and Direct Supervision/Market Intervention
I. Assessing ESMA and the Direct Supervision/Market Intervention Setting
II. Examining ESMA’s Role as a Direct Supervisor
III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy
IV. Direct Supervision in Practice: Rating Agencies and Trade Repositories
V. NCA-Oriented Supervision: Breach of EU Law, Binding Mediation, and Emergency Conditions
VI. Exceptional Intervention: Short Selling, Product/Services Intervention, and Intervention in the Commodity Derivatives Market
VII. The 2017/2018 Reform Waypoint (1): CCP Supervision and the ‘European Supervisory Mechanism’
VIII. The 2017/2018 Reform Waypoint (2): The 2017 ESA Proposal
IX. And the Direction of Travel Continues: The 2018 Crowdfunding Proposal
X. Conclusion
6. ESMA as a Network Actor
I. ESMA as a Network Actor
II. ESMA and the EU Financial Governance Network
III. ESMA and the International Financial Market Governance Network
IV. Conclusion
Postscript
Index

Citation preview

THE AGE OF ESMA Since its establishment in 2011, the European Securities and Markets Authority (ESMA) has become a pivotal actor in EU financial market regulation and supervision. Its burgeoning influence extends from the rule-making process to supervisory convergence/coordination to direct supervision. Reflecting the now critical importance of ESMA to how the EU regulates and supervises financial markets, and with ESMA at an inflection point in its evolution, particularly in light of the Commission’s 2017 proposals to reform ESMA and the UK’s withdrawal from the EU, The Age of ESMA maps, contextualises, and examines ESMA’s role and the implications for EU financial market governance.

ii

The Age of ESMA Governing EU Financial Markets

Niamh Moloney

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2018 Copyright © Niamh Moloney, 2018 Niamh Moloney has asserted her right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2018. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Moloney, Niamh, author. Title: The age of ESMA : governing EU financial markets / Niamh Moloney. Other titles: Age of European Securities and Markets Authority Description: Oxford, UK ; Portland, Oregon : Hart Publishing, 2018. Identifiers: LCCN 2018039832 (print) | LCCN 2018040281 (ebook) | ISBN 9781509921799 (Epub) | ISBN 9781509921775 (hardback) Subjects: LCSH: European Securities and Markets Authority. | Capital market—Law and legislation—European Union countries. | Securities—European Union countries. | BISAC: LAW / Business & Financial. Classification: LCC KJE2245 (ebook) | LCC KJE2245 .M65 2018 (print) | DDC 346.24/0666—dc23 LC record available at https://lccn.loc.gov/2018039832 ISBN: HB: 978-1-50992-177-5 ePDF: 978-1-50992-178-2 ePub: 978-1-50992-179-9 Typeset by Compuscript Ltd, Shannon

To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

To Iain

vi

PREFACE The Age of ESMA provides an in-depth examination of the European Securities and Markets Authority (ESMA). Since its 2011 establishment, ESMA, although a soft-lawbased, coordination-oriented actor, has come to exert a decisive technocratic influence on EU financial market governance. How ESMA has achieved this pivotal position and the nature of the implications call for examination. But this examination is all the more pressing given the current inflection point in ESMA’s development. The withdrawal of the UK from the EU (Brexit), the Capital Markets Union agenda, and the 2017 review of ESMA are all combining to construct a crucible from which ESMA may emerge with enhanced powers. This book accordingly interrogates how ESMA has come to occupy a central position in EU financial market governance, the nature and reach of its technocratic influence, and whether any challenges to effectiveness or legitimacy are arising from this ‘agencification’ of EU financial market governance. The Age of ESMA reflects my close interest in ESMA’s development and its impact on EU financial market governance since its establishment and builds on work I have published on ESMA over this period. I had the privilege of being a member of ESMA’s first and second consultative Securities and Markets Stakeholder Groups over 2011–2016, and of being appointed to the Board of Appeal of the European Supervisory Authorities in spring 2018, but the analysis in this book is based solely on the public record of ESMA’s activities. In writing this book I have incurred several debts of gratitude. Much of the book was written over a period of research leave from the law department of the London School of Economics and Political Science in autumn 2017, for which I am very grateful. My graduate students on my LLM course on European Capital Markets Law have been a constant source of challenge, energy, and inspiration and have allowed me to test many of the ideas presented in this book, while the LSE law department provides the most intellectually exciting and supportive environment for research. My understanding of ESMA and its place in EU financial market governance has been enriched by engagement with a wide range of experts. I would like to record my thanks to Professor Kern Alexander, Dr Despina Chatzimanoli, Professor Pierre-Henri Conac, Professor Eilís Ferran, Alexander Justham, Dr Carmine di Noia, Jonathan Overett-Somnier, Peter Parker, Professor Lucia Quaglia, Dr Pierre Schammo, Professor Takis Tridimas, and Mirella Wassiluk. I owe a particular debt of gratitude to Professor Joana Mendes and Professor Jennifer Payne who generously read some of the book’s chapters and provided valuable comments. Hart Publishing has guided the book through to publication with exemplary efficiency, courtesy, professionalism, and attention to detail; I thank in particular my commissioning editor Dr Roberta Bassi, production editor Tom Adams, and copy editor Catherine Minahan. Any errors or material omissions are my responsibility.

viii Preface My greatest debt of gratitude is – as always – to my wonderful husband Iain Donovan, to whom this book is dedicated. The book aims to state the law and major developments as at 1 July 2018, although it has been possible to squeeze in some later developments in places and in the Postscript. Niamh Moloney 8 August 2018 Dublin and London

CONTENTS Preface�� vii Table of Treaties, Regulations, and Directives�� xvii Table of Abbreviations��xxix 1. Introducing ESMA�� 1 I. Introduction: Examining ESMA through an Institutional Lens�� 1 II. Characterising ESMA: ESMA’s Setting and its Role�� 4 A. Capturing ESMA: A Hybrid Actor in a Distinct Setting�� 4 B. ESMA as a Component of the European System of Financial Supervision�� 5 i. The Single Financial Market and the ESFS�� 5 ii. ESMA within the ESFS�� 7 C. ESMA as an Administrative, Non-Majoritarian Institution in Financial Market Governance – a Financial Market Regulator�� 11 D. ESMA as an EU Agency�� 13 E. ESMA as a Network Actor�� 15 F. ESMA as a ‘State of the Art’ Actor in EU Financial Market Governance�� 16 G. Searching for ESMA and the 2017/2018 Reform Waypoint�� 18 III. Contextualising ESMA�� 19 A. ESMA’s Evolution: Incremental and Sustainable Change�� 19 B. Explaining ESMA’s Evolution: Political, Institutional, and Technocratic Forces�� 24 i. Multiple Driving Factors�� 24 ii. Political Preferences�� 26 iii. Supranational/Institutional Preferences�� 27 iv. Technocratic Preferences�� 29 C. The 2017/2018 Reform Waypoint: From Incrementalism to Punctuated Change?�� 30 IV. Technocratic Influence, Effectiveness, and Legitimacy�� 33 A. Examining ESMA�� 33 B. ESMA’s Expanding Technocratic Influence: A Distinct and Dynamic Actor in the EU Agency Framework�� 34 C. Effectiveness: Mandate Delivery, the Single Market Setting, and Innovation�� 35 D. Legitimacy: Technocrat or Despot?�� 38 V. Roadmap�� 40

x Contents 2. ESMA’s Governance�� 41 I. Assessing ESMA and its Governance Arrangements�� 41 II. Examining ESMA’s Governance Arrangements�� 42 A. Capturing ESMA’s Hybrid Governance Arrangements�� 42 B. Dynamism and Reform�� 42 III. Contextualising ESMA’s Governance Arrangements: Influence, Effectiveness, and Legitimacy�� 43 A. Financial Markets and Administrative Governance: Context and Challenges�� 43 B. The EU Context and Challenges�� 48 i. The Governance of EU Agencies�� 48 ii. Governance Design and Multiple Principals�� 50 iii. Governance Design and Constraints on Discretion�� 53 C. Meeting ESMA’s Governance Needs: Effectiveness and Legitimacy�� 55 IV. ESMA’s Institutional Design�� 57 A. Operational Organisation and Privileging National Experts�� 57 B. The Board of Supervisors�� 58 C. The Management Board�� 61 D. Chair and Executive Director�� 61 E. Internal Organisation and Working Methods�� 62 i. Working Methods�� 62 ii. Impact Assessment�� 62 iii. Consultation�� 63 F. Independence�� 65 G. Effectiveness and Legitimation: Inside the Board of Supervisors�� 67 i. Challenges to the Board of Supervisors and the 2017 ESA Review�� 67 ii. Inside the Board of Supervisors: Through a Glass, Darkly�� 69 H. Governance Reform: Disruptive or Supportive?�� 72 i. Sliding into Bureaucracy?�� 72 ii. Reconfiguring the Board of Supervisors and the Proposed ‘Executive Board’�� 74 iii. Disruptive or Supportive Reform?�� 76 I. Constitutive Legal Framework: ESMA’s Mandate and Powers�� 78 V. ESMA’s External Governance Arrangements�� 82 A. Administrative and Judicial Review�� 82 i. Board of Appeal�� 82 ii. The Ombudsman and other Administrative Channels�� 84 iii. Judicial Review�� 85 B. Institutional Oversight and Accountability Arrangements�� 86 i. Institutional Oversight�� 86 ii. Accountability Arrangements�� 87 iii. Accountability to the European Parliament and Council�� 88 iv. Accountability to the Commission�� 96

Contents xi v. Budgetary Accountability�� 96 vi. Financial Accountability�� 97 vii. Inter-ESA Relations and International Financial Governance�� 97 VI. ESMA’s Funding Arrangements�� 98 A. Funding Sources and Budgetary Procedures�� 98 B. Funding Reform�� 99 C. The 2017 ESA Proposal��101 VII. Conclusion��103 3. ESMA and Regulatory Governance��104 I. Assessing ESMA and the Regulatory Governance Setting��104 II. Examining ESMA’s Role in Regulatory Governance��108 A. Capturing ESMA’s Regulatory Governance Role��108 i. ESMA as a Rule-maker��108 ii. ESMA’s Regulatory Governance Powers��109 B. Dynamism and Reform��109 III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy��110 A. Financial Markets and Administrative Regulatory Governance: Context and Challenges��110 B. The EU Context��112 C. ESMA in Action: Influence, Effectiveness, and Legitimacy��113 IV. Building the Single Rule-book: ESMA as Architect of EU Administrative Financial Market Regulation��116 A. Procedural and Institutional Context��116 i. Technical Advice to the Commission��116 ii. Binding Technical Standards��120 iii. The Rise of RTSs��121 B. ESMA’s Expanding Technocratic Influence��126 i. Procedure, Process, and Institutional Relations��126 ii. ESMA Entrepreneurialism and Reform��132 iii. A Transformative Rule-book��132 C. The Administrative Rule-book and ESMA’s Effectiveness��133 i. Data Informed��134 ii. Consultation��135 iii. Agility and Revisability��136 iv. Expert Deliberation and the Injection of National Experience�� 138 v. Institutional Sensitivity��140 D. The Administrative Rule-book and Legitimation��140 i. Technical Advice��141 ii. Draft RTSs��143 V. Building the Soft Law Rule-book: ESMA as the Designer and Custodian of EU Financial Market Soft Law��145 A. Procedural and Institutional Context��145 i. Article 16 Guidelines��145 ii. Article 29 Measures��148

xii Contents B. ESMA’s Expanding Technocratic Influence��149 i. The Reach and Style of Article 16 Guidelines��149 ii. The Range and Nature of Article 29 Measures��153 C. Effectiveness and Legitimacy: Guidelines��155 i. Effectiveness��155 ii. Legitimacy��157 D. Effectiveness and Legitimacy: Article 29��162 VI. The Legislative Process: Shaping Regulatory Governance from the Bottom Up��165 VII. Conclusion��167 4. ESMA and Supervisory Convergence��169 I. Assessing ESMA and the Supervisory Convergence Setting��169 II. Examining ESMA’s Role in Supervisory Convergence��173 A. Capturing ESMA’s Supervisory Convergence Role��173 i. ESMA as System Supervisor and as ‘Europeanising’ Supervision��173 ii. ESMA’s Supervisory Convergence Powers��175 B. Dynamism and Reform��176 III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy��179 A. Financial Markets and Administrative Supervisory Governance: Context and Challenges��179 B. The EU Context��181 i. A Novel Competence Shaped by Distinct Interests��181 ii. The 2017/2018 Reform Waypoint��186 C. ESMA in Action: Influence, Effectiveness, and Legitimacy��187 IV. Supervisory Convergence in Practice��191 A. ESMA as Facilitator, Coordinator, Coach, and Policeman��191 B. Facilitating Supervision: Risk Analytics and Data Management��192 i. A Burgeoning ESMA Data Hub��192 ii. Burgeoning Powers and Influence but Challenges?��199 C. Facilitating Supervision: Stress Test Support��200 D. Facilitation and Coordination: Colleges of Supervisors��202 E. Coaching: Supervision the ESMA Way��207 i. Europeanising Supervision��207 ii. The ESMA Coaching Manual: Guidelines, Q&As, and other Soft Measures��209 iii. Delegation Arrangements��211 iv. Coaching through Institutional Support��211 v. Coaching through Nudging: Opinions on Supervisory Approaches and Decisions��213 F. Coaching … and Policing: Peer Review��221 i. ESMA’s Approach to Peer Review��221 ii. Effectiveness and Legitimacy��228

Contents xiii G. The Policeman – a Hardening Agent��231 H. Three Specific Supervisory Convergence Mandates and Brexit��232 i. Financial Stability��232 ii. The Retail Markets and Consumer Protection��233 iii. Financial Innovation��236 iv. Brexit��237 V. Conclusion��240 5. ESMA and Direct Supervision/Market Intervention��241 I. Assessing ESMA and the Direct Supervision/Market Intervention Setting��241 II. Examining ESMA’s Role as a Direct Supervisor��245 A. Capturing ESMA Direct Supervision Role��245 i. ESMA as a Hybrid Supervisory Actor��245 ii. ESMA’s Powers (1): Regulated Actors��245 iii. ESMA’s Powers (2): Directing NCAs��246 iv. ESMA’s Powers (3): Exceptional Conditions��246 B. Dynamism and Reform��247 III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy��249 A. Financial Markets and Administrative Supervisory Governance: Context and Challenges��249 B. The EU Context��249 i. Intergovernmental Preferences��249 ii. Supranational/Institutional Preferences��254 iii. Technocratic Preferences: ESMA and NCAs��256 C. ESMA in Action: Influence, Effectiveness, and Legitimacy��258 IV. Direct Supervision in Practice: Rating Agencies and Trade Repositories��260 A. Credit Rating Agencies��260 i. Legal Regime and Operating Framework��260 ii. Rating Agency Supervision in Action: Technocratic Influence but a Balanced Scorecard?��263 B. Trade Repositories��272 i. Legal Regime and Operating Framework��272 ii. Supervision in Action: Technocratic Influence but another Balanced Scorecard?��273 V. NCA-Oriented Supervision: Breach of EU Law, Binding Mediation, and Emergency Conditions��277 A. Breach of EU Law (Article 17) and Binding Mediation (Article 19)��277 i. The Legal Regime��277 ii. Articles 17 and 19 in Action: Limited Technocratic Influence but Effectiveness Strains?��280 B. Article 18 – Emergency Conditions��287

xiv Contents VI. Exceptional Intervention: Short Selling, Product/Services Intervention, and Intervention in the Commodity Derivatives Market��288 A. Legal Framework��288 i. Short Selling��288 ii. Product Intervention��290 iii. Commodity Derivatives Markets��293 B. Effectiveness and Legitimacy Strains?��294 VII. The 2017/2018 Reform Waypoint (1): CCP Supervision and the ‘European Supervisory Mechanism’��296 A. The Reform Waypoint��296 B. CCP Supervision as a Specialist Waymarker: Contestation and Coordination��296 C. The 2017 CCP Supervision Proposal and a New Supervisory Model��300 i. The European Supervisory Mechanism: ESMA as System Supervisor��300 ii. A Waymark?��303 VIII. The 2017/2018 Reform Waypoint (2): The 2017 ESA Proposal��304 A. From Incremental to More Punctuated Change: The Reform Context��304 B. ESMA’s NCA-Oriented Powers��309 C. ESMA’s Direct Supervision Powers: A Basket of Reforms��310 i. Information-gathering Powers��310 ii. Supervisory Empowerments��311 IX. And the Direction of Travel Continues: The 2018 Crowdfunding Proposal��313 X. Conclusion��314 6. ESMA as a Network Actor��316 I. ESMA as a Network Actor��316 II. ESMA and the EU Financial Governance Network��316 A. ESMA and the European System of Financial Supervision��316 i. ESMA and the ESRB��316 ii. ESMA and the ESAs��317 B. ESMA and Banking Union��323 III. ESMA and the International Financial Market Governance Network��326 A. The EU, ESMA, and International Financial Market Governance��326 B. ESMA and the International Standard Setters��328 i. A Productive Channel for Influence��328 ii. Effectiveness and Legitimacy��329 C. ESMA, Third Country Actors, and Equivalence��332 i. The Third Country/Equivalence Regime and ESMA’s Role��332 ii. The Third Country Regime in Practice: ESMA’s Influence��336

Contents xv iii. Effectiveness and Legitimacy��339 iv. The 2017/2018 Reform Waypoint: The Third Country Regime, Brexit, and ESMA��341 IV. Conclusion��349 Postscript��350 Index��355

xvi

TABLE OF TREATIES, REGULATIONS, AND DIRECTIVES Treaties Treaty of Lisbon��21, 22 Treaty on European Union (TEU) Art 5�� 81 Art 15��120 Art 15(1)��120 Art 16(4)��60, 279 Treaty on the Functioning of the European Union (TFEU)�� 55 Art 114�� 55, 81, 102 Art 126(7)��324 Art 127(2)��298 Art 258��278, 279 Art 263�� 82, 83, 85, 86, 140, 158, 283, 284 Art 265�� 85 Art 289�� 22 Art 290�� 22, 55, 86, 109, 112, 116, 117, 118, 120, 121, 122, 123, 142, 148 Art 291��22, 51, 55, 86, 109, 112, 116, 117, 118, 120, 121, 122, 123, 148, 333 EU Regulations Reg 1606/2002 on international accounting standards (IAS Regulation) [2002] OJ L243/1�� 9 Reg 216/2008 on common rules in the field of civil aviation [2008] OJ L79/1�� 58 Reg 713/2009 establishing an agency for the cooperation of energy regulators [2009] OJ L211/1�� 58 Reg 1060/2009 on credit rating agencies [2009] OJ L302/1��193 Art 60��283 Reg 1092/2010 establishing a European Systemic Risk Board (ESRB Regulation) [2010] OJ L331/1��232, 317 Art 22(1)��232 Art 22(2)–(4)��232 Art 23��232 Art 24��232

xviii Table of Treaties, Regulations, and Directives Reg 1093/2010 establishing a European Banking Authority (EBA Regulation) [2010] OJ L331/12��4, 97, 130, 163, 317 Art 44(1)��321 Reg 1094/2010 establishing a European Insurance and Occupational Pensions Authority (EIOPA Regulation) [2010] OJ L331/48��317 Reg 1095/2010 establishing a European Securities and Markets Authority (ESMA Regulation) [2010] OJ L331/84*�� 2, 4, 7, 71, 78, 98, 105, 114, 120, 124, 137, 143, 241, 316, 317 Recital 19��292 Recital 23��129 Recital 32��286 Recital 41��173, 223 Art 1(2)��79, 159, 160, 277, 287 Art 1(3)�� 79, 159, 160 Art 1(5)�� 4, 7, 8, 42, 65, 80, 114 Art 2��4, 317 Art 2(1)��7, 316 Art 2(3), (4)��317 Art 3�� 88 Art 4��300 Art 5��300 Art 5(1)�� 7 Art 5(2)��300 Art 8��233, 236 Art 8(1)��79, 114, 118, 175, 176 Art 8(1)(a)��81, 237 Art 8(1)(aa)��210 Art 8(1)(f)��192, 199, 236, 237 Art 8(1)(k)�� 88 Art 8(2)�� 80, 118, 176 Art 8(3)�� 63 Art 9��159, 233, 234, 236 Art 9(5)��21, 55, 60, 246, 247, 251, 255, 288, 295 Art 10�� 64, 109, 120, 121 Art 10(1)��120, 129 Art 11��109, 120 Art 11(2)��121 Art 12��109, 120, 121, 300 Art 13��109, 120 Art 13 (1)–(3)��121 Art 14�� 64, 109, 120, 121 Art 15��109, 300 Art 15(1)��121, 129 * Some Article references to the ESMA Regulation in the Table relate to provisions proposed under the Commission’s 2017 proposal to reform ESMA.

Table of Treaties, Regulations, and Directives xix Art 15(2)��121 Art 16��60, 63, 64, 65, 78, 109, 114, 145, 146, 147, 148, 149, 152, 153, 155, 159, 160, 161, 162, 164, 176, 209, 210 Art 16(2)��146, 162 Art 16(3)��146 Art 16(4)��146, 162 Art 16(5)�� 65 Art 17�� 75, 83, 84, 198, 231, 246, 257, 277, 277, 278, 279, 280, 281, 282, 283, 284, 285, 286, 321 Art 17–19��21, 176, 251, 252, 283, 287, 302, 304, 305, 306, 309, 314 Art 18��83, 246, 247, 251, 256, 257, 287, 288, 300, 302, 309 Art 18(1)��202 Art 19�� 75, 83, 219, 231, 246, 251, 278, 279, 280, 281, 285, 286, 287, 292, 302, 304, 305, 306, 309, 314, 321 Art 19(1)��292 Art 19(2)��279 Art 19(2)(a)��292 Art 21��176, 191 Art 21(1), (2)��204 Art 22�� 75, 159, 166, 191 Art 22–24��176 Art 23��191 Art 23(1)��197 Art 25–27��176 Art 28��176, 191, 211, 289, 290 Art 29��60, 109, 114, 145, 148, 153, 160, 162, 163, 164, 165, 166, 176, 191, 207, 213, 214, 219, 238, 243 Art 29(1)(a)��148 Art 29(1)(b)��199 Art 29(1)(c)��148, 330 Art 29(1)(e)��210 Art 29(2)��148, 191 Art 29a�� 75 Art 30�� 75, 176, 191, 223, 224, 230 Art 30(2)(b)��147 Art 30(3), (4)��224 Art 31��176, 191, 202, 237 Art 31a��75, 221 Art 31a(1)–(4)��347 Art 31b��199 Art 32�� 75, 176, 191, 201 Art 32(1)��197 Art 32(2)��201 Art 32(2a)��202 Art 32(3)��197

xx Table of Treaties, Regulations, and Directives Art 33�� 327, 336, 348 Art 34��118, 166 Art 35��176, 191, 192, 199, 310 Art 35(5)��192 Art 35(6)��192, 302 Art 35a��310 Art 35b–35h�� 75, 198, 310 Art 37��64, 65 Art 38��279, 280 Art 39��82, 283 Art 40��74, 290 Art 40(1)�� 58, 59, 302 Art 40(3), (4), (6)�� 59 Art 40–44�� 58 Art 41(1)�� 60 Art 41(2), (3)��279 Art 42�� 66 Art 43��60, 76 Art 43(3)�� 86 Art 43(4)–(6)�� 88 Art 43(8)�� 86 Art 44��60, 261, 273, 277, 295 Art 44(1)�� 60, 120, 145, 279 Art 44(2), (4)�� 60 Art 44a��73, 302 Art 44b��73, 302 Art 44b(1)�� 75 Art 44c��73, 302 Art 45�� 74, 75, 236 Art 45(1)–(4)�� 61 Art 45–47�� 61 Art 46��66, 74 Art 47�� 61, 75, 230 Art 47(3)�� 200, 309, 310 Art 48�� 76 Art 48(1)�� 61 Art 48(2)��61, 86 Art 48(3)�� 61 Art 48(5)��61, 66 Art 48a��73, 302 Art 49��61, 66 Art 50��342 Art 50(1)�� 88 Art 51��60, 62 Art 51(2)��62, 86 Art 51(3)�� 62

Table of Treaties, Regulations, and Directives xxi Art 51(5)�� 66 Art 52��60, 62, 66 Art 53��60, 62 Art 54��318 Art 56��318 Art 58��75, 82 Art 58(2), (3), (5), (6)�� 83 Art 59��66, 82, 83 Art 60��83, 283 Art 60(7)�� 83 Art 61��83, 85 Art 61(3)�� 85 Art 62��101 Art 62(1)�� 98 Art 62a��101 Art 63��61, 98 Art 64�� 98 Art 72�� 83 Art 75(3)�� 59 Reg 182/2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers [2011] OJ L55/13�� 109, 117, 343 Art 4��117 Art 5��118 Art 5(4)(a)��118 Reg 1227/2011 on wholesale energy market integrity and transparency (REMIT Regulation) [2011] OJ L326/1��274 Reg 236/2012 on short selling and certain aspects of credit default swaps (Short Selling Regulation) [2012] OJ L86/1�� 9, 23, 54, 55, 87, 122, 132, 134, 147, 148, 149, 154, 193, 215, 216, 224, 241, 247, 252, 288 Art 18(1)��215 Arts 18–26��289 Art 19��289 Art 19(1)��215 Art 20(1)��215 Art 21��289 Art 21(1)��215 Art 23��289 Art 25��218 Art 26��215 Art 27(2)��215 Art 27(3)��215 Art 28��247, 289 Art 28(1)–(3)�� 54

xxii Table of Treaties, Regulations, and Directives Reg 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR Regulation) [2012] OJ L201/1�� 9, 22, 32, 79, 122, 123, 124, 129, 130, 131, 132, 133, 135, 136, 137, 143, 148, 149, 150, 151, 154, 164, 178, 193, 201, 203, 204, 228, 233, 246, 272, 273, 275, 288, 317, 333, 334, 340, 345 Art 6(a), (b)��138 Art 9��272 Art 11��318 Art 15��205 Art 16��318 Art 17�� 204, 205, 279 Art 17(4)��207 Art 18��204, 205 Art 18(4)��204 Art 19��205 Art 21�� 205, 223, 228 Art 21(4)��204 Art 21(6)��201 Art 21a��301 Art 21b��301 Art 25(2)��334 Art 41��318 Art 49�� 204, 205, 318 Art 54��204 Art 54(4)��148 Art 60–74��272 Art 75(3)��335 Art 77(1)��334 Art 77(2)��335 Reg 966/2012 on the financial rules applicable to the general budget of the Union (Financial Regulation) [2012] OJ L298/1��96, 123 Reg 345/2013 on European venture capital funds (EUVECA Regulation) [2013] OJ L115/1�� 9, 125, 311, 312 Reg 346/2013 on European social entrepreneurship funds (EUSEF Regulation) [2013] OJ L115/81�� 9, 125, 311, 312 Reg 575/2013 on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation (CRR)) [2013] OJ L176/1��200 Reg 1022/2013 amending the EBA Regulation [2013] OJ L287/5��283 Art 8(1)(aa)��208 Art 19��286 Art 29��208 Art 39��283 Art 60��283, 284

Table of Treaties, Regulations, and Directives xxiii Reg 1024/2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (ECB/SSM Regulation) [2013] OJ L287/63�� 320, 321, 324 Recital 28��323 Art 1��323 Art 2(3)��323 Art 4(1)��324 Reg 596/2014 on market abuse (Market Abuse Regulation) [2014] OJ L173/1��9, 124, 129, 149, 154, 159, 178, 193, 195, 217, 218, 224, 279 Art 4��194, 195 Art 13��279 Art 13(3)–(5)��218 Reg 600/2014 on markets in financial instruments (MiFIR) [2014] OJ L173/84��9, 10, 20, 23, 79, 88, 89, 91, 104, 105, 115, 119, 122, 123, 124, 125, 127, 128, 129, 130, 131, 133, 134, 135, 136, 137, 139, 141, 142, 143, 146, 148, 150, 152, 153, 154, 155, 156, 158, 159, 162, 163, 164, 165, 166, 170, 178, 186, 193, 195, 196, 197, 198, 209, 214, 215, 217, 218, 219, 233, 234, 241, 242, 247, 272, 274, 279, 288, 290, 311, 312, 324, 333, 336, 338 Art 4��279 Art 4(4)��219 Art 4(5)��195 Art 7��279 Art 7(1)��195 Art 9��279 Art 9(2)��219 Art 9(4)��195, 219 Art 11(1)��195 Art 11(2)��219 Art 15(1)��195 Art 18(4)��195 Art 19(1)��195 Art 22��195 Art 25��195 Art 26�� 195, 199, 272 Art 26(10)��195 Art 27��195, 199 Art 40�� 247, 291, 292, 293, 294, 295 Art 42��290, 291 Art 42(6)��291

xxiv Table of Treaties, Regulations, and Directives Art 44(2)��195 Art 45��247, 294 Art 46��334, 348 Art 49��334 Art 51��118 Reg 806/2014 establishing the Single Resolution Mechanism (SRM Regulation) [2014] OJ L225/1 Art 2��323 Art 95��286 Reg 909/2014 on improving securities settlement in the EU and on central securities depositories (CSDR) [2014] OJ L257/1��9, 79, 124, 149, 193, 336 Art 24��223 Art 25��336 Reg 1286/2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs Regulation) [2014] OJ L352/1�� 9, 124, 135, 137, 143, 154, 233 Art 8��318 Art 10��318 Art 13��318 Reg 760/2015 on European long-term investment funds (ELTIF Regulation) [2015] OJ L123/98�� 9, 125, 311, 312 Reg 2365/2015 on transparency of securities financing transactions (SFTR) [2015] L337/1�� 193, 272, 274 Art 9��272 Art 29��317 Reg 1011/2016 on benchmarks (Benchmark Regulation) [2016] OJ L171/1��9, 19, 106, 125, 149, 154, 159, 193, 204, 206, 252, 311, 335 Arts 30–33��336 Art 34��206, 279 Art 34(4)��206 Art 35��198 Art 46��203 Reg 827/2017 establishing a Union Programme to support specific activities in the field of financial reporting and auditing [2017] OJ L129/24��330 Reg 1129/2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation) [2017] OJ L168/12��9, 106, 116, 119, 125, 167, 193, 210, 222, 311 Art 13(1)��125 Art 14(3)��125 Art 15(2)��125 Art 16(5)��125 Art 18(4)��125

Table of Treaties, Regulations, and Directives xxv Art 19(4)��125 Art 20��223 Art 20(12)��184, 210 Art 20(13)��222 Art 25(7)��125 Art 29��335 Art 30��251, 335 Art 30(4)��125 Art 34��198 Art 37��279 Art 43��194 Art 44(3)��116 Art 44(6)��116 Art 45��118 Reg 1131/2017 on money market funds (MMF Regulation) [2017] OJ L169/8��9, 149, 152, 161, 193, 197, 201, 202 Reg 2402/2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (Securitisation Regulation) [2017] OJ L347/35��9, 12, 106, 193, 251, 272, 336 Consolidated Credit Rating Agency Regulation (CCRAR)��9, 22, 149, 193, 245, 260, 261, 263, 264, 265, 266, 267, 268, 269, 270, 272, 273, 274, 335, 339, 340 Art 4��335 Art 5��335 Art 5(1)��335 Art 8(3)��261 Art 21��260 Art 22a��261 Art 23b��260 Art 23b(2), (3)��260 Art 23c��261 Art 23d��261 Art 23e��261 Art 23e(3), (4)��261 Art 24��262 Art 24(2)��262 Art 25��262 Art 36a��262 Art 36a(1)–(4)��262 Art 36b(1), (3)��263 Annex I��264 Annex III��261, 262 Annex IV��262

xxvi Table of Treaties, Regulations, and Directives EU Directives Dir 1993/22 on investment services [1993] OJ L141/27�� 20 Dir 2003/71 on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) [2003] OJ L345/64��9, 125 Dir 2003/6 on insider dealing and market manipulation (Market Abuse Directive) [2003] OJ L96/16��218 Dir 2004/39 on markets in financial instruments (MiFID I) [2004] OJ L145/1��105, 147, 148, 152, 159, 219, 224, 225, 227, 228, 229, 233, 234, 251 Dir 2004/109 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (Transparency Directive) [2004] OJ L390/38��9, 149, 154, 193 Dir 2006/48 relating to the taking up and pursuit of the business of credit institutions (Capital Requirements Directive/CRD I) [2006] OJ L177/1��147 Dir 2009/65 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS Directive) [2009] OJ L302/96��9, 149, 166, 193, 224 Dir 2011/61 on alternative investment fund managers (AIFMD) [2011] OJ L174/1��9, 119, 122, 127, 129, 131, 134, 135, 139, 147, 148, 149, 150, 151, 154, 158, 193, 209, 214, 217, 223, 224, 312, 323, 332 Art 13(2)��148 Art 38��223 Dir 2013/36 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (Capital Requirements Directive/CRD IV) [2013] OJ L176/338��200 Dir 2014/51 amending earlier directives in respect of the powers of the European Supervisory Authorities [2014] OJ L153/1��121, 278 Dir 2014/56 on statutory audits (Statutory Audit Directive) [2014] OJ L158/196��252 Dir 2014/59 on bank recovery and resolution (Bank Recovery and Resolution Directive/BRRD) [2014] OJ L173/190��297 Dir 2014/65 on markets in financial instruments (MiFID II) [2014] OJ L173/349��9, 10, 20, 79, 88, 89, 91, 104, 105, 115, 116, 119, 122, 123, 124, 125, 127, 128, 129, 130, 131, 133, 134, 135, 136, 137, 139, 141, 142, 143, 146, 148, 150, 152, 153, 154, 155, 156, 158, 159, 162, 163, 164, 165, 166, 170, 178, 186, 193, 195, 196, 197, 198, 204, 209, 214, 215, 217, 218, 220, 241, 251, 288, 290, 311, 312, 324, 327, 328, 333

Table of Treaties, Regulations, and Directives xxvii Art 4(1)��290 Art 4(15)��290 Art 9(1)��148 Art 24(11)��148 Art 25(9)��148 Art 25(10)��148 Art 33��220 Art 45(9)��148 Art 57��293 Art 58��293 Art 59��220 Art 63(2)��148 Art 69��251, 293 Art 71��194 Art 87��198 Art 89(3), (4)��116

xxviii

TABLE OF ABBREVIATIONS ACER AIFMD BoS Brexit BTSs CCPs CCRAR CEREP CESR CfDs CJEU CME CMU CRA/TR CSDR CWGs DVCM EASA EBA ECB ECOFIN ECON

– – – – – – – – – – – – – – – – – – – – – –

EEA EFTA EIOPA ELTIF Regulation EMIR ERP ESAs ESC ESFS ESMA ESRB EU EUSEF Regulation EUVECA Regulation

– – – – – – – – – – – – – –

Agency for the Cooperation of Energy Regulators Alternative Investment Fund Managers Directive (2011) Board of Supervisors withdrawal of the UK from the EU binding technical standards central clearing counterparties Consolidated Credit Rating Agency Regulation central repository database (rating agencies) Committee of European Securities Regulators Contracts for Differences Court of Justice of the EU coordinated market economy Capital Markets Union credit rating agencies/trade repositories Central Securities Depositories Regulation (2014) consultative working groups double volume cap mechanism European Aviation Safety Agency European Banking Authority European Central Bank Economic and Financial Affairs Council Economic and Monetary Affairs Committee (European Parliament) European Economic Area European Free Trade Association European Insurance and Occupational Pensions Authority European Long Term Investment Fund Regulation (2015) European Market Infrastructure Regulation (2012) European Ratings Platform European Supervisory Authorities European Securities Committee European System of Financial Supervision European Securities and Markets Authority European Systemic Risk Board European Union European Social Entrepreneurship Fund Regulation (2013) European Venture Capital Fund Regulation (2013)

xxx Table of Abbreviations FESCO FIRDS FSAP FSB FSC IAS Regulation IFRS IOSCO ISSBs ITSs LEI LME MAR MiFID II MiFIR MMF Regulation NCAs NRAs ODRF ODRG OTC PRIIPs Regulation

– – – – – – – – – – – – – – – – – – – – – –

QMV RADAR REACH system

– – –

RTSs SCs SMEs SMSG SRB SRM SSM SWD TFEU TRACE TRV UCITS

– – – – – – – – – – – –

Forum of European Securities Commissions Financial Instruments Reference Data System Financial Services Action Plan Financial Stability Board Financial Services Committee International Accounting Standards Regulation (2002) International Financial Reporting Standards International Organisation of Securities Commissions international standard-setting bodies implementing technical standards Legal Entity Identifier liberal market economy Market Abuse Regulation (2014) Markets in Financial Instruments Directive II (2014) Markets in Financial Instruments Regulation (2014) Money Market Fund Regulation (2017) national competent authorities national resolution authorities OTC Derivatives Regulators Forum OTC Derivatives Regulators Group over-the-counter Packaged Retail and Insurance-Based Investment Products Regulation (2014) qualified majority voting Ratings Data Reporting Tool Registration, Evaluation, Authorisation and Restriction of Chemicals (EU) regulatory technical standards standing committees small and medium-sized enterprises Securities and Markets Stakeholder Group (ESMA) Banking Union’s Single Resolution Board Banking Union’s Single Resolution Mechanism Banking Union’s Single Supervisory Mechanism staff working document Treaty on the Functioning of the EU Trade Reporting and Compliance Engine Trends, Risks, and Vulnerabilities in EU Securities Markets Undertakings for Collective Investment in Transferable Securities

1 Introducing ESMA I. Introduction: Examining ESMA through an Institutional Lens Since its establishment in January 2011 in response to the financial crisis, the European Securities and Markets Authority (ESMA) – based in Paris and with some 200 employees1 – has established itself as a decisive technocratic influence on the governance of the European Union (EU) financial market, shaping how regulated firms and national regulators behave. It is not an exaggeration to suggest that EU financial market regulation can be divided into the pre- and post-ESMA periods, such is the scale of the influence it has come to exert in a relatively short time. ESMA is nonetheless a soft law-based, coordination-oriented EU agency. This book interrogates how it has come to occupy this central position in EU financial market governance and the ramifications of its expanding influence. It does so by providing an in-depth examination of ESMA’s role and whether ESMA’s burgeoning technocratic influence – and the related ‘agencification’2 of EU financial market governance – raises challenges for ESMA’s effectiveness in delivering its mandates and for its legitimacy as a technocratic EU agency. First, however, some scene-setting observations. European Union financial market governance, regarded as the superstructure of rules, supervisory arrangements, and institutional structures that governs the EU financial market,3 presents myriad questions and conundrums – from the nature of the impact of EU intervention on financial markets to the optimal design of institutional arrangements – which are canvassed in a rich and fast-expanding scholarship. Why focus on ESMA, and why do so now? The answer to this question lies in ESMA’s importance, distinctiveness, and dynamism. First, ESMA, operating in an often ambitious and expansionist manner, has positioned itself as an actor of central importance in EU financial market governance – despite its soft law/coordination orientation and the bounds placed on it by its organisational design

1 In its most recent annual report ESMA reported on a head count of 2,294 employees, across all the different categories of ESMA employee: ESMA, Annual Report on 2017 (2018) 65. 2 See generally in the EU agency context H Hoffman and A Morini, ‘Constitutional Aspects of the Pluralisation of the EU Executive through “Agencification”’ (2012) 37 European Law Review 419. 3 For the purposes of this book, the EU financial market relates to the actors, firms, and structures that support market-based funding (funding through marketable instruments rather than through bank lending – discussed further in section II.B.i) and related intermediation and risk management, such as investment firms, investment funds, market infrastructures, proprietary traders, dealers in securities, market gatekeepers such as rating agencies, and different classes of retail and professional investor.

2 Introducing ESMA as an EU agency. As at Spring 2018, ESMA was, for example, developing and overseeing a vast soft law rule-book; informally claiming a form of the ‘no action’ jurisdiction enjoyed by certain regulators internationally (the ‘no action’ power relates to the ability of a regulator to indicate that it will not take action against a regulated entity if that entity takes a specified course of action – it can lead to an informal disapplication of rules); sitting at the centre of an immense data-hub; deploying, for the first time, novel direct product intervention tools in the EU financial market (which led to a drop in the share price of certain leading platforms for the trading of Contracts for Differences (CfDs)); stress testing central clearing counterparties (CCPs) – the erstwhile ‘nuclear power houses’ of the EU financial system; adopting and overseeing contested Brexit-related opinions and other measures on the treatment of UK firms re-locating to the EU-27 market; directly supervising a small but not immaterial cohort of regulated actors; and facing the prospect of becoming a significantly more powerful direct supervisor following a series of Commission proposals over 2017/early 2018, including the pivotal 2017 E uropean Supervisory Authorities Proposal (the ESA Proposal).4 None of this could have been easily or at least safely predicted in January 2011. The reasonable intuition that ESMA has come to occupy a central position in EU financial market governance needs, however, to be carefully unpacked and the nature of ESMA’s influence and the implications dissected. Second, ESMA’s institutional distinctiveness needs to be confronted. Part EU agency, part traditional financial market regulator, part international standard-setter, part EU network actor;5 part horizontal/peer coordinator of national regulators, part vertical/hierarchical supervisor of national regulators – ESMA is a creature of many parts and defies easy characterisation. Common to all these characterisations is the importance of the relationship between ESMA and the national financial market regulators (national competent authorities or NCAs), which currently carry out national supervision in the EU financial market and which form ESMA’s decision-making body – the Board of Supervisors. The pivotal ESMA/NCA relationship is primarily cooperative and coordinating in style, but it is becoming increasingly hierarchical as ESMA develops and as its different characterisations evolve. ESMA’s hybrid nature is unusual in financial market governance and so calls for assessment, but assessment is all the more necessary as ESMA’s hybridity bears on its ability to exert influence and the extent to which it poses challenges for effectiveness and legitimation. Finally, ESMA’s highly dynamic quality calls for assessment. Since its establishment in January 2011, ESMA has inserted itself into EU financial market governance through a purposeful and often ambitious exercise of its powers. Whether this dynamism has been contained within the legitimating mechanisms set out in its constitutive a rrangements6 or posed effectiveness challenges to its mandates requires examination. Further, ESMA is reaching an inflection point. While its ability to shape regulator and regulated actor behaviour is now significant and its technocratic influence pervasive, it may be on the cusp of receiving additional powers. Over 2017 and early 2018 the Commission 4 COM (2017) 536. These different developments are discussed in subsequent chapters. 5 ESMA forms part of the European System of Financial Supervision along with its sister agencies – the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) – the European Systemic Risk Board, and national regulators. 6 Set out in the 2010 ESMA Regulation: Regulation (EU) No 1095/2010 [2010] OJ L331/84.

Introduction: Examining ESMA through an Institutional Lens 3 proposed a series of reforms, all concerning the conferral of additional powers on ESMA and all tilting it, slowly certainly but perhaps inexorably, in the direction of becoming the long-predicted ‘single supervisor’ for the EU financial market. The confluence of the completion of the EU’s Capital Markets Union (CMU) agenda and the UK’s withdrawal from the EU is, at the same time, constructing a reform crucible from which other ESMA reforms may emerge. ESMA’s acquisition of influence and any further empowerments may, however, place significant stress on its original constitutive arrangements. A word on the book’s approach is warranted. It is concerned with legal and institutional matters – with ESMA as a technocratic financial market agency situated within the EU’s administrative governance arrangements, how it operates, and the nature and implications of its influence.7 Its focus is on ESMA’s design and behaviour and not on normative questions as to the optimal design and structure of EU financial market governance generally, or on empirical questions as to the transformative effects of EU financial market governance choices on markets.8 Its approach can be situated within the financial regulation literature that explores institutional governance9 and the cognate literature on EU administrative governance,10 particularly recent scholarship on the nature of and constraints on EU executive power in the wake of the financial crisis11 and on experience with the crisis-era institutional reforms.12 Adopting a legal/institutional perspective places the analysis at the intersection of a number of rich and burgeoning bodies of work. The EU agency literature provides explanations for how agencies such as ESMA develop and the challenges that can arise, and is also coming to focus on ESMA’s distinct features.13 Political economy analyses of EU financial governance

7 Its approach can therefore be situated within the literature that regards law and its supporting institutions as not being intrusions on markets but rather necessary parts of the architecture which supports the modern capitalist economy. See, eg, S Deakin, D Gindis, G Hodgson, K Huang, and K Pistor, ‘Legal institutionalism: Capitalism and the constitutive role of law’ (2017) 45 Journal of Comparative Economics 188; and E Ferran, Building an EU Securities Market (Cambridge University Press, Cambridge, 2000). 8 For examples see J Payne and E Howell, ‘The Creation of a European Capital Market’ in P Koutrakos and J Snell (eds), Research Handbook on the Law of the EU’s Internal Market (Elgar, Cheltenham, 2017) 241 (EU financial market governance design); and HB Christensen, L Hail, and C Leuz, Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement, ECGI Finance Working Paper No 407/2014, available at http://ssrn.com/abstract=1745105 (an empirical assessment). 9 See, eg, C Ford, Innovation and the State. Finance, R egulation and Justice (Cambridge University Press, New York, 2017); and A Riles, ‘Is New Governance the Ideal Architecture for Global Financial Regulation?’ (2013) 31 Monetary and Economic Studies 65. 10 For a recent examination of EU agencies from a legal/institutional perspective, see H Hoffman, ‘EU Regulatory Union? The Role of Agencies and Standards’ in Koutrakos and Snell (eds), n 8, 460. 11 J Mendes, ‘Bounded Discretion in EU Law: a limited judicial paradigm in a changing EU’ (2017) 80 Modern Law Review 443. 12 See P Weismann, European Agencies and Risk Governance in EU Financial Markets Law (Routledge, London and New York, 2015); L Cuocolo and V Miscia, The Gentle Revolution of European Banking Regulation: Models and Perspectives in Supervision, BAFFI Centre Research Paper Series No 2014-164, available at http://ssrn.com/abstract=2539641; and, from the extensive Banking Union literature, T Tuominen, ‘The European Banking Union: a shift in the internal market paradigm’ (2017) 54 Common Market Law Review 1359 and the special edition of the European Business Organisation Law Review on Banking Union ((2015) 16(3)). 13 See recently, eg, A Spendzharova, Becoming a Powerful Regulator: the European Securities and Markets Authority in European Financial Sector Governance, TARN Working Paper 8/2017, available at https://ssrn. com/abstract=2965429.

4 Introducing ESMA shed light on the preferences that shape ESMA’s operating environment.14 The recentlyemerging scholarship on international financial law provides lessons on how innovative financial governance arrangements and institutional designs can be applied to crossborder settings, such as ESMA’s setting, and their challenges.15 Regulatory theory offers productive insights into the tools ESMA uses and how it can accordingly exert influence.16 The book’s analysis accordingly draws on the insights and lessons of a rich composite literature to probe the central position ESMA now occupies in EU financial market governance. The interrogation of ESMA that follows exposes the scale of the influence ESMA has come to exert and does not underestimate the effectiveness and legitimacy risks. Its approach is primarily diagnostic, although it identifies areas where reforms would, within the current institutional settlement within which ESMA operates, enhance effectiveness or legitimacy. Its conclusion is, however, optimistic. ESMA emerges as a technically expert, responsive, and agile actor, often deploying ‘state of the art’ tools and approaches; and the arrangements that support ESMA’s effectiveness in delivering its mandates and its legitimacy as a technocratic actor appear resilient and adaptive, if coming under some pressure in places. A wider point can be made, if more tentatively: ESMA’s development suggests that EU financial market governance has now acquired a capacity to adapt and flex over time in response to environmental change in a manner that bodes well for effectiveness but does not – so far at least – raise undue challenges for legitimation. This chapter anticipates the structure of subsequent chapters by introducing ESMA as an actor in EU financial market governance and examining why its characterisation matters but can be elusive (section II); the context within which ESMA operates and how its role and powers have evolved (section III); and the nature of the influence it has come to exert, and why effectiveness and legitimation challenges may arise (section IV).

II. Characterising ESMA: ESMA’s Setting and its Role A. Capturing ESMA: A Hybrid Actor in a Distinct Setting ESMA is formally an EU agency charged with delivering its mandates under its constitutive 2010 ESMA Regulation and subsequent legislative empowerments. Behind this straightforward description lies considerable hybridity and complexity. ESMA can be characterised in multiple ways, but these can be boiled down to: a component of the

14 On the preferences that have shaped EU financial market governance, see L Quaglia, D Howarth, and M Liebe, ‘The Political Economy of European Capital Markets Union’ (2016) 54 Journal of Capital Market Studies 185. 15 See, eg, C Brummer, Soft Law and the Global Financial System. Rule-making in the 21st Century (Cambridge University Press, New York, 2015). 16 eg, experimentalist governance theory provides useful insights into ESMA’s effectiveness (eg, J Zeitlin, ‘EU Experimentalist Governance in Times of Crisis’ (2016) 39 West European Politics 1073).

Characterising ESMA: ESMA’s Setting and its Role 5 European System of Financial Supervision (ESFS); a form of financial market regulator, familiar from financial market governance; an EU agency, directed to single market support; and an EU/international network actor. This hybridity matters as it bears on diagnosis of ESMA’s influence and of the implications. Identification of ESMA’s different characterisations is a slippery business, however, and is becoming more so as ESMA moves to an inflection point; as subsequent chapters discuss, ESMA’s role is ‘hardening’ and its character is becoming more hierarchical as it pushes deeper into territory currently held by NCAs.

B. ESMA as a Component of the European System of Financial Supervision i. The Single Financial Market and the ESFS ESMA sits within the wider system of EU financial governance that supports the EU’s single or integrated financial services market: it forms part of the ESFS and must act in the interest of the EU alone.17 This single market setting, and the at times conflicting liberalising and risk management demands it makes of EU financial governance, was the crucible within which ESMA was forged over 2009–10. It continues to shape ESMA’s role and how it exerts influence. The 2017 ESA Proposal places its proposed ESMA reforms squarely within this setting, relating them to the benefits a single financial market is asserted to bring and to the role of ESMA in supporting this aspect of the EU single market in financial services.18 The EU has long sought to construct a single financial market through different governance means.19 This project is designed to secure for the EU economy a series of benefits, including easier and cheaper access to capital for firms; a deep and liquid financial market in which major investors and capital suppliers such as asset managers, pension funds, and insurance companies can access a range of investment opportunities and diversify their risks effectively; and lower cost and easier access by households to long-term savings products. It is also designed to wean the EU financial system from its long and persistent dependence on bank-based funding20 (funding based on banks

17 ESMA Regulation, Arts 1(5) and 2. 18 2017 ESA Proposal, n 4, Explanatory Memorandum, 2. 19 The degree of financial market integration is usually examined by reference to the degree of asset price convergence/divergence within different asset classes, and to investment indicators, such as the composition of household and wholesale investment portfolios; levels of cross-border securities issuance; and the incidence of cross-border branch and service supply channels and pan-EU market infrastructures. Levels of integration are regularly monitored by the Commission in its annual ‘European Financial Stability and Integration Reviews’ and by the ECB in its annual reports on ‘Financial Integration in Europe’. 20 See Commission, European Financial Stability and Integration Review 2017 (SWD (2017) 171) 24; Commission, Staff Working Document, Economic Analysis Accompanying the Commission Communication on the Mid-Term Review of the Capital Markets Union Action Plan (SWD (2017) 224) 36–37; Commission, European Financial Stability and Integration Review 2016 (SWD (2016) 146) 33; and Commission, Initial Reflections on the Obstacles to the Development of Deep and Integrated EU Capital Markets (SWD (2015) 13) 22.

6 Introducing ESMA intermediating between depositors and borrowers) and to promote market-based funding (funding through marketable securities such as shares and bonds, intermediated for investors seeking returns and firms seeking capital through actors such as investment funds and investment firms). Whatever the merits of this project and the means deployed to execute it,21 it is has long been a mainstay of EU financial policy. The current CMU policy agenda, adopted in 2015,22 due for completion by 2019,23 and designed to strengthen market-based investment, to provide new and wider sources of funding, and to strengthen household access to finance,24 is only the most recent of a series of initiatives in support of a single financial market. The single financial market project has, for most of its development, been based on regulatory harmonisation, initially to remove regulatory frictions to integration (primarily over the liberalising Financial Services Action Plan (FSAP25) era (1999–2004)) and latterly to contain and manage cross-border and domestic risks (primarily over the risk-reducing financial crisis era (2008–14), which saw the densely harmonised ‘single rule-book’ balloon). Institutional governance as a single financial market support mechanism only emerged in a serious way over the financial crisis period, when the crystallisation of the acute financial stability risks to which the single market and particularly the euro area were exposed led to the EU engaging for the first time with meaningful institutional reform. The 2011 establishment of the ESFS, within which ESMA sits, followed. The ESFS is composed of: the Member States’ national regulators (or NCAs), which ground the ESFS, supervising regulated actors in according with the EU’s single rulebook; the three sectoral European Supervisory Authorities (ESAs), which, in their different sectors, contribute to the development and consistent application of the single rule-book, resolve cross-border problems, and promote regulatory and supervisory convergence26 – ESMA, EBA, EIOPA, and their coordinating Joint Committee; and the European Systemic Risk Board (ESRB), which is charged with monitoring pan-EU system-wide risks and macro-prudential stability. The ESFS has two main functions. First, it supports the development of the single rule-book that is adopted by the Council and European Parliament (the legislative component) and the Commission (the administrative rules component). Second, the ESFS provides a supporting infrastructure for the coordination of supervision at national level and the development of convergent supervisory practices. Sitting uncomfortably alongside the ESFS are the newer and distinct operational structures of Banking Union that govern the mutualisation of banking sector risk by its ‘participating’ Member States. The B anking Union a rrangements 21 An extensive literature examines the relative benefits of bank- and market-based funding systems and the EU’s policy commitment to market-based funding. See, eg, M Kremer and A Popov, ‘Special Feature A: Financial Development, Financial Structure and Growth: evidence from Europe’ in ECB, Financial Integration in Europe (2018) 65; M Giovannini, C Mayer, S Micossi, C Di Noia, M Onado, M Pagano, and A Polo, Restarting European Long-term Investment Finance. A Green Paper Discussion Document, Centre for E uropean Policy Research Paper (2015); and M Pagano and S Langfield, Bank Bias in Europe: Effects on Systemic Risk and Growth, ECB Working Paper No 1797 (2015). 22 Commission, Action Plan on Building a Capital Markets Union (COM (2015) 468). 23 Progress is regularly monitored (eg, Commission, Completing the Capital Markets Union by 2019 – time to accelerate delivery (COM (2018) 114)). 24 Commission, Mid-Term Review of the Capital Markets Union Action Plan (COM (2017) 292). 25 COM (1999) 232. 26 As recently described by the Commission: 2017 ESA Proposal, n 4, Explanatory Memorandum, 2.

Characterising ESMA: ESMA’s Setting and its Role 7 apply to euro area Member States (on a mandatory basis) and other ‘participating Member States’ (on a voluntary basis) and, so far, to their deposit-taking institutions. Banking Union’s Single Supervisory Mechanism (SSM), operational since 2014, brings the supervision of the euro area’s some 6,000 banks (non-euro area Member States may join the SSM on a voluntary basis, but have yet to do so), directly and indirectly, under the control of the European Central Bank (ECB). The ECB has overall oversight of the SSM, is directly responsible for the supervision of (currently) 118 of the EU’s most important banking groups (‘significant banks’), and oversees the supervision of other euro area banks (‘less significant banks’) by their NCAs. Banking Union’s Single Resolution Mechanism (SRM), fully operational since 2016, brings the resolution of SSM zone banks, directly and indirectly, within the control of Banking Union’s Single Resolution Board (SRB) and includes a Single Resolution Fund to support resolution. The ESFS and Banking Union are very different constructs and have been shaped by different forces.27 The ESFS is a single-market-oriented, coordination-based arrangement, which captures the vast population of financial actors subject to EU regulation. Banking Union is an operational and executive construct, based on centralised supervision and risk mutualisation, and currently limited in scope to banks. There are nonetheless leakages and synergies between the ESFS and Banking Union that have shaped ESMA’s development, as discussed in chapter 6.

ii. ESMA within the ESFS The ESMA Regulation constitutes ESMA as part of the ESFS and as an independent Union ‘body’ with legal personality (Articles 2(1) and 5(1)), and requires ESMA to act in the EU interest alone (Article 1(5)). ESMA is designed as an EU agency28 and is subject to the EU rules that govern agencies. Decision-making is located within ESMA’s Board of Supervisors, the voting members of which are the relevant NCAs for financial markets. ESMA’s objective is directed to its single market setting and is to protect the public interest by contributing to the short-, medium-, and long-term stability and effectiveness of the financial system, for the EU economy, its citizens and business (Article 1(5)). This main objective is accompanied by a number of subsidiary and diffuse objectives, which cover: improving the functioning of the internal market; ensuring the integrity, transparency, efficiency, and orderly functioning of financial markets; strengthening international supervisory coordination; preventing regulatory arbitrage and promoting equal conditions of competition; ensuring the taking of

27 An extensive literature examines the different forces that shaped Banking Union and which were related to the toxic ‘doom loop’ the 2010–12 euro area crisis exposed between failing banks, sovereigns, and the viability of the euro. See, eg, M Schoeller, ‘Providing Political Leadership? Three Case Studies on Germany’s Ambiguous Role in the Eurozone Crisis’ (2017) 24 Journal of European Public Policy 1 (on political preferences); R Epstein and M Rhodes, ‘The Political Dynamics behind Europe’s New Banking Union’ (2016) 39 West European Politics 415 (on Commission and ECB influence); and D Howarth and L Quaglia, ‘Internationalized Banking, Alternative Banks, and the Single Supervisory Mechanism’ (2016) 39 West European Politics 438 (on the influence of local banking markets). 28 ESMA is listed among the EU’s ‘decentralised agencies’ on the Commission’s agency website at https://europa.eu/european-union/about-eu/agencies/esma_en.

8 Introducing ESMA investment and other risks are appropriately regulated and supervised; and e nhancing consumer protection (Article 1(5)). ESMA has articulated this scattergun mandate as a ‘mission’ to enhance the protection of investors and promote stable and orderly markets in the EU, and as encompassing three related objectives: investor protection; orderly markets; and financial stability.29 ESMA is conferred with related tasks, set out in Article 8 of the ESMA Regulation, and with related powers, set out across the ESMA Regulation; specific expressions of these tasks and powers are scattered across s ectoral EU financial market legislation – all EU financial market legislation adopted since 2011 has conferred specific tasks and powers on ESMA. These tasks and powers can be classified into four broad areas, all of which bear on support of the single financial market: regulatory governance; supervisory convergence; risk assessment; and direct supervision/intervention.30 The other ESAs carry out similar tasks but do not engage in direct supervision of market segments, currently a distinct feature of ESMA’s design. First, as regards regulatory governance, ESMA has been conferred with a series of soft powers relating to support of the EU’s single rule-book. Legislative rule-making for the EU financial market is the prerogative of the European Parliament and C ouncil; the Commission, overseen by the Parliament and Council, adopts administrative financial market rules. Within this framework, ESMA proposes certain forms of administrative financial market rule (Binding Technical Standards), which are adopted by the Commission. ESMA also provides the Commission with ‘technical advice’ on administrative financial market rule-making generally. Finally, ESMA can adopt an array of soft law, notably guidelines in relation to which NCAs can be required to ‘comply or explain’. ESMA is increasingly being drawn into the upstream policy/legislative development process, mainly by providing technical support to the Commission. Second, in relation to ‘supervisory convergence’, an EU term of art that relates to the support of cross-border supervisory coordination and to the development and diffusion of best supervisory practice, ESMA has a series of soft powers, including to engage in peer review, support cross-border supervisory inspections, oversee colleges of supervisors, and adopt soft law. As regards risk assessment, ESMA’s extensive if soft powers include the hosting and management of multiple databases and infrastructures; reporting and reviewing risks; collecting and collating a vast range of reports from the market and NCAs; and providing empirical support to financial market policy development. Finally, ESMA has been conferred with a limited suite of direct supervision/ intervention powers. First, ESMA has powers to direct NCAs and market participants to take specified action when the exceptional circumstances set out in the ESMA Regulation arise. Second, ESMA has been conferred with a small number of sectorspecific intervention powers in relation to short selling, product/service intervention, and commodity derivatives markets. Lastly, ESMA has exclusive direct supervisory jurisdiction over two sets of EU regulated actor: credit rating agencies; and trade

29 ESMA, Annual Report on 2017 (2018) 13. The Commission has adopted these objectives when describing ESMA’s role (ibid). 30 ESMA usually organises its tasks in a similar manner and as covering: the single rule-book; risk monitoring and analysis; supervisory convergence; and direct supervision (ESMA, Annual Report on 2017 (2018) 13–14).

Characterising ESMA: ESMA’s Setting and its Role 9 repositories. These regulatory governance, supervisory convergence, risk assessment, and direct s upervision/intervention tasks and powers are exercised under the s ectoral EU financial market legislation which defines ESMA’s scope of action and which is continually expanding. ESMA organises its activities into nine major related policy areas: • corporate disclosure/financial reporting (primarily, the 2003 Prospectus Directive/2017 Prospectus Regulation, 2004 Transparency Directive, and 2002 International Accounting Standards Regulation (IAS Regulation));31 • credit rating agencies (2011 Consolidated Credit Rating Agency Regulation (CCRAR Regulation));32 • fund management (2009 Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, 2011 Alternative Investment Fund Managers Directive (AIMFD), 2013 European Venture Capital and European Social Entrepreneurship Fund Regulations (EUVECA and EUSEF Regulations), 2015 European Long Term Investment Fund Regulation (ELTIF Regulation), and 2017 Money Market Fund Regulation (MMF Regulation));33 • investor protection (2014 Markets in Financial Instruments Directive II (MiFID II) and 2014 Packaged Retail Investment and Insurance-Based Product Regulation (PRIIPs Regulation));34 • market abuse (2014 Market Abuse Regulation);35 • markets and investment firms (MiFID II and 2014 Markets in Financial Instruments Regulation);36 • benchmarks (2016 Benchmark Regulation);37 • short selling (2012 Short Selling Regulation);38 and • post-trading (2012 European Market Infrastructure Regulation (EMIR) and 2014 Central Securities Depositories Regulation (CSDR)).39 The regulated sectors within ESMA’s scope of action are continually expanding, most recently through the 2017 Securitisation Regulation,40 and additional legislative measures are regularly proposed, currently mainly under the CMU agenda. 31 Directive 2003/71/EC [2003] OJ L345/64; Regulation (EU) No 2017/1129 [2017] OJ L168/21; Directive 204/109/EC [2004] OJ L390/38; and R egulation (EC) No 1606/2002 [2002] OJ L243/1. 32 The EU’s rating agency regime is split across four legislative measures, one of which (the 2011 Credit Rating Agency Regulation (EU) No 513/2011 [2011] OJ L145/30) confers supervisory power on ESMA. References in this book are to the Commission’s informal consolidation of the texts in the Consolidated Credit Rating Agency Regulation (CCRAR) (ELI: http://data.europa.eu/eli/reg/2009/1060/2015-06-21). 33 Directive 2009/65/EC [2009] OJ L302/32; Directive 2011/61/EU [2011] OJ L174/1; Regulation (EU) No 345/2013 [2013] OJ L115/1; Regulation (EU) No 346/2013 [2013] OJ L115/18; Regulation (EU) No 2015/760 [2015] OJ L123/98; and Regulation (EU) No 2017/1131 [2017] OJ L169/8. 34 Directive 2014/65/EU [2014] OJ L173/349 and Regulation (EU) No 1286/2014 [2014] OJ L352/1. 35 Regulation (EU) No 596/2014 [2014] OJ L173/1. 36 Regulation (EU) No 600/2014 [2014] OJ L173/84. 37 Regulation (EU) No 2016/1011 [2016] OJ L171/1. 38 Regulation (EU) No 236/2012 [2012] OJ L86/1. 39 Regulation (EU) No 648/2012 [2012] OJ L201/1 and Regulation (EU) No 909/2014 [2014] OJ L257/1. 40 Regulation (EU) No 2017/2402 [2017] OJ L347/35.

10 Introducing ESMA This scattergun set of tasks and powers obscures the scale of the influence ESMA now wields over the EU financial market, and the multiplicity of channels it can use to do so. In early to mid-2011, as ESMA was finding its institutional feet, it was preoccupied with advising the Commission on administrative rules and its operating scope was confined by a relatively limited set of legislative measures. By 2015, having been instrumental in the adoption of the massive crisis-era administrative single rule-book, ESMA was turning to its supervisory convergence powers and building an ambitious related agenda.41 By 2017, and following the adoption since 2011 of some 15 or so major crisis-era legislative measures, which expanded the EU’s regulatory perimeter around financial markets and so ESMA’s scope of operation, ESMA had become deeply embedded within EU financial market governance. Over 2017 ESMA was, for example, gearing up to deploy its new supervisory coordination powers in relation to benchmarks, one of the newest actors within the EU’s regulatory perimeter; grappling with the extensive operational data management powers conferred on it under MiFID II/MiFIR, which had placed it at the epicentre of a massive dataset on market structure; concluding its work on restructuring the EU derivatives market by advising the Commission on which classes of derivatives must be traded on traded venues (having previously advised on which classes of derivatives must be cleared through CCPs); preparing to deploy, for the first time, its new powers to prohibit a financial product (since deployed in March 2018); reacting to the first delegation to it of supervisory powers held by an NCA; taking its most overt political action yet by adopting forceful opinions on how EU-27 NCAs should approach the Brexit-related relocation of UK firms; and shaping the development of the EU’s dominant financial market policy agenda – the CMU agenda.42 The year 2017 also saw the adoption of two major Commission proposals to increase ESMA’s powers. The 2017 CCP Supervision Proposal has suggested that ESMA be conferred with new powers to coordinate the supervision of EU CCPs and to supervise directly third-country CCPs, and follows an earlier 2016 proposal to confer on ESMA new coordination powers in relation to CCP recovery and resolution.43 The Commission’s 2017 ESA Proposal is the most ambitious reform, covering ESMA governance and funding reform as well as proposals for additional direct supervision empowerments for ESMA. Since then, the 2018 Crowdfunding Proposal has proposed that ESMA be the exclusive EU supervisor of crowdfunding service providers.44 If adopted, these proposals will open several additional channels through which ESMA can shape EU financial market governance. This functional and historical account gives some sense of the potential scale of ESMA’s influence on EU financial market governance, as a single market actor operating within the ESFS. Behind this account lie the additional if overlapping characterisations of ESMA, which help in further unpacking and dissecting ESMA’s role and influence and the ramifications.

41 ESMA,

Strategic Orientation 2016–2020 (ESMA/2015/593). developments are discussed in subsequent chapters. 43 COM (2017) 331 and COM (2016) 856. 44 COM (2018) 113. 42 These

Characterising ESMA: ESMA’s Setting and its Role 11

C. ESMA as an Administrative, Non-Majoritarian Institution in Financial Market Governance – a Financial Market Regulator ESMA forms part of the ESFS, but it is also an agency with financial market governance responsibilities. Agencies, typically characterised as non-majoritarian institutions, have become a familiar part of the apparatus for governing the modern state; the welldocumented rise of the regulatory state and the related deploying by governments of regulatory tools to achieve policy outcomes and to manage an increasingly complex risk environment have increased reliance on agencies to deliver policy goals. Agencies are typically (not always) independent from their political principals and are granted delegated powers to deliver their mandates, although they are also confined by these mandates and by related constraints on their operation and discretion.45 Technocratic and administrative in orientation, agencies allow governments to commit credibly to the achievement of regulatory policy goals and to the taking of decisions with longterm horizons that might otherwise be vulnerable to political influence and escape, provide the credible, specialist technical capacity needed to manage regulatory policies, particularly in areas requiring scientific and technical risk assessment, and also provide governments with a means for dispersing blame.46 Non-majoritarian by design, agencies are not directly legitimated by representation. Their legitimacy is classically a function of their technical expertise and of the confining of their actions to the technical non-political sphere, which should not generate public interest choices engaging value judgements or redistribution.47 But while the agency model is well-established, it is becoming increasingly contested as the line between technical and political choices becomes thinner with the expansion in agency power, and as the ‘trust in technocracy’ on which the agency model is predicated becomes weaker with repeated failures of agency risk identification and management.48 Agency technology is accordingly not straightforward to apply, and ESMA’s burgeoning influence as one of the EU’s newest agencies accordingly calls for analysis. Further, ESMA’s financial market setting poses distinct challenges. In the financial market sphere, independent agencies (financial market regulators) have come to be the standard means for delivering regulatory policy choices.49 In parallel with the exponential growth in financial markets since the early 1980s, and the related deepening dependence of national fiscal stability and individual financial welfare on the financial system, governments worldwide have expanded the agency-based structures that

45 M Thatcher and A Stone Sweet, ‘Theory and Practice of Delegation to Non Majoritarian Institutions’ (2002) 25 West European Politics 1. 46 For an account of the rise of the regulatory state and of agencies, see K Yeung, ‘The Regulatory State’ in R Baldwin, M Cave, and M Lodge (eds), The Oxford Handbook of Regulation (Oxford University Press, Oxford, 2010) 64. 47 In the EU context, G Majone, Regulating Europe (Routledge, London, 1996). 48 P Craig, UK, EU and Global Administrative Law. Foundations and Challenges (Oxford University Press, Oxford, 2016) 702. 49 For a survey see E Ferran, ‘Institutional Design: the choices for national systems’ in N Moloney, E Ferran, and J Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University Press, Oxford, 2015) 97.

12 Introducing ESMA oversee the financial system.50 Since the financial crisis, when the economic, social, and political salience of the public interest in how financial markets are governed was exposed to searing effect, financial market regulators have seen a material expansion of their mandates and powers. The financial crisis prompted a sharpened political focus on how financial market regulators operate. This led to some agency restructuring and the assignment of blame,51 and to the dilution of agency independence in some cases.52 But it also led to an expansion of financial market regulators’ powers. This expansion was a function of several factors, but reflects in particular the crisis-era political consensus on the need to strengthen risk identification and management capacity, intensify regulation, move to more intrusive supervision, and deploy enforcement powers more assertively. It also reflects crisis-era alterations to the normative setting of financial market regulation and the nature of the public interest pursued, across two dimensions in particular. First, while consumer protection has long been associated with financial market regulation, the crisis era led to a political commitment in many jurisdictions to a more intrusive and precautionary approach to the consumer financial markets, and to a related empowerment of financial market regulators. Second, financial stability, historically the bailiwick of banking/prudential regulators, was infused into financial market regulation and tied into financial market regulators’ mandates and powers. That financial market regulators, designed as independent, expertise-led agencies, matter to the administration of financial market public policy is hardly a new or controversial statement.53 But as the mandates and powers of financial market regulators have expanded, greater pressure has been placed on their ability to manage their now extensive but often intractable mandates. The typical financial market regulator is now usually charged with supporting financial stability, securing consumer financial protection, and ensuring orderly markets – by securing financial market efficiency, transparency, and integrity.54 Pinning down the exact outcomes and actions implied by these mandates would test the abilities of the most technocratically expert and far-seeing regulator. Financial market regulators are also usually charged with discharging their mandates in an identified manner – which can include acting in a manner which, is, variously, transparent, proportionate, calibrated to different market segments, and responsive to competitiveness. Mandate delivery is all the more difficult given the repeated cycles of crisis and reform that have come to characterise financial market regulation and which reflect the distinct complexity, contingency, and uncertainty challenges associated with

50 The agency-based ‘expertise-driven model’ for governing financial market is, however, of very longstanding, being deployed initially in the US in response to the market failures that spurred the Great Depression: M Barr, ‘Comment. Accountability and Independence in Financial Regulation: Checks and Balances, Public Engagement, and Other Innovations’ (2015) 78 Law and Contemporary Problems 119. 51 For an examination of the UK political reaction and the related institutional reforms, see E Ferran, The Reorganisation of Financial Services Supervision in the UK: An Interim Progress Report, University of Cambridge Faculty of Law Research Paper No 49/2011, available at http://ssrn.com/abstract=1952705. 52 S Gadinis, ‘From Independence to Politics in Financial Regulation’ (2013) 101 California Law Review 327. 53 For a recent assessment from a US perspective, see D Langevoort, Selling Hope, Selling Risk: Corporations, Wall Street and the Dilemmas of Investor Protection (Oxford University Press, New York, 2016). 54 The international standard-setting body for financial markets (the International Organisation of Securities Commissions) has identified protecting investors, ensuring that markets are fair, efficient and transparent, and the reduction of systemic risk as the three governing objectives of securities (financial market) regulation: IOSCO, Objectives and Principles of Securities Regulation (2017).

Characterising ESMA: ESMA’s Setting and its Role 13 financial markets. But if a financial market regulator cannot reliably deliver on its technical mandate, questions arise as to its effectiveness and whether the agency operating model for the delivery of financial market policy is fit for purpose. Further, as financial market regulators’ mandates and powers have increased, the boundary between political and technical action has become more permeable given the intensifying fiscal implications of their actions, and greater pressure is being placed on legitimation. The design, mandates, powers, and performance of financial regulators generally and financial market regulators specifically has accordingly come to generate a rich post-crisis scholarship.55 ESMA is a hybrid form of financial market regulator. It does not exercise the full suite of powers traditionally associated with financial market regulators, but in many respects it is like a traditional financial market regulator, notably in its ability to adopt soft law and to supervise, if to a limited extent, regulated actors. ESMA’s ‘in-house adoption’ of the three classic objectives pursued by financial market regulators (financial stability; investor protection; and orderly markets) signals its self-perception as a financial market regulator. ESMA therefore poses similar challenges to those generated by financial market regulators generally, and analysis of its role must take this into account, albeit that ESMA’s primary role relates to the coordination of national financial market regulators and to the promotion of supervisory coordination within the ESFS. Further, as well as being an agency-based financial market regulator, ESMA is an EU agency, and its role and ability to exert influence has been shaped by the distinct forces that shape EU agencies.

D. ESMA as an EU Agency ESMA is an EU agency, constructed to resolve EU-specific financial market policy problems and to deliver EU regulatory policy for the single financial market.56 This distinct EU setting also shapes the book’s analysis. Agencies, including financial market regulators, have burgeoned at national level within the EU. The EU has also deployed EU-level agencies, in order to strengthen its administrative capacity to run the single market and to resolve collective action problems, including as regards cross-border market liberalisation and transnational crisis management.57 With their strong connection to single market support, EU agencies are associated with supranationalism and 55 For a US (banking) example, see K Judge, ‘The Federal Reserve: a study in soft constraints’ (2015) 78 Law & Contemporary Problems 65; and for a UK (financial market) perspective, see E Ferran, ‘The New Mandate for the Supervision of Financial Services Conduct’ (2012) 65 Current Legal Problems 411. 56 A massive and multi-faceted literature, from legal, regulatory theory, political economy, and other perspectives, examines EU agencies. For a recent treatment from a legal perspective, see M Chamon, EU Agencies. Legal and Political Limits to the Transformation of the EU Administration (Oxford University Press, Oxford, 2016); and earlier D Geradin and N Petit, The Development of Agencies at EU and National Levels: Conceptual Analysis and Proposals for Reform, Jean Monnet Working Paper 01/04 (2004), available at https://jeanmonnetprogram.org/archive/papers/04/040101.pdf. 57 From the extensive literature on the normative basis and purpose of EU agencies, see, eg, A Boin, M Busuioc, and M Groenleer, ‘Building European Union Capacity to Manage Transboundary Crises: Network or Lead Agency Model?’ (2014) 8 Regulation & Governance 418; and G Majone, ‘Delegation of Regulatory Powers in a Mixed Polity’ (2002) 8 European Law Journal 319.

14 Introducing ESMA with providing the EU with additional expert administrative capacity, beyond the Commission, to run the single market.58 But, as outlined in section III, they have been driven by an array of preferences, supranational but also intergovernmental/political and technocratic in orientation, which have shaped their operating settings and ability to exert influence. This influence is intensifying. As the EU has moved into harmonising social and risk regulation to deepen market liberalisation and integration, and as the reach of single market policy has deepened, a gradual ‘Europeanisation’ of administrative decision-making has occurred59 and the agency model has burgeoned.60 These EU agencies share the challenges raised by domestic agencies but are different in several ways, three in particular. First, they are typically organised as bodies that coordinate national agencies (who hold operational supervisory and decision-making power) and not as centralised decision-making bodies.61 Second, their operating freedom, mandates, and ability to take binding decisions are limited, reflecting the preferences that shape delegation to agencies in the EU and also the Treaty rules governing delegation to agencies – chief among them the Meroni principle, which limits the extent to which agencies can be conferred with discretionary powers.62 Finally, their organisational design and governance arrangements reflect the multiplicity of notional delegating principals and preferences engaged in their construction. Analysis of ESMA’s influence must accordingly also take account of its distinct EU-agency setting and thus the different intergovernmental, supranational, and transnational/technocratic preferences that shape EU agencies; the cross-border and transnational orientation of EU agencies’ functions and their coordination and risk management bias; and their distinct design and governance arrangements. Analysis of ESMA must further take account of how ESMA differs from other EU agencies. While ESMA is similar to many EU agencies,63 it is one of the (if not the) most powerful agencies in the EU regulatory space.64 This alone marks it out as distinctive. But ESMA’s governance arrangements are also different in that (and by contrast with other

58 D Levi-Faur, ‘Regulatory Networks and Regulatory Agencification: Towards a Single European Regulatory Space’ (2011) 18 Journal of European Public Policy 810. 59 An extensive literature examines the ‘Europeanisation’ of national regulatory policies and their administration as the single market has deepened. See, eg, H Anheier (ed), Governance Challenges & Innovations (Oxford University Press, Oxford, 2018); and earlier R Dehousse, Misfits: EU Law and the Transformation of European Governance, Jean Monnet Working Paper 2/02 (2002), available at http://www.jeanmonnetprogram.org/archive/papers/02/020201.html. 60 See E Vos, ‘Three Decades of Risk Research’ (2017) 8 European Journal of Risk Regulation 47; and, in the ESA context, M Everson, A Technology of Expertise: EU Financial Services Agencies (2012) LEQS WP No 49/2012, available at http://www.lse.ac.uk/europeanInstitute/LEQS%20Discussion%20Paper%20Series/ LEQSPaper49.pdf. 61 N Vestlund, ‘Pooling Administrative Resources through EU Regulatory Networks’ (2017) 24 Journal of European Public Policy 61. 62 Case 9-56 Meroni v High Authority (ECLI:EU:C:1958:7). 63 S Griller and A Orator, ‘Everything under Control? The “Way Forward” for European Agencies in the Footsteps of Meroni’ (2010) 25 European Law Review 3, 7–9, noting, eg, common financial/accountability regulations. 64 The ESAs have been characterised as a ‘genuinely different arrangement’ (E Chiti, ‘An Important Part of the EU’s Institutional Machinery: features, problems and perspectives of European agencies’ (2009) 46 Common Market Law Review 1395, 1431); as ‘some of the most powerful autonomous institutions ever established at EU level’ (Everson, n 60, 17); and as having ‘been accorded power greater than other agencies’ (Craig, n 48, 540).

Characterising ESMA: ESMA’s Setting and its Role 15 EU agencies) national technical expertise is privileged over direct EU institutional representation in its governance arrangements, given the dominance of NCAs in its decision-making Board of Supervisors, and this has shaped how it deploys its powers.

E. ESMA as a Network Actor A third layer of characterisation and hybridity can be unpeeled. There is a strong network dimension to ESMA’s character, which can be identified in three settings in which it operates in particular. The first setting relates to the pivotal ESMA/NCA relationship. ESMA is an EU agency charged with acting independently in the EU interest, but it operates through its NCA-dominated Board of Supervisors. The ESMA/NCA relationship is multi-faceted and can be difficult to unravel, but it shapes how and the extent to which ESMA can exert influence. In this ESMA/NCA network setting, ESMA can variously be characterised as a hierarchically superior supervisor (directing NCAs how to act in exceptional conditions, producing opinions on specified NCA action, and overriding NCA action); a monitor (engaging in peer review and overseeing the operation of colleges of supervisors); a resource (managing on behalf of NCAs the extensive data collection and management required of them under sectoral EU financial market legislation); a peer supervisor (supervising those segments over which it has been given direct supervisory powers); and a facilitator of mutual learning (through the adoption of the vast swathe of soft law designed to shape and steer NCA supervision). These different characterisations all presuppose some degree of ESMA hierarchy over NCAs, or at least of peer authority. ESMA nonetheless acts through NCAs via the NCA-dominated Board of Supervisors and is dependent on NCAs in taking action. Collective resistance by NCAs would materially limit ESMA’s ability to act and individual NCAs cannot easily be made subject to ESMA’s will, given the predominantly soft nature of ESMA’s powers and the many constraints that apply to exercise of its binding powers. ESMA’s influence on EU financial market governance has accordingly been shaped by how it manages this delicate ESMA/NCA network. Second, analysis of ESMA must be placed within the ESFS network setting. ESMA’s ability to exert influence is in part a function of how it navigates the ESFS institutional environment, protects its mandate territory, and exploits the opportunities this fractured territory affords it to strengthen its regulatory capacity to exert influence.65 Finally, ESMA sits within the wider international financial governance setting. International financial governance is usually characterised as the system that develops standards for the global financial system, supports market access, and facilitates supervisory and regulatory coordination, primarily through the measures adopted by the international standard-setting bodies (ISSBs) – notably the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (Basel Committee), the International Organization of Securities Commissions (IOSCO), and the International

65 On the notion of regulatory capacity, which is directed to the ability of a regulator to achieve outcomes, see further section III.B.iv.

16 Introducing ESMA Financial Reporting Standards (IFRS) Foundation. Situating ESMA within international financial governance, and specifically within international financial market governance, is productive for analysis of ESMA’s influence for two reasons. First, there are some resonances between ESMA and the ISSBs of international financial market governance. ESMA, like the ISSBs, can be regarded as an epistemic community of expert regulators, exerting technocratic influence. Also like the ISSBs, it deploys primarily soft powers and operates in a multi-level environment that has domestic political, intergovernmental, and supranational/transnational dimensions. Useful points of connection can accordingly be drawn between ESMA and the ISSBs in examining ESMA’s influence. There are, however, limits to this analysis. European Union financial market governance is the most advanced system globally for managing cross-border financial market access and related risks,66 and ESMA’s powers and ability to exert influence must be situated in this distinct context. The ISSBs must, for example, grapple with the ‘escape’ problems associated with international financial market governance and which flow from its soft-law foundations; by sharp contrast, EU financial market governance and ESMA’s mandates are supported by the behemoth and binding ‘single rule-book’. Further, the supervisory coordination that is central to ESMA’s role is much less evident in international financial market governance. There are few incentives to concede national supervisory control internationally given the complexities and costs associated with the allocation or sharing of related fiscal risk, and supervisory coordination mechanisms remain limited, even if they are developing through the ISSBs; the resulting system has been described as characterised by ‘mutual adaptation’ and ‘co-operative de-centralization’.67 ESMA’s EU operating environment is materially different, being shaped by the multiple and binding supervisory coordination requirements imposed on NCAs. There is, however, a second dimension to ESMA’s relationship with international financial market governance that calls for analysis. ESMA is charged with an international mandate that covers engagement with the ISSBs and the management of non-EU/’third country’ actors’ access to the EU financial market. As discussed in chapter 6, this mandate to act within the international financial market governance network has afforded ESMA significant potential to exert influence, potential which is expanding with Brexit and the prospect of the UK as a third country as regards EU financial market governance.

F. ESMA as a ‘State of the Art’ Actor in EU Financial Market Governance Finally, while not a layer of characterisation as such, ESMA’s influence can productively be examined through the innovation lens. Financial market governance can reasonably be accused of making innovation something of a fetish. Repeated cycles of financial 66 See E Ferran, ‘Financial Supervision’ in D Mügge (ed), Europe and the Governance of Global Finance (Oxford University Press, Oxford, 2014) 16; and Riles, n 9, both noting how international financial governance has borrowed coordination devices developed by the EU. 67 E Helleiner and S Pagliari, ‘The End of an Era in International Financial Regulation? A Postcrisis Research Agenda’ (2011) 65 International Organization 169.

Characterising ESMA: ESMA’s Setting and its Role 17 market crisis and regulatory failure have fuelled a sometimes feverish search for new ways of setting financial market policy goals, doing financial market regulation, and using supervisory tools.68 The search for innovation has two, related dimensions: the quest for better, newer ways of addressing old problems; and the hunt for optimal tools to identify and respond to market-led innovation. As regards the former, the financial crisis-era calibration of the ‘new governance’ tools, which previously shaped much of regulatory intervention internationally, and which recast these tools to give them a more ‘command and control’, risk-driven quality, exemplifies the ongoing search for new ways of addressing longstanding if newly clothed problems.69 Similarly, consumer financial protection policy has become something of a policy lab for new approaches as financial market regulators grapple with the multiplicity of difficulties that have long beset the delivery of consumer financial protection mandates.70 As regards the latter, the rise of digitisation and how it can best be responded to by financial market regulators, whether by deploying old tools or new approaches, is currently shaping the innovation debate.71 The dangers of groupthink and distraction attend the relentless search for innovation, as does the risk of wasteful experimentation. Nonetheless, there is merit in the search. It is difficult to protect the public interest in stable financial markets. Financial market regulators must, to identify only a few of the more material difficulties, police a regulatory perimeter that is vulnerable to arbitrage and obsolescence; act at a distance in space and time from the regulated community; battle with informational asymmetries; manage an ever-shifting risk landscape; and grapple with the complexity, uncertainty, and contingency associated with financial market evolution.72 The crisis-era preoccupation with managing innovation left an organisational legacy to ESMA in the form of a specific requirement for a dedicated internal committee on financial innovation.73 But a concern to monitor and address market innovation and also to adopt new approaches to delivering its mandates also infuses ESMA’s activities more generally. ESMA is not a traditional financial market regulator and is not fully exposed to the challenges raised by the search for innovation. Nonetheless, it must grapple with these challenges to a significant extent. Further, ESMA must achieve its mandates in a complex setting in which it must manage cross-border risks and navigate significant institutional complexities, notably the need to act through NCAs; this can require nimble innovation. The extent to which ESMA deploys innovative approaches is accordingly also relevant to analysis of its influence.

68 For an account of how the UK Financial Conduct Authority (FCA) has experimented with different styles of regulation, see J Black, ‘Regulatory Styles and Supervisory Strategies’ in Moloney et al (eds), n 49, 217. 69 On how ‘new governance’ changed thinking on how financial regulators should operate, see C Ford, ‘New Governance in the Teeth of Human Frailty: Lessons from Financial Regulation’ (2010) Wisconsin Law Review 101, characterising the new governance financial regulator as serving variously as clearing house, catalyst, monitor, prod, and coordinator, and exposing the weaknesses in this approach. 70 eg, the UK FCA has experimented with repeated iterations of its consumer financial protection policy, which has become more precautionary and interventionist over time (recently, FCA, Our Mission 2017. How We Regulate Financial Services (2017)). 71 See, eg, P Paech, ‘The Governance of Blockchain Financial Networks’ (2017) 80 Modern Law Review 1073. 72 Capturing the range of difficulties the regulation of, eg, hedge funds raises, see A Johnstone, ‘Regulating Hedge Funds for Systemic Stability: the EU’s approach’ (2015) 21 European Law Journal 758. 73 Now the ESMA Standing Committee on Financial Innovation.

18 Introducing ESMA

G. Searching for ESMA and the 2017/2018 Reform Waypoint ESMA has therefore different characterisations. It is organised as an EU agency and responds to single market administrative needs, albeit that these needs reflect the specific features of the single EU financial market, and poses similar challenges to those presented by EU agencies. It is at the same time a hybrid form of financial market regulator and so exercises some, at least, of the distinct technocratic functions carried out by financial market regulators, and poses some of the challenges presented by these non-majoritarian actors, if in a distinct EU-level/ESFS setting. Resonances between ESMA and the ISSBs of international financial governance can also be identified. Its myriad related tasks lend themselves to multiple descriptions of ESMA as, variously, soft rule-maker, coach and support to NCAs, data-hub, hierarchical supervisor/overseer of NCAs, and direct supervisor of certain regulated actors. All these different characterisations have shaped how ESMA exerts influence and the implications. But however ESMA is characterised, its role is hardening as ESMA extends its reach over EU financial markets. The 2017/2018 reform ‘waypoint’ may lead to a further hardening of ESMA’s role. Over Summer/Autumn 2017, two proposals for ESMA reform were adopted by the Commission. The first relates to the distinct supervisory challenges posed by CCPs, financial market infrastructures of cross-border reach and acute systemic importance to the EU financial system. Earlier, the 2016 CCP Recovery and Resolution Proposal had proposed new coordination-based empowerments for ESMA in the highly sensitive area of CCP recovery and resolution.74 The more far-reaching 2017 CCP Supervision Proposal75 proposes that ESMA be conferred with significantly stronger supervisory coordination powers (close to but short of direct supervision) over CCPs, by means of a new ‘European Supervisory Network’ through which ESMA could, in effect, direct and exercise veto powers over NCA supervision of CCPs. It also proposes the conferral on ESMA of direct powers to supervise third country CCPs. The second suite of reforms is contained in the Commission’s 2017 ESA Proposal.76 The ESMA-related reforms touch (sometimes very lightly) on most aspects of its governance, mandates, and powers, but the major reforms fall into three areas: governance; supervisory convergence; and direct supervision. The governance reforms would dilute the powers of ESMA’s d ecision-making Board of Supervisors by locating in a new Executive Board (composed of officials appointed by the Parliament and Council) a series of powers currently exercised by the Board of Supervisors and regarded as vulnerable to conflict of interests (notably ESMA’s powers to proceed against or impose decisions on NCAs). The reforms also address ESMA’s funding model, proposing that most of its funding be based on industry contributions (rather than on the current EU/Member State mix). The supervisory convergence reforms are mainly directed to tightening ESMA’s current powers, including by means of a Brexit-related ESMA oversight power over NCA decisions whether to authorise actors who rely on delegation channels back to their home state to carry out

74 See

n 43.

76 See

n 4. The different elements of the Proposal are discussed across the book.

75 ibid.

Contextualising ESMA 19 their EU business. Finally, new direct supervision powers are proposed for ESMA. Chief among these are the proposed empowerments for ESMA to authorise and supervise certain EU prospectuses and all third country prospectuses; three EU funds (the EUVECA, the EUSEF, and the ELTIF); MiFIR data services providers; and certain benchmark administrators under the Benchmark Regulation. The year 2018 saw the reform trajectory continue in this direction, with the 2018 Crowdfunding Proposal suggesting additional direct empowerments for ESMA in relation to crowdfunding service providers. The fate of these proposals and the final form in which they will (if at all) be adopted by the co-legislators can only be guessed. But if ESMA slides as a result into centralisation and away from coordination, its power and ability to exert influence may increase but its effectiveness and legitimacy may be compromised. The very proposal of the reforms, however, underlines the dynamism associated with ESMA’s evolution. How ESMA has evolved and the factors that have shaped its evolution are considered in the following section.

III. Contextualising ESMA A. ESMA’s Evolution: Incremental and Sustainable Change This book argues that ESMA has come to occupy a central position in EU financial market governance, exerting influence through multiple channels and accelerating the agencification of EU financial market governance signalled by its 2011 establishment. This central role in EU financial market governance has not been achieved by radical, resetting change. One of the themes that recurs in the evolution of ESMA and how it exerts influence on EU financial market governance is incrementalism – a feature associated with the development of EU financial governance generally.77 ESMA’s powers are dictated by the EU legislative process, and so are a function of compromise across different and sometimes competing preferences (examined further ahead). ESMA’s powers have accordingly been conferred in an incremental manner and as the legislative process has ‘learned by doing.’ The caution with which the legislative process has approached empowerments to ESMA has, however, meant that ESMA has developed in a broadly sustainable manner which is conducive to ESMA strengthening its ability to exert influence. It has also allowed ESMA to develop how it deploys its powers in practice in a similarly incremental and experimental manner, without attracting material stakeholder resistance. A brief functional account of ESMA’s evolution exposes the extent to which its development has been incremental. While ESMA is increasingly becoming associated with supervision, its ‘creation story’ is nested within the EU’s long attempts to establish a process for administrative rule-making. The initial, very faint traces of financial market 77 See G Glöckler, J Lindner, and M Salines, ‘Explaining the Sudden Creation of a Banking Supervisor for the Euro Area’ (2017) 24 Journal of European Public Policy 1135, noting the ‘incrementalist slant’ of the literature on EU financial governance change.

20 Introducing ESMA agencification can be traced to the late 1970s/early 1980s and the first, embryonic set of harmonising financial market measures, which covered, in a partial and limited manner, fund-raising matters such as the listing of securities and the disclosure required on offers to the public. But these measures also saw the EU take its first steps towards institutional governance reform with their related ‘Contact Committees’, composed of national technical experts/regulators and charged with advising the Commission on legislative reform and with facilitating Member State coordination. Subsequently, as the EU’s comitology-based administrative rule-making process developed,78 efforts were made to strengthen these informal Contact Committees so that they would play a role in the comitology process and oversee the Commission’s adoption of financial market administrative rules. The very difficult and lengthy Parliament/Council negotiations on the comitology process, however, meant that these financial market-specific reforms foundered.79 The first serious attempt at institutional reform was driven by technocratic national preferences. In 1997, as pressure began to mount for deeper financial market integration and for related reforms to financial market regulatory governance, FESCO, an informal forum for cooperation between the EU’s financial regulators, was established by the regulatory community. FESCO was designed to address the difficulties posed by what had come to be regarded as a sclerotic legislative process by adopting soft common standards that national regulators would adopt domestically. FESCO’s greater significance, however, lies in the template it provided for the first institutional reform in this area, which would follow finally in 2001 – the establishment of the Committee of European Securities Regulators (CESR) under the Lamfalussy process.80 By then, the weaknesses in the EU’s legislative and administrative rule-making process had been identified as a significant impediment to the development of the EU financial market and to the achievement of the ambitious liberalising reform agenda set out in the 1999 FSAP. The FSAP was accordingly accompanied by the Lamfalussy institutional reform proposals, which recommended that a specialist administrative rule-making process be established for the financial market sector, based on the then comitology process.81 The Lamfalussy process, still followed today albeit that it has been refined, segmented financial market governance into level 1 legislative measures adopted by the political inter-institutional process; level 2 administrative rule-making adopted by the Commission; level 3 soft measures adopted by CESR, designed to support coordination between NCAs; and level 4 enforcement action by the Commission. The primary concern of CESR was with regulatory governance, being charged with advising the Commission on

78 The comitology process was initially based on the Commission’s adopting administrative rules, overseen by committees of national representatives with different levels of oversight power, and on the Council’s ultimately controlling the process, a source of deep contention with the European Parliament. See further Craig, n 48, 400–02 and 522–31. 79 The attempt to set up an oversight comitology committee under the 1993 Investment Services Directive (the ancestor of MiFID II/MiFIR) collapsed despite repeated attempts to revise the Directive to provide for administrative rule-making. See N Moloney, EU Securities and Financial Markets Regulation, 3rd edn (Oxford University Press, Oxford, 2014) 861–62. 80 CESR was constituted as an independent advisory body for ‘reﬂection, debate and advice’: Commission Decision 2001/527/EC (Official Journal references are only provided for legislative measures in this book). 81 Final Report of the Committee of Wise Men on the Regulation of European Securities Markets (2001).

Contextualising ESMA 21 administrative rules, although it was also empowered to adopt soft measures, including measures to support supervisory convergence. Over its 10 years or so of activity, CESR came to deploy its soft powers to some effect, developing a raft of soft law and advising the Commission on administrative rules, but also taking EU financial market governance into the then relatively uncharted territory of supervisory convergence and supervisory coordination. It remained a soft-law body, with no binding powers.82 In the immediate run-up to the financial crisis there was some political and institutional support for a strengthening of CESR’s soft powers, but little support for radical change.83 The 2007–08 financial crisis was the proximate cause of the transformation of CESR into ESMA. But despite the acute market conditions, incrementalism continued to characterise the process of EU financial market institutional governance reform. As has been extensively documented,84 the financial crisis exposed not only the significant weaknesses in the EU’s rule-book for financial markets, but also the inability of EU supervisory governance, which was based on national supervision, to deliver effective supervisory coordination and to manage crisis conditions.85 ESMA, a key element of the EU’s reform prescription for these weaknesses, certainly represented at the time a material strengthening of CESR. It was constituted as an independent EU agency and its powers were more extensive than those of CESR. As regards supervisory governance, under the ESMA Regulation, Articles 17–19, ESMA was conferred with a suite of binding powers to impose decisions on NCAs and on market participants in identified, exceptional circumstances. Further, Article 9(5) of the ESMA Regulation contained an enabling power for the conferral on ESMA of additional, exceptional market intervention powers where subsequently provided for in EU legislation (and some such powers have followed). Nonetheless, the binding powers conferred on ESMA were (and remain) limited and exceptional. ESMA’s primary means for influencing supervision was its extensive but soft supervisory convergence tool-kit, which was stronger than but not dissimilar to CESR’s. Similarly, while ESMA’s powers in relation to regulatory governance were more extensive than those of CESR, they represented an incremental strengthening of CESR’s role in regulatory governance. By 2009, when the ESMA negotiations were underway, the Lisbon Treaty had provided a Treaty settlement

82 On the CESR era, see Moloney, n 79, 862–80 and 951–58; G Ferrarini, ‘Contract Standards and the Markets in Financial Instruments Directive. An Assessment of the Lamfalussy Regulatory Architecture’ (2005) 1 European Review of Contract Law 19; and Ferran, n 7, 61–126. 83 As was clear from the Commission’s pre-crisis 2007 Lamfalussy Review. The review culminated in the December 2007 ECOFIN Conclusions, which confirmed political support for CESR’s (and the other sectoral Lamfalussy committees for banking and insurance/pensions) remaining a soft-law body: ECOFIN Council Conclusions, 4 December 2007 (Council Document 15698/07). 84 For a legal/institutional perspective, see E Ferran, ‘Crisis-driven Regulatory Reform: Where in the World is the EU Going?’ in E Ferran, N Moloney, J Hill, and JC Coffee, The Regulatory Aftermath of the Global Financial Crisis (Cambridge University Press, Cambridge, 2011) 1; and N Moloney, ‘EU Financial Market Regulation after the Global Financial Crisis: “More Europe” or More Risks?’ (2010) 47 Common Market Law Review 1317. And for a political economy perspective, see D Ioannou, B Leblond, and A Niemann, ‘European Integration and the Crisis: Practice and Theory’ (2015) 22 Journal of European Public Policy 155; and D Howarth and L Quaglia, ‘Banking Union as Holy Grail: Rebuilding the Single Market in Financial Services, Stabilizing Europe’s Banks and “Completing” Economic and Monetary Union’ (2013) 51 Journal of Common Market Studies 103. 85 As set out in the EU’s major diagnostic report on the financial crisis: the High Level Group on Financial Supervision in the EU, Report (2009).

22 Introducing ESMA to the long-running battle between the European Parliament and Council on the nature of, and control over, administrative rule-making.86 The Lisbon Treaty classified EU law-making as engaging ‘legislative’ rules (Article 289 TFEU, adopted by the co-legislators and equivalent to the level 1 stage of the Lamfalussy process) and ‘delegated’ and ‘implementing’ administrative rules (Articles 290 and 291 TFEU, adopted primarily by the Commission and equivalent to level 2 of the Lamfalussy process). ESMA was accordingly charged with advising the Commission on delegated administrative rules in accordance with Article 290; with proposing ‘Regulatory Technical Standards’ (a new and specialist form of Article 290 delegated rule for the financial sector) for Commission adoption under Article 290; with advising the Commission on implementing rules under Article 291; and with proposing ‘Implementing Technical Standards’ (a similarly new form of Article 291 implementing rule) for Commission adoption under Article 291. But while ESMA’s role in the administrative rule-making process was accordingly significantly more proceduralised and extensive than CESR’s, it, like CESR, remained primarily an advisory actor in this regard. Notwithstanding the acute and chaotic market conditions that attended its establishment, ESMA was not accordingly constructed from a blank sheet of paper. It emerged from a long sequence of institutional designs and reforms. The facilitation by the Lisbon Treaty of administrative rule-making, the EU’s by then well-established and maturing agency infrastructure,87 the availability of the CESR model as an ‘off-the-shelf ’ institutional vehicle, and broad political and institutional confidence in administrative governance in the financial market sphere (expressed over the pre-crisis 2007 Lamfalussy Review), all meant that tested institutional templates were available when the crisis led to political and institutional preferences moving in support of stronger administrative governance and away from the informal CESR model. Since then, incrementalism has continued to define ESMA’s evolution. As discussed in subsequent chapters, ESMA’s powers have been gradually expanding since 2011, although ESMA’s core powers under its founding Regulation had not, prior to the 2017/2018 reform waypoint, been revised or the subject of major reform proposals. The expansion of ESMA’s powers has been achieved through the sector-specific, legislative amplification of ESMA’s original ESMA Regulation powers. This strengthening has been across all three of ESMA’s main areas of activity: direct supervision; regulatory governance; and supervisory convergence. The first major expansion related to direct supervision and came in 2011, when ESMA was conferred with direct and exclusive supervisory powers over credit rating agencies under the Consolidated Credit Rating Agency Regulation. These powers were followed by direct supervisory powers for ESMA over trade repositories in 2012 under EMIR, and by a series of more limited, sector-specific direct intervention powers for ESMA in relation to short

86 See, eg, J Mendes, ‘Delegated and implementing rulemaking: proceduralisation and constitutional design’ (2013) 19 European Law Journal 22. 87 By the time the ESMA was under construction over 2009–10, agency governance in the EU was burgeoning, with the Commission earlier adopting a major communication on the future for and reform of agencies: Commission, European Agencies – the Way Forward (COM (2008) 135). See, for a contemporaneous review, Chiti, n 64.

Contextualising ESMA 23 s elling (2012 Short Selling Regulation), services/product intervention (2014 Markets in Financial Instruments Regulation (MiFIR)) and intervention in the commodity derivatives markets (2014 MiFIR). The more material if less eye-catching enhancements have related to regulatory governance and supervisory convergence. Since 2011, ESMA has been given a vast array of mandates to support the Commission’s adoption of administrative rules under all the major crisis-era legislative measures. Together, these mandates have led to ESMA’s becoming a decisive influence on the behemoth administrative r ule-book now contained within the EU’s single rule-book. All these legislative measures have also amplified ESMA’s supervisory convergence powers, typically empowering ESMA in different financial market sectors to support NCA coordination; engage in mediation and peer review; gather and host different market disclosures; develop and host databases and IT infrastructures of various type; and support international coordination and information exchange. This incremental strengthening of ESMA by means of sectoral amplification of ESMA’s core powers reflects the cautious approach taken by the major reviews of ESMA. The Commission’s initial 2013–14 ESA Review was careful in tone, reporting on generally good progress but not making major proposals for reform.88 The IMF’s 2013 review was similar. It called for calibrations here and there but was broadly supportive of the status quo.89 More sector-specific reviews, notably the 2015 review of ESMA’s supervision of rating agencies, have likewise been supportive while identifying areas of weaknesses.90 Similarly, ESMA has made internal operational refinements, notably to how it delivers its supervisory convergence mandate, but its governance arrangements still follow the template established in 2011 and based on decision-making by ESMA’s Board of Supervisors. Incrementalism is also a characteristic of how ESMA has deployed and developed its powers. ESMA’s first five years or so were dominated by organisational capacity building, its different mandates to support the administrative rule-making process, and the need to establish itself as a credible supervisor of credit rating agencies and trade repositories. Since 2016, a marked if still incremental shift in ESMA’s ambitions can be observed, notably in relation to its supervisory convergence activities, which have burgeoned since the 2015 adoption of ESMA’s 2016–20 Strategic Orientation.91 ESMA asserted in the Strategic Orientation that its ‘start-up’ phase was over, and signalled that it was entering a new phase of development, characterised by a shift away from supporting rule-making and towards supporting convergence of NCAs’ supervisory practices. Since the adoption of the Strategic Orientation ESMA has, variously and over time, and through learning by experience, strengthened its ability to gather and interrogate data, built new data infrastructures, more assertively shaped NCA supervisory decision-making through soft law, built and monitored stronger cooperation structures 88 Commission, Report on the Operation of the European Supervisory Authorities and the European System of Financial Supervision (COM (2014) 509) and related Staff Working Document (SWD (2014) 261). 89 IMF, Financial Sector Assessment Program, European Union. European Securities and Markets Authority. Technical Note. IMF Country Report No 13/69 (2013). 90 European Court of Auditors, EU Supervision of Credit Rating Agencies – Well Established but not yet Fully Effective, No 22 (2015). 91 ESMA’s 2018 report on its supervisory convergence activities underlines the growing scale and ambition of its activities: ESMA, Supervisory Convergence. Work Programme 2018 (ESMA42-114-540) (2018).

24 Introducing ESMA (including colleges of supervisors), and more intrusively monitored and queried NCA decision-making (including through the adoption of opinions, peer review, and stress testing). As noted at the outset of this chapter, this trajectory has been sustained, with ESMA’s activities over 2017–18 evidencing a degree of influence over NCA and market behaviour difficult to predict in 2011.

B. Explaining ESMA’s Evolution: Political, Institutional, and Technocratic Forces i. Multiple Driving Factors Behind this account of ESMA’s incremental development lie the different forces that have shaped how it has evolved and its ability to exert influence. Regulatory theory and related public policy scholarship teaches that institutional change, such as the establishment of ESMA, is a distinct form of ‘second order’ governance change that is more invasive and influential than ‘first-order’ technical changes to rules but capable of being pursued in the absence of the usually disruptive conditions which drive more far-reaching ‘third-order’ changes to the normative basis for intervention (such as the policy goals or the public interest pursued).92 A multi-faceted literature on fi nancial governance/agency change can usefully be probed to identify the different forces that have shaped ESMA, a form of second-order institutional change. This literature uses different tools and approaches, but certain forces, chief among them political and institutional preferences, functional/market imperatives and conditions, and preexisting governance settings (including the incidence of agencies and the nature of their powers), recur, as does emphasis of the interplay of these forces. The literature on financial governance change generally, for example, suggests that political preferences, market conditions that drive functional and related political imperatives, and the extent to which influential actors are resourced, informed, and have the technical and institutional capacity to respond,93 all shape how change operates in the financial governance sphere.94 Similar forces can be identified in analyses of the EU setting. The literature on EU agency development supports three major accounts of agency development which identify similar driving forces95 – political preferences,

92 J Black, ‘What is Regulatory Innovation’ in J Black, M Lodge, and M Thatcher (eds), Regulatory Innovation. A Comparative Analysis (Elgar, Chelthenham, 2005) 1. For a similar public policy perspective on change, see P Hall, ‘Policy Paradigms, Social Learning and the State: The Case of Economic Policy-making in Britain’ (1993) 25 Comparative Politics 275. 93 Including the extent to which a state has significant ‘regulatory capacity’, or the ability to achieve outcomes through the adoption, monitoring, and enforcing of rules (D Bach and A Newman, ‘The European Regulatory State and Global Public Policy: Micro-institutions, Macro-influence’ (2007) 14 Journal of European Public Policy 827). The notion of ‘regulatory capacity’ is a multi-faceted one and can also be used productively to examine agency operation, as noted further in section IV. 94 For a literature review, see M Moschella and E Tsingou, ‘Regulating Finance After the Crisis: Unveiling the Different Dynamics of the Regulatory Process’ (2013) 7 Regulation & Governance 407. 95 For recent accounts, see M Egeberg and J Trondal, ‘Researching EU Agencies: what have we learned and where do we go to from here? (2017) 55 Journal of Common Market Studies 675; Spendzharova, n 13; M Egeberg, J Trondal, and N Vestlund, ‘The quest for order: unravelling the relationship between the

Contextualising ESMA 25 supranational/functional preferences, and the influence of pre-existing agencies.96 Agency development has been related to inter-governmentalism and to Member States’ political interests in making credible commitments to taking collective action; this analysis connects the development of agency power to notional delegations from the Member States.97 Agency development has also been associated with supranationalism and with the Commission’s functional interest in developing an EU administrative capacity that can support integration objectives and thereby relieve resource and political pressure on the Commission; here, agency development can be seen in terms of delegations (of sorts98) from the Commission.99 Finally, agency development can be associated with the influence exerted by EU and national agencies. The agency templates already available can generate a policy diffusion dynamic, shaping the institutional space on which political and supranational preferences act.100 The distinct transnational/technocratic preferences EU agencies can create once established can also act as a driving force.101 Similarly, the multi-principal delegation model associated with delegation to EU agencies102 accommodates national regulators as notional delegators of power to EU agencies and as forces shaping them.103 Lastly, the cognate political economy literature on EU financial governance policy change identifies similar forces. It examines how political preferences, supranational/institutional preferences, and market conditions/ forms of economic organisation can all combine to shape how and the pace at which financial governance change in the EU develops.104 ESMA sits at the intersection of these different bodies of scholarship as an expression of financial governance change, a new and advanced form of EU agency, and an expression of EU financial governance policy change,105 and the different forces identified in this composite literature as shaping change can also be identified as uropean Commission and European Union agencies’ (2015) 22 Journal of European Public Policy 609; and E Craig, n 48, 401–04. 96 The multi-faceted literature on agency development can be sliced in different ways. Other accounts highlight similar but differently organised factors, including structural factors that drive demand for independent agencies as a means for showing credible policy commitment to liberalisation agendas and effective regulatory governance; functional demand for an EU administrative capacity given limited Commission resources and expertise; and inter-institutional politicking. See B Rittberger and A Wonka, ‘Introduction: agency governance in the European Union’ (2011) 18 Journal of European Public Policy 780. 97 eg R Dehousse, ‘Delegation of powers in the European Union: the need for a multi-principal model’ (2008) 31 West European Politics 789; RD Kelemen, ‘The Politics of “Eurocratic” Structure and the new European Agencies’ (2002) 25 West European Politics 93; and M Shapiro, ‘The Problem of Independent A gencies in the United States and the European Union’ (1997) 4 Journal of European Public Policy 276. 98 On the difficulties in drawing a delegation line from the Commission to EU agencies see ch 2. 99 eg Majone, n 57. 100 M Thatcher, ‘The creation of European regulatory agencies and its limits: a comparative analysis of European delegation’ (2011) 18 Journal of European Public Policy 790; and M Thatcher and D Coen, ‘Reshaping European regulatory space: an evolutionary analysis’ (2008) 31 West European Politics 806. 101 Egeberg and Trondal, ‘Researching EU Agencies’, n 95. 102 D Curtin, ‘Delegation to EU Non-Majoritarian Agencies and Emerging Practices of Public Accountability’ in D Geradin and N Petit (eds), Regulation through Agencies in the EU. A New Paradigm of European Governance? (Elgar, Cheltenham, 2005) 88. 103 M Buess, ‘European Union agencies and their management boards: an assessment of accountability and demoi-cratic legitimacy’ (2015) 22 Journal of European Public Policy 94. 104 See, eg, Quaglia et al, n 14; and I Begg, ‘Regulation and supervision of financial intermediaries in the EU: the aftermath of the financial crisis’ (2009) 47 Journal of Common Market Studies 1107. 105 Few accounts focus on ESMA, however. For an exception see Spendzharova, n 13; and I Bajakić and M Božina Beroš, ‘Examining Agency Governance in the European Union Financial Sector. A Case Study of ESMA’ (2017) 30 Economic Research 1743.

26 Introducing ESMA shaping ESMA’s development. As discussed across this book, political preferences, supranational preferences, and governance settings/technocratic preferences, which respond to market conditions and functional imperatives, can all be identified in the cocktail of factors that have shaped ESMA and how it operates. These forces can also be related to the incrementalism and marginal policy adjustment that can be associated with financial governance/agency change in the EU generally and specifically with ESMA’s evolution. The range of different preferences at stake, the related potential for contestation and necessity for compromise, and the associated EU tendency to rely on prior experience of and experiments with financial governance reform,106 can all be linked to ESMA’s incremental development. A short outline of the major forces that can be identified as shaping ESMA and its ability to exert influence follows.

ii. Political Preferences National political preferences, expressed primarily in the Council but also influential in the European Parliament, have long been the dominant influence on EU financial market governance. These preferences are shaped by an array of factors, but prominent among these are the Member States’ different institutional economic foundations,107 traditionally classified in terms of the Liberal Market Economy (LME), very broadly associated with market organisation/capital market-based financial systems and more limited regulatory intervention; and the Coordinated Market Economy (CME), very broadly associated with strategic coordination/bank-based financial systems and heavier levels of intervention.108 As the EU financial system and Member States’ financial systems have evolved,109 Member States’ preferences have been classified as those of the more liberally-oriented ‘market-making’ Member States and those of the more interventionist ‘market-shaping’ Member States.110 The Council ‘market-making’ coalition, usually composed of Member States with stronger capital markets and a significant international presence in their markets, including the Nordic Member States, the N etherlands, and the UK, has typically advocated for a style of EU financial market governance that is facilitative and promotes market access and liberalisation; is supportive of transparency and disclosure techniques over behavioural regulation and open to market substitutes for intervention; and which tolerates a degree of national discretion. It has traditionally been

106 See recently Glöckler et al, n 77; and C Burns, J Clifton, and L Quaglia, ‘Explaining Policy Change in the EU: financial reform after the crisis’ (2018) 25 Journal of European Public Policy 728. 107 J Story and L Walter, The Political Economy of Financial Integration in Europe. The Battle of the Systems (MIT Press, Cambridge, 1997). 108 P Hall and D Soskice (eds), Varieties of Capitalism. The Institutional Foundations of Comparative Advantage (Oxford University Press, Oxford, 2001). 109 For a literature review on the evolution of the related ‘comparative capitalisms’ strand of political economy, see G Jackson and R Deeg, ‘The Long-Term Trajectories of Institutional Change in European C apitalism’ (2012) 19 Journal of European Public Policy 1109. 110 eg, S James and L Quaglia, ‘Why does the United Kingdom (UK) have inconsistent preferences on financial regulation? The case of banking and capital markets’ (2018) Journal of Public Policy, available at https://doi.org/10.1017/S0143814X17000253; Burns et al, n 106; L Quaglia, ‘The “Old” and “New” Politics of Financial Services Regulation in the EU’ (2012) 17 New Political Economy 515; and L Quaglia, ‘Completing the single market in financial services: the politics of competing advocacy coalitions’ (2010) 17 Journal of European Public Policy 1007.

Contextualising ESMA 27 wary of the centralisation of financial market governance through institutional reform and tends to support local supervisory autonomy. The market-shaping coalition by contrast, often associated with France, Spain, and Italy, typically takes a more interventionist posture, displays a more prominent regulatory bias, and is more supportive of institutional centralisation. Multiple forms of coalition can, however, be identified, depending on the particular issue at stake and related Member State preferences. The establishment of ESMA’s immediate precursor, CESR, was not attended by major political contestation, reflecting its soft status as well as market conditions that were favourable for reform. The strong growth in the EU financial market over the late 1990s/early 2000s accommodated political support for a more ambitious approach to the liberalisation and integration of financial markets through governance reform, albeit primarily harmonisation-based reform.111 Over the 2009–10 crisis-era ESMA negotiations, while the market-shaping coalition was to the fore (as it was over the crisis-era reforms generally112), there was broad political consensus on the need for stronger supervisory coordination, reflecting Member States’ need to signal credible commitment to securing financial stability as markets roiled. Political preferences were not, however, fully aligned. As outlined in subsequent chapters, the Council negotiations struggled most on whether ESMA should be accorded direct supervisory powers, given the prospect that would follow of the Member States’ either carrying the fiscal risk of ESMA supervisory action or, alternatively, engaging in some form of related EU-level risk mutualisation – both of which outcomes would have represented a major change to EU financial market governance at the time. Sharp tensions were exposed between those Member States prepared to limit, to some degree, national supervisory autonomy and those concerned to retain national supervisory discretion and fiscal control.113 By contrast, ESMA’s proposed regulatory governance and supervisory convergence powers (both of which were familiar to the Council from the CESR era and from administrative rule-making procedures generally) were not heavily contested. Since then, and as discussed in later chapters, subsequent expansions of ESMA’s powers have only rarely been the subject of material Council contestation, although contestation has been sharp as regards ESMA’s supervision and exceptional intervention powers, and the Council remains wary, overall, of supervisory empowerments for ESMA.

iii. Supranational/Institutional Preferences Supranational/institutional preferences have operated in tandem with political preferences in shaping ESMA’s development. These have primarily taken the form of the Commission’s preference for deeper integration and its related support of more intense harmonisation and administrative governance as means for supporting integration. Over the financial crisis, this led to the Commission’s supporting the ESMA/ESA

111 Nonetheless, particular negotiations were often difficult. See Quaglia, ‘Completing the single market in financial services’, n 110. 112 Ferran, n 84. 113 See Moloney, n 79, 960–64; and A Spendzharova, ‘Is More “Brussels” the Solution? New European Union Member States’ Preferences about the European Financial Architecture’ (2012) 50 Journal of Common Market Studies 315.

28 Introducing ESMA reforms as well as an intensification of the EU’s role in financial market governance.114 Subsequently, the Commission might have been expected to have become a standard bearer for a further strengthening of ESMA.115 In practice its position has been more nuanced. This may reflect a sensitivity to the dominance of Member States’ preferences and their tendency to incrementalism.116 The Commission also, however, has incentives to protect its executive pre-eminence against ESMA encroachment; it has been concerned to keep ESMA under its control and highly sensitive to any reforms that might breach the Meroni ruling’s restrictions on the powers which can be granted to EU agencies. At the same time, the Commission has used ESMA as an institutional vehicle to drive financial market integration, most notably under its CMU agenda. The European Parliament has come to take a keen interest in ESMA’s development. But while it was an early supporter of ESMA over the 2009–10 negotiations and called for ESMA to be given significantly greater supervisory power than was finally conferred on it, the Parliament’s position has not been consistently favourable to ESMA, reflecting in part the Parliament’s growing concern to monitor EU agencies.117 While the Parliament typically supports the strengthening of ESMA’s direct supervision and supervisory convergence powers, it is usually careful to protect its prerogatives over administrative rule-making and has been wary of ESMA’s extensive use of its soft-law powers. There is less evidence on how the other major supranational/institutional actor, the ECB, has shaped ESMA’s development. Certainly, the ECB, following the Banking Union reforms, has emerged as a distinct supranational influence on the shape of EU financial governance generally.118 There is also evidence that the ECB supports the construction of a single capital market supervisor, which it regards as a means for strengthening financial stability and for supporting the completion of Economic and Monetary Union (EMU).119 It is not, however, clear that the ECB supports a related strengthening of ESMA. While it has been broadly supportive of extensions to ESMA’s powers, the ECB/ ESMA relationship has at times been fractious, as ESMA has protected its financial market territory from ECB encroachment and the ECB has sought greater oversight over financial markets.

114 eg, M Bauer and S Becker, ‘The unexpected winner of the crisis: the European Commission’s strengthened role in economic governance’ (2014) 36 Journal of European Integration 213; and Moloney, n 79, 892–93. 115 eg, Everson, n 60. 116 A recent political economy analysis of the crisis-era reforms has concluded that the Commission’s failure to push a normatively different basis for EU financial regulation post crisis reflected the dominance of political preferences to maintain the status quo: Burns et al, n 106. For a more positive account of the Commission’s role, crediting it with some ‘ideational leadership’ for its championing of the ESA reforms, see D Hodson, ‘The little engine that wouldn’t: supranational entrepreneurship and the Barrosso Commission’ (2013) 35 Journal of European Integration 301. 117 Which has been well documented in the agency literature. See, eg, N Font and I Pérez Durán, ‘The European Parliament Oversight of EU Agencies through Written Questions’ (2016) 23 Journal of European Public Policy 1349. 118 See, eg, S de Rynck, ‘Banking on a Union: the politics of changing Eurozone banking supervision’ (2016) 23 Journal of European Public Policy 119. 119 ECB, Financial Integration in Europe (2016) 97, noting its preference, in the context of CMU, for a ‘single European capital markets supervisor’. It reiterated its support in its 2018 report (Financial Integration in Europe (2018) 56–57).

Contextualising ESMA 29

iv. Technocratic Preferences Finally, ESMA’s distinct preferences fall to be considered. Financial regulators have been identified as influential agents of change on financial governance, albeit that their influence is typically incremental.120 This capacity to effect change extends into the cross-border setting. International political economy analyses of international financial governance teach that national political preferences can be shaped, and levels of political contestation reduced, by technocratic actors, chiefly the regulators and central banks that sit in the ISSBs.121 These regulatory actors exert influence through a variety of channels, including domestic political channels, but they can also create networks of expert communities,122 which, operating through the ISSBs, can construct distinct transnational preferences.123 Within the EU, national regulators are increasingly driving national political preferences and shaping EU financial governance.124 National central banks are also defending their preferences, particularly in relation to stability-oriented governance.125 While these technocratic preferences can reflect national forms of economic/market organisation and related political preferences, they also often reflect the distinct institutional preferences of national regulators.126 But distinct technocratic preferences have also been identified at EU level and associated with the development of EU agencies. EU agencies can develop autonomous preferences, which can be transnational and technocratic in orientation127 and accordingly build distinct agendas, separate from, although not necessarily in conflict with, those of national ministries and of national regulators.128 ESMA’s evolution and how it exerts influence bears out this account of the importance of technocratic preferences. As this book shows, it has deployed its powers in a purposeful and often ambitious and expansionist manner, which has, over time, led to an incremental but material strengthening of its position in EU financial market governance. This behaviour resonates with the insight from regulatory theory that regulators seek 120 A Baker, ‘The Gradual Transformation? The Incremental Dynamics of Macroprudential Regulation’ (2013) 7 Regulation & Governance 417. 121 See, eg, A Newman and E Posner, ‘Transnational Feedback, Soft Law, and Preferences in Global Financial Regulation’ (2016) 23 Review of International Political Economy 123. 122 As initially suggested in Anne-Marie Slaughter’s pioneering work: A New World Order (Princeton University Press, Princeton, NJ, 2004). 123 E Tsingou, ‘Regulatory reaction to the global credit crisis: analyzing a policy community under stress’ in E Helleiner, S Pagliari, and H Zimmerman (eds), Global Finance in Crisis (Routledge, London and New York, 2010) 21. 124 eg, examining the influence of the UK FCA on the development of EU legislation, B Sennholz-Weinhardt, ‘Regulatory Competition as a Social Fact: Constructing and Contesting the Threat of Hedge Fund Managers’ Relocation from Britain’ (2014) 21 Review of International Political Economy 1240. 125 S McPhilemy, ‘Integrating macro-prudential policy: central banks as the “third force” in EU financial reform’ (2016) 39 West European Politics 526. 126 D Lombardi and M Moschella, ‘Domestic Preferences and European Banking Supervision: Germany, Italy and the Single Supervisory Mechanism’ (2016) 39 West European Politics 462. 127 Egeberg and Trondal, ‘Researching EU Agencies’, n 95. 128 See E Ruffing, ‘Agencies between two worlds: information asymmetry in multilevel policy-making’ (2015) 22 Journal of European Public Policy 1109 (examining the German financial market regulator); T Bach and E Ruffing, ‘Networking for Autonomy? National Agencies in European Networks’ (2013) 91 Public Administration 712 (examining German agencies generally); and M Egeberg and J Trondal, ‘EU-level agencies: new executive centre formation or vehicles for national control’ (2011) 18 Journal of European Public Policy 868 (based on evidence from 16 EU agencies).

30 Introducing ESMA to strengthen their ‘regulatory capacity’, as well as with the notion of ‘bureaucratic creep’ familiar from the agency literature. ESMA is a new actor in EU financial market governance, exercising primarily soft powers, and is bounded by institutional hierarchy, notably the pre-eminent position of the Commission over administrative rule-making and of NCAs over supervision. ESMA has, accordingly, distinct and strong incentives to strengthen its institutional position, in particular by developing ‘regulatory capacity’, which has been identified as determining the extent to which a regulator can achieve outcomes. Regulatory capacity can be elusive to capture and is context dependent, but broadly it relates to the regulator’s ability to achieve its objectives and resolve problems. It depends on several related ‘resources’, including powers, data capacity/information, expertise, financial resources, institutional/strategic position, and credibility.129 Some of these resources, such as powers and financial resources, are not (or not entirely) within ESMA’s control. But the way in which ESMA is deploying its powers can, however, be associated with a strengthening of other resources, such as its technical expertise, data capacity, and credibility with key stakeholders, and so of its regulatory capacity and, accordingly, of its ability to exert influence. Further, as a new EU agency ESMA can be expected to reinforce its position by testing its powers and the constraints placed on them;130 as outlined in this book, there are elements of related bureaucratic entrepreneurialism and adventurism in ESMA’s activities. It is not always easy, however, to identify a distinct ESMA preference, as ESMA’s ability to act is a function of NCA agreement, and distinct NCA preferences, which compete with ESMA’s, can emerge. As discussed throughout this volume, the pivotal ESMA/NCA relationship can be collegiate and cooperative, but it can also be fractious.

C. The 2017/2018 Reform Waypoint: From Incrementalism to Punctuated Change? ESMA’s evolutionary trajectory and the forces that have shaped it suggest ESMA could have been expected to experience a strengthening of its powers and ability to exert influence in the short to medium term, whether by means of the incremental legislative conferral of additional powers or by ESMA’s own efforts to strengthen its regulatory

129 In the political economy literature, regulatory capacity is associated with the ability of a state to formulate, monitor, and enforce rules: Bach and Newman, n 93. In the regulatory theory literature, regulatory capacity has similarly been characterised as relating to the ability of regulators to achieve outcomes. It has been examined as a composite concept, relating to the actual or potential possession of relevant ‘resources’, plus the existence of actual or potential conditions that make it likely that those resources will be deployed in such a way as to further the identified goals of those seeking to regulate or resolve identified problems; the resources required have been identified as including information, expertise, financial/economic resources, authority and legitimacy, strategic position, and organisational capacity: J Black, ‘Enrolling actors in regulatory systems: examples from UK financial services regulation’ [2003] Public Law 63. For a recent assessment of regulatory capacity, see M Lodge and K Wegrich, The Problem-solving Capacity of the Modern State: Governance Challenges and Administrative Capacities (Oxford University Press, Oxford, 2014). 130 Bureaucratic drift or creep arises where an agency develops and pursues a policy agenda differing from that of its political principals: Kelemen, n 97. The notion of EU agencies becoming unmoored from their political and supranational masters and developing ‘Iives of their own’ is increasingly being explored in the agency literature: Egeberg and Trondal, ‘Researching EU Agencies’, n 95.

Contextualising ESMA 31 capacity and ability to exert influence. The post-crisis strengthening of EU financial market governance has certainly created ideal conditions within which technocracy can thrive.131 The burgeoning and dynamic single rule-book – in a state of almost perpetual flux – the related increasing technical reliance by the Commission on ESMA and need of market participants for regulatory certainty, NCA demands for supervisory support, and the useful vehicle ESMA provides for addressing emerging supervisory challenges – all are creating conditions within which incremental reforms to ESMA, and ESMA’s strengthening of its regulatory capacity, can be expected. The 2017/2018 waypoint, however, suggests that more punctuated change may be in the offing. This book is concerned with ESMA’s current suite of powers, how they are deployed, and what this suggests as to ESMA’s influence, effectiveness, and legitimacy; it is not concerned with the optimal design of institutional governance for the EU financial market, nor with how ESMA might be reconfigured. Nonetheless, as dynamism is a defining feature of ESMA, some comment is warranted on future developments. The early stage of the reform proposals and uncertainties as to how the reforms will be shaped in the EU reform crucible dictate that analysis can only be tentative. The confluence of the three 2017/2018 reform proposals (the 2017 CCP Supervision Proposal, the 2017 ESA Proposal, and the 2018 Crowdfunding Proposal), each suggesting a strengthening of ESMA’s role, including in the contested area of supervision, is eye-catching – particularly as the Commission tied the ESA Proposal to progression ‘to a single capital markets supervisor’132 – even if allowance must be made for some institutional positioning at a time of Brexit-related uncertainty. Nonetheless, the significance of the reform waypoint should not be overplayed. As suggested throughout this book, the reforms can still be associated with incrementalism. Few changes are proposed to ESMA’s regulatory governance powers, in relation to which the Commission remains pre-eminent; ESMA’s supervisory convergence powers are certainly strengthened, but not recast significantly; and the much discussed suite of proposed supervisory empowerments relates to small market segments, each with a limited EU footprint and low levels of fiscal risk – only as regards CCP supervision might major change be in the offing given ESMA’s de facto pre-eminence in the 2017 CCP Supervision Proposal’s new ‘European Supervisory Network’, and even then this reform can be regarded as an advanced form of supervisory convergence action. The most material changes proposed relate to ESMA’s governance: the proposed strengthening by the 2017 ESA Proposal of bureaucracy within ESMA’s governance (through a new Executive Board and the dilution of the Board of Supervisors) and changes to its funding model. Further, ESMA has some institutional competition in the reform process; December 2017 saw the Commission propose that certain systemic investment firms be supervised by the SSM (in response to likely Brexit-related relocations to the euro area from the UK).133

131 For further analysis of this point, see N Moloney, ‘EU financial governance after Brexit: the rise of technocracy and the absorption of the UK’s withdrawal’ in K Alexander, C Barnard, E Ferran, and N Moloney, Brexit and Financial Services. Law and Policy (Hart Publishing, Oxford, 2018) 61. 132 Commission, Reinforcing Integrated Supervision to Strengthen Capital Markets Union and Financial Integration in a Changing Environment (COM (2017) 542). 133 COM (2017) 781.

32 Introducing ESMA There are also few signs of major changes to the forces that shape ESMA and its a bility to exert influence. It is not easy to disentangle the different forces that have shaped the 2017/2018 reform waypoint. It emerged from different incubators: the 2017 CCP Supervision Proposal has emerged from the 2015–16 technical review of EMIR; the 2017 ESA Proposal has emerged from the 2017 ESA Review process, which built on the earlier 2013–14 ESA Review; and the 2018 Crowdfunding Proposal has emerged from the CMU agenda. Clearly, these different incubators are all powered by similar forces, but the reforms have nonetheless developed in different policy silos and in response to distinct needs and preferences. The 2017/2018 reform waypoint is also entangled with the EU’s three current major financial integration projects: the CMU agenda; the completion of Banking Union; and the completion of EMU. The reform waypoint is not accordingly some form of ‘big bang’ but rather a coincidence of a series of different reforms, which have been in gestation for different periods. Similarly, the different preferences that shape ESMA’s development do not appear to be changing significantly. Current indications suggest that the Commission is cleaving to its long-held commitment to use governance reform to support financial market integration but also to control ESMA (most evident in its proposed dilution of the Board of Supervisors’ powers); that significant political (and NCA) contestation on the appropriateness of the supervisory centralisation envisaged by the reforms can be expected; that ESMA’s technocratic influence has shaped the waypoint; and that support but also scepticism can be expected from the European Parliament and ECB – reactions which can be associated with ESMA’s development since 2011.134 Brexit, and the related potential for market disruption, supervisory competition for UK relocation business, and risks arising from the ‘offshoring’ in the UK of financial services critical for the EU financial market,135 may, however, disrupt the forces that have shaped ESMA. Certainly, Brexit has sharpened the Commission’s focus on financial market integration and its administrative supports; the Commission has drawn a clear line from potential Brexit-related market disruption, supervisory arbitrage risks, and pressure on supervision to the need for ESMA reform to protect EU financial stability and the integration process.136 The withdrawal of the UK also removes a political friction against empowerments to ESMA, which can reasonably be assumed to have emboldened the Commission; the UK was a strong opponent of transfers of supervisory powers to ESMA, and also sought to ensure that single market preferences on supervision were not trumped by any euro area preference for supervisory centralisation.137

134 See further ch 5. 135 Most notably in relation to risk management and derivatives clearing. See further N Moloney, ‘Brexit and financial services: (yet) another re-ordering of institutional governance for the EU financial market (2018) 55 Common Market Law Review 175; and U Batsaikhan, R Kalcik, and D Schoenmaker, ‘Brexit and the European financial system: mapping markets, players, and jobs’, Bruegel Policy Contribution, Issue 4 (2017). 136 The 2017 ESA Proposal, eg, identified Brexit as requiring that supervisory arrangements be strengthened to ensure that financial markets continued to support the EU economy on an adequate and sound basis: 2017 ESA Proposal, n 4, Explanatory Memorandum, 2. 137 Well-illustrated by the pre-referendum ‘New Settlement’ negotiated by then Prime Minister David Cameron, which sought to protect single market financial governance from euro area encroachment: Decision of the Heads of State or Government Meeting Within the European Council, Concerning a New Settlement for the United Kingdom with the European Union, European Council Meeting, 18 and

Technocratic Influence, Effectiveness, and Legitimacy 33 The effect of Brexit on the Council’s posture on ESMA reform is nonetheless difficult to predict. The Brexit-related competitive dynamics and concerns to attract relocation business, which have taken hold in the financial services area, may lead to pressure for greater subsidiarity and national supervisory autonomy. Conversely, Brexit may provide those Member States, notably France, who are traditionally supportive of the centralisation of financial market governance with an opportunity to promote ESMA-based centralisation as a means of competitive advantage and to signal their dominance as leading financial centres. Similarly, while there is at present little stakeholder support for centralised supervision (the 2017 ESA Review produced a broad consensus that the ESAs were currently fit for purpose and a concern to protect NCA supervisory discretion/autonomy138), pressure may come from market participants for supervision to be concentrated in one location if wholesale market activity becomes significantly more dispersed across the EU-27 following Brexit. Speculation as to ESMA’s future shape is currently perilous. There are nonetheless reasonable grounds for suggesting that the 2017/2018 reform waypoint will not disrupt the currently incremental nature of ESMA’s development or radically reset its powers. Some reforms will, however, emerge, and ESMA’s ability to exert influence on EU financial market governance is likely to be strengthened. Inquiry into how ESMA has deployed its current suite of powers, the influence it has come to exert, and the implications is accordingly apposite. The next section of this introductory chapter introduces the book’s approach to examining ESMA’s influence and the implications for effectiveness and legitimacy, an approach informed by analysis of ESMA’s different characterisations and the context in which its powers have developed and are deployed, as introduced in this and earlier sections.

IV. Technocratic Influence, Effectiveness, and Legitimacy A. Examining ESMA Subsequent chapters map the nature and extent of ESMA’s technocratic influence over the single rule-book (regulatory governance – chapter 3), operational NCA decisionmaking (supervisory convergence – chapter 4), the behaviour of regulated actors (direct supervision – chapter 5), and in the ESFS and international networks (chapter 6), and accordingly, on how the EU financial market is governed. This mapping also supports examination of ESMA’s effectiveness and legitimacy, two key benchmarks for assessment of ESMA.139 ESMA is a non-majoritarian EU agency; it is also a hybrid form of financial 19 February 2016, EUCO 1/16 (Annex 1). On the UK’s influence, see N Moloney, ‘Bending to uniformity: EU financial regulation with and without the UK’ (2017) 40 Fordham International Law Review 1335; and D Howarth and L Quaglia, ‘Brexit and the Single European Financial Market’ (2017) 55 (S1) Journal of Common Market Studies 149. 138 Commission, Feedback Statement on the Public Consultation on the operation of the European Supervisory Authorities (2017). 139 Effectiveness and legitimacy, imperatives that drive the use and the design of agencies, are frequently used to examine administrative governance (eg, Craig, n 48) and financial administrative governance (eg, M Barr, ‘Who’s in Charge of Global Finance’ (2014) 4 Georgetown Journal of International Law 971).

34 Introducing ESMA market regulator. As such, it has been designed to deliver its legislative mandates in a technically effective manner that supports the EU’s administrative capacity in relation to single financial market regulatory governance, supervisory convergence, and direct supervision. As ESMA’s influence burgeons, its effectiveness in delivering its mandates requires consideration. So do ESMA’s legitimation arrangements. The distinction between technocratic and political action is becoming increasingly stylised as agencies move closer to the political space and come to adjudicate between competing claims and make choices with redistributive consequences.140 The political/technocratic border that bounds ESMA action is also permeable. ESMA operates with restricted discretion and, in theory at least, outside the political sphere, not being empowered to take decisions engaging value judgments and/or redistributive choices. In practice, the scale of ESMA’s influence over EU financial market governance may be taking it close to the political sphere and placing pressure on its legitimating mechanisms.

B. ESMA’s Expanding Technocratic Influence: A Distinct and Dynamic Actor in the EU Agency Framework ESMA’s expanding influence is a function of the different forces that have shaped it and are shaping it, as already noted. But ESMA’s development also reflects the wider growth in the EU agency sector generally.141 The EU now deploys 34 ‘decentralised agencies’.142 These agencies can be classified in different ways, but can broadly be characterised from the least powerful information-oriented agencies, responsible for the production and dissemination of data (such as the European Agency for Health and Safety at Work); to agencies that coordinate networks of national agencies and provide advisory and technical assistance services to the EU, including on administrative rule-making, and to national bodies (such as the Agency for the Cooperation of Energy Regulators and the European Maritime Safety Agency); to the most powerful agencies, of which ESMA is one, which, to different degrees, have individual case and more general decision-making powers (such as the Office for Harmonisation in the Internal Market (which addresses trademarks and designs); the European Chemicals Agency (which has powers over the registration of products under the EU’s REACH system – Registration, E valuation and

140 Yeung, n 46, noting the ‘myth’ that politics and regulation can be split. The increasingly political and discretionary nature of agency action is a recurring theme of the legal literature on EU agencies (eg, E Chiti, ‘Is EU Administrative Law Failing in some of its Crucial Tasks?’ (2016) 22 European Law Journal 576). 141 A rich literature examines the recent growth in EU agencies. For legal perspectives on the nature of, causes, and challenges of this growth see, eg: Chiti, ‘Is EU Administrative Law Failing’, n 140; J Mendes, ‘Discretion, Care and Public Interests in the EU Administration: probing the limits of law’ (2016) 53 Common Market Law Review 419; E Chiti, ‘European agencies’ rulemaking: powers, procedures and assessment (2013) 19 European Law Journal 93; Chiti, n 64; and D Geradin, ‘The development of European regulatory agencies: what the EU should learn from the American experience’ (2005) 11 Columbia Journal of European Law 1. Agency growth has also been subject to extensive examination in the public policy/political economy literature. See Egeberg and Trondal, ‘Researching EU Agencies’, n 95; and, for an assessment of the initial growth spurt, Thatcher and Stone Sweet, n 45. 142 Listed at https://europa.eu/european-union/about-eu/agencies/decentralised-agencies_en.

Technocratic Influence, Effectiveness, and Legitimacy 35 Authorisation of Chemicals); and the European Aviation Safety Agency (which can issue technical rules on safety specifications and compliance).143 Over time, and while decision-making agencies remain the exception, agencies have become more powerful and exerted greater influence over the governance of the single market. Following the establishment of the first two (information-based) agencies in the mid-1970s, a second wave of agency construction in the 1990s, directed to giving the EU the capacity to engage in the increasingly complex risk assessments and technical reviews required as the single market project deepened, led to the establishment of 10 technical/scientifically-oriented agencies.144 This was followed by a third wave of sector-specific agency construction in the 2000s, which led to the establishment of agencies with decision-making powers, among them the chemicals and aviation safety agencies.145 A waypoint was reached in 2012 with the adoption by the European Parliament, Council, and Commission of a ‘Common Approach’ on EU agencies, designed to deliver a more coherent and efficient framework for agencies.146 ESMA’s strengthening ability to exert technocratic influence has resonances with this expansion in the power and influence of EU agencies generally. The scale and nature of ESMA’s influence, however, is distinct and calls for extended examination, particularly as the distinct financial market setting within which ESMA operates shapes how ESMA exerts influence, and as ESMA’s powers and ability to exert influence are significantly greater than those of other EU agencies.

C. Effectiveness: Mandate Delivery, the Single Market Setting, and Innovation The determinants of ESMA’s effectiveness are not easy to tie down. ESMA’s effectiveness could, for example, be examined in relation to the optimal organisation of institutional governance for the EU financial market and in relation to how the ESMA model fares against other models – spanning from entirely decentralised and based on NCA action, to entirely centralised and based on a single central supervisor (however configured – whether a turbo-charged ESMA, a retooled ECB, or an entirely new institution). A host of related questions arise, including whether the current structure of the EU financial market calls for a type of institutional arrangement different from the current ESMA/ESFS-based system. The EU financial system is predominantly bank-based,147 and while the EU has long promoted market-based funding, the EU financial market is still developing and remains fragmented. European Union financial markets are, however, strengthening. This development is in part cyclical (for example, debt securities have since the financial crisis acted as substitutes for bank loans148), but it is also 143 For this taxonomy see Chiti, n 64. For a similar approach see Griller and Orator, n 63. 144 Dehousse, n 59. 145 For a review of the stages of agency development, see 2008 Commission Agency Communication, n 87. 146 Joint Statement of the European Parliament, the Council of the EU, and the European Commission on Decentralized Agencies, 19 July 2012, with annexed Common Approach. 147 See n 21. 148 ESRB, Macroprudential Policy Issues Arising from Low Interest Rates and Structural Changes in the EU Financial System (2016) 23.

36 Introducing ESMA structural (bond financing is persisting as lending conditions improve149). Recourse by firms to bond and share financing is increasing. Between 2008 and 2014 non-financial corporates almost doubled their recourse to bonds;150 bond issuances by non-financial corporates have continued to increase, with 2017 seeing a 9 per cent annual growth rate in the euro area.151 While there is less pronounced growth in levels of share issuance,152 funding through private placements of shares to institutional investors (outside trading venues) is increasing and being drawn away from the US private placement market.153 Alternative sources of funding (such as venture capital, business angels, and crowdfunding) are also increasing.154 Market developments have been of a scale to embolden the Commission to suggest that a transition to market-based funding is underway.155 But the EU financial market remains fragmented.156 For example, while securitisation is widely relied on by France’s major banks,157 it has decreased in Germany (where the Landesbank suffered from exposure to asset-backed securities over the crisis)158 and securitisation is generally fragmented across the EU.159 In terms of issuance levels, non-financial corporates in the UK and France accounted for almost two-thirds of all bond issuances at the end of 2015, with issuance levels in other Member States significantly lower.160 Fragmentation is also a feature of other market segments. Venture capital funding, for example, is concentrated across eight Member States,161 while in relation to the private placement market, Germany accounts for some 50 per cent of private placement deals.162 More generally, levels of financial market development vary across the EU, with the capital markets of central, eastern, and south-eastern Europe (CESEE) identified by the Commission as lagging behind and as in need of tailored support.163 These differences will likely embed further on the UK’s withdrawal from the EU. On the consumer side, retail investment markets remain national in o rientation.

149 Commission, European Financial Stability and Integration Review 2018 (SWD (2018) 165) 21 and 26–27, noting that market funding was continuing to expand in the euro area and that non-financial companies in the EU have not fully reverted to bank lending despite easing lending conditions. 150 2016 European Financial Stability and Integration Review, n 20, 35. In 2017, the Commission reported that corporate bond issuance by non-financial corporates had nearly doubled between 2006 and 2016: 2017 Economic Analysis Accompanying the CMU Mid-Term Review, n 20, 41. 151 2018 European Financial Stability and Integration Review, n 149, 21. 152 Over 2017, non-financial corporates’ equity issuance levels increased by 0.6%: ibid, 23. 153 2016 European Financial Stability and Integration Review, n 20, 29. 154 2017 European Financial Stability and Integration Review, n 20, 27. 155 ibid, 26–27; and 2016 European Financial Stability and Integration Review, n 20, 1. 156 The ECB’s most recent assessment reported on a modest advance in financial integration over 2017 and that capital market integration was stronger than integration in other sectors, although integration here was most pronounced as regards price indicators (converging equity returns and price yields) and not quantitative indicators: ECB, Financial Integration in Europe (2018) 10 and 25. 157 D Howarth, ‘State Intervention and Market-based Banking in France’ in I Hardie and D Howarth (eds), Market-Based Banking and the International Financial Crisis (Oxford University Press, Oxford, 2013) 128. 158 I Hardie and D Howarth, ‘German Market-Based Banking’ in Hardie and Howarth (eds), ibid, 103. 159 2017 Economic Analysis Accompanying the CMU Mid-Term Review, n 20, 52. 160 2016 European Financial Stability and Integration Review, n 20, 37. 161 Some 90% of venture capital funding is concentrated in the UK, Germany, France, Sweden, the Netherlands, Spain, Austria, and Finland: 2017 Economic Analysis Accompanying the CMU Mid-Term Review, n 20, 28. 162 ibid, 32. 163 2018 Financial Stability and Integration Review, n 149, 44–51.

Technocratic Influence, Effectiveness, and Legitimacy 37 ouseholds rarely, if ever, invest in cross-border investment products, as has been H frequently recorded by the Commission.164 A recent Commission ‘eurobarometer’ on financial products and services, based on survey evidence, has similarly found that none of its respondents had purchased shares or an investment cross-border.165 This form of fragmented market, composed of different pockets of market development and specialisation, lends itself to speculation as to which form of institutional governance is optimal – whether the current ESFS/ESMA-based model or, alternatively, a more ambitious design, based on centralised supervision where optimal for particular market segments. But other questions also arise as regards the optimal design of institutional governance for the EU financial market, including in relation to functional capacity (given the vast and heterogeneous population of financial market actors); the EU’s legal capacity (given Treaty requirements relating to competence, proportionality, and subsidiarity); and political feasibility (given the already distinct political preferences on institutional financial market governance, and the sharp contestation any related risk mutualisation is likely to provoke). These questions have been and continue to be extensively canvassed in a rich literature and are not rehearsed here. The concern of this book is with a more narrowly-drawn question, which focuses on ESMA’s distinct role as a technocratic, single market agency and on its current mandates. Assuming, as the political process has done, that a degree of agencification of EU financial market governance through ESMA is warranted, is ESMA proving to be an effective actor, capable of delivering its mandates? One early examination of ESMA called on it, as a new technocratic support to the EU, to build a ‘genuinely responsive’ ESMA/NCA network, which would support effective national input into rule-making and also sensitive supranational oversight of supervision – but warned of the risks of an inefficient centralisation of supervision within ESMA given its powers to act in a hierarchical manner and of its becoming a ‘too distant interlocutor’ on risk management.166 How, accordingly, has ESMA developed as a technocratic support to the EU financial market? Subsequent chapters explore ESMA’s effectiveness, as this can be unpacked in different ways depending on the specific ESMA powers and mandates at issue. Three themes relevant to ESMA’s effectiveness can, however, be introduced here. First, ESMA’s approach to its mandates and powers can be associated with a productive degree of engagement with ‘state of the art’ practices, which mitigates somewhat the challenges of its operating setting. As discussed later, it is difficult to develop optimal technocratic methods for governing financial markets given the complexities, uncertainties, and contingencies. The difficulties are all the greater in the ESMA context. Supervisory powers remain a national competence; rule-making power remains with the Commission; and ESMA’s governance arrangements locate decision-making with NCAs on the Board of Supervisors, although ESMA’s mandates are directed to EU-level outcomes. ESMA’s approach can, however, be associated with a degree of experimentation and ‘learning by doing’; mutual ESMA/NCA regulatory learning; extensive consultation; 164 2017 Economic Analysis Accompanying the CMU Mid-Term Review, n 20, 72–77; and Commission, Distribution of Retail Investment Products across the European Union (2018). 165 Commission, Special Eurobarometer 446, Financial Products and Services, July 2016, 7. 166 Everson, n 60.

38 Introducing ESMA and a concern to build and interrogate reliable data infrastructures, risk assessment frameworks, and risk-based supervision models. These features can all be associated with ‘state of the art’ governance models in the cross-border/transnational financial market sphere,167 and with the new and experimentalist governance techniques that have attractions for cross-border settings,168 and which augur well for ESMA’s ability to navigate its challenging setting in a manner which allows it to meet its mandates effectively. Second, the incremental way ESMA’s powers have been conferred has allowed ESMA to develop in a politically and institutionally sustainable manner. ESMA has also tested and developed its powers in a similarly incremental manner, increasing its influence over time but also learning from experience and experimentation. Finally, ESMA can be regarded, overall, as an actor of expanding technical expertise and experience, typically responsive and agile – if at times ambitious and entrepreneurial – and also sensitive to the distinct constraints posed by its operating setting – capable of mediating between its mandates to act in the EU interest and the need to engage with NCA experience and preferences. ESMA’s technocratic grip on EU financial market governance is, despite the predominantly soft nature of its powers, now tight. But there are reasonable grounds for suggesting that, some eight years after its establishment, and on the cusp of acquiring additional powers, ESMA has developed an ability to act effectively in deploying its powers and pursuing its mandates.

D. Legitimacy: Technocrat or Despot? ESMA’s effectiveness must be balanced against its legitimacy as a non-majoritarian agency of EU design and purpose. The transfer of powers to agencies is legitimated through various means. These can be classified as input-oriented (representative in nature and including agencies’ constitutive legislative measures), throughputoriented (procedural in nature), and output-oriented (results/expertise-based and accountability-directed in nature). These different legitimating arrangements are designed to ensure that agencies do not make public interest choices, engage in redistribution, or act in the political sphere, expanding beyond the mandates imposed by their delegating principals. In the EU agency context, legitimation mechanisms reflect the distinct EU setting and include the Meroni principle,169 which prohibits agencies from engaging in discretionary action without appropriate conditionality imposed by the delegating EU institutions and which can support review. In addition, legitimation through expert output has been, and is increasingly since the financial crisis, associated with the l egitimacy of EU agencies.170 167 Riles, n 9. 168 In the EU context, see G de Búrca, ‘New Governance and Experimentalism: An Introduction’ (2010) Wisconsin Law Review 227; and Zeitlin, n 16. The merits of new and experimentalist governance techniques are explored in later chapters. 169 See n 62. 170 For a recent assessment, see J Mendes and I Venzke, ‘Introducing the Idea of Relative Authority’ in J Mendes and I Venzke (eds), Who Should Do What in European and International Law (Hart Publishing, Oxford, 2018).

Technocratic Influence, Effectiveness, and Legitimacy 39 But as agencies become more powerful, their legitimacy can come under threat,171 particularly as agencies can struggle to address the problems they, as expert bureaucracies, are charged with resolving, as the failure of financial regulation prior to the financial crisis makes clear. The legitimation challenges posed by agencies generally can be identified in EU agencies,172 along with those additional challenges specific to the EU setting.173 The failure of EU administrative law to recognise and control the ‘hidden discretion’ exercised by EU agencies notwithstanding Meroni, for example, has been identified as a material weakness in their legitimating arrangements.174 The pivotal relationship between EU agencies and Member States and their national regulators, a defining feature of the EU agency,175 also poses distinct challenges for legitimation in the EU context. European Union agencies can steer national regulatory action but are ultimately dependent on support from national regulators, raising questions as to whether national regulators (or governments) should form part of EU agencies’ legitimation arrangements – albeit that these arrangements are usually based on the assumption that EU agency powers are delegated from EU institutions.176 These challenges are brought into sharp focus by ESMA’s central role in EU financial market governance. As its influence expands, ESMA is pushing closer to the political sphere, shaping regulatory governance, delving deeper into NCAs’ operational choices, and pressing on the Meroni boundary. The pressure that is as a result being placed on ESMA’s legitimation arrangements is all the while increasing, particularly as the expertise-oriented, output legitimation strongly associated with EU agency legitimation can be difficult to secure in ESMA’s financial market governance context; for example, metrics for assessing its outputs can be difficult to establish and intractable to apply. But despite the building pressure, here too there are grounds for optimism. As discussed in subsequent chapters, ESMA’s legitimation framework has multiple elements, is evolving as ESMA develops, and is proving adaptive. This framework is, however, coming under increasing pressure as ESMA’s influence continues to expand.

171 In 2002, as EU agency governance was burgeoning, Dehousse warned of agency weaknesses as regards transparency and citizen participation, particularly as citizens were more likely to show greater interest in certain administrative decisions than in legislative principles: Dehousse, n 59, 4. This insight was borne out in the ESMA context in early 2018, when ESMA’s consultation on the first exercise of its power to ban/restrict the marketing of products led to an extraordinarily high level of response from retail investors in CfDs (the target of the restrictions), generating in the region of 20,000 responses, the previous response record being in the region of some 500 or so (albeit that responses were supported by online mechanisms made available by some CfD trading platforms: H Murphy, ‘Europe Market Watchdog Hits Retail Trading Platforms with Tough New Rules’ Financial Times (27 March 2018)). 172 Vos has highlighted the continuing importance of the ‘old question’ of legitimation after some 30 years of EU risk regulation governance: Vos, n 60. 173 From the extensive literature and for a legal perspective, see Chamon, n 56; Chiti, n 140; and Griller and Orator, n 63. For a political economy perspective, see M Božina Beroš, Some Reflections on the Governance and Accountability of the Single Resolution Board, TARN Working Paper 3/2017 (2017), available at http:// ssrn.com/abstract=2940198. 174 Chiti, n 140. 175 For an extensive exploration of EU agencies as sitting between EU institutions and the Member States, see the discussions in M Everson, C Monda, and E Vos (eds), European Agencies between Institutions and Member States (Kluwer Law International, Alphen aan de Rijn, 2014). 176 Buess, n 103.

40 Introducing ESMA

V. Roadmap The following chapters explore ESMA’s role, how it has deployed its powers, the nature of the influence it has come to exert, and whether effectiveness or legitimation challenges arise. They inquire into ESMA’s major spheres of activity: regulatory governance (chapter 3); supervisory convergence (chapter 4); direct supervision and intervention (chapter 5); and its two major technocratic networks – the EU (ESFS and Banking Union) network and the international network (chapter 6). A final postscript offers some brief observations on ESMA’s future. First, ESMA’s structure and governance are discussed in chapter 2.

2 ESMA’s Governance I. Assessing ESMA and its Governance Arrangements This chapter is concerned with ESMA’s governance arrangements – the organisational, procedural, and legal arrangements that provide ESMA’s operating apparatus, support its regulatory capacity, and shape how it exercises its powers and exerts influence. These arrangements have been stable since ESMA’s establishment in 2011. The 2017/2018 reform waypoint, however, saw major reforms being proposed under the 2017 European Supervisory Authorities Proposal (ESA Proposal) and the 2017 Central Clearing Counterparties Supervision Proposal (CCP Supervision Proposal).1 This chapter, like others, is not concerned with the optimal institutional organisation of EU financial market governance or the appropriateness of the EU’s decision to deploy ESMA as an institutional vehicle for the delivery of EU financial market policy. Its concern is with ESMA as a technocratic EU actor of expanding influence, and with how its governance arrangements have shaped its role and how it exerts influence. It identifies and explores these arrangements and the forces that have shaped them, their implications for ESMA’s role and ability to exert influence, and any effectiveness or legitimacy strains which may be emerging. It takes a broadly optimistic view. ESMA’s governance arrangements have accommodated ESMA in expanding its technocratic influence. But they have also provided multiple and adaptive means for legitimating ESMA; subsequent chapters examine how legitimation is achieved in practice as regards ESMA’s different powers. Structural weaknesses can nonetheless be identified, particularly regarding accountability. A similarly positive conclusion is reached as regards effectiveness, which is related here to ESMA’s operational capacity to take decisions in a technically informed, expert manner, responsive to national competent authorities (NCAs) but supportive of its mandate to act in the EU interest, and in an independent, agile and responsive, and procedurally efficient way; subsequent chapters unpack ESMA’s effectiveness as regards its different powers. ESMA’s ongoing tilt into a supervisory posture and into a more hierarchical position over NCAs requires some finessing of its governance arrangements, however, while the 2017/2018 reform waypoint proposals carry risks. The chapter first characterises and contextualises ESMA’s governance arrangements (sections II and III) and then explores their different elements (internal organisational arrangements, including legislative framework; external governance

1 Respectively,

COM (2017) 536 and COM (2017) 331.

42 ESMA’s Governance arrangements, including accountability channels; and funding basis (sections IV to VI)). Section VII recaps the chapter’s findings.

II. Examining ESMA’s Governance Arrangements A. Capturing ESMA’s Hybrid Governance Arrangements ESMA’s governance arrangements can be classified into ESMA’s internal organisational design and decision-making arrangements; ESMA’s external governance arrangements, including review fora and accountability requirements; and ESMA’s funding model.2 Reflecting ESMA’s hybridity, these governance arrangements represent a fusion of different imperatives and interests. They can be associated with the governance arrangements of financial market regulators as they are designed to ensure that ESMA, as a non-majoritarian, technical actor, has the requisite operational apparatus to fulfil its different legislative mandates as regards financial markets and also to legitimate its actions. They also have been shaped by ESMA’s EU setting. ESMA’s governance arrangements are based on the governance templates developed for EU agencies, which respond to the different interests engaged by EU agency design. In addition, they reflect ESMA’s distinct role in EU financial market governance and in particular the pivotal ESMA/NCA relationship. ESMA’s governance arrangements are designed to support the EU interest,3 but they inject NCA expertise and NCA collaboration into the process through which ESMA actions in support of that interest are adopted – this is expressed in ESMA decision-making’s being located in the NCA-dominated Board of Supervisors. This aspect of ESMA’s governance is now experiencing some stress related to the ability of the NCA-dominated Board to support the more hierarchical, vertical dimension to ESMA’s mandates (most marked in ESMA’s supervisory powers to direct NCAs, discussed further in chapter 5). As ESMA’s activities pivot from being oriented towards regulatory governance to overseeing how the single rule-book is implemented and applied by NCAs in practice, greater pressure is being exerted on the capacity of its governance arrangements to deliver this more hierarchical, vertical function and to ensure the EU interest is reflected in how ESMA interacts with NCAs.

B. Dynamism and Reform Until the 2017/2018 reform waypoint, ESMA’s governance arrangements had not experienced major reform,4 although they had been finessed, mainly in response to the 2012 2 The Organisation for Economic Cooperation and Development (OECD) similarly identifies regulators’ governance arrangements as comprising external governance arrangements (relating to the distribution of power and relationships between the legislature, politicians, the courts, regulators’ governing bodies, and regulated entities); and internal governance arrangements (including organisational structure, roles and responsibilities, and accountability arrangements): OECD, The Governance of Regulators (2014) 19. 3 ESMA must act in the interests of the EU: ESMA Regulation (Regulation (EU) No 1095/2010 [2010] OJ L331/84), Art 1(5). 4 EU agency governance has, however, frequently been challenged. See, eg, E Chiti, ‘Is EU Administrative Law Failing in Some of its Crucial Tasks?’ (2016) 22 European Law Journal 576; and E Chiti, ‘European

Contextualising ESMA’s Governance Arrangements 43 Common Approach to EU Agencies,5 which led to internal enhancements to ESMA’s planning processes.6 The 2013–14 ESA Review uncovered stakeholder concern regarding ESMA’s funding arrangements, and regarding the perceived dominance of national interests on the Board of Supervisors and the related risk of ESMA action against an NCA being stymied,7 but did not lead to significant reforms.8 Governance reform has now come on the agenda with the 2017 ESA Proposal. This Proposal would leave many of the governance components examined in this chapter largely undisturbed, but, if adopted, could lead to two major reforms. The Proposal would change ESMA’s funding model to incorporate an industry-funded component. It would also divert power away from the Board of Supervisors/NCAs by means of a new, bureaucratic ‘Executive Board’ empowered to take certain NCA-sensitive decisions, including in relation to investigations of an NCA in alleged breach of EU law, binding mediations between NCAs, and peer reviews of NCAs. While they have been stable for some time, ESMA’s governance arrangements cannot be easily pigeon-holed, particularly as they contain elements familiar from financial market administrative governance but also reflect the distinct role ESMA plays as an EU agency within the European System of Financial Supervision (ESFS). The implications of this hybrid context are considered in the following section.

III. Contextualising ESMA’s Governance Arrangements: Influence, Effectiveness, and Legitimacy A. Financial Markets and Administrative Governance: Context and Challenges The financial market regulators and EU agencies whose governance arrangements are reflected in those of ESMA are, despite their different settings, all administrative agencies designed to apply technical expertise in a legitimate manner. Their governance Agencies’ Rulemaking: Powers, Procedures and Assessment’ (2013) 19 European Law Journal 93 – calling for stronger accountability frameworks, more proceduralisation of agency soft law, and better consultation practices. 5 Joint Statement of the European Parliament, the Council of the EU, and the European Commission on Decentralised Agencies, 19 July 2012 with annexed ‘Common Approach’. The Common Approach followed the Commission’s earlier 2008 reform agenda (Commission, European Agencies – the Way Forward (COM (2008) 135)) and was amplified by a subsequent ‘Roadmap’ of reforms (Commission, Roadmap on the Followup to the Common Approach on EU Decentralised Agencies 2012). 6 Including ESMA’s implementation of the reforms relating to the EU’s annual and multi-annual planning cycle (eg, the new three-year horizon ‘Single Programming Document’, which EU agencies now use to make budgetary and staffing proposals). 7 eg, Review of the New European System of Financial Supervision. Part 1: The Work of the European Supervisory Authorities, Study by Mazars for the European Parliament (IP/A/ECON/ST/2012-23) (‘Mazars Report’). 8 Commission, Report on the Operation of the European Supervisory Authorities and the European System of Financial Supervision (COM (2014) 509) and related Staff Working Document (SWD (2014) 261). The Commission proposed only minor reforms (such as encouraging greater ESMA staff involvement in ESMA’s different committees), although it identified some more ambitious medium-term reforms, including funding reforms.

44 ESMA’s Governance a rrangements grapple with a related conundrum; how to ensure that the technocratic power and discretion the political process confers is exercised in a legitimate manner and, at the same time, that the agency’s operational capacity to achieve its mandate effectively is not hindered. Agencies are used to administer policy and manage an increasingly complex risk environment in an independent,9 credible, expertly and technically informed manner that can engage with long-term decision-making and which is insulated from political influence.10 Agencies are accordingly designed as technocratic institutions possessed of specialised public authority,11 and their actions are not directly legitimated by representative actors.12 But, as discussed in this section, although agencies are designed as technically-oriented, non-majoritarian institutions and to operate at a distance from the political process, they can exercise political authority and impact on policy outcomes and citizens,13 and their actions can have the discretionary and distributive attributes associated with legitimation by direct political representation.14 Their actions must accordingly be legitimated by other means – or, in other words, agencies must be given the necessary social and political ‘licence’ to operate.15 Legitimation needs become acute where agencies are given regulatory powers as well as individualised decision-making powers.16 Agency governance arrangements accordingly not only empower agencies to act and apply technical expertise, but also include mechanisms to support legitimation. These include legislative rules that define and delimit the mandates and powers of agencies (thereby structuring and confining the legal space within which agency action is taken17); agency design arrangements and decision-making procedures;18 procedural

9 Although not all agencies are formally independent. Independence is, however, usually associated with financial market regulators. 10 For a classic examination from an EU perspective, see G Majone, Regulating Europe (Routledge, New York, 1996). 11 M Thatcher and A Stone Sweet, ‘Theory and Practice of Delegation to Non-Majoritarian Institutions’ (2002) 25 Western European Politics 1. 12 From the extensive literature, see F Amtenbrink and R Lastra, ‘Securing Democratic Accountability of Financial Regulatory Agencies – A Theoretical Framework’ in R de Mulder (ed), Mitigating Risk in the Context of Safety and Security – How Relevant is a Rational Approach? (OMV, Rotterdam, 2008) 115, 121. Similarly, noting that moving decisions to the technocratic plane can neutralise public participation, C Ford, Innovation and the State: Finance, Regulation and Justice (Cambridge University Press, New York, 2017) 213. 13 As is frequently noted in the literature. See, eg, B Rittberger and A Wonka, ‘Introduction: agency governance in the European Union’ (2011) 18 Journal of European Public Policy 780, 785–86. 14 eg M Shapiro, ‘The Problems of Independent Agencies in the US and the EU’ (1997) 4 Journal of European Public Policy 276. 15 From the literature on ‘licensing’ and legitimation, see J Black, ‘Constructing and Contesting Legitimacy and Accountability in Polycentric Regulatory Regimes’ (2008) 2 Regulation & Governance 137. 16 P Craig, UK, EU and Global Administrative Law. Foundations and Challenges (Oxford University Press, Oxford, 2016) 676–77. 17 See J Mendes, ‘Bounded discretion in EU law: a limited judicial paradigm in a changing EU’ (2017) 80 Modern Law Review 443; and J Mendes, ‘Discretion, Care and Public Interests in the EU Administration: Probing the Limits of Law’ (2016) 53 Common Market Law Review 419. 18 For contrasting perspectives on the decision-making procedures of the contested, crisis era-established US Consumer Financial Protection Bureau and their implications for legitimation, see R Romano, Does Agency Structure Affect Agency Decisionmaking? Implications of the CFPB’s Design for Administrative Governance, ECGI Law Working Paper No 380/2018, available at http://ssrn.com/abstract=3096356; and S Block Lieb, ‘Accountability and the Bureau of Consumer Financial Protection (2012) 7 Brooklyn Journal of Corporate, Financial & Commercial Law 25.

Contextualising ESMA’s Governance Arrangements 45 requirements that support the achievement of mandated outcomes, including consultation obligations; political oversight, review, and veto powers over agency action; judicial review; and reporting and review-oriented accountability mechanisms.19 They also include the normative order of constitutional provisions and general principles that binds public authority and which is policed through judicial review.20 Agency discretion is of particular concern to agency governance arrangements. Agencies carry out technical, efficiency-oriented functions, but the establishment of an agency typically involves some degree of discretion being conferred so that the agency can deliver these functions – the more contingent, uncertain, and complex the agency’s operating environment, the greater the need for discretion. But as it is almost impossible to confine agency action within a technical box, discretionary choices that can have normative policy implications and political content almost inevitably arise.21 As agencies exercise their discretion and so ‘fill the institutional setting with life’,22 legitimation can become strained: discretionary action is susceptible to multiple influences beyond the conditions set by the legislature,23 while in exercising discretion agencies can and often must balance different public interests and can have distributive effects. The legitimating devices in agency governance frameworks can also be associated with the related need to ensure that agencies do not exceed or avoid their mandates, and to reduce related ‘agency losses’ and curtail ‘bureaucratic drift’ from agencies’ powers and legal mandates.24 A rich political science literature examines agency governance arrangements through the lens of the principal/agent relationship and considers the need to reduce the ‘agency losses’ the delegating principal, the representative body which establishes the agency, may incur. The principal must delegate discretion sufficient to ensure its objectives are met, but the agency agent has incentives to pursue its own interests, informed by its informational and expertise advantages. Agency discretion is accordingly restricted by the delegating principal to reduce the risk of the agency’s generating outcomes different from those it was established to achieve.25 These constraining techniques typically include ex-ante contract (legislative) design and related ex-post monitoring, reporting, and institutional checks.26 But achieving an optimal balance

19 Craig, n 16, 679–82; and Chiti, ‘Is EU Administrative Law Failing’, n 4, 590. 20 Mendes, ‘Discretion, Care and Public Interests’, n 17. 21 P Lindseth, ‘Equilibrium, Demoi-cracy, and Delegation in the Crisis of European Integration’ (2014) 15 German Law Journal 529, 537. Similarly, warning that administrative rules ‘will regularly deal with practical and normative issues of real importance’, Craig, n 16, 700, and, in the context of EU agencies, noting that it is ‘doubtful whether a useful definition of “technical” as opposed to “political” issues can be developed’, S Griller and A Orator, ‘Everything under Control? The “Way Forward” for European Agencies in the Footsteps of Meroni’ (2010) 25 European Law Review 3, 22. 22 E Ruffing, ‘Agencies between two worlds: information asymmetry in multilevel policy-making’ (2015) 22 Journal of European Public Policy 1109. 23 The legal space where administrative actors take discretionary decisions can be structured, but the decisions made are shaped by different factors, including political dynamics, expert judgement, and decisionmakers’ moral/ideological preferences: Mendes, ‘Discretion, Care and Public Interests’, n 17. 24 D Kelemen, ‘The Politics of “Eurocratic” Structure and the New European Agencies’ (2002) 25 West European Politics 93. 25 eg Thatcher and Stone Sweet, n 11, 4–5. 26 D Curtin, ‘Delegation to EU Non-Majoritarian Agencies and Emerging Practices of Public Accountability’ in D Geradin, R Muñoz, and N Petit (eds), Regulation through Agencies in the EU. A New Paradigm of European Governance? (Elgar, Cheltenham, 2005) 88, 98.

46 ESMA’s Governance between ensuring the agency does not stray beyond its mandate and allowing it sufficient room to manoeuvre so that it can fulfil its tasks in a technically efficient manner, is not straightforward. Agencies’ legitimation arrangements, designed to mediate between technical functionality and legitimation imperatives, have been identified as broadly taking three forms, directed to: input legitimacy; throughput/procedural legitimacy; and output legitimacy.27 Input legitimacy relates to democratic representativeness. It often takes the form of agencies’ constitutive legislative measures, but it can also be a function of opportunities for civil society to participate in agency decision-making.28 Throughput or procedural legitimacy concerns the agency decision-making process,29 and can include transparency and judicial review requirements.30 It is related to input legitimacy, particularly with respect to procedural requirements for representation and consultation.31 Finally, output legitimacy is functionally-oriented and relates to agencies’ technical capacity or problem-solving ability, and to review of that capacity and ability; it can also be related to agencies’ reputational incentives.32 Output legitimation is strongly associated with agencies’ legitimacy. Agencies are established as non-majoritarian actors to deliver technical, expert functions, insulated from political control. The imperative for direct political oversight can therefore be regarded as diminished, as such political oversight could subvert technical quality, and legitimacy can instead, at least in part, be delivered through accountability mechanisms that assess technical agency outputs against prescribed benchmarks and agency mandates.33 Output legitimation assumes that agencies are operating on the basis of ‘informed, databased expertise’ and not on an arbitrary basis,34 but also ensures they can be held to account against their outputs. Output legitimation can also be supported by procedural requirements to act in an expert, deliberative, and transparent manner, informed by consultation and supported by a strong data-gathering and interrogation capacity.35 The need for agency governance arrangements to balance between the appropriate support of technical effectiveness and the securing of legitimation can be acute with financial market regulators, given the extent to which their actions can have

27 Similarly, legitimacy can be characterised in terms of procedural legitimacy, in that those affected by a norm have been included in the formulation process; and substantive legitimacy, which relates to policy consistency and problem-solving capacity: L Senden, ‘Soft post-legislative rulemaking: a time for more stringent control’ (2013) 19 European Law Journal 57. 28 See further Craig, n 16, 744–54. 29 The framing of agency action within procedural rules has been identified as supporting legitimacy by providing structure to the multiple contacts an agency has with other actors, addressing information asymmetries, allowing the balancing of competing interests, and thereby acting as an instrument of political control: D Curtin, H Hoffman, and J Mendes, ‘Constitutionalising EU Executive Rule-Making Procedures: A Research Agenda’ (2013) 19 European Law Journal 1, 4. 30 Senden, n 27, 58. 31 Griller and Orator, n 21, 21. On consultation as ‘importing the participatory model of democratic legitimation’ into EU agencies, see Chiti, ‘EU Agencies’ Rulemaking’, n 4, 107. 32 K Judge, ‘The Federal Reserve: A Study in Soft Constraints’ (2015) 78 Law & Contemporary Problems 65. 33 Craig, n 16, 541–42. 34 M Barr, ‘Accountability and independence in financial regulation: checks, balances, public engagement and other innovations’ (2015) 78 Law & Contemporary Problems 119, 120. 35 M Thatcher, ‘Regulation after delegation: independent regulatory agencies in Europe’ (2002) 9 Journal of European Public Policy 954.

Contextualising ESMA’s Governance Arrangements 47 distributive consequences in the form of taxpayer burden sharing.36 In order to ensure their technical effectiveness, financial market regulators are usually allowed a material degree of discretion as to how they carry out their mandates, and are often given independence guarantees;37 political influence is usually minimised to insulate them from short-term political preferences.38 Risks to legitimation can then arise, including of ‘bureaucratic drift’ away from mandates and objectives, industry capture, and the regulator’s engagement with issues that are politicised and have distributive consequences.39 The prevalence of a matrix-type approach to legitimation in financial market regulators’ governance arrangements reflects the reality that no single component is likely to secure legitimacy in this context, as well as the need to protect technical effectiveness and operational independence. Input legitimacy-oriented devices, such as detailed legislative mandates and specification of operating powers, designed to frame the legal space within which the regulator operates, are common.40 Procedural and output legitimacy-oriented mechanisms, which also support technical effectiveness, are also strongly associated with financial market regulators. These include impact assessment, data-gathering and interrogation, and consultation obligations. Chief among the output legitimation devices in common use, however, are accountability mechanisms.41 Accountability has long been associated with agency legitimation42 and can take different forms and be delivered in different ways.43 But however it is organised, accountability involves an obligation to account against criteria and subsequent sanctions/consequences where failures arise.44 Accountability also implies that the

36 From the US financial crisis-era debate, see A Levitin, ‘The Politics of Financial Regulation and the Regulation of Financial Politics (2014) 127 Harvard Law Review 1992; and from the EU crisis-era debate, see N Dorn, ‘Policy stances in financial market regulation: market rapture, club rules or democracy?’ in K Alexander and N Moloney (eds), Law Reform and Financial Markets (Elgar, Cheltenham, 2011) 35. 37 The principles adopted by the international standard-setter for financial markets (International Organization of Securities Commissions (IOSCO)), eg, include that regulators be operationally independent (but accountable): IOSCO, Objectives and Principles of Securities Regulation (2017), principle A.2. On the postcrisis privileging of technical discretion in EU financial governance see Mendes, ‘Bounded discretion in EU law’, n 17. 38 Although for a critique of the greater degree of political influence over banking regulators since the financial crisis, see L Bressman and R Thompson, ‘The Future of Agency Independence’ (2010) 63 Vanderbilt Law Review 599; and S Gadinis, ‘From Independence to Politics in Financial Regulation (2013) 101 California Law Review 327. 39 E Hüpkes, M Quintyn, and M Taylor, ‘The Accountability of Financial Sector Supervisors – Principles and Practice’ (2005) 16 European Business Law Review 1575. 40 See, eg, the ‘strategic’ and ‘operational’ objectives of the UK Financial Conduct Authority (FCA) (Financial Services and Markets Act 2000, ss 1B–1E), and, for a different approach, the ministerial directions that constrain the Australian Securities and Investments Commission (ASIC) (Australian Securities and Investments Commission Act 2001, s 12). 41 For an analysis of the governance regimes of financial regulators in the UK, US, and Spain, see P IglesiasRodríges, The Accountability of Financial Regulators: a European and International Perspective (Kluwer, Alpha aan den Rijn, 2014). 42 On the longstanding concern of accountability with the use of discretionary authority by nonmajoritarian institutions, see M Lodge and L Stirton, ‘Accountability in the Regulatory State’ in R Baldwin, M Cave, and M Lodge (eds), The Oxford Handbook of Regulation (Oxford University Press, Oxford, 2010) 49. 43 Amtenbrink and Lastra identify constitutional accountability (ensuring the agency operates within its system of checks and balances); parliamentary and judicial accountability (parliamentary reporting and judicial review); and performance accountability (agency efficiency): Amtenbrink and Lastra, n 12, 123. 44 M Busuioc, European Agencies. Law and Practice of Accountability (Oxford University Press, Oxford, 2013) 44.

48 ESMA’s Governance agency accounts for its actions to an ‘accountability forum’,45 which assesses the agency’s activities.46 By contrast with more static legitimating devices, accountability mechanisms are designed to be dynamic and to support ongoing legitimation through the identification, review, and sanction of potential abuses.47 Purposeful accountability review can, however, be a challenge in the financial market regulation context. Financial market oversight is not a science, optimal review benchmarks can be elusive, and financial market regulators operate under conditions of significant uncertainty and contingency, as discussed in subsequent chapters. Despite recent technical advances, data remain incomplete, indicators of market stress can be unclear,48 and regulators can struggle to identify which behavioural change is necessary and how it can be achieved.49 Optimal benchmarks can therefore be difficult to design, while accountability review may be politicised and insufficiently sensitive to technical challenges.50 The financial market regulator accordingly presents governance challenges.51 Financial market regulators must be equipped with an operational apparatus that equips them to deliver their mandates in a technically effective manner. But adequate legitimation may require governance devices that may hinder these regulators’ operational freedom and technical effectiveness.

B. The EU Context and Challenges i. The Governance of EU Agencies The EU setting is more complex again. ESMA is not dissimilar to the typical financial market regulator, in that it is charged with a series of regulatory and supervisory tasks which demand technical expertise and insulation from the political process. Its governance arrangements must accordingly equip it with the operational capacity to act in a technically expert and independent manner but also provide legitimation. ESMA is at the same time an EU agency, charged with a single market-oriented mandate and with acting in the EU interest, and operating within the distinct institutional setting of EU agencies, which has shaped their governance arrangements and particularly their legitimation mechanisms.52 For example, while EU agencies have long been associated 45 M Bovens, ‘Public Accountability’ in E Ferlie, L Lynne, and C Pollitt (eds), The Oxford Handbook of Public Management (Oxford University Press, Oxford, 2005) 182. 46 Busuioc, n 44, 44. 47 Amtenbrink and Lastra, n 12, 122. 48 See, eg, K Judge, ‘Information Gaps and Shadow Banking’ (2017) 103 Virginia Law Review 411; and, for a policy perspective, R Heath and E Goksu, G-20 Data Gaps Initiative II: Meeting the Policy Challenge, IMF Working Paper No 16/43 (2016). 49 A recent example relates to the difficulties regulators face in embedding cultural change: eg, Financial Stability Board, Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (2017). 50 Barr, n 34. 51 ibid, 120, suggesting that financial regulation raises ‘unique problems’ not easily addressed by administrative law conventions and scholarship. 52 A vast multi-dimensional literature examines EU agency governance. For a pre-ESMA legal assessment, see D Geradin, ‘The development of European regulatory agencies: what the EU should learn from the

Contextualising ESMA’s Governance Arrangements 49 with the expert technical capacity and related output legitimation familiar from agency governance generally,53 their related accountability arrangements reflect their distinct EU setting. EU agencies are usually subject to political accountability (to the European Parliament and Council), judicial accountability (to the Court of Justice of the EU (CJEU)), and to financial accountability (including to the Commission, external auditors, and the European Court of Auditors).54 The European Central Bank (ECB), acting as overseer of Banking Union’s Single Supervisory Mechanism (SSM), is not an agency, but the multiple accountability arrangements that apply55 and the close political review by the Council and Parliament of its SSM mandate and powers illustrate the distinct sensitivities the EU setting can generate.56 EU agencies also have distinct input legitimation arrangements shaped by the multiple ‘principals’ from which their powers can be regarded as ‘delegated’, as well as by the EU’s Treaty requirements on inter-institutional balance. Two features associated with ESMA’s distinct EU setting have been influential on 3333 ESMA’s governance arrangements and are relevant to this assessment: delegation from multiple notional principals and the related availability of multiple legitimation channels; and the restrictions the Meroni ruling57 places on ESMA’s discretion and the implications for effectiveness and legitimacy.

American experience’ (2005) 11 Columbia Journal of European Law 1. For a recent political science perspective on the EU’s crisis-era agency reforms, see M Božina Beroš, Some Reflections on the Governance and Accountability of the Single Resolution Board, TARN Working Paper 3/2017 (2017), available at https://ssrn. com/abstract=2940198; and for a recent legal perspective on ESA governance specifically, I Chiu, ‘Power and Accountability in the EU Financial Regulatory Architecture: Examining Inter-agency Relations, Agency Independence and Accountability’ (2015) 8 European Journal of Legal Studies 67. 53 Classically, Majone, n 10. The ESAs have been examined as privileging technocratic deliberation and functional effectiveness over traditional models of input legitimacy: M Everson, A Technology of Expertise: EU Financial Services Agencies, (2012) LEQS WP No 49/2012, available at http://www.lse.ac.uk/europeanInstitute/LEQS%20Discussion%20Paper%20Series/LEQSPaper49.pdf. 54 Busuioc, n 44, 260–61, characterising EU agencies’ accountability arrangements as representing a ‘large menu of accountability mechanisms’. 55 The Commission’s 2017 assessment of the accountability of Banking Union’s SSM identified its political accountability to the European Parliament, Council, Eurogroup, and national parliaments; judicial accountability through CJEU review; administrative accountability through internal review by the ECB’s Administrative Board of Review and administrative oversight by the Commission, European Ombudsman, European Court of Auditors, and European Banking Authority; and the ECB’s ‘consultation culture’ as all forming part of its accountability arrangements: Commission, Report on the Single Supervisory Mechanism (COM (2017) 591) 4–5. 56 Autumn 2017 saw the European Parliament and Council raise concerns that the ECB was acting outside its mandate and competences in adopting new guidelines for banks on non-performing loans. The ECB, which has been careful to underline its accountability regarding its SSM activities (eg, speech by B Coeuré (ECB Executive Board) on ‘Independence and Accountability in a Changing World’, 28 March 2017), argued that the draft guidelines were within its operational supervisory competences (see, eg, Statement by ECB Banking Supervision Chair Nouy to Second Ordinary Hearing of the Chair of the ECB’s Supervisory Board, European Parliament Economic and Monetary Committee, 9 November 2017). The legal services of the European Parliament and Council opined, however, that the draft guidelines represented an invalid exercise of regulatory power: C Jones, ‘ECB set to Rethink Plan for Curbing Eurozone Bad Loans’, Financial Times (5 December 2017). The guidelines were subsequently revised by the ECB to emphasise their soft status (ECB, Addendum to the ECB Guidance to Banks on Non-Preforming Loans: Supervisory Expectations for Prudential Provisioning of Non-performing Exposures, March 2018). 57 Case 9-56 Meroni v High Authority (ECLI:EU:C:1958:7).

50 ESMA’s Governance

ii. Governance Design and Multiple Principals The design of EU agency governance arrangements is often explained by reference to principal/agent analysis. The Council and European Parliament are typically regarded as EU agencies’ directly legitimated, delegating principals, as the seats of representative democracy in the EU. But the EU agency delegation chain is not a clear one, given multiple potential principals and also ambiguities as to the source of the powers ‘delegated’ and whether they are delegated or conferred.58 This obscured delegation chain has resonances with the different interests associated with EU agency development and design: intergovernmental and political interests expressed in the Council and (to a lesser extent) the Parliament; Commission supranational interests; and the interests of the national regulators who are typically injected into agency governance design to provide technical expertise.59 The Council and Parliament, with interests (particularly the Council) in ensuring credible commitment to policy outcomes through agencification, are usually regarded as the main delegating principals who shape EU agencies’ governance arrangements, and their interests are expressed through their adoption of the constitutive legislative measures which prescribe agencies’ institutional structure, mandates, powers, and oversight arrangements. EU agencies can also be regarded as exercising executive powers in support of the single market, which are notionally delegated from the Commission,60 the EU’s executive, and the representative of the EU interest EU agencies are designed to support; EU agency development has also been identified as a function of the Commission’s supranational interest in a European administration. The Commission’s interests are reflected in its (typically) direct representation on EU agencies’ decision-making bodies and its agency appointment and budgetary oversight powers. Finally, the national regulators usually injected into EU agency governance design as technical experts might also be regarded as a source of EU agency power, and the ‘delegation’ process accordingly expressed in terms of a ‘Europeanisation’ of national powers.61 In particular, EU agency supervisory powers

58 The principal/agent analytical framework is widely used in the EU agency literature and identifies as potential principals indirectly elected bodies (the Council) as well as those that are politically appointed (the Commission) (see Curtin, n 26, 90, noting the need to consider accordingly ‘multiple chains of delegation with multiple links’ when examining EU agency governance arrangements). While the prevailing principal/ agent analysis sheds light on how legitimation and related accountability mechanisms can be constructed, the extent to which EU agency powers are ‘delegated’ from EU institutions (which presupposes their pre-existence at EU-level) or are rather conferred (as such powers in practice lie at national level) also forms part of the EU agency governance debate (see nn 60 and 61). The term ‘delegation’ is used throughout this chapter, but the hybridity and complexity that lie behind this are acknowledged. 59 eg, M Egeberg and J Trondal, ‘Researching EU agencies: what have we learned (and where do we go from here?)’ (2017) 55 Journal of Common Market Studies 675. See further ch 1. 60 Delegation from the Commission is a slippery notion in the ESMA context, as ESMA does not exercise administrative rule-making power (which remains with the Commission) and ESMA’s supervisory powers, as discussed in this section, derive from national competences. 61 The delegation of supervisory powers to EU agencies has been characterised as an extraction of power from national administrations (D Geradin and N Petit, The Development of Agencies at EU and National Levels: Conceptual Analysis and Proposals for Reform, Jean Monnet Working Paper 01/04, (2004), available at https://jeanmonnetprogram.org/archive/papers/04/040101.pdf) and as a Europeanisation of national administration (R Dehousse, Misfits: EU Law and the Transformation of European Governance, Jean Monnet Working Paper 02/02 (2002), available at http://www.jeanmonnetprogram.org/archive/papers/02/020201. html). Chiti has similarly identified ambiguities in the ‘delegation’ process, noted that powers which are

Contextualising ESMA’s Governance Arrangements 51 are primarily implementing or executive in nature, and as such typically rest at Member State level and within national regulators (not EU institutions). This is implicit in Article 291 TFEU and express in the allocation of supervisory power to NCAs under sectoral EU financial market legislation and in the related recognition of NCAs’ preeminence in executive, supervisory matters. Such EU agency supervisory powers might be regarded, therefore, as conferred powers, extracted from a national source, rather than as powers delegated from an EU source. The incorporation of Member State representatives/national regulators within EU agency governance design, as is standard, can accordingly be regarded as not just a means for embedding technical expertise, but also as a means for securing a degree of legitimation62 – not only by strengthening output legitimation by embedding national technical expertise within EU agencies, but also by engaging the Member States, and potentially national regulators, at least to some extent, within the EU agency legitimation framework as sources of certain of the powers of EU agencies, particularly supervisory powers. Multiple notional ‘principals’ with an interest in the powers of EU agencies and in how they are exercised and overseen can therefore be associated with EU agency operation63 and with how their governance arrangements have been shaped.64 In the ESMA context, the existence of multiple potential ‘principals’ has benefits and drawbacks. ESMA’s ability to carry out its tasks effectively may be compromised if its governance arrangements become as a result cumbersome and heavily proceduralised, and its mandate restrictively designed, given the different and often competing interests engaged. Further, risks to legitimation may be generated if multiple legitimating channels accordingly open and do not operate in a complementary manner. But this multiplicity can also be productive, particularly given the potential for the NCA representatives on ESMA’s Board of Supervisors to support not just technical efficiency in the delivery of the EU interest – and thereby output legitimation – but also, if indirectly and admittedly thinly, a degree of input legitimation by representing notional ‘delegations’ from the Member States and some form of Member State political oversight. This analysis does not seek to overplay the role of NCAs in input legitimation of ESMA, particularly as national regulators are typically independent from, although accountable to, the national political process, and as they can develop technocratic interests distinct from national interests.65 Further, ESMA is charged with supporting the EU interest, albeit that this interest is informed by national financial market experience and practice. Nonetheless, NCAs’ potential to provide an admittedly thin form of input legitimation should not be overlooked, particularly given the growing pressure on ESMA’s legitimation framework. ‘delegated’ are sometimes ‘implied powers’ the relevant EU competence for which is not always clear, and described EU agencies as institutionalising cooperation and integration among Member States’ administrations: Chiti, ‘EU Agencies’ Rulemaking’, n 4, 1423 and 1398. 62 M Buess, ‘European Union agencies and their management boards: an assessment of accountability and demoi-cratic legitimacy’ (2015) 22 Journal of European Public Policy 94. Chiti has similarly identified ‘horizontal control … within the transnational networks coordinated by EU bodies’ as a form of agency accountability mechanism: Chiti, ‘Is EU Administrative Law Failing’, n 4, 590. 63 The EU setting accordingly has resonances with the operating environment of financial regulators generally, which has been identified as requiring accountability to the ‘multiple principals’ affected by regulatory action, including supervised actors and the public: Hüpkes et al, n 39. 64 Kelemen, n 24, 96. 65 See n 177.

52 ESMA’s Governance The notion of multiple principals as productively shaping EU agency/ESMA governance design has resonances with recent thinking in EU constitutional theory, which suggests that agency legitimation might be regarded as extending beyond the EU’s representative institutions (the Council and Parliament) and as relating to the EU as a multi-faceted ‘demoicracy’. The demoicracy concept acknowledges the scale and importance of the interdependence between Member States in the EU constitutional settlement and the related role of Member States as legitimating actors. It also recognises that peoples do not form a cohesive EU whole but are connected through different transnational or horizontal networks and institutions.66 Legitimacy is accordingly not just related to delegation from the Council and Parliament as notionally representative EU actors. Member States and their representative institutions can also be associated with the legitimation of EU action, while legitimation channels can in addition be developed to recognise the transnational organisation of the EU demoicracy. The legitimacy of EU agencies might accordingly be related, at least to some extent, to the accountability relationships between the national regulators represented on agencies and their respective national systems and representative bodies.67 It might also be related to, additionally, a form of transnational, peer accountability that acknowledges that national regulators on EU agencies have peer responsibilities to the agency and their fellow regulators, as EU agencies are an expression of how the EU demoicracy can organise itself transnationally. This form of legitimation through peer/agency accountability can be regarded as taking the form of an inter-regulator commitment to acting in the EU interest and to supporting the agency through peer coordination, communication, and deliberation, the sharing of expertise, and mutual monitoring of compliance and commitment.68 This demoicracy-informed analysis does not make large claims as to the related role NCAs on ESMA’s Board of Supervisors, independent from but accountable to local political processes, can play in input legitimation.69 Neither does it seek to overplay the horizontal legitimation potential of some form of peer NCA/ transnational accountability, given the remoteness of this form of legitimation from

66 In Nicolaïdis’ formulation, demoicracy relates to ‘a Union of peoples who govern together, but not as one’: K Nicolaïdis, ‘European Demoicracy and Its Crisis’ (2013) 51 Journal of Common Market Studies 351, showing how legitimacy can be a function of multiple but connected national polities, rather than of a single European populace acting as a political unit, and that it accommodates horizontal as well as vertical delegations of power and the notion of shared governance. See further K Nicolaïdis, ‘The Idea of European Demoicracy’ in J Dickson and P Eleftheriadis, Philosophical Foundations of European Union Law (Oxford University Press, Oxford, 2013) 247. 67 Buess has suggested that as the vertical links between EU institutions and the Member States are of crucial importance in assessing the demoicratic quality of EU institutions and their legitimacy, EU agencies should be politically accountable to the Member States and their political institutions: Buess, n 62, 98. Similarly, but from a different perspective, Lindseth, n 21, 534–35, showing how delegation flows from national principals to EU supranational agents. 68 Buess, n 62. Transnational/peer-oriented legitimation has some resonances with the horizontal accountability analysis used in the agency literature, which distinguishes between traditional, ‘vertical’/hierarchical accountability and new forms of ‘horizontal’ accountability designed to manage the proliferation in and complexity and increasing influence of agencies (eg T Schillemans, ‘Accountability in the shadow of hierarchy: the horizontal accountability of sgencies’ (2008) 8 Public Organization Review 175). 69 The Buess study noted that higher levels of legitimation obtain where agency representatives are from national ministries (not regulators), and found that of the six agencies surveyed (which did not include the ESAs), in only one case did an agency board display vertical/political accountability nationally.

Contextualising ESMA’s Governance Arrangements 53 direct representation and as national regulators themselves face legitimation challenges. It seeks only to highlight that Board-related legitimation of ESMA action can potentially extend beyond output legitimation, and that care should be taken before its role and composition is changed. The notion of NCAs forming some part of ESMA’s legitimation arrangements also has (admittedly faint) resonances with new thinking on financial governance. As discussed in later chapters, ESMA can be regarded as displaying ‘experimentalist’ governance qualities. Experimentalist governance is associated with governance arrangements, including agencies, which respond to complex and contingent environments in which the optimum course of action is not always clear (such as financial markets) by setting high-level goals and by using a coordinated learning process, based on local experimentation and ‘frontline’ experience, to inform problem-solving and to adjust and improve measures in light of experience.70 This form of governance is also, however, associated with horizontal peer–regulator-based accountability and related legitimation, as it links accountability to a peer commitment to purposeful, data-informed, and diligent regulatory learning and revision.71 It has accordingly some resonances with the legitimation through horizontal peer–regulator accountability that can be associated, if tentatively, with EU agencies. ESMA’s peer review process, for example, could be regarded as providing such a channel for accountability and so legitimation, as it involves NCAs engaging in mutual monitoring, review, and learning. Peer review supports output-related legitimation of ESMA action, but it is not without relevance for a (thin) form of peer-accountability-related legitimation.

iii. Governance Design and Constraints on Discretion ESMA’s EU setting also means that its operating environment is shaped by the distinct constraints imposed by the Meroni ruling. This ruling imposes on EU agencies a non-delegation principle designed to support the Treaty-based institutional balance of power.72 Meroni only permits the delegation of executive powers the exercise of which can be subject to strict review in light of objective criteria determined by the delegating authority; the delegation of discretionary powers, implying a wide margin of discretion that may make possible the execution of actual economic policy, is prohibited. Accordingly, EU agencies are subject to a distinct limiting principle: they may not be given or exercise discretionary powers that afford them a wide margin of discretion making possible the execution of actual economic policy; and to the extent they can exercise discretion it must be constrained by objective criteria which allow for effective judicial review. The principle has had constitutive influence on ESMA’s design: the strict conditionality imposed on ESMA’s supervisory powers, for example,

70 For a foundation analysis, see C Sabel and W Singer, ‘Minimalism and Experimentalism in the Administrative State’ (2011) 100 Georgetown Law Journal 53. 71 C Sabel and J Zeitlin, ’Experimentalism in the EU: common grounds and persistent differences’ (2012) 6 Regulation & Governance 410. Similarly, G de Búrca, RO Keohane, and C Sabel, ‘Global Experimentalist Governance’ (2014) 44 British Journal of Political Science 477, finding that experimentalist governance, with its emphasis on mutual monitoring, peer review, and consultation, supports new accountability patterns. 72 On Meroni as protecting the Treaties’ institutional balance, see Griller and Orator, n 21; and G Majone, ‘Delegation of Regulatory Powers in a Mixed Polity’ (2002) 8 European Law Journal 319.

54 ESMA’s Governance is an expression of Meroni.73 The Meroni constraint is not only legal; it has long been used to achieve institutional and political preferences to constrain ESMA’s development.74 As EU agencies have developed, the Meroni principle has been subject to extensive analysis. At the risk of reductionism, either it is supported as a means of ensuring that discretionary agency action operates within the rule of law and is appropriately legitimated by democratic organs, or it is criticised for fettering EU agencies in effectively carrying out their tasks as expert non-majoritarian actors and as needing to be replaced with other legitimating devices such as accountability mechanisms.75 Meroni has also been criticised for stunting the development of adequate governance arrangements for EU agencies. By creating the legal fiction that wide-ranging discretion cannot be conferred on agencies, it has led to the development of a ‘hidden discretion’, which risks not being appropriately legitimated.76 ESMA exemplifies the difficulties generated by Meroni. On the one hand, Meroni acts as constitutive and legitimating legal principle. It delimits ESMA’s activities, has shaped its powers, and acts as a basis for judicial review. On the other, ESMA’s burgeoning activities and its intensifying technocratic influence might be regarded as having burst the bounds of Meroni, while procedural efficiency might call for its removal. The Meroni ruling was applied to the specificities of ESMA’s functions in the 2014 European Court of Justice (ECJ) Short Selling ruling, which applies Meroni to the exceptional direct intervention powers given to ESMA under the 2012 Short Selling Regulation.77 The Court did not revisit Meroni. But it took a flexible approach to its application, emphasising that if appropriate conditions adopted by the legislature apply to the exercise of discretion, the Meroni requirement is met: the Court highlighted the difference between valid, clearly-defined executive powers, subject to strict review in the light of objective criteria, and invalid, discretionary powers involving a wide margin of discretion which could make possible the exercise of actual economic policy. ESMA’s powers were circumscribed by the different conditions and criteria that limited ESMA’s discretion under the 2012 Short Selling

73 On the ‘Meroni logic’ as shaping ESMA’s regulatory powers see M Busuioc, ‘Rulemaking by the European Financial Supervisory Authorities: walking a tight rope’ (2013) 19 European Law Journal 111 and on its impact on EU agency design generally see M Chamon, ‘EU Agencies Between Meroni and Romano or the Devil and the Deep Blue Sea’ (2011) 48 Common Market Law Review 1055. 74 The Commission has frequently used Meroni to restrict ESMA’s operating freedom, including to limit ESMA’s enforcement powers over rating agencies (2010 Rating Agency Proposal Impact Assessment (SEC (2010) 678), 13). At Member State level, the UK frequently relied on the Meroni principle to restrict ESMA’s powers: N Moloney, ‘Bending to uniformity: EU financial regulation with and without the UK’ (2017) 40 Fordham International Law Journal 1335. 75 For contrasting perspectives, see Griller and Orator, n 21 (the importance of Meroni to legitimation) and Geradin, n 52 (the Meroni effectiveness difficulties). 76 Chiti, ‘Is EU Administrative Law Failing’, n 4, 589. 77 Case C-270/12 UK v European Parliament and Council (ECLI:EU:C:2014:18) (the powers are discussed in ch 5). The UK Government challenged ESMA’s powers under the 2012 Short Selling Regulation (Regulation (EU) No 236/2012 [2012] OJ L86/1) to require market participants to notify to the relevant NCA or disclose to the public details of a net ‘short position’, or to prohibit or impose conditions on short sales (Art 28(1)), subject to conditions linked to threats to market integrity, functioning, and stability, and to NCA failure to act appropriately (Art 28(2) and (3)). The Meroni challenge was based on a number of grounds, including ESMA’s powers entailing a ‘very large measure of discretion’; ESMA’s being given a wide range of choices as to which measures to impose – measures which would, the UK argued, have very significant policy implications given their potential impact on financial markets; the factors ESMA was required to take into account being highly subjective; the ongoing ability of ESMA to renew any measures being without any overall time limit; and, overall, the conferral of broad discretion on ESMA to apply policy in a particular case.

Contextualising ESMA’s Governance Arrangements 55 Regulation and which were amplified by Commission Delegated Regulation 918/2012.78 The Court also pointed to the procedural conditions on ESMA action, including the consultation obligations imposed on ESMA, the temporary nature of the ESMA decision, and the obligation on ESMA to review any measure imposed on a three-month review cycle. The Court further related ESMA’s powers to the enabling power for emergency intervention under ESMA Regulation Article 9(5),79 and found that ESMA’s powers were strictly confined to those set out in Article 9(5). Accordingly, while ESMA’s powers entailed the exercise of discretion, they were ‘precisely delineated and amenable to judicial review in light of the objectives established by the delegating authority’ and complied with Meroni; they did not imply that ESMA was vested with a large degree of discretion incompatible with the TFEU.80 The implications of the ruling for the Meroni principle are contested.81 But it can be read as loosening the Meroni constraint and as widening the operating space within which ESMA’s actions can be regarded as legitimate.82 This is because the conditions that bounded ESMA’s exercise of the relevant powers can reasonably be regarded as general and high-level and as allowing ESMA very significant discretion; and as ESMA’s decision-making powers engaged complex choices, which required a balancing of public interests in a sensitive area.83 Nonetheless, the conditions constraining ESMA’s powers were regarded as sufficient to allow review. The Short Selling ruling may have released some of the Meroni pressure, certainly as regards ESMA’s operational effectiveness, but it is something of a sticking plaster as regards legitimacy. The incongruity between the Meroni principle and the scale of ESMA’s technocratic influence in practice is real.

C. Meeting ESMA’s Governance Needs: Effectiveness and Legitimacy Within this hybrid administrative financial market governance/EU setting, ESMA’s governance arrangements must meet a range of needs. In terms of effectiveness, they 78 Short Selling, n 77, para 52. 79 See further ch 5. 80 Short Selling, n 77, paras 52, 53, and 54. 81 eg CF Bergström, ‘Shaping the New System for Delegation of Powers to EU Agencies: United Kingdom v European Parliament and Council (Short Selling)’ (2015) 52 Common Market Law Review 219; E Howell, ‘The European Court of Justice: Selling Us Short’ (2014) 11 European Company and Financial Law Review 454; P Van Cleynenbrueguel, ‘Meroni Circumvented? Article 114 TFEU and EU Regulatory Agencies’ (2014) 21 Maastricht Journal of International Law 64; M Scholten and M van Rijsbergen, ‘The ESMA Short Selling Case: Erecting a New Delegation Doctrine in the EU upon the Meroni-Romano Remnants’ (2014) 4 Legal Issues of Economic Integration 389; H Marjosola, ‘Bridging the Constitutional Gap in EU Executive Rule-Making’ (2014) 10 European Constitutional Law Review 500; and M Chamon, ‘The Empowerment of Agencies under the Meroni Doctrine and Article 114: Comment on UK v Parliament and Council (Short Selling) and the Proposed Single Resolution Mechanism’ (2014) 39 European Law Review 380. 82 See Craig, n 16, 539–40; and N Moloney, EU Securities and Financial Markets Regulation, 3rd edn (Oxford University Press, Oxford, 2014) 998–1003. Further opening the way to a wider agency operating space, the Court also ruled that the Romano ruling (Case 98/90 Romano v Institut National d’assurance Maladie (ECLI:EU:C:1981:104)), which prohibits the conferral of power to adopt acts having the force of law on bodies other than the EU legislature, did not imply that ESMA could not be empowered to adopt measures of general application, as long as the Meroni conditions were met; and that Art 290/291 TFEU did not establish an exclusive framework within which the power to adopt administrative measures of general application could be delegated or conferred. 83 See further ch 5.

56 ESMA’s Governance must ensure that, as a non-majoritarian EU agency charged with meeting its legislative mandates through the deploying of technical expertise and functional specialisation, ESMA has the organisational capacity to act in an independent, operationally-efficient and technically-informed manner, and, given its single market/ESFS setting, to act in the EU interest but incorporate the expertise of member NCAs. These arrangements must also ensure that ESMA has sufficient operational freedom to meet its mandate in an agile and responsive manner, given the contingent, uncertain, and complex nature of financial market risk. ESMA’s governance arrangements must also, at the same time, ensure adequate legitimation of ESMA’s activities and reflect the distinctiveness of its EU setting in this regard. As discussed in the following sections and amplified in later chapters, ESMA’s governance framework, despite its complex EU institutional setting and the multiple ‘principals’ which can be regarded as having shaped it, appears relatively ‘fit for purpose’. As regards legitimation, there is a fuzzy quality to many of ESMA’s legitimating arrangements. But together they form a workable means for legitimating ESMA’s activities, while the political support the construction of ESMA (and the other ESAs) garnered, at a time of acute financial crisis and despite the incursion the ESAs would lead into national sovereignty, provides something of a legitimation backstop.84 ESMA’s legitimating arrangements include its constitutive legislative framework, which supports input legitimation; the many accountability and review arrangements, which support output legitimation; and the often (although not always) heavily proceduralised nature of ESMA’s activities, which supports procedural legitimation. Other legitimating mechanisms act in support. The location of ESMA decision-making within the NCAdominated Board of Supervisors can be associated, to some degree, with legitimation, whether in the form of NCA vertical accountability to national political systems; a horizontal peer NCA commitment to ESMA’s mandates, transnational coordination, and expertise sharing; or the Board’s support of technical, expert deliberation and thereby output legitimation. The extent to which Meroni supports legitimation can be debated, but Meroni is certainly embedded in the most sensitive areas of ESMA’s mandates, including through the extensive conditionality and proceduralisation that apply to ESMA’s supervisory powers.85 ESMA’s legitimation arrangements are proving dynamic and adaptive, as its different ‘principals’ strengthen their relationships with ESMA; the European Parliament, in particular, is emerging as an increasingly engaged and committed accountability forum. Nonetheless, there are weaknesses, particularly as regards accountability benchmarks. From the effectiveness perspective, ESMA’s governance arrangements do not appear to be obstructing ESMA’s ability to engage in operationally-efficient, technicallyinformed decision-making in an agile, responsive, and independent manner that enrols NCA expertise and experience in delivering EU objectives. ESMA’s independence guarantee does not seem to be under threat, and ESMA’s operational/decision-making engine appears to be functioning smoothly; for example, consultation and impact

84 A Boin, M Busuioc, and M Gronleer, ‘Building European Union Capacity to Manage Transboundary Crises: Network or Lead-Agency Model’ (2014) 8 Regulation & Governance 418. 85 See further ch 5.

ESMA’s Institutional Design 57 assessment requirements are supporting data-informed decision-making and the Board of Supervisors appears to be operating in a productively deliberative manner. To the extent Meroni is fettering ESMA’s capacity to act effectively, this is more a function of the constraints it imposes on any additional competences being conferred on it than of material obstructions to its current operation, although, as discussed in chapter 5, Meroni can be associated with some strain on ESMA’s supervisory effectiveness. A tipping point may be on the horizon. If ESMA’s technocratic influence continues to expand, as can be reasonably predicted, its legitimation arrangements will require some bolstering; mechanisms for ensuring strengthened political oversight will likely be required. ESMA’s ability to act effectively will also likely come under pressure; the location of all decision-making power in the Board of Supervisors is unlikely to be sustainable over the long term. The 2017 ESA Proposal reforms, however, privilege technical effectiveness over legitimation and risk compromising the legitimacy of ESMA’s activities.

IV. ESMA’s Institutional Design A. Operational Organisation and Privileging National Experts ESMA’s organisational model is based on that used for EU agencies generally, albeit with some significant modifications.86 The EU’s more-or-less standard organisational template for agencies reflects the rationale for the establishment of non-majoritarian agencies, in that it is designed to support agency technical efficiency and operational independence but also to ensure that agency action is legitimated.87 It also seeks to accommodate the interests of the multiple delegating institutional ‘principals’ usually identified as having an interest in the operation of EU agencies (the Council, the European Parliament, and the Commission) alongside national interests.88 The typical EU agency is composed of an executive director; an administrative management board, responsible for ensuring that the obligations of the constitutive agency Regulation are met (typically formed of representatives of the Commission, Council, and Parliament and regarded as the seat of legitimation); and an expert, scientific board (typically composed of national regulators and designed to support technical effectiveness).89 An associated board of appeal usually hears appeals from those affected

86 The Commission has acknowledged that ‘there will always be variations between agencies: their different functions, ways of working and sizes have not developed by chance, but reflect an attempt to define the best way for each agency to discharge its responsibilities effectively’, and highlighted the need to respect agencies’ specific characteristics: 2008 Agency Communication, n 5, 6. 87 eg, E Chiti, ‘An important part of the EU’s institutional machinery: features, problems and perspectives of European agencies’ (2009) 46 Common Market Law Review 1395. 88 M Busuioc, ‘European agencies and their boards: promises and pitfalls of accountability beyond design’ (2012) 19 Journal of European Public Policy 719. 89 These components were identified as common to EU agency design in the 2012 Common Approach (n 5). See further F Vibert, ‘Better Regulation and the Role of EU Agencies’ in S Weatherill (ed), Better Regulation (Hart Publishing, Oxford, 2007) 387.

58 ESMA’s Governance by agency decision-making. The Agency for the Cooperation of Energy Regulators (ACER), established in 2009,90 for example, has an executive Director, responsible for managing the agency and for adopting (following a favourable opinion of the technical ‘Board of Regulators’) the different technical opinions, recommendations, and decisions ACER is empowered to adopt. Oversight is provided by an ‘Administrative Board’ of nine voting members, two of which are appointed by the Commission, two by the Parliament, and five by the Council. It is responsible for appointing the ACER Director, appointing the technical Board of Regulators, ensuring ACER carries out its mission and performs its tasks assigned in accordance with its founding Regulation, adopting a work programme and annual report, adopting certain internal and staffing rules, and for budgetary matters. The Board of Regulators provides technical expertise (by providing opinions to the Director) and is composed of voting representatives of the relevant national regulatory authorities and one non-voting Commission representative. ESMA’s organisational design is related to the classic EU agency design, in that it has representative/oversight legitimating elements and technical expertise elements. But it is distinct. Technical expertise and representative/oversight legitimating functions are combined within a single decision-making body, the Board of Supervisors, on which only NCAs have voting rights, although the Commission is a non-voting member. This organisational principle privileges technical expertise and independence. Direct input/representative legitimacy on the Board is weak, taking the form of the Commission’s non-voting seat, which can be regarded as reflecting the EU interest.91 The Board supports output legitimation, however, by placing technical experts at the centre of decision-making. The Board can also be associated, to some extent, with NCAs’ accountability links back to the Member States, as well as with a form of transnational/peer NCA accountability, both of which provide some degree of legitimation, as discussed earlier. ESMA’s organisational design is distinct but not exceptional. The European Aviation Safety Agency (EASA), established earlier in 2008, is not dissimilar organisationally.92 Oversight functions and certain technical functions are carried out by its Management Board, which is composed of voting Member State representatives and one voting Commission representative: other technical tasks in relation to EASA’s work, including inspections and investigations, are reserved to the Director. ESMA’s operational architecture revolves around the Board of Supervisors, but under ESMA Regulation, Article 6 it has four components: the decision-making Board of Supervisors; the operational Management Board; the Chair and Executive Director; and the Board of Appeal. Each is considered in further detail in the following subsections.

B. The Board of Supervisors The Board of Supervisors (ESMA Regulation, Articles 40–44) is ESMA’s decision-making body. Under Article 40(1) it is composed of: the (voting) heads of the NCAs responsible 90 Regulation (EC) No 713/2009 [2009] OJ L211/1. 91 As well as the notional (and admittedly slippery) delegation of executive power from the Commission to ESMA. 92 Regulation (EC) No 216/2008 [2008] OJ L79/1.

ESMA’s Institutional Design 59 for the supervision of financial markets;93 the ESMA Chair, who chairs Board meetings but, reflecting typical EU agency design, is non-voting; one (non-voting) Commission representative; and one (non-voting) representative of each of the European Systemic Risk Board (ESRB), European Banking Authority (EBA), and European Insurance and Occupational Pensions Authority (EIOPA). Under Article 40(6), the Executive Director may participate in meetings on a non-voting basis. By contrast with standard EU agency design, scientific/expert functions and oversight/representative functions have not been separated; technical expertise has been privileged by the location of all decision-making power in the Board and the limitation of voting power to NCAs. The Board has a legitimation function, however, linked to the national and transnational/peer accountability relationships which can be traced in the Board; in addition, the injection of NCA technical expertise and deliberation and challenge of ESMA can support output legitimation. The Commission’s direct participation (a traditional element of agency governance) also provides legitimation; although the Commission is a non-voting member its influence can be significant, as considered further in section IV.F of this chapter. Technical efficiency and related output legitimation are supported by the Board’s discretion to admit other members/observers. The NCAs of the ‘European Economic Area (EEA) members of the European Free Trade Association’ (Norway, Iceland, and Liechtenstein) have been admitted as ‘members without voting rights’.94 This status reflects the requirement for these NCAs under the EEA Agreement (which provides for access to the EU single market) to follow ESMA measures. Other supervisors may attend as observers: Article 75(3) of the ESMA Regulation provides that third country supervisors may be admitted as ‘observers’ under cooperation agreements entered into with third countries. The Board’s Rules of Procedure adopt an expansive approach, providing that additional observers and experts may be invited, including representatives of third country supervisors, and also NCAs of an EU candidate state as long as accession negotiations have successfully completed.95 Whether or not the UK may be permitted some form of observer status (which may become important for the UK if UK/EU access arrangements require some degree of regulatory equivalence) is forming part of the discussions on the new settlement the UK may come to agree with the EU.96 But however this politically sensitive question is resolved,97 it is clear that observer status does not bring voting power.

93 Where more than one authority could sit on the Board, the different authorities must agree as to the sitting authority (Art 40(4)). NCAs must also arrange for high-level alternates, although NCA heads must meet in person twice annually: Art 40(1) and (3). 94 The Board’s Rules of Procedure (ESMA, Decision of the Board of Supervisors, Rules of Procedure (ESMA/2012/BS/88, rev3), version 14 December 2016) provide that it is to include the heads of the relevant NCAs in each EEA member of the European Free Trade Association (EFTA), and the EFTA Surveillance Authority, who are to have, except for the right to vote, the same rights and obligations as EU NCAs in the work of ESMA: Arts 1(1)(g) and 7(1). 95 Board Rules of Procedure, Art 1(3)–(5). 96 eg, House of Lords, EU Committee, 11th Report of Session 2017–2019, Brexit: the future of financial regulation and supervision (2018), para 168. 97 At the time of writing, the draft Withdrawal Agreement between the UK and the EU takes an austere position as regards agency participation over the proposed UK transition period (Draft Withdrawal Agreement, 28 February 2018 (TF50 (2018 33))). Arts 2, 122, and 126 together provide that the UK would be subject to acts adopted by the agencies of the EU, while Art 6 provides that the UK would not participate

60 ESMA’s Governance Board meetings are convened by the Chair; they may also be convened at the request of one-third of the Board’s membership (ESMA Regulation, Article 44(2)). The range of the Board’s nominated tasks underscore its position as the ESMA decision-maker: giving guidance to the work of ESMA and taking the decisions associated with its tasks and power; the adoption of opinions, recommendations, decisions, and advice; adoption of ESMA’s annual and multi-annual work programmes and annual reports; and adoption of the budget (Article 43).98 The Board is also charged with appointing the Chair and Executive Directive and with exercising disciplinary authority, including deciding to remove them from office (Articles 43 and 51). The Board may establish internal committees for specific tasks and delegate certain clearly defined tasks to internal committees or panels, the Management Board, or the Chair (Article 41(1)). Board decision-making takes place in accordance with the Board’s Rules of Procedure and the ESMA Regulation voting rules. The Board generally operates under a simple majority vote.99 A qualified majority vote (QMV)100 applies to its regulatory governance activities (the proposing of Binding Technical Standards (BTSs) and the adoption of ESMA Regulation Article 16 guidelines and recommendations, but not Article 29 ‘soft law’) and to any decisions to prohibit products or activities under Article 9(5) (Article 44). Specific blocking minority rules govern ESMA’s powers to impose a binding mediation decision on NCAs.101 A quorum is formed by two-thirds of the Board’s voting members and provision is made for a written procedure.102 While the QMV requirement supports operational effectiveness, in that it allows the Board to cut through deadlocked situations, in practice the Board tends to operate by consensus, as noted in section IV.G. Non-voting members and observers (save the Chair and Executive Director) may not attend Board discussions relating to individual financial market participants, unless otherwise provided in relevant EU legislation or where specific provision is made in relevant agreements with third country supervisors (Article 44(4)).

in the decision-making and governance of agencies. It also provides that the UK could (by invitation, on a case-by-case basis and exceptionally, and without voting rights) attend agency meetings, but only where the discussion concerned individual acts to be addressed during the transition period to the UK (or to natural or legal persons residing or established in the UK), or where the presence of the UK was necessary and in the interests of the EU, in particular for the effective implementation of EU law during the transition period (Art 123(5)). 98 ESMA describes the Board as ‘guid[ing] the work of the Authority and hav[ing] the ultimate decisionmaking responsibility regarding a broad range of matters’: Annual Report on 2016 (2017) 13. 99 Each Board member has one vote (ESMA Regulation, Art 44(1)). A simple majority is achieved where more voting members, each exercising one vote, vote in favour than against; abstentions are not counted: Board Rules of Procedure, Art 4(3). 100 Under the Board Rules of Procedure, and reflecting Art 16(4) TEU, a qualified majority is obtained where at least 55% of voting members are in favour, comprising at least 16 of them and coming from NCAs comprising at least 65% of the population of the EU (population figures are calculated using the figures adopted by the Council of the EU and in force at the relevant time): Art 4(7) and (9). 101 See further ch 5. 102 Board Rules of Procedure, Art 4(1) and (11)–(15). The written procedure requires that all voting members express approval or disagreement, or abstain. The Chair must specify the issues engaged and whether the proposal is ‘consensual or controversial’. Use of the written procedure must be expressly justified where it relates to Binding Technical Standard (BTS) proposals.

ESMA’s Institutional Design 61

C. The Management Board Operational management is provided by an executive Management Board (ESMA Regulation, Articles 45–47) composed of the Chair and six Board of Supervisors members, elected by and from the voting members of the Board; to secure orderly succession, mandates overlap and rotation arrangements apply (Article 45(1)).103 The Commission and the Executive Director are non-voting members of the Management Board (Article 45(2)), but the Commission is, in a traditional agency feature, empowered to vote on the adoption of ESMA’s budget (Articles 45(2) and 63). The Board may also appoint advisers or experts to assist it (Article 45(4)). The Management Board operates under its Rules of Procedure and on a simple majority basis (Article 45(2)). It is tasked with ensuring that ESMA carries out its mission and performs the tasks assigned to it in accordance with the ESMA Regulation (Article 47), and supports the work of the Board of Supervisors,104 including by proposing (for Board of Supervisor adoption) an annual and multi-annual work programme, the draft budget, and the draft annual report. It must also adopt a staff policy plan and implement the EU’s Staff Regulation, adopt access to document rules, and appoint and remove members of the Board of Appeal. The Management Board is further charged with exercising ESMA’s budgetary powers in accordance with the ESMA Regulation (see section VI).

D. Chair and Executive Director ESMA is represented by a ‘full-time, independent professional’ Chair (ESMA Regulation, Article 48(1)); the Chair105 is not a representative of the Member States or a Commission appointee, as ESMA was careful to highlight at the outset.106 The Chair is appointed by the Board of Supervisors on the basis of merit, skills, knowledge, and experience, based on an open selection procedure; the European Parliament has an oversight role, having the right to hold a hearing with the candidate and, subsequently, to object to the appointee (Article 48(2)). The independence of the Chair (required and guaranteed under Article 49107) is protected by the requirement that only the Parliament can remove the Chair, following a decision of the Board of Supervisors (Article 48(5)). The Chair is responsible for preparing the work of the Board of Supervisors and chairs meetings of the Boards of Supervisors and Management (Article 48(1)).

103 Management Board members (who may appoint alternates) are appointed for a two-and-a-half-year term (extendable once). Board composition must be balanced and proportionate, and must reflect the EU as a whole. The initiation of the voting process and its outcome is noted in Board of Supervisors minutes. 104 It must meet before every Board of Supervisors meeting and as often as the Management Board deems necessary, but at least five times annually: Art 45(3). 105 Appointed for a five-year term, extendable once: Art 48(3). ESMA Chair Steven Maijoor was appointed in 2011 and reappointed in 2016 for a second term. 106 ESMA, Frequently Asked Questions (2011) 9. 107 See n 137.

62 ESMA’s Governance A ‘full-time, independent professional’ Executive Director (Article 51), appointed by the Board of Supervisors,108 is responsible for the management of ESMA, preparing the work of the Management Board, and implementing ESMA work programmes, under the guidance of the Board of Supervisors and the control of the Management Board (Article 53).109 The Executive Director (whose independence and is required and guaranteed under Article 52) may only be removed by a decision of the Board of Supervisors.

E. Internal Organisation and Working Methods i. Working Methods In practice, the Board works through the committees, working groups, and task forces on which NCAs are represented, chief among them the permanent Standing Committees (SCs), which carry out initial technical work for Board decisions.110 Each SC is chaired by an (elected) Board of Supervisor member; NCA staff provide technical input (to the extent an NCA is engaged with the issue in question111); and ESMA staff act in support and as rapporteurs. Initially, ESMA established the following SCs: Secondary Markets; Investment Management; Post-Trading; Credit Rating Agencies; Corporate Finance; Corporate Reporting; ESMA-Pol (market surveillance) (now Market Integrity); Investor Protection and Intermediaries; Financial Innovation; Review Panel;112 Economic and Markets Analysis; and IT Governance and Management.113 The SCs have expanded with ESMA’s burgeoning remit and now include SCs on Supervisory Convergence, Market Data, and Commodity Derivatives. The SCs allow ESMA to corral the technical expertise of NCAs, but they also support a degree of input legitimation in that they allow national interests to inform ESMA’s work, and strengthen output legitimacy by embedding local experiences and best practices.

ii. Impact Assessment Impact assessment/cost–benefit analysis supports the technical capacity of financial market regulators but also forms part of their legitimating arrangements.114 Particularly

108 The Executive Director is appointed by the Board of Supervisors, after confirmation by the European Parliament, on the basis of merit, skills, knowledge and experience, and for a five-year term, which may be extended once: Art 51(2) and (3). Executive Director Verena Ross was appointed in 2011 and reappointed in 2016 for a second term. 109 The Director’s tasks are set out in Art 53 and reflect those allocated by the 2012 Common Approach to agency Directors: n 5, 6–7. 110 ESMA, Standing Committees, available at https://www.esma.europa.eu/about-esma/working-methods/ standing-committees. 111 Decisions as to how prioritise ESMA engagement at the SC/working group technical level are increasingly preoccupying NCAs given competing domestic demands. 112 Since reformed as ESMA’s peer review functions have evolved (ch 4). 113 ESMA, Annual Report on 2012 (2013) 70. 114 eg, P Rose and C Walker, ‘Dodd-Frank Regulators, Cost-Benefit Analysis and Agency Capture’ (2013) 66 Stanford Law Review Online 9.

ESMA’s Institutional Design 63 since the financial crisis, financial market regulators have been required to engage in such assessment, and failure to engage in appropriate assessment can be grounds for judicial review.115 But there are limits to the extent to which impact assessment can act as a legitimating device or support effectiveness. Assessments can struggle to deliver precise and reliable results, data can be limited, regulators are frequently operating in conditions of uncertainty and contingency, and impact assessment can obscure underlying societal values.116 Nonetheless, impact assessment at least mitigates legitimation and effectiveness risks, and is now well-established in financial market regulators’ governance arrangements. Impact assessment is built into ESMA’s operating framework, being required of ESMA for BTS proposals and ESMA Regulation, Article 16 guidelines, while ESMA also deploys impact assessment in its soft-law activities and technical advice more generally. As discussed in later chapters, ESMA’s capacity to engage in impact assessment is growing and, as its data capacity expands, becoming more reliable. The potential of impact assessment to strengthen ESMA’s technical capacity is therefore increasing, as is its capacity to act as a legitimating device. So too is institutional interest in high-quality impact assessment; the 2017 ESA Proposal, for example, proposes a strengthening of ESMA’s impact assessment requirements.117

iii. Consultation Similarly, ESMA’s consultation arrangements support its technical capacity and provide a means, if a thin one, for supporting input/procedural legitimacy by facilitating stakeholder representation. Consultation is not a panacea for legitimation weaknesses given its challenges. These include the difficulties in organising and corralling the diffuse retail investor/financial consumer interest, and the advantages the industry has in leveraging consultations to its own ends,118 as well as the potential distortions consultations can generate.119 Nonetheless, consultation, whatever its limitations, is strongly associated

115 As is illustrated by the high-profile 2007 US Goldstein ruling, in which a US court declared invalid a new US SEC hedge fund rule, in part as the SEC’s reasoning was not plausible. For analysis, see (2007) 120 Harvard Law Review 1394. 116 See E Posner and C Sunstein, Moral Commitments in Cost–Benefit Analysis, University of Chicago Public Law & Legal Theory Series No 620 (2017), available at http://dx.doi.org/10.2139/ssrn.2930450; and JC Coates, Cost–Benefit Analysis of Financial Regulation: Case Studies and Implications, Harvard Public Law Working Paper No 14-05 (2015), available at http://ssrn.com/abstract=2375396. 117 The Proposal adds a new requirement for ESMA to have due regard to the principles of better regulation, including the results of cost–benefit analyses: 2017 ESA Proposal, n 1, ESMA Regulation, Art 8(3). The Commission’s better regulation agenda is primarily concerned with impact assessment (eg Commission, Better Regulation Guidelines (SWD (2015) 111) Toolbox). 118 eg, L Kastner, ‘“Much Ado about Nothing?” Transnational Civil Society, Consumer Protection and Financial Regulatory Reform’ (2014) 21 Review of International Political Economy 1313; and N Moloney, How to Protect Investors. Lessons from the EC and the UK (Cambridge University Press, Cambridge, 2010) 398–425. 119 ESMA’s January 2018 consultation on its first proposed use of its contested product intervention powers (to restrict online Contracts for Differences (CfD) trading by retail investors) received the largest number ever of ESMA consultation responses (‘thousands of responses’), following the use by CfD trading platforms of social media mechanisms to encourage (largely critical) responses from retail investors in what was described as a ‘frantic lobbying effort’: H Murphy, ‘EU Regulator Receives Wave of Responses to CfD Clampdown’, Financial Times (5 February 2018).

64 ESMA’s Governance with good regulatory practice given its legitimation and also technical capacity benefits, and is embedded within ESMA’s operation.120 ESMA’s regulatory governance activities are subject to consultation requirements,121 results are published, and ESMA has developed extensive feedback protocols, as discussed in chapter 3. ESMA’s commitment to consultation appears to be growing. Early 2018 saw a material innovation in the form of a ‘stakeholder survey’ on ESMA’s consultation and engagement practices and on its responsiveness, which suggests a commitment to expanding its consultation methods and deploying more innovative communication methods.122 ESMA has also established a range of Consultative Working Groups (CWGs), which support most of its SCs. While the appointment of CWG members was initially subject to charges of a lack of transparency,123 it has since become formalised and is carried out through public calls for expressions of interest. Consultation also takes place through ESMA’s Securities and Markets Stakeholder Group (SMSG), required under ESMA Regulation, Article 37.124 The SMSG is composed of 30 members appointed by the Board of Supervisors, and must represent, in balanced proportions, financial market participants operating in the EU (10 of its members must represent financial market participants), their employees’ representatives, consumers, users of financial services, and representatives of small and medium-sized enterprises (SMEs). In addition, five members must be independent top-ranking academics. In appointing the SMSG, the Board must also, to the extent possible, ensure an appropriate geographical and gender balance and representation of stakeholders across the EU. The SMSG must be consulted on ESMA’s proposed BTSs and Article 16 measures, and in practice is consulted on a wide range of activities.125 The SMSG may also submit opinions and advice on any issue related to ESMA’s tasks. The SMSG and the Stakeholder Groups of the other ESAs were a novelty for EU financial governance when originally established. As such, and given their diffuse representation and potentially overly high expectations as to their effectiveness, they have been subject to repeated criticism. The 2013–14 ESA Review concluded that while the Stakeholder Groups were valued and needed stronger resources, there were difficulties.126 Among the host of criticisms reported were that longer mandates (beyond two and a half years) were needed, Group expertise was limited, Group access to ESA documents was restricted, the ESAs were not providing sufficient feedback, and consumer stakeholders were under-represented.127 Composition of the SMSG has also proved controversial. A 2013 European Ombudsman report found an instance of ESMA maladministration arising from its including only one SME representative within the SMSG and not c omplying with the requirement to ensure, to

120 ESMA’s annual ‘Regulatory Work Programme’ indicates the consultations to be engaged in for each regulatory workstream. 121 eg, ESMA Regulation, Arts 10, 15, and 16. 122 ESMA, Stakeholder Survey, February 2018. 123 Mazars Report, n 7, 93. 124 Three groups have been constituted since the first Group was established in mid-2011, each with a twoand-a-half-year term. 125 SMSG Minutes are published on ESMA’s website at https://www.esma.europa.eu/about-esma/ governance/smsg. 126 2013–14 Commission ESA Review Report, n 8, 10–11. 127 2013–14 Commission ESA Review Report SWD, n 8, 20–21.

ESMA’s Institutional Design 65 the extent possible, a balanced representation of stakeholders across the EU; failing to explain its choice; and applying the balance criteria only to the SMSG as a whole and not to different SMSG constituencies.128 The Parliament has also been critical, suggesting that the Stakeholder Groups’ benefits have been limited and calling for more transparency on their composition and work.129 Criticism had waned by the 2017 ESA Review, although concerns persisted regarding the appointment process, the limited time available to the Stakeholder Groups to respond to ESA consultations, and consumer representation.130 The innovative quality of the Stakeholder Groups and a likely exaggerated sense of the Groups’ access, influence, and potential can be associated with much of the criticism. The ESMA SMSG appears to work effectively with ESMA, producing a large number of opinions and advisory statements, as well as own-initiative reports.131 The 2017 ESA Proposal has proposed a number of refinements that should, if adopted, enhance the SMSG’s effectiveness, chief among them that members’ terms be expanded to four years, that minority opinions be permitted, and that the Stakeholder Groups of all three ESAs be empowered to issue joint opinions and advice.132 More materially, the Commission has proposed that the SMSG be empowered to query the competence basis of ESMA Article 16 guidelines and trigger related Commission action.133 As discussed in chapter 3, this power could have destabilising effects and lead to undue industry influence over ESMA’s regulatory governance activities.

F. Independence Central to ESMA’s organisational design is its independence.134 ESMA’s independence is constituted by the ESMA Regulation, and so its extent is controlled by its delegating ‘principals’.135 Its independence guarantee is, however, widely cast. ESMA enjoys an independence guarantee as an agency136 and with respect to the Board

128 European Ombudsman, Complaint 1967/2011/(EIS) LP, Decision of 19 December 2013. The report also made a series of recommendations, including that ESMA publicise calls for ‘expressions of interest’ more widely. 129 European Parliament, Resolution with Recommendations to the Commission on the ESFS Review, 11 March 2014 (P7_TA(PROV)(2014)0202) paras AI–AJ. 130 Commission, Public Consultation on the Operations of the European Supervisory Authorities (2017) 20; and Commission, Feedback Statement on the Public Consultation on the Operations of the European Supervisory Authorities (2017) 17. 131 Available at https://www.esma.europa.eu/about-esma/governance/smsg. 132 2017 ESA Proposal, n 1, ESMA Regulation, Art 37. 133 ibid, Art 16(5). 134 On independence as a defining (if sometimes brittle) feature of EU agency and NCA design, see S Lavrijssen and A Ottow, ‘Independent supervisory authorities: a fragile concept’ (2012) 39 Legal Issues of Economic Integration 419; and M Tison, ‘Do not attack the watchdog: banking supervisor’s liability after Peter Paul’ (2005) 42 Common Market Law Review 639. 135 Agency independence has been characterised as a ‘formal independence from politics’, constructed by an agency’s constitutive legal regime and the extent to which representative actors are prepared to delegate power: C Hanretty and C Koop, ‘Measuring the Formal Independence of Regulatory Agencies’ (2012) 19 Journal of European Public Policy 198. 136 ESMA is to act independently and objectively and in the interest of the Union alone (ESMA Regulation, Art 1(5)).

66 ESMA’s Governance of Supervisors, Management Board, Chair, and Executive Director.137 Its mixed EU/ Member State funding model is also designed to support independence. Nonetheless, the reality of ESMA’s independence has been doubted since its establishment, particularly as regards the Commission’s engagement. The 2013–14 ESA Review, for example, reported on concerns as to whether ESMA could operate independently given Commission representation on the Board of Supervisors,138 albeit that such involvement is a key feature of agency design.139 As discussed in subsequent chapters, the Commission is not a passive Board member. The Commission’s appetite for Board intervention reflects its assertive posture on agency engagement generally, which is reflected in the introduction by the 2012 Common Approach to agencies of a convention whereby the Commission would activate an ‘alert/warning system’ where it had ‘serious reasons for concern’ that an agency Management Board would take a decision not in compliance with its mandate, in violation of EU law, or in manifest contradiction with EU policy objectives. Under this convention, the Commission must raise its concern with the relevant Board, and, if the Board does not desist, inform the European Parliament and Council.140 The alert is designed to operate as a political check and does not have legal effect – but it illustrates the influence the Commission is designed to, and in practice must, exercise: under the convention, the Commission must warn the co-legislators where it has serious concerns.141 In the case of ESMA, this procedure has not been activated yet, but there are echoes of it in the Commission’s not exceptional attempts to constrain ESMA, although these episodes usually take the form of highlighting mandate constraints and rarely involve direct contestation on technical issues.142 The 2017 ESA Proposal if adopted would, however, formalise a similar ‘alert’ procedure, directed to allowing the Commission to constrain ESMA’s powers to adopt soft guidelines.143 Other challenges to ESMA’s independence come from the non-voting status of the ESMA Chair on the Board of Supervisors; the Meroni-related limitations on its

137 Arts 42, 46, 49, 52, and 59. Board of Supervisors and Management Board independence (Arts 42 and 46) is cast in terms of the Boards’ acting independently and objectively in the sole interest of the EU as a whole and not seeking or taking instructions from EU bodies or institutions, any Member State government, or any other public or private body. Neither the Member States, EU institutions or bodies, nor any other public or private body are to seek to influence the Boards. Similarly-worded guarantees apply to the Chair and the Executive Director (Arts 49 and 52). The Chair’s independence is additionally protected by the requirement that the Chair can only be removed from office by the European Parliament, following a Board of Supervisors’ decision (Art 48(5)); the Executive Director’s removal requires a Board of Supervisors’ decision (Art 51(5)). 138 See, eg, 2013–14 Commission ESA Review Report SWD, n 8, 19–20; and 2014 Parliament ESFS Review Resolution, n 129, para AH. For an examination of the Commission’s role as obstructing ESMA’s operational independence, see I Bajakić and M Božina Beroš, ‘Examining Agency Governance in the European Union Financial Sector. A Case Study of ESMA’ (2017) 30 Economic Research 1743. 139 The Commission warned early on that ‘while the ESAs should enjoy maximum independence to objectively fulfil their mission, the Commission has to be involved where institutional reasons and the Treaty so require’ (2009 ESMA Proposal (COM (2009) 503), 4), although it also suggested that ‘in order to limit as much as possible interference in the technical work of supervisors’, its participation be kept to the minimum: 2009 ESA Proposals Impact Assessment (SWD (2009) 1235) 35. 140 2012 Common Approach, n 5, 13. 141 ibid. 142 See further ch 3. 143 See further ch 3.

ESMA’s Institutional Design 67 regulatory powers and the oversight and veto powers exercised by the Council and European Parliament over administrative rules which ESMA has shaped; and aspects of ESMA’s accountability arrangements, notably the Commission’s control over the quantum of the EU subsidy element of ESMA’s budget and the budgetary approval power wielded by the Parliament and Council as joint EU budgetary authority. These potentially independence-constraining devices also form part of ESMA’s legitimating arrangements, however, and reflect the trade-off that can arise between independence and accountability.144 But while governance arrangements such as accountability mechanisms can limit agency independence, the question is one of degree and of how to ensure that sufficient independence and legitimation is secured. There is little evidence thus far that ESMA’s ability to exercise its powers independently is being prejudiced.145 Further, independence guarantees are typically robustly protected by their EU beneficiaries. The ECB, which benefits from a Treaty-based independence guarantee, provides an extreme but nonetheless illustrative example from its assertive defence of its independence in the OLAF case.146 Similarly, from the outset ESMA was careful to assert its independence,147 and subsequent institutional skirmishes, noted in this chapter and in subsequent chapters, underscore this commitment. There are, however, some potentially troublesome straws in the wind, notably in the form of the Parliament’s interest in having access to internal ESMA preparatory papers and policy discussions.148

G. Effectiveness and Legitimation: Inside the Board of Supervisors i. Challenges to the Board of Supervisors and the 2017 ESA Review The prominent role of the Board of Supervisors in ESMA’s organisational design has been questioned, primarily over the 2013–14 and 2017 ESA Reviews, but overall the Reviews have not identified major difficulties with the Board’s dominance.149 Nonetheless, there has been some disquiet. The 2013–14 ESA Review exposed concerns as to a perceived prevalence of national interests on the Board and as to a related s tructural

144 The relationship between independence and accountability is contested. Accountability can be regarded as becoming relevant only where an agency is, in fact, independent and the delegating authority seeks to ensure oversight through accountability mechanisms: M Busuioc, ‘Accountability, control and independence: the case of European Agencies’ (2009) 15 European Law Journal 599. Contrarily, independence and accountability can be regarded as in conflict: M Scholten, ‘Accountability v independence: proving the negative correlation’ (2014) 21 Maastricht Journal of European and Comparative Law 197 (although suggesting that ESMA’s independence is not compromised by its accountability arrangements). 145 See further ch 3 on regulatory governance and chs 4 and 5 on supervisory governance. 146 Case C-11/00 Commission v ECB (ECLI:EU:C:2003:395). 147 ESMA Chair Maijoor asserted early on that independence was a key ESMA characteristic and could lead to conflict with the markets, politicians, and the Commission: N Tait, ‘ESMA watchdog prepared to clash with Brussels’, Financial Times (2 March 2011). 148 European Parliament, Resolution on Stocktaking and Challenges of the EU Financial Services Regulation, 19 January 2016 (P8_TA(2016)0006)) paras 48 and 52. 149 The 2017 ESA Review covered governance reform in detail, but the reforms were not prominent in stakeholder responses; in the region of half addressed governance and of those one-third found current arrangements to be appropriate and efficient: 2017 ESA Consultation Feedback Statement, n 130, 15.

68 ESMA’s Governance disincentive to take action against peer NCAs.150 The Commission and European Parliament identified a series of potential reforms, including more extensive delegation of tasks to the ESMA Chair and the appointment of independent members to the Board.151 The Review also saw early support for an expansion of the Management Board’s tasks, including for it to be empowered to take ‘vertical’ action against NCAs (including peer review, breach of EU law, and binding mediation action).152 Subsequently, the Commission’s wide-ranging 2017 ESA Consultation raised similar themes in more depth, including whether the Board of Supervisors-based operating model was generating disincentives to use ESMA’s vertical tools against NCAs, how Board conflict of interest risks could be managed, and the potential role of independent Board members and of greater delegation to the ESMA Chair.153 The Commission also queried whether the Management Board’s mandate should be extended in order to free the Board of Supervisors to focus on strategic and sensitive matters, and also to manage NCA conflict of interest risk.154 This signalling of governance reform did not meet with strong stakeholder support.155 ESMA was generally unenthusiastic.156 Some stakeholders identified a Board-of- Supervisor ‘culture of compromise’ and supported Board governance reforms that would facilitate ESMA’s application of NCA-oriented tools, but there was little c onsensus.157 Neither was there consensus on the need for independent Board of Supervisor members, although there was some support for this reform based on the need to institutionalise further the EU interest on the Board; there was also some limited support for direct political representation on the Board.158 Similarly, the Review saw little agreement on the Board’s voting arrangements. The ESMA Regulation QMV requirement enjoyed generally strong support and there was little support for alternative forms of majority voting, such as majorities that would give greater weight to the EU’s largest fi nancial

150 2013–14 Commission ESA Review Report, n 8, 9; and 2013–14 Commission ESA Review Report SWD, n 8, 17. The European Parliament also warned of the challenges the Board faced in adopting an independent EU perspective: 2014 Parliament ESFS Review Resolution, n 129, para AU. The related Mazars Report, however, suggested that ESA governance represented a good balance between the need for an EU-wide view and the desirability of national ‘buy-in’, and that while national bias was a challenge, the EU/NCA relationship was not fixed or binary: Mazars Report, n 7, 14. 151 2013–14 Commission ESA Review Report, n 8, 9; and 2014 Parliament ESFS Review Resolution, n 129, Annex of Detailed Recommendations. 152 While there was broad satisfaction with the Management Board, the Review highlighted some support for it to have independent members and a wider mandate, which would release the Board of Supervisors for more strategic tasks: 2013–14 Commission ESA Review Report SWD, n 8, 18. The European Parliament also supported the addition of independent members to the Management Board (who would also vote on the Board of Supervisors), and a reallocation of competences between the Management Board and Board of Supervisors to allow the latter to focus on more strategic issues and regulatory matters: 2014 Parliament ESFS Review Resolution, n 129, para AU and Annex, ‘Governance’ section. 153 2017 ESA Consultation, n 130, 6–7 and 18–19. 154 ibid, 18. 155 2017 ESA Consultation Feedback Statement, n 130, 15. 156 ESMA’s response to the 2017 ESA Consultation did not address Board composition but noted its opposition to the delegation of tasks from the Board to an NCA panel or to the Chair: ESMA, Response to the 2017 ESA Consultation (ESMA03-173-194) (2017) 6. 157 2017 ESA Consultation Feedback Statement, n 130, 5. 158 ibid, 15 and 16.

ESMA’s Institutional Design 69 markets,159 to be adopted. Neither was there consensus on whether tasks should be withdrawn from the Board of Supervisors and placed in the Management Board, or on the future composition of a potentially strengthened Management Board.160 As is predictable, NCAs tended to support the current organisation of decisionmaking and the related pre-eminence of NCAs, as a means of ensuring a connection between those developing and those applying regulation and of ensuring sufficient expertise and ‘buy-in’.161

ii. Inside the Board of Supervisors: Through a Glass, Darkly The 2013–14 and 2017 ESA Reviews indicate muted but persistent uneasiness as to the Board’s dominance in ESMA’s organisational design, and particularly as to potential prejudice to the EU interest. Reforms are in the pipe-line. Accordingly, what is known about Board of Supervisor decision-making, and the extent to which it supports ESMA’s effectiveness and legitimacy, which could inform any reforms? From the effectiveness standpoint, the centrality of the Board to ESMA’s organisational design should support the taking by ESMA of expert, technically-informed decisions that reflect the EU interest and also, by bringing NCA challenge and critique to the fore in ESMA decision-making, hone ESMA’s technical capacity. The dominance of technocratic NCAs in the Board’s composition underscores that the Board is designed to act as a deliberative, expert forum, which can identify, articulate, and support the EU interest, rather than as a representative forum for intergovernmental, political contestation, which could prejudice ESMA’s capacity to act in the EU i nterest.162 National interests are unlikely to be suppressed on the Board and can be expected to inform discussions and the articulation of the EU interest. But there is a natural alignment between the financial stability, orderly markets, and consumer protection objectives typically pursued by NCAs and the risks ESMA is designed to manage – even allowing for some growing contestation as ESMA probes deeper into NCA autonomy. Effective deliberation is procedurally facilitated by ESMA’s internal organisation, including the Management Board and ESMA’s SCs, which support the Board, and by the consultation and impact assessment disciplines that apply to ESMA’s activities. There are certainly frictions. The Board of Supervisors is a large decision-making body, with 28 (soon 27) voting members as well as non-voting members/observers.163 But its size does not necessarily imply prejudice to effectiveness and operation in the EU interest; the ECB/SSM’s Supervisory Board is also a large body but appears to be reasonably fit

159 There was some industry support for voting rights to be linked to financial sector share, but it was not widespread: ibid, 15–16. 160 ibid, 9 and 16. 161 ibid, 15. NCAs tended to be of the view that the Board was not driven by national interests, albeit that the NCA sensitivities engaged by ESMA’s supervisory convergence activities were acknowledged: eg, response by the French NCA (available at https://ec.europa.eu/eusurvey/publication/esas-operations2017?surveylanguage=en). 162 Everson, n 53. 163 Although it is dwarfed by the Management Boards of some agencies, which can have up to 80 members: 2012 Commission Roadmap, n 5, 1.

70 ESMA’s Governance for purpose.164 More materially, the QMV requirement does not apply to Board action generally, and this may slow and obstruct decision-making in contested areas, particularly where the nature of the EU interest is contested and national interests are strong.165 Further, as was well reported by the 2013–14 and 2017 Reviews, NCAs’ concern to avoid proceeding against peer NCAs may lead to the Board’s failing appropriately to consider transnational risks and ESMA’s EU mandate. The dominance of the NCA voice also raises the risk of prejudicial groupthink.166 This risk is aggravated by the increasing regulatory reliance post-crisis on data, which can give a veneer of scientific credibility but which can be contingent and based on contestable assumptions. More generally, decision-making through expert bodies does not necessarily privilege deliberation and the identification of an EU interest. It is not, for example, clear whether the EU’s comitology process, based on the oversight of Commission administrative rule-making by expert committees, is dominated by consensus-oriented, collective deliberation or is a function of political contestation and assertion of preferences.167 The centrality of the Board should in principle also support legitimacy. Input legitimacy is certainly weak on the Board. The Commission is the only EU institution directly represented and does not have voting rights. The SMSG provides a degree of input legitimacy, but it acts in an advisory capacity and there are concerns over its effectiveness. Nonetheless, the dominance of NCAs on the Board reflects a political decision to constitute ESMA in this way and, as noted earlier, NCA-located decision-making might support a limited degree of peer- and also nationally-oriented legitimation. To the extent technical NCA deliberation dominates Board decision-making, horizontal/ transnational peer NCA accountability – in the form of a collective commitment to identification and support of the EU interest through deliberative decision-making and experience sharing, and to mutual and also ESMA monitoring, including of ESMA’s activities and mandate to act in the EU interest – might be regarded as doing some of the heavy lifting on legitimation. To the extent contestation of national interests dominates, the related infusion of national accountability dynamics into Board discussions might be regarded as supporting legitimation, at least to some extent and even if the form of EU interest thereby promoted is weakened. As regards output legitimacy, there are, as already noted, reasonable grounds for assuming Board effectiveness. Board of

164 Composed of the 19 euro-area NCAs, four ECB representatives, and the Supervisory Board’s Chair and Vice Chair. It has, however, experienced overload difficulties, and adopted procedural reforms to ensure that its agenda is limited to matters of strategic and operational significance: 2017 Commission SSM Review, n 55, 6. 165 Busuioc, n 44, 120–21, examining the risk of agency boards ‘serv[ing] as a platform for mobilisation around narrowly-drawn national interests’. 166 See generally C Goodhart, ‘Groupthink and the Current Financial Crisis’ in J Pixley and G Harcourt (eds), Financial Crises and the Nature of Capitalist Money (Palgrave Macmillan, Basingstoke, 2013) 70; and, in the context of the international standard-setting bodies, R Romano, Against Financial Regulation: A Comment, Yale Law & Economics Research Paper No 414 (2010), available at http://ssrn.com/abstract=1697348. 167 For a review, see R Dehousse, A Fernández Pasarín, and J Plaza, ‘How Consensual is Comitology?’ (2014) 21 Journal of European Public Policy 842; and earlier C Joerges, ‘Deliberative political processes’ revisited: what have we learned about the legitimacy of supranational decision-making’ (2006) 44 Journal of Common Market Studies 779; and C Joerges and J Neyer, ‘From intergovernmental bargaining to deliberative political processes: the constitutionalisation of comitology’ (1997) 3 European Law Journal 273.

ESMA’s Institutional Design 71 S upervisor-based decision-making also reinforces ESMA’s throughput/procedural legitimacy. The Board’s decision-making processes are, for example, more transparent and accessible than those which govern Commission decision-making168 – Board minutes are published, as are ESMA’s extensive consultation and feedback documents.169 The Board’s decision-making procedures are also proceduralised under the ESMA Regulation and in related sectoral financial market legislation,170 further reinforcing throughput/ procedural legitimacy.171 In practice, there are grounds for suggesting that the Board acts (for the most part) in a technically expert, data-informed, and deliberative manner, which provides challenge of ESMA and thereby supports technical effectiveness and so output legitimation. There is also evidence that NCAs engage in peer regulatory learning, share best practice, and are concerned to monitor ESMA’s mandate, suggesting that a limited form of peer/transnationally-oriented input legitimation in addition can be identified too. As discussed in chapter 3, the evidence on regulatory governance suggests that the Board adopts a deliberative approach, preferring consensus over contestation, and that related Board decisions are informed by data and national experience. The experience with regulatory governance also suggests a productive monitoring dynamic; different NCAs have, for example, intervened to challenge whether ESMA’s burgeoning soft-law activities are within its mandate. There is less experience with supervisory convergence and direct supervision, spheres where national interests are likely to be significant. The growing evidence discussed in chapters 4 and 5 suggests, however, that the Board is increasingly willing to take technically informed, vertical action, which may be uncomfortable, against peer NCAs and in the EU interest; for example, peer reviews are becoming more robust and blunt. The Board also appears able to adopt common positions in support of the EU interest in highly sensitive areas where NCA competitive interests are strong, notably on Brexit-related matters.172 There are certainly difficulties with ESMA’s powers to take vertical action against NCAs through its binding mediation and breach of EU law powers, but, as examined in chapter 5, it is not clear that these difficulties are a function of Board decision-making failures. More generally, the Board appears careful to protect its decision-making prerogatives and to avoid acting as a rubber-stamp of SC or ESMA proposals.173 It is unlikely that national interests are absent from

168 Analysis of EU agency decision-making draws unfavourable comparisons between the generally closed Commission ‘comitology’ world and the relative openness and accessibility of agency decision-making: see, eg, Curtin, n 26; and Buess, n 62. 169 See further ch 3. 170 ibid. 171 Chiti has identified the degree of ESA proceduralisation as supporting legitimation: Chiti, ‘European Agencies’ Rulemaking’, n 4, 101 and 105. 172 See further ch 4. 173 eg, an early Board of Supervisors (BoS) Meeting saw the Board discuss its role in credit rating agency supervision and the Board/ESMA allocation of power: BoS, Minutes, 20 March 2012 (ESMA/2012/BS/46). Similarly, although the Board has come to support Standing Committees’ taking on additional tasks, it has been concerned to ensure that NCAs (not ESMA staff) retain the role of SC Chairs; there has also been only limited support for the delegation of decisions to SC Chairs; and there is evidence of sensitivity to ensuring that Board-level decisions do not drift to SCs: Minutes, 26 January 2017 (ESMA32-24744-0098-10); 10 December 2015 (ESMA/2015/BS/232); and 7 November 2013 (ESMA/2013/BS/197).

72 ESMA’s Governance Board discussions.174 Neither is it desirable, given the potential for the infusion of national interests and for related contestation to support technical effectiveness, and thereby output legitimation, but also to provide a limited form of nationally-oriented accountability. But major claims cannot be made for this potential nationally-oriented accountability channel. Usually NCAs are accountable politically, but they typically enjoy independence guarantees. In addition, studies of EU agencies suggest that a ‘Europeanisation’ of national administrative behaviour typically follows EU agency establishment, which reduces national political influence.175 National representatives on EU agencies tend to operate increasingly at arm’s length from political control (as they experience a deepening of their autonomy and influence through the informational advantages they derive from agency membership176), become closer to national agencies and to the Commission,177 and develop peer-oriented solutions which may not be preferred by national political actors.178 In practice, while distinct national interests can be observed in ESMA decision-making and do generate contestation, the EU interest does not seem to be prejudiced as yet by NCAs’ dominance of ESMA’s decision-making arrangements. That there are difficulties with Board of Supervisors-located decision-making and its prominence in ESMA’s governance arrangements is not in doubt. Overall, however, the Board can be characterised as fit for purpose and effective, supporting deliberative, technically-informed decision-making in the EU interest, providing productive challenge of ESMA, and also thereby supporting output legitimation. More tentatively, the Board also supports a degree of peer-related and nationally-oriented legitimation. Refinements could be productive – the allocation of more workaday supervisory decisions to the Management Board would free up Board of Supervisor capacity, for example. But it is not clear that radical overhaul of the Board’s design would produce material enhancements, as examined in the following section.

H. Governance Reform: Disruptive or Supportive? i. Sliding into Bureaucracy? Notwithstanding the fractured response to the 2017 ESA Review, the Commission went ahead with significant governance reforms in its 2017 ESA Proposal. Chief among them 174 International financial governance analysis suggests that while the standard-setters of international financial governance are epistemic, network actors and can form related distinct policy positions, regulators’ positions on standard-setters are also informed by their national interests and domestic incentives and audiences. See, eg, C Brummer, ‘How International Financial Law Works (and How it Doesn’t)’ (2011) 99 Georgetown Law Journal 257. 175 See, eg, T Bach, E Ruffing, and K Yesilkagit, ‘The Differential Empowering Effects of Europeanization on the Autonomy of National Agencies’ (2015) 28 Governance 285. 176 N Vestlund, ‘Pooling Administrative Resources through EU Regulatory Networks’ (2017) 24 Journal of European Public Policy 61. 177 E Ruffing, ‘Agencies between two worlds: information asymmetry in multilevel policy-making’ (2015) 22 Journal of European Public Policy 1109; T Bach and E Ruffing, ‘Networking for Autonomy? National Agencies in European Networks’ (2013) 91 Public Administration 712; and M Egeberg and J Trondal, ‘EU-level agencies: new executive centre formation or vehicles for national control’ (2011) 18 Journal of European Public Policy 868. 178 Ruffing, n 177.

ESMA’s Institutional Design 73 is a proposed dilution of the power of the Board of Supervisors and a related strengthening of bureaucratic power within ESMA through a new ‘Executive Board’. Earlier, the exigencies of pan-EU CCP supervisory coordination179 had prepared the ground for Board governance reform. The 2016 CCP Recovery and Resolution Proposal proposed that a new ESMA ‘Resolution Committee’, which would include the new national resolution authorities (NRAs) required under the Proposal and be structurally separate from the rest of ESMA’s functions (given the conflict of interest risk related to supervisory forbearance which resolution can generate), be established.180 It was not proposed that this new Committee should have decision-making powers, but it would have significant technical influence as it would be charged with preparing the CCP resolution decisions to be reserved to the Board of Supervisors under the Proposal. Subsequently, a more decisive move towards bureaucratic hierarchy within ESMA’s governance was signalled by the 2017 CCP Supervision Proposal.181 It has proposed a material strengthening of ESMA’s powers over CCP supervision through ESMA’s oversight of a new ‘European Supervisory Network’ (see chapter 5). Of significance to this chapter is that ESMA’s proposed new CCP powers are accompanied by major governance reforms. The Proposal provides for a new ‘Board of Supervisors in Executive Session’ (CCP Executive Session), which would sit alongside the full Board of Supervisors and which would exercise ESMA’s new supervisory powers.182 This proposed parallel Board would have a different composition from the full Board, including, critically, non-NCA voting members. It would include, first, five permanent members: a voting Head and two Directors (all full-time independent professionals appointed by the Council following an open selection process and on foot of a Commission proposal and Parliament approval); a non-voting ECB representative; and a non-voting Commission representative. Second, alongside these members would sit a shifting cohort of voting but non-permanent members in the form of a representative of the NCA of each CCP, as well as a non-voting representative of each relevant ‘central bank of (relevant currency) issue’ for each CCP. These members would sit only where necessary and appropriate for the CCPs under their supervision. This new CCP Executive Session, operating under a simple majority vote (the Head would have a casting vote), would take all decisions relating to ESMA’s proposed new CCP powers, although it would be required to inform the Board of Supervisors.183 As discussed in chapter 5, this governance proposal poses risks to ESMA legitimacy, particularly as it weakens the role of the full Board of Supervisors. It also signals the Commission’s preference for the Board of Supervisors’ power to be diluted and for the Board’s membership to be expanded to include independent, executive voting members. Both these preferences are clear in the most far-reaching of the recent governance proposals, presented in the 2017 ESA Proposal.

179 See

further ch 5. (2016) 856, Art 6. 181 COM (2017) 331. 182 ibid, ESMA Regulation, Arts 44a–44c, 48a. 183 CCP Supervision Proposal, n 181, ESMA Regulation, Art 44b. 180 COM

74 ESMA’s Governance

ii. Reconfiguring the Board of Supervisors and the Proposed ‘Executive Board’ The 2017 ESA Proposal proposes a major reconfiguration of ESMA’s governance arrangements, which would lead to a material concentration of power in a new bureaucratic forum, the Executive Board. The Management Board and the Executive Director would be removed and replaced with the new Executive Board, which would be composed of independent members, conferred with a series of operational supervisory tasks, and charged with the exercise of those ESMA powers where NCA conflicts of interest may arise. The proposals reflect the Commission’s contention that the incentive structure of the Board of Supervisors is leading to an absence of decisions in some areas, or promoting decisions that are predominantly oriented to national interests.184 The Commission has accordingly discounted the legitimation the Board can provide185 and privileged bureaucracy.186 Under the Proposal, the new Executive Board would be composed of the ESMA Chair and five full-time independent members,187 each appointed for a five-year term (renewable once) and assigned different policy and managerial tasks (by the Chair).188 These members would also sit on the Board of Supervisors, albeit in a non-voting capacity.189 One of these members (the ‘member in charge’) would carry out functions similar to those of the Executive Director, being responsible for budgetary matters and the work programme, while another would act as Vice-Chair and deputise for the Chair. The Head of the proposed new CCP Executive Session would be an observer on the Executive Board, and the Commission would also participate in meetings, in each case without voting rights. The selection of the members would be, in effect, controlled by the Commission. Members would be selected by the Council (which would also identify the ‘member in charge’) based on merit and following an open call but from a Commission short list (which would be approved by the Parliament). Executive Board decision-making would be by simple majority, with each member exercising one vote and the Chair having a casting vote; while the Commission representative would not be empowered to vote, the representative would exceptionally be empowered to vote on the establishment of the annual budget.

184 2017 ESA Proposal, n 1, Explanatory Memorandum, 3. 185 The Commission attributed the lack of NCA support for governance reform to NCAs’ not wishing to lose influence, but did not engage with the benefits of this influence (ibid, 11), although it acknowledged NCAs’ role in setting strategic direction and in regulatory governance: Commission, Reinforcing Integrated Supervision to Strengthen Capital Markets Union and Financial Integration in a Changing Environment (COM (2017) 542) 7. 186 The Commission related the reforms to its wider efforts to make EU agency decision-making more decentralised and independent: 2017 ESA Proposal, n 1, Explanatory Memorandum, 6. 187 In a formula familiar from the ESMA Regulation, members would be required to act independently and objectively in the sole interest of the EU as a whole, and neither seek nor take instructions from the EU institutions or bodies, from any Member State government, or from any other public or private body (and neither Member States, nor the EU institutions or bodies, or any other public or private body could seek to influence members): 2017 ESA Proposal, n 1, ESMA Regulation, Art 46. 188 ibid, Art 45. 189 ibid, Art 40.

ESMA’s Institutional Design 75 The proposed new Board’s tasks would fall into two categories: the administrative and planning tasks currently located with the Management Board; and tasks moved from the Board of Supervisors. As regards the former, the Board would be responsible for all necessary measures to ensure ESMA’s functioning and propose (for Board of Supervisors adoption) work programmes and annual reports, and exercise the budgetary powers conferred on it; it would also, like the Management Board, be charged with appointing and removing Board of Appeal members.190 The ‘member in charge’, like the Executive Director, would be charged with implementing the annual work programme; taking all necessary measures to ensure ESMA’s functioning; preparing annual and multi-annual work programmes; drawing up the preliminary budget; and exercising ESMA’s staff-related powers.191 Other functions currently reserved to the Executive Director would be moved to the Executive Board.192 Of most import to ESMA’s governance is the proposed conferral on the Executive Board of exclusive power to adopt decisions currently reserved to the Board of Supervisors and also in new areas proposed under the 2017 ESA Proposal.193 Most of these decisions have in common their ‘vertical’/NCA-oriented quality and related potential for Board of Supervisors’ conflict of interest risk. The Proposal provides that the Executive Board be charged with decision-making in relation to ESMA Regulation Article 17 (the power to take breach of EU law investigation action against an NCA); Article 19 (the power to impose a binding mediation decision on NCAs); Article 22 (assessment of systemic risk); proposed new Article 29a (the proposed new power for ESMA to set a Strategic Supervisory Plan and to assess NCAs plans against it); Article 30 (peer review); proposed new Article 31a (proposed new ESMA power to review NCA authorisation of delegations by EU regulated actors to third countries); Article 32 (assessment of market developments); and proposed new Articles 35b–35h (proposed new ESMA power to require information from financial market participants and to impose administrative sanctions for noncompliance).194 Any matters relating to CCPs would be reserved to the proposed new CCP Executive Session, which under a parallel 2017 Proposal would be conferred with the relevant CCP-oriented powers.195 The Executive Board would have full decisionmaking autonomy in these areas but would be required to keep the Board of Supervisors informed. It would also be empowered to propose decisions for Board of Supervisors adoption regarding the different direct authorisation/supervision powers currently conferred on ESMA under sectoral EU financial market legislation and which are exercised by the Board of Supervisors; the Board of Supervisors would only be able to reject such Executive Board proposals by a two-thirds majority decision, following which decision the Executive Board would be required to review the proposed actions.196 The Proposal also provides that the Executive Board would examine, provide an opinion on, and make a proposal on all matters to be decided by the Board of Supervisors.

190 ibid,

Arts 47 and 58. See further section VI on the budgetary process. Art 45. representation of ESMA on the ESA Joint Committee (see ch 6). 193 2017 ESA Proposal, n 1, ESMA Regulation, Art 47. 194 These powers are considered further in chs 4 and 5. 195 COM (2017) 539, amending the 2017 ESA Proposal (Art 44b(1)). 196 This power is noted in the related Explanatory Memorandum. 191 ibid,

192 Including

76 ESMA’s Governance The Proposal in addition clarifies and narrows the Board of Supervisors’ remit. Under the Proposal, the Board would guide ESMA’s work, adopt ESMA opinions, recommendations, guidelines and decisions, and issue advice as provided for under the ESMA Regulation, except for those tasks reserved to the Executive Board (and to the proposed CCP Executive Session).197 The Proposal also provides for greater Commission control over the appointment of the ESMA Chair, currently selected by the Board, proposing that the Commission draw up a short list to be approved by the European Parliament and from which the Council would make the final decision.198

iii. Disruptive or Supportive Reform? The Commission’s governance reforms are among the most radical and contested of those contained in the 2017 ESA Proposal and their future is unclear. The Commission’s earlier pathfinder consultation did not garner extensive responses, but neither did it generate widespread support for governance reform. The potential for contestation is well exemplified by the cleavage the governance reforms opened between ESMA and NCAs. While the ESMA response to the 2017 ESA Review was muted on governance issues199 (although ESMA Chair Maijoor called for ESMA to be equipped with governance arrangements that gave it sufficient independence in deploying its supervisory convergence tools200), NCAs have emerged as hostile, typically seeing no need for reform or proposing only finessing reforms.201 The Executive Board reform, if adopted, would tilt ESMA’s governance more towards bureaucratic centralisation and away from inter-NCA, expert deliberation. From an effectiveness perspective, it has attractions. The preparation by the Executive Board of the technical supervisory decisions to be taken by the Board of Supervisors has a compelling functional logic. The relocation in the Executive Board of decision-making powers prone to NCA conflict of interest, and the stronger influence the Commission would have on the composition of the Executive Board, also has an appealing logic as regards the articulation and support of the EU interest, given the dangers (albeit not yet clearly evidenced) of NCAs obstructing ESMA action, particularly as ESMA delves

197 2017 ESA Proposal, n 1, ESMA Regulation, Art 43. 198 ibid, Art 48. 199 ESMA’s response noted only that the Board should be given additional opportunities to delegate certain technical decisions to the Chair or an NCA-composed panel of the Board (n 156). 200 Speech on ‘The State of European Financial Markets’, 17 October 2017. 201 The Danish, Swedish, Irish, and Dutch NCAs all opposed Board of Supervisors governance reform, with the Dutch NCA, eg, emphasising the importance of the Board of Supervisors to ESMA’s accountability. The Finnish NCA saw a need for a stronger EU perspective on the Board, but proposed that this be achieved through additional permanent Board of Supervisors members. The Estonian NCA was supportive of the current governance arrangements and linked any proposed empowerment of the Management Board to its having NCA representatives and to final decision-making authority remaining with the Board of Supervisors. The Spanish NCA supported a strengthening of the Management Board, but called for its membership to be selected by the Board of Supervisors. Similarly, the French NCA suggested that a strengthened Management Board could include NCA representatives on a rotating basis alongside new permanent members (responses available at https://ec.europa.eu/eusurvey/publication/esas-operations-2017?surveylanguage=en).

ESMA’s Institutional Design 77 deeper into NCAs’ supervisory practices. A re-ordering and focusing of the Board of Supervisors’ agenda should allow it to concentrate on strategic and sensitive issues. The reform may also, by removing the potential for tensions to be generated on the Board of Supervisors from ESMA’s powers over NCAs, smooth Board of Supervisors’ decision-making generally. Further, the Executive Board proposal does not represent dangerously adventurous blue-sky thinking. The ECB Executive Board operates in a similar manner – preparing the work of the ECB decision-making Governing Council, implementing ECB monetary policy, and giving related instructions to national central banks – and includes four independent members appointed by the European Council alongside national representatives. Similarly, the Supervisory Board of the ECB/ SSM includes four ECB representatives, appointed by the decision-making Governing Council, alongside the national supervisors who sit on the board in a rotating sequence. Neither body, however, exercises the type of hierarchical authority proposed for the new ESMA Executive Board, although their de facto powers are material; both bodies also include national representatives. But any such strengthening of bureaucratic decision-making in ESMA must be accompanied by due consideration of the risks to legitimation. It is not necessarily the case that deliberation by NCAs in the Board of Supervisors is less likely to support the EU interest than bureaucratic deliberation in the proposed new Executive Board, particularly as NCAs are technically expert and closest to the risks ESMA is designed to tackle; output legitimation may as a result be weakened by the reforms. Further, to the extent the Board of Supervisors can be associated with input legitimacy, whether of a peer- or national accountability-oriented kind, this legitimating function would be undermined. The Board of Supervisors’ legitimation role could be further undermined by the proposals to expand its membership to include permanent Executive Board and CCP Executive Session members. These new members would not exercise voting power, but the Board would become larger and more unwieldy, and decision-making could become more cumbersome and prone to box-ticking; output and other forms of legitimation supported by the Board could accordingly be prejudiced. The need for consideration of legitimation risks is all the greater as the proposed Executive Board would likely equip ESMA with an executive apparatus primed to expand and deepen ESMA’s mandate and at risk of engaging in bureaucratic creep. The potential of the Board of Supervisors for supporting effectiveness and legitimation should accordingly not be discounted too quickly. Mechanisms are, however, needed to ensure active Board decision-making, particularly if ESMA’s influence over EU financial market governance continues to intensify.202 Three modest proposals are offered here. First, the establishment of a committee framework within the Board of Supervisors, akin to the committee frameworks operated by corporate boards, which framework would ensure that certain ESMA decisions were reviewed in depth by specialist Board committees before their formal adoption by the Board, but also before

202 For an examination of the optimal design of board/similar oversight mechanisms within regulators, see HY Jabotinsky and M Siems, How to Regulate the Regulators: Applying Principles of Good Corporate Governance to Financial Regulatory Institutions, ECGI Law Working Paper No 354/2017, available at http:// ssrn.com/abstract=2978112.

78 ESMA’s Governance their subsequent and final execution by ESMA,203 should create incentives and opportunities for strong NCA engagement. Board decision-making is currently supported by the SCs, but the SCs are primarily ex-ante, policy preparation committees and are not usually composed of Board members but of senior NCA representatives (albeit they are chaired by a Board member). A small number of Board of Supervisors committees, composed of Board members and accountable to the Board, and charged with ensuring that, in identified areas, decisions were thoroughly reviewed prior to Board adoption, and after Board adoption and prior to final ESMA execution, should enhance the Board’s legitimation function as well as its decision-making effectiveness. Second, greater reliance should be placed on the QMV. The QMV requirement, which is generally supported by ESMA’s NCAs,204 currently applies only to certain Board functions, primarily the adoption of Article 16 guidelines and proposed BTSs. It does not apply in several areas where legitimation risks are significant – notably the adoption of ESMA’s soft supervisory convergence measures. As discussed in chapter 4, these measures have the potential to very significantly increase ESMA’s technocratic influence. Neither does a QMV requirement apply to broader matters of strategy. A more widely-drawn QMV requirement should have the effect of generating broader Board engagement. Finally, ESMA’s governance could be usefully recast to include some form of independent ‘Monitoring Board’ that sits above the Board of Supervisors. This could include independent experts, representatives of the supranational interest, and representatives of national interests (perhaps in the form of representatives from different groups of Member States, grouped by market size or structure). Its role would be to support and challenge ESMA management and the Board of Supervisors, particularly on ESMA’s high-level strategic objectives and priorities – not to subvert operational or strategic decision-making, nor to adopt the proposals and actions which are the prerogatives of management and the Board. Overall, the 2017 ESA Proposal may be a retrograde reform, as it would strengthen bureaucratic hierarchy and weaken Board-located legitimation whilst also creating, through the proposed new Executive Board, bureaucratic incentives for ESMA to push against its mandates.

I. Constitutive Legal Framework: ESMA’s Mandate and Powers Finally, ESMA’s operating apparatus includes the constitutive legal constraints that apply through the ESMA Regulation and which structure the legal space within which ESMA can act. These constraints take the form of scope limitations, the identification of ESMA’s powers, and the specification of ESMA’s mandate and objectives, compliance

203 Some industry concern has been expressed that ‘invisible’ technocratic influence can be brought to bear on ESMA decision-making, potentially bypassing the Board: K Murphy, ‘EU Power Grab Risks Disenfranchising National Regulators,’ Financial Times (12 October 2017). 204 The QMV model is generally regarded by NCAs as working well, and the 2017 ESA Review saw several NCAs (including the French and Spanish NCAs) call for it to be used more widely in ESMA decision-making (responses available at https://ec.europa.eu/eusurvey/publication/esas-operations-2017?surveylanguage=en).

ESMA’s Institutional Design 79 with which can be challenged or reviewed through ESMA’s different accountability fora. In practice, these constraints are relatively loose and allow ESMA significant operational freedom, but while they do not carry material risks to effectiveness they are not without bite as regards legitimation. The scope of ESMA’s activities is widely defined under the ESMA Regulation and in practice does not usually hinder its activities or pose effectiveness difficulties. The Regulation’s legislative delimitation of scope acts nonetheless as a legitimating constraint on ESMA’s activities, providing a friction against opportunism. Article 1(2) requires ESMA to act within the powers conferred by the Regulation and within the scope of the identified EU legislative measures205 and of all administrative measures based on those acts; it accommodates subsequent legislative measures that confer powers on ESMA by reference to ‘any further legally binding Union act which confers tasks on the Authority’.206 Article 1(3) additionally empowers ESMA to act ‘in the field of activities of market participants’ in relation to issues not directly covered by Article 1(2), including corporate governance, auditing, and financial reporting. A qualification applies in that such action must be necessary to ensure the effective and consistent application of the Article 1(2) measures. ESMA is also to take ‘appropriate action’ in the context of take-over bids, clearing and settlement, and derivative issues. In practice, the ever-increasing scope of the Article 1(2) sectoral legislative regime means that the breadth and generality of Article 1(3) is less troubling from a legitimation perspective than might appear. The empowering of ESMA to take ‘appropriate action’ in relation to clearing and settlement and derivative issues, for example, has been overtaken by the extensive powers conferred on ESMA under the 2012 EMIR, the 2014 MiFID II/MiFIR, and the 2014 Central Securities Depositories Regulation.207 ESMA’s tasks and related powers are also delineated, although here again they are sufficiently elastic to accommodate ESMA’s sometimes expansionist approach, as discussed in subsequent chapters. The co-legislators also tend to incrementally expand ESMA’s tasks and powers and do not regard the ESMA Regulation as a limiting framework, particularly as regards supervision. Under Article 8(1), which sets out ESMA’s tasks, ESMA is to: • contribute to the development of high-quality common regulatory and supervisory standards and practices (including by providing opinions to the EU institutions and developing guidelines, recommendations, and draft BTSs); • contribute to the consistent application of legally-binding EU acts (including through supporting a common supervisory culture, preventing regulatory arbitrage, mediating between NCAs, ensuring effective and consistent supervision of financial

205 Art 1(2) lists all the relevant sectoral financial market legislative measures which confer power on ESMA (see further chapter one for ESMA’s scope of activity). 206 The 2017 ESA Proposal updates the Art 1(2) list but also proposes the addition of a general clause providing that the ESMA Regulation applies without prejudice to other EU acts conferring authorisation or supervisory functions and corresponding powers on ESMA, reflecting recent indications that ESMA’s direct supervision mandate will be expanded in the future (see ch 5). 207 Regulation (EU) No 648/2012 [2012] OJ L201/1; Directive 2014/65/EU [2014] OJ L173/349; Regulation (EU) No 600/2014 [2014] OJ L173/84; and Regulation (EU) No 909/2014 [2014] OJ L257/1.

80 ESMA’s Governance

• • • • • • • •

market participants, ensuring the coherent functioning of colleges of supervisors, and acting in emergency situations); stimulate and facilitate delegation by NCAs; cooperate with the ESRB; organise and conduct peer reviews (including issuing guidelines and recommendations and identifying best practices); monitor and assess market developments; undertake economic analyses of markets; foster investor protection; engage in a range of tasks concerned with the support of colleges of supervisors and crisis resolution; and publish through its website information on its field of activities.

ESMA is also to fulfil any other specific tasks set out in the ESMA Regulation or in other legislative acts. Under Article 8(2), which sets out ESMA’s related powers, ESMA is empowered to: • • • • • • • •

develop BTSs; issue guidelines and recommendations; issue specific recommendations; take individual decisions addressed to NCAs; and take individual decisions addressed to financial market participants in line with the ESMA Regulation; issue opinions to the EU institutions; collect information; develop common methodologies concerning the assessment of products and distribution processes; and maintain databases.

ESMA’s related mandate and objectives are high-level and couched in general terms (Article 1(5)). ESMA’s objective is to ‘protect the public interest by contributing to the short, medium, and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses’. To that end, it is charged with contributing to specified but scattergun and general outcomes: improving the functioning of the internal market, including in particular a sound, effective, and consistent level of regulation and supervision; ensuring the integrity, transparency, efficiency and orderly functioning of financial markets; strengthening international supervisory coordination; preventing regulatory arbitrage and promoting equal conditions of competition; ensuring the taking of investment and other risks are appropriately regulated and supervised; and enhancing consumer protection. For these purposes, ESMA is to contribute to ensuring the consistent, efficient, and effective application of the acts within its scope; foster supervisory convergence; provide opinions to the Commission, Council and Parliament; and undertake economic analyses of the market to promote the achievement of its objectives. Article 1(5) further directs ESMA to ‘pay particular attention’

ESMA’s Institutional Design 81 to any systemic risk posed by financial market participants, the failure of which could impair the operation of the financial system or the real economy. This structuring of ESMA’s discretion and exercise of authority is not without bite, but nonetheless these legal constraints are open-textured and porous. They allow ESMA significant freedom to experiment, respond to market conditions, develop tools for achieving its mandate, and deploy the new and experimentalist governance techniques which have significant attractions as means for delivering ESMA’s mandates, as discussed in later chapters. From an effectiveness perspective, the operational freedom allowed to ESMA is attractive. But the design of these legal constraints poses legitimacy challenges. The objectives that structure ESMA’s operating environment and constrain its authority, for example, are widely drafted and may incentivise bureaucratic expansionism. Further, they do not easily support accountability, as discussed in section V.B. The 2017 ESA Proposal does not bring greater granularity to ESMA’s constitutive legal constraints but rather intensifies their diffuse quality. As discussed in chapter 4, the Proposal suggests that ESMA be charged with a series of nebulous tasks in relation to Fintech and the support of innovation and, more generally, with taking account of technological innovation, innovative and sustainable business practices, and the integration of environmental, social and governance-related factors.208 However well-meaning, diffuse directions of this nature do little to constrain ESMA or support legitimation, and may provide incentives for ESMA to engage in bureaucratic adventurism. Additional legitimating legal constraints apply through the constitutional/Treaty principles that structure ESMA’s exercise of authority.209 As discussed in section III.B.iii the Meroni principle constrains how ESMA exercises discretion, although its relevance can be questioned. Other limitations apply under Article 5 TEU, which enjoins the EU to act within the limits of its conferred powers and objectives and under a Treaty competence, and to respect the principles of proportionality and subsidiarity.210 ESMA’s constitutive competence is Article 114 TFEU which provides the competence for measures for the approximation of Member States rules which have as their object the establishment and functioning of the internal market. It is not directly relevant to ESMA’s operating environment; its main effect is to shape the extent to which the co-legislators can confer new powers on ESMA.211 Nonetheless, Article 114 delimits ESMA’s sphere of competence and so can act as a friction against ESMA bureaucratic creep, particularly given the risk of Article 114-related litigation were ESMA action to provoke material Member State or institutional contestation. Similarly, while the Article 5 proportionality and subsidiarity principles are primarily associated with

208 2017 ESA Proposal, n 1, ESMA Regulation, Art 8(1a). 209 On the EU constitutional order as structuring administrative discretion, see Mendes, ‘Discretion, Care and Public Interests’, n 17. 210 These two principles combine to provide that the EU can take action (in areas of shared competence such as financial market governance) only and insofar as the objectives of the action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU (subsidiarity); and that the content and form of EU action must not exceed what is necessary to achieve the objectives of the Treaty. 211 Art 114 is a malleable and fluid competence, as is clear from the ECJ’s wide reading of the competence in the Short Selling ruling and in a series of accommodating rulings on the scope of Art 114. See further Moloney, n 82, 884–88 and 1002.

82 ESMA’s Governance the extent to which ESMA can be empowered by the co-legislators,212 they can act as frictions against ESMA expansionism. The general principles of EU law, which include the protection of legitimate expectations, transparency, and proportionality, also sit in the background as constraining/legitimating principles which serve as grounds for judicial review of ESMA action.213 Alongside these principles are the more informal standards of good regulatory governance, which do not operate as formal judicial review criteria but which are designed to support effective regulatory action and which typically include proportionality and transparency standards.214

V. ESMA’s External Governance Arrangements A. Administrative and Judicial Review i. Board of Appeal Addressees of an ESMA decision must be informed of ESMA’s intention to adopt a decision and given an opportunity to respond; decisions must be reasoned and, absent exceptional circumstances, made public; they must also be reviewed at appropriate intervals (ESMA Regulation, Article 39). In addition to the legitimation provided by this proceduralisation, an appeal mechanism with additional legitimating effects is available in the form of the ESA Board of Appeal – while not formally external to ESMA, it is designed to provide objective review. The decisions of EU agencies, given their third-party effects, are typically subject to review by an administrative review body in the form of a dedicated but independent board of appeal.215 Reflecting this convention, as well as the coercive nature of certain of ESMA’s powers, the ESMA Regulation provides for a Board of Appeal to protect third party interests and hear appeals from ESMA decisions (Articles 58–59). The Board of Appeal, a joint body of the three ESAs, hears appeals against decisions which, for

212 The need to respect subsidiarity and proportionality in any expansion of the ESAs’ activities was highlighted over the 2017 ESA Review: 2017 ESA Consultation Feedback Statement, n 130. 213 See T Tridimas, The General Principles of EU Law (Oxford University Press, Oxford, 2018). For an example of proportionality review in the EU financial governance context generally, see T Tridimas and N Xanthoulis, ‘A Legal Analysis of the OMT Case: Between Monetary Policy and Constitutional Conflict’ (2016) 23 Maastricht Journal of European and Comparative Law 17. 214 The Basel Committee’s Core Principles for Effective Banking Supervision (2012), eg, emphasise the importance of a proportionate approach to intervention (at 1). Good governance principles can be enshrined in legislative mandates. The UK FCA, eg, is enjoined to apply a proportionality principle, cast in terms of the need for any burden or restriction imposed on a person or on an activity to be proportionate to the benefits expected: Financial Services and Markets Act 2000, s 3B. 215 On the role of boards of appeal in EU agency governance, see M Chamon, ‘EU Risk Regulators and Procedural Law’ (2014) 3 European Journal of Risk Regulation 324, noting how such boards have only been provided for agencies with decision-making powers. The board of appeal jurisdiction derives from Art 263 TFEU, which provides for CJEU review of agency decisions but also provides that acts setting up agencies can additionally lay down specific conditions and arrangements governing review of agency action (such as boards of appeal). These boards can, nonetheless, be bypassed by applicants appealing directly to the CJEU: ibid.

ESMA’s External Governance Arrangements 83 the purposes of the ESMA jurisdiction, are specified as covering those adopted under ESMA Regulation, Articles 17 (breach of EU law action), 18 (binding mediation), and 19 (emergency action), as well as those adopted under any measure within ESMA’s scope of operation under the ESMA Regulation. There is no general right of appeal against ESMA action.216 The Board is composed of six members and six alternates, who, while appointed by the ESAs, are subject to and protected by stringent independence requirements (Articles 58(5) and 59).217 Two members and two alternates are appointed by the ESMA Management Board (Article 58(2) and (3)).218 The Board of Appeal operates through a majority of four of its six members, one of which must, where the appeal relates to ESMA, be a member appointed by ESMA (Article 58(6)). Board decisions, which can be appealed to the CJEU under Article 263 TFEU (Article 61), must be reasoned and made public (Article 60(7)). The appeal process is available to any natural or legal person (including NCAs) regarding a reviewable ESMA decision addressed to that person (or a decision addressed to another person but of ‘direct and individual concern’ to that party). The review process is further proceduralised under Article 60 and the Board’s internal Rules of Procedure.219 The Board of Appeal has to date adopted seven decisions, four of which relate to ESMA. Two of these concern appeals (on procedural and substantive grounds) against an ESMA decision not to register a credit rating agency.220 In each case, the Board dismissed the appeal, upholding the substantive grounds on which the decisions were made by ESMA as appropriately reasoned and dismissing the procedural complaints. While both appeals are highly technical and involve findings of fact, they suggest that while the Board is sympathetic to applicants’ concerns regarding onerous ESMA procedures, it will not lightly overturn ESMA’s technical decisions and is concerned to allow ESMA appropriate operational latitude. The third case relates to an ESMA determination not to take Article 17 investigatory action against the Luxembourg NCA221 concerning that NCA’s supervision of the EU prospectus regime, following a third party request for Article 17 action.222 Earlier, the Board of Appeal had adopted an approach facilitative to appellants to the admissibility of ESA Article 17 ‘decisions’ not to proceed following a third party request for Article 17 action, in the context of an EBA-related appeal against EBA’s refusal to take Article 17 action.223 In the ESMA case, the Board 216 The Board can additionally hear appeals in relation to ESMA refusals of access to documents: ESMA Regulation, Art 72. 217 Under ESMA Regulation, Art 58(5), Board of Appeal members cannot be removed from office unless found guilty of serious misconduct; the Management Board, following consultation with the Board of Supervisors, takes the decision to remove the member. Extensive independence and impartiality requirements apply under Art 59, including requirements for annual declarations of interests. 218 Board members must be individuals of high repute and meet the specified knowledge and experience qualifications. 219 Board of Appeal, Rules of Procedure (BOA 2012 002). See the discussion by its current President: W Blair, ‘The Board of Appeal of the European Supervisory Authorities’ (2013) 24 European Business Law Review 165. 220 Global Private Rating Company ‘Standard Rating Ltd’ v ESMA, Decision 10 January 2014 (BoA 2013–14); and FinancialCraft Analytics SP.Z.o.o. v ESMA, Decision 3 July 2017 (BoA 2017 01). 221 Under Art 17, ESMA may take investigative action against an NCA that may be in breach of EU law. The power is highly sensitive and has yet to be used by ESMA. See further ch 5. 222 Investor Protection Europe Sprl v ESMA, Decision 10 November 2014 (BoA 2012 002). 223 SV Capital OÜ v EBA, Decision 24 June 2013 (BoA 2013-008). The case is discussed in ch 5 in the context of Art 17.

84 ESMA’s Governance decided the appeal was not admissible, based on the failure of the appellant to establish a sufficient interest to take the appeal.224 The Board of Appeal nonetheless displayed a concern to ensure that the appeal process was accessible, finding that ESMA’s determination not to open Article 17 proceedings was a reviewable decision, and that there was a distinction between the general admissibility standards applied to judicial review by the EU courts (which could have led to a finding that the ESMA determination was not a decision and so not reviewable) and those applicable to appeal to a specialist court or tribunal, such as the Board; the limitations that applied to EU judicial review did not apply to the Board of Appeal as they would be incompatible with the Board’s purpose. Subsequently, the CJEU ruled in an EBA/Article 17 case that an ESA determination not to proceed under Article 17 was not a reviewable decision.225 It remains to be seen whether the Board will follow the CJEU’s more restrictive approach.226 The public record thus far suggests that the Board of Appeal is a relevant but not central element of ESMA’s governance framework. The Board provides the technically expert and deep review of ESMA action that may be challenging to deliver in the traditional judicial review context. In practice, it appears concerned to accommodate appeals, through a flexible approach to admissibility, and to provide robust, fact-based review of ESMA. This augurs well for legitimation. At the same time, a concern to allow ESMA appropriate operational discretion can be identified, mitigating any risks to ESMA’s effectiveness. Board review can be expected to expand along with ESMA’s mandates, particularly if ESMA’s direct supervisory powers are increased, and to become more embedded within ESMA’s governance arrangements.

ii. The Ombudsman and other Administrative Channels The European Ombudsman, which investigates complaints about maladministration within the EU’s institutions and bodies, provides another review forum. Thus far, only a small number of complaints have been made against ESMA, and these have usually been dismissed.227 As ESMA becomes more visible in EU financial market governance,

224 The Board found that the appellant, a trade association representing investor interests and which had raised concerns with ESMA as to the behaviour of the Luxembourg NCA, had failed to establish a sufficient interest within the relevant CJEU case law. Specifically, it had not shown that, as an association, it was representing the interests of natural or legal persons who would be entitled to bring proceedings, or that, as an association, it was individually concerned. 225 Case C-577/15 P SV Capital OÜ v EBA (ECLI:EU:C:2016:947). See further ch 5. 226 The fourth appeal relates to an undocumented and unsubstantiated appeal against unidentified ESMA decisions not to open an Art 17 investigation against an NCA, which was summarily dismissed by the Board as inadmissible: A v ESMA, Decision 30 April 2018 (BoA 2018 01). 227 Only in relation to the composition of the SMSG (n 128) has a clear finding of maladministration been made. In two cases (in relation to complaints concerning (i) the imposition of fees on a rating agency and (ii) a failure to respond to correspondence) the Ombudsman closed the complaints, finding no maladministration and commending ESMA for its cooperation with the rating agency (in the former case) and noting the steps ESMA had taken to settle the matter (in the latter case) (Complaint 1884/2015/JAS, Decision of 14 December 2016 and Complaint 933/2015/EIS, Decision of 2 December 2015). The Ombudsman also dismissed a complaint relating to ESMA’s hiring practices (Complaint 1167/2011/MMN, Decision of 17 December 2012).

ESMA’s External Governance Arrangements 85 and particularly to civil society, the likelihood of an affected party taking a petition is likely to increase, as is clear from the recent complaints relating to ESMA’s engagement with the outbreak of mis-selling of complex products by Cyprus-based online firms.228 The Ombudsman also draws ESMA into its wider investigations into administrative practices.229 While the Ombudsman is unlikely to become a material influence on how ESMA operates, given the niche quality of financial market governance within its very wide remit, there are already indications that it can prompt administrative/ procedural efficiencies, with benefits for ESMA’s effectiveness and legitimacy. As noted in section V.B, ESMA is also reviewed by other administrative bodies, particularly as regards budgetary matters, including by the European Court of Auditors.

iii. Judicial Review ESMA decisions are also reviewable by the CJEU. Under Article 263 TFEU, the CJEU230 is to review the legality of identified acts, including ‘acts of bodies, offices or agencies of the Union intended to produce legal effects vis-à-vis third parties’. Article 61 of the ESMA Regulation reflects Article 263, providing that Member States and the EU institutions, as well as any natural or legal person,231 may institute proceedings before the CJEU to annul ESMA decisions (and Board of Appeal decisions), in accordance with the Article 263 procedure.232 ESMA’s actions are reviewable against the grounds for review: lack of competence; infringement of an essential procedural requirement; infringement of the Treaties or of any rule of law relating to their application; or misuse of powers. The Article 263 procedure applies indirectly to acts that ESMA does not adopt but which it has influenced; the Commission, for example, could face annulment action under Article 263 in relation to delegated rules it has adopted on the basis of ESMA technical advice or BTSs based on ESMA proposals. The reviewability of ESMA’s vast corpus of soft law is unclear as it depends on whether particular measures produce legal effects;233 as discussed in chapter 3, it is not always clear when a soft

228 The Ombudsman heard two complaints on ESMA’s failure to respond to correspondence relating to alleged violations of EU law by a Cyprus online trading firm; these were closed after ESMA subsequently responded to the complainant and informed the Ombudsman of the steps being taken. The Ombudsman found no maladministration but noted that it would be open to it to address the matter on its own initiative if ESMA did not deal with it appropriately (Complaints 480/2016/CEC and 485/2016/CEC, Decisions 7 February 2017). Another complaint on ESMA’s failure to respond was dismissed in November 2017 (Case 385/2017/CEC, Decision 23 November 2017). In summer 2017 a further petition was lodged on ESMA’s failure to take enforcement against the Cypriot NCA in relation to the mis-selling scandal (Case 618/2017/CEC). 229 eg, Letters to ESMA requesting information on its controls on ex-employees acting as lobbyists and on its interview practices (CSI/21/2015/NF and OI/4/2013/CK). 230 Composed of the ECJ and the General Court; appeal is to the General Court in the first instance, whose rulings can be appealed on a point of law to the ECJ. 231 Any natural or legal person may institute proceedings against an act addressed to that person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them and does not entail implementing measures. 232 A failure by ESMA to act can be reviewed under Art 265 TFEU where ESMA has an obligation to act and fails to act, as is reinforced by ESMA Regulation, Art 61(3). 233 The ECJ has confirmed that soft-law measures are reviewable, depending on their legal effects: Case C-322/88 Grimaldi v Fonds des Maladies Professionelles (ECLI:EU:C:1989:646).

86 ESMA’s Governance measure is reviewable. So far, the CJEU has not ruled in an Article 263 action against ESMA. The limitation of Article 263 to acts with legal effects restricts its relevance as an ESMA review mechanism, given the technocratic influence ESMA wields through its soft powers and the uncertainty as to when soft measures are reviewable. Were an action to arise, the CJEU would be likely to defer to ESMA’s technical expertise and, in light of the Short Selling ruling, allow it a significant measure of discretion.234 Nonetheless, judicial review may, particularly if ESMA comes to acquire more binding powers, acquire more salience as a legitimating channel over time.

B. Institutional Oversight and Accountability Arrangements i. Institutional Oversight Institutional oversight is exercised over ESMA in several ways, which include the accountability channels that are a central element of its legitimation framework and which are discussed further in this section V.B.235 The European Parliament and Council set ESMA’s scope of action by adopting, as constituting actors, the scope, power, and mandate limitations set out in the ESMA Regulation and in sectoral financial market legislation. ESMA’s governance arrangements also include specific institutional oversight procedures. The Parliament and Council are ESMA’s main institutional accountability fora, as noted in this section. In addition, they have oversight over ESMA’s role in administrative rule-making. As discussed in chapter 3, the Parliament and Council oversee the Delegated Acts and BTSs adopted by the Commission but which are heavily influenced by ESMA. This oversight regime reflects the Article 290/291 TFEU settlement on administrative rulemaking generally, but it also reflects the concern of the co-legislators, and particularly the Parliament,236 to retain oversight over ESMA’s role in administrative rule-making. The Parliament also exercises oversight over the ESMA Chair and Executive Director appointments process.237 The Commission is directly represented on ESMA’s Board of Supervisors and sits within ESMA’s accountability regime, particularly as regards budgetary accountability. Institutional engagement levels vary. The Commission plays an active role in ESMA oversight through the different accountability channels discussed in this section V.B and through its Board of Supervisors seat, which it typically uses to monitor ESMA’s

234 Mendes, ‘Bounded discretion in EU law’, n 17, examining the CJEU’s deference in reviewing administrative action. 235 Everson has identified ESMA’s ‘plural accountability scheme’ as its primary legitimating mechanism: Everson, n 53. 236 The European Parliament has been analysed as becoming more comfortable with EU agencies over time, in part because of its success in developing control mechanisms: C Lord, ‘The European Parliament and the Legitimation of Agencification’ (2011) 18 Journal of European Public Policy 909. 237 While the Board of Supervisors appoints the ESMA Chair and exerts disciplinary authority, the European Parliament may object to any appointment (ESMA Regulation, Arts 43(3), 43(8), and 48(2)). Similarly, while the Board of Supervisors appoints the Executive Director and exerts disciplinary authority (Arts 43(8) and 51(2)), the Parliament confirms the appointment.

ESMA’s External Governance Arrangements 87 mandate compliance.238 The Council has to date paid little attention to overseeing ESMA (beyond constituting the legal bounds on ESMA’s operation and, as discussed in chapter 3, finessing administrative rule-making procedures).239 The Parliament, by contrast, has been more active than the Council, and has emerged as the primary institutional forum to which ESMA is accountable, as discussed in the following subsections.

ii. Accountability Arrangements Agency accountability mechanisms are not easy to design given the need to protect agencies’ independence and operational discretion.240 Accountability mechanisms are all the more troublesome in the ESMA context given the range of different delegating ‘principals’ (loosely termed) to which ESMA could be regarded as accountable, and which could lead to cumbersome and potentially conflicting accountability arrangements, and also given the need for its accountability arrangements to reflect the scale of ESMA’s influence and accordingly for them to engage with ESMA’s soft powers.241 In practice, the range of different accountability arrangements that apply to ESMA, which reflect the multiplicity of potential principals engaged (as well as the availability of other actors as accountability fora – an accountability forum does not have to take the form of a delegating principal242), mitigate the risk of its not being held to account appropriately and do not, so far at least, appear to be obstructive of the emergence of a purposeful accountability system – although there are weaknesses, as noted in the following subsections.243 Further, while ESMA’s judicial/administrative review accountability channels (mainly the Board of Appeal and CJEU, as already noted) are primarily concerned with ESMA’s binding decisions, the other accountability arrangements discussed in the following subsections extend over ESMA’s mandate more generally. The Council and Parliament are ESMA’s primary institutional accountability fora, but other forms of accountability arrangement are also in place, including those which address budgetary and financial matters, those which derive from ESMA’s inter-ESA network and its international activities, and those, as discussed earlier in this

238 See further ch 3 on Commission/ESMA relations as regards regulatory governance. 239 Council engagement with agencies is usually expressed through the Council’s preferences as regards agencies’ constitutive arrangements, and in particular the embedding of national representatives into agency governance: J Christensen and V Nielsen, ‘Administrative Capacity, Structural Choice and the Creation of EU Agencies’ (2010) 17 Journal of European Public Policy 176. 240 On the challenges, see Lodge and Stirton, n 42, 349; and Chiti, ‘Is EU Administrative Law Failing?’, n 4, 590–91. 241 Accountability arrangements should reflect the extent to which powers are delegated and discretion can be exercised: Amtenbrink and Lastra, n 12, 124. 242 Accountability fora, which are concerned with ex-post monitoring and not ex-ante control (the latter is associated more with constitutive action by delegating principals), can take multiple forms and do not have to be located within the delegating principals: Busuioc, n 44, 48. 243 For an examination of the effectiveness of ESMA’s accountability arrangements, see M van Rijsbergen and J Foster, ‘“Rating” ESMA’s Accountability: “AAA” Status’ in M Scholten and M Luchtman (eds), Law Enforcement by EU Authorities. Implications for Political and Judicial Accountability (Elgar, Chelthenham, 2018) 53 and C di Noia and M Gargantini, ‘Unleashing the European Securities and Markets Authority: Governance and Accountability after the ECJ Decision on the Short Selling Regulation’ (2014) 15 European Business Organisation Law Review 1.

88 ESMA’s Governance chapter, that can be identified within ESMA’s Board of Supervisors. Further, a degree of public accountability can be associated with ESMA’s governance given its extensive public reporting obligations244 and as ESMA is charged with publishing on its website information on its activities ‘to ensure information is easily accessible by the public’ (ESMA Regulation, Article 8(1)(k)) – in practice, its website hosts a wealth of information. This form of public accountability245 is limited, as it does not easily support the identification of weaknesses and the imposition of sanctions. These reporting and publications obligations have the potential, however, to increase public understanding of ESMA’s activities and may, in the long run, strengthen the Parliament and Council as accountability fora if an informed and engaged public constituency emerges. ESMA’s main, non-judicial/administrative review accountability channels are considered in the following subsections.

iii. Accountability to the European Parliament and Council a. Reporting Requirements and Institutional Relationships ESMA is primarily accountable to the European Parliament and Council (ESMA Regulation, Article 3), and is subject to a range of related reporting obligations. These include submission of an annual report to the Council and Parliament (as well as to the Commission, Court of Auditors, and the European Economic and Social Committee) (Article 43(5)). The annual and multi-annual Work Programmes required of ESMA246 must also be submitted to the Council and Parliament (as well as to the Commission) (Article 43(4) and (6)). Under Article 50(1), the Council and Parliament may invite the ESMA Chair to make a statement; the Chair must also, in relation to the Parliament only, make a statement and answer questions when requested, and report in writing on ESMA’s main activities when requested. In practice, the ESMA Chair makes an annual statement to the Parliament’s Economic and Monetary Affairs Committee (ECON), which typically covers the year’s regulatory governance and supervisory activity highlights but also relates ESMA’s work to major EU policy initiatives, such as Capital Markets Union.247 ESMA additionally participates in ECON scrutiny h earings

244 ESMA must, eg, publish its annual/multi-annual work programmes and annual reports (ESMA Regulation, Art 43(4), (5), (6)). 245 Public reporting, consultation, and participation mechanisms have all been associated with the public accountability of financial regulators: Hüpkes et al, n 39, 29. 246 The 2012 Common Approach set out standards for agency work programmes and also called for them to be subject to Commission consultation as well as to (multi-annual work programmes only) European Parliament consultation: see Common Approach, n 5, 9 and 2012 Commission Roadmap, n 5, Actions 26–30). 247 ESMA Chair Maijoor’s 2017 ECON Statement, eg, updated the Committee on ESMA’s work but focused on ‘important current topics for EU securities markets’ – MiFID II/MiFIR implementation, Brexit, and CMU: Statement, ECON Committee, 9 October 2017 (ESMA22-105-239). The 2016 Statement similarly covered ESMA’s work and the Chair’s ‘thoughts on the key issues ESMA expects to face in the future’, as well as ESMA’s commitment to CMU and its concern that CMU be ‘progressed without pause’ notwithstanding the withdrawal of the UK from the EU (Statement, ECON Committee, 29 September 2016 (ESMA/2016/1391)). The 2015 and 2014 Statements took a similar format (eg, Statement, ECON Committee, 14 September 2015 (ESMA/2015/1349)). Although Statements are typically short, they have become more detailed over time.

ESMA’s External Governance Arrangements 89 on proposed administrative rules,248 engages bilaterally and informally with ECON members,249 and takes part in ECON policy and legislative hearings.250 Different Parliamentary groupings also provide fora for ESMA/Parliament interaction and challenge.251 In terms of the formal consequences and sanctions associated with accountability review, the Parliament and Council hold the ultimate sanction, in that they can revise ESMA’s founding Regulation to limit its powers or restrict the extent to which they confer new powers on ESMA. In practice, the risk of Parliamentary and Council disapproval or tension, which could disrupt ESMA’s operating environment, acts as a proxy for formal sanctions or consequences. As noted ahead, ESMA has proved sensitive to institutional disapproval. The Council has, to date, paid little attention to holding ESMA to account. The public record is largely silent, save for the Council’s general and typically economical reactions to the periodic reviews of the ESAs.252 ESMA participates as an observer in the Council’s Financial Services Committee (FSC) and Economic and Financial Committee (EFC), but there is little evidence that this engagement operates as an accountability forum.253 The Parliament has been more active. In practice, ECON acts as ESMA’s main accountability forum. Annual review hearings with ECON can be challenging, but they are more usually an occasion on which the ESMA Chair presents ESMA’s priorities and raises concerns,254 and they do not generate formal consequences or feedback. It would be misleading nonetheless to characterise the Parliament, through ECON, as a passive accountability forum. The Parliament, for example, also monitors ESMA through its resolutions and MEPs’ written questions. Written questions are fairly sporadic and tend to reflect national interests as well as political salience.255 Thus far, in the financial governance area they have been primarily directed to EBA and to issues of material

248 ESMA participates regularly in different ECON scrutiny sessions. Recently, MiFID II/MiFIR scrutiny sessions have dominated (eg, ECON MiFID II/MiFIR Scrutiny Sessions 21 June 2016 (ESMA/2016/940); 10 November 2015 (ESMA/2015/1639); 15 July 2015 (ESMA/2015/1133); and 16 June 2015 (ESMA/2015/936)). 249 The MiFID II/MiFIR scrutiny statements (n 248) note ESMA’s bilateral exchanges with individual MEPs. 250 eg ECON Public Hearing on CCP Recovery and Resolution, ESMA Statement, 22 March 2017 (ESMA7199-372) and ECON Public Hearing on Securitisation, ESMA Statement, 12 June 2016 (ESMA/2016/943). 251 eg the early 2017 ALDE workshop at which ESMA Chair Maijoor set out ESMA’s concerns regarding third country CCPs: ESMA Chair Maijoor, Address, ALDE Seminar on the Review of the European Supervisory Authorities, 8 February 2017. 252 See, eg, Presidency Issues Note on Review of the ESFS, 20 October 2017 (Council Document 13447/17) and ECOFIN Council Conclusions on the ESFS Review, 7 November 2014. 253 The Executive Director reports on participation to the Board of Supervisors. The Minutes suggest that discussions are high level and directed to EU financial market policy generally (eg, Minutes, 31 January 2018 (ESMA22-106-900), reporting on FSC discussions on virtual currencies and sustainable finance). 254 Busuioc has found that EU agencies often use European Parliament accountability mechanisms as lobbying platforms and to increase their visibility: Busuioc, n 44, 128–29. ESMA’s 2017 ECON Statement, eg, raised ESMA’s budget, warned of the risk of potential glitches in the MiFID II/MiFIR implementation process, and welcomed the 2017 ESA Proposal’s proposed strengthening of ESMA’s powers over third country actors. ESMA also uses technical ECON hearings to promote its agenda. The 2017 ECON hearings on the 2016 CCP Recovery and Resolution Proposal, eg, saw ESMA draw ECON’s attention to ESMA’s experience with colleges of supervisors and to the related lessons for the Proposal. 255 This reflects European Parliament practice generally (N Font and I Perez Duran, ‘The European Parliament Oversight of EU Agencies through Written Questions’ (2016) 23 Journal of European Public Policy 1349, noting the limited number of questions directed to EBA).

90 ESMA’s Governance political import, notably the pan-EU bank stress testing coordinated by EBA.256 Resolutions (usually based on ECON proposals), however, can be challenging. The Parliament’s 2016 Resolution on Stocktaking is indicative.257 It called for better quality and stronger cross-sector coordination as regards the ESAs’ regulatory products; warned against the administrative process taking political decisions reserved to the legislative process and called on the ESAs to ‘stick to the empowerments laid down in the basic acts’; ‘regretted’ that the ESAs had not always respected their mandates for the development of administrative rules; and ‘deplored’ insufficient communication between the Commission and ESMA in the preparation of administrative rules.258 It also asked the ESAs to take a ‘careful approach’ to the number and extent of their guidelines, particularly where there was no express legislative mandate for guideline adoption.259 The Parliament’s annual ESMA budgetary discharge decisions (which it adopts as (with the Council) the EU’s joint budgetary authority) contain similar, mandate-oriented directions to ESMA. In 2018, while the Parliament identified ESMA’s major achievements (including, it considered, ESMA’s work on Brexit, CMU, stress testing of CCPs, and mis-selling of complex products), it called on ESMA to ‘carefully adhere to its tasks’, not go beyond its mandates, and pay particular attention to proportionality so as to optimise its resources and achieve the objectives mandated by the Parliament and Council. It also underlined that ESMA should reflect the specific features of national markets in its activities and involve market participants ‘sufficiently promptly’ in its development of measures, and should ensure sufficient internal budgetary allocation to its supervisory convergence mandate.260 In 2017 the Parliament called on ESMA to ‘carefully adhere’ to the tasks assigned to it by the co-legislators, warning that a closer focus on its mandates could result in a more efficient use of resources; it also requested ESMA to keep the Council and Parliament informed, particularly on the preparation of administrative rules, in a timely, regular, and comprehensive manner.261 The Parliament made other specific recommendations, including for faster publication of Board of Supervisors minutes and for such minutes to provide better insights into the decisionmaking process, and for ESMA to apply a proportionate approach to its powers. The 2016 discharge resolution was similar in tone, warning ESMA not to seek to broaden its mandates beyond the tasks assigned to it by the co-legislators. It also called on ESMA to pay particular attention to: upholding the safety and soundness of the financial sector; respecting the proportionality principle; and achieving outcomes that were consistent, coherent, and free of superfluous complexity. ESMA was asked in addition to provide more comprehensive and timely reporting.262 The 2015 discharge resolution similarly called on ESMA to ‘stick to the tasks assigned by the European Parliament

256 See, eg, EBA Letter to MEP Sven Giegold, 20 October 2016 (EBA/2016/D/944). 257 See n 148. 258 ibid, para 49. 259 ibid, para 54. 260 European Parliament, Resolution on Discharge of the 2016 ESMA Budget, 18 April 2018 (P8_TAPROV(2018) 155), Observations. 261 European Parliament, Resolution on Discharge of the 2015 ESMA Budget, 27 April 2017 (P8_TAPROV(2017) 177), Observations. 262 European Parliament, Resolution on Discharge of the 2014 ESMA Budget, 28 April 2016 (P8_TAPROV(2016) 181), Observations.

ESMA’s External Governance Arrangements 91 and Council’.263 One of the most significant eruptions of tension between ESMA and the Parliament concerned the extent to which the Parliament could have sight of internal ESMA deliberations on draft BTSs and technical advice, following a leaking to the industry of internal ESMA papers, which papers had not been disclosed to the Parliament. The Parliament’s 2016 discharge resolution therefore regretted that ESMA had not kept the EU legislator informed in a sufficient and comprehensive manner and called for an ‘end to this maladministration’. The Parliament’s irritation was also made clear in the 2016 Resolution on Stocktaking, which called in consequence for the Parliament to have access to early-stage ESMA internal deliberations.264 From the outset, ESMA was sensitive to its accountability obligations,265 and the public record suggests an ESMA determination to respond to Parliament concerns and to develop a productive relationship – but at the same time to protect its independence. During the ESMA/Parliament imbroglio on the leak of internal ESMA papers, for example, ESMA Chair Maijoor committed to doing the ‘utmost’ to keep the Parliament informed.266 Chair Maijoor also, however, sought to protect ESMA’s independence and operational effectiveness, cautioning that there were limits to how detailed ESMA could be in disclosing its thinking on live policy issues, particularly given the Board of Supervisors’ independence obligation.267 Indications of a responsive approach to the Parliament’s concerns are also evident in ESMA’s 2017 ECON Statement, which welcomed ECON’s ‘continuous and constructive dialogue’; the 2016 Statement, which noted ESMA’s willingness to reconsider its approach to draft BTSs where legislative mandate difficulties arose; and the 2015 Statement, which highlighted ESMA’s appreciation of ECON’s input into the development of the MiFID II/MiFIR BTSs. Similarly, the MiFID II/MiFIR ECON scrutiny process was peppered with references to ESMA’s desire to communicate with MEPs, respond to their concerns, and support their deliberations.268 Current indications suggest that while the Parliament is strengthening as an accountability forum for ESMA, it is not impinging, thus far, on ESMA’s operational independence and capacity to operate effectively. Up to now it has tended to operate as a ‘fire alarm’, raising concerns where it sees material risks to legitimacy.269 But it is becoming more willing to raise alarms, and this trend is likely to become more marked, in part given ESMA’s dynamic nature, but in part also as civil society engagement with ESMA is likely to increase, and thereby also the Parliament’s attention – the Parliament’s recourse to ‘fire alarm’ oversight has been associated with civil society and public interest groups raising issues with agencies.270 Direct civil society engagement with ESMA is

263 European Parliament, Resolution on Discharge of the 2013 ESMA Budget, 29 April 2015 (P8_ TAPROV(2015) 152), Observations. 264 2016 Parliament Resolution on Stocktaking, n 148, para 52, calling for the Parliament to be provided with ‘provisional drafts and interim information on the progress of work’. 265 ESMA, Annual Report on 2011 (2012), 9, noting its accountability obligations and its commitment to transparency. 266 eg ESMA MiFID II/MiFIR ECON Scrutiny Statement, 15 July 2015 (ESMA/2015/1133). 267 Ibid. 268 eg, ESMA MiFID II/MiFIR ECON Scrutiny Statement, 10 November 2015 (ESMA/2015/1639). 269 Busuioc, n 44, 133. 270 Kelemen, n 24, 98.

92 ESMA’s Governance currently relatively weak but it is increasing,271 while the 2013 establishment of Better Finance, an EU-funded consumer finance stakeholder, has led to an intensification of Parliament/consumer interest contacts on EU financial market governance more generally.272 Further, other Parliament oversight fora are emerging. The Parliament’s Petitions Committee, which hears petitions from EU citizens, recently called on ESMA to explain its approach to the online mis-selling of complex products, in response to a petition.273 Overall, however, the Parliament is best regarded as a high-level political check on ESMA, and not as providing close accountability monitoring of specific ESMA decisions. The Parliament’s attention to ESMA also tends to be sporadic, and its main concern is usually with protecting its prerogatives over administrative rule-making, rather than with holding ESMA to account against its mandates and objectives.274 Nonetheless, the Parliamentary limb of ESMA’s accountability framework is, at least as regards high-level political oversight, broadly fit for purpose. b. Reporting, Objectives, and Performance Metrics While ESMA’s institutional accountability arrangements are developing, they suffer from variable levels of institutional engagement and they do not usually involve detailed assessments of ESMA’s actions. These weaknesses are compounded by the nature of ESMA’s reporting to the European Parliament and Council. Meaningful accountability review of financial market regulators presupposes the availability of relevant objectives, but also of data on the reviewed regulator’s performance against those objectives – such as the extent to which identified market and other outcomes (for example, the fair treatment of investors) have been achieved – which can ground the review.275 ESMA’s legislative objectives, however, are, as discussed earlier, couched in general and diffuse terms, and are ill-suited to supporting the construction of measurable outcomes or other performance metrics, and so to acting as benchmarks for accountability review. They contrast with the detailed operational objectives of the UK NCA (the FCA), for example, which sit alongside its ‘strategic objective’ of ensuring relevant markets function well.276 The Dutch NCA (the AFM), to take another example, has a series of strategic objectives277 and sets annual, detailed priorities.278 ESMA is, however, beginning to construct a more granular and cohesive set of objectives and to develop related reporting metrics, suggesting a responsive capacity

271 Evidence of which comes from the recent engagement by the public with ESMA’s proposals to restrict CfD marketing to retail investors (see n 119), and from the complaints made to ESMA regarding the mis-selling of such instruments (see further ch 4). 272 See, eg, the ‘open letters’ sent by Better Finance to the EU institutions, available at http://betterfinance.eu. 273 ESMA Statement to Petitions Committee, 17 July 2017 (ESMA43-318-752). 274 Clear from, eg, the European Parliament’s concern to ensure its prerogatives are not side-stepped by the informal ‘early legal review’ process, which, as discussed in ch 3, is designed to allow the Commission and ESMA to resolve drafting difficulties with draft administrative rules: 2016 Parliament Resolution on Stocktaking, n 148, para 52. 275 Amtenbrink and Lastra, n 12, 124. 276 Financial Services and Markets Act 2000, ss 1B–1E. 277 Available at https://www.afm.nl/en/over-afm/werkzaamheden/strategische-doelstellingen. 278 eg AFM, AFM Agenda 2018 (2018).

ESMA’s External Governance Arrangements 93 to adapt its accountability arrangements and to reinforce its legitimacy. ESMA’s opentextured legislative objectives have allowed it to set a ‘mission’ – which it regards as to enhance investor protection and promote stable and orderly financial markets in the EU; it has also reinterpreted its scattergun objectives as three high-level objectives – investor protection, orderly markets, and financial stability.279 While this somewhat opportunistic claiming of a mission and objectives might generate some queasiness as regards legitimacy,280 it can also be regarded as a reasonable response to a diffuse set of legislative objectives, and suggests a responsive approach to the management of legitimacy risks. In addition, ESMA’s reporting is evolving and beginning to grapple with the development of more granular reporting metrics. ESMA’s Annual Reports, which it regards as an ‘important accountability tool’,281 have become more detailed over time. ESMA’s first Annual Report on 2011 had, unsurprisingly, a strongly agenda-setting quality.282 The reporting was primarily narrative and historic, setting out in detail ESMA’s activities over its first year, but did not link these activities to particular objectives or outcomes. By 2018, ESMA’s Annual Report on 2017 was significantly more detailed, providing extensive coverage of ESMA’s activities as well as comprehensive disclosures on how ESMA operated as an organisation.283 It also reported on the objectives set for different workstreams in the related Work Programme (discussed below) and on how those objectives were met. While the reporting on objectives was narrative and high-level in style,284 it nonetheless provided something of a benchmark against which accountability oversight could be exercised. The Annual Report did not, however, identify or discuss particular outcomes. By contrast, the UK FCA’s annual report, which assesses its performance against its statutory objectives, contains detailed outcomes and outcome indicators, and examines how each outcome has been achieved and to what extent.285 A similar approach is followed in the Dutch AFM’s reporting.286 As ESMA’s capacity to develop metrics and benchmarks becomes more sophisticated (as can be

279 eg, ESMA, Annual Report on 2017 (2018) 13, describing its mission, ‘based on its Regulation’, as ‘to enhance the protection of investors and promote stable and orderly markets in the EU’ and its objectives as ‘investor protection: to have the needs of financial consumers better served and to reinforce their rights as investors while acknowledging their responsibilities; orderly markets: to promote the integrity, transparency, efficiency, and well-functioning of financial markets and robust market infrastructure; and financial stability: to strengthen the financial system in order to be capable of withstanding shocks and the unravelling of financial imbalances while fostering economic growth’. ESMA’s sense of its mission has not changed materially since its 2011 Annual Report, which described its mission as to enhance the protection of investors and promote stable and well-functioning markets: ESMA, Annual Report on 2011 (2012) 9. 280 ESMA’s self-articulation in its Annual Report on 2017 of its investor protection objective (ibid) introduces notions of consumer responsibility which are contested and which are more typically associated with legislative amplification. 281 ESMA, Annual Report on 2017 (2018) 13. 282 The Report, eg, identified ESMA’s ‘organisational characteristics’ as European, independent, cooperative, accountable, professional, and effective: at 9. 283 ESMA, Annual Report on 2017 (2018) 44–68. 284 eg, the reporting on ESMA’s achievement of the relevant single rulebook objectives: ibid, 32–36. 285 eg, FCA, Annual Report 2015–2016, 16 (noting, eg, an outcome that ‘consumers have fair access to fair products and services which deliver what they promise’ and an indicator of ‘fair products and services’ and ‘improved consumer experience’. 286 eg AFM, Intense Supervision in a Changed Playing Field. Annual Report 2016 (2017).

94 ESMA’s Governance expected given its fast-developing risk assessment activities discussed in chapter 4), annual reporting can be expected to become more granular. Reporting metrics are also being developed through ESMA’s annual Work Programmes, which are adopted annually for the following year and transmitted to the Commission, Council, and Parliament. ESMA’s first 2012 Work Programme was limited, setting out in broad terms ESMA’s planned activities for 2012 (which were almost entirely related to the support of administrative rule-making), and did not specify particular objectives or outcomes.287 It was cast in terms of ‘deliverables’, which were identified in general terms, such as the delivery of technical advice under a particular mandate, and set out the level of priority for each deliverable.288 By the time of the 2018 Work Programme cycle, ESMA’s reporting had become more sophisticated. The 2018 Work Programme was situated within ESMA’s 2016–2020 Strategic Orientation289 and ESMA’s multi-annual planning process (which is currently based on ESMA’s 2018–2020 ‘Single Programming Document’, which includes a multi-annual work programme with financial and staffing outlooks for 2019 and 2020).290 The Work Programme took the form of an umbrella Work Programme291 and three sub-work programmes – the Supervisory Convergence Work Programme, the Regulatory Work Programme, and the Risk Assessment Work Programme.292 The umbrella Work Programme is notable for its engagement with objective-setting and reporting metrics.293 It set out four major areas of activity with multiple sub-activity areas (seven within the supervisory convergence area; three within risk assessment; eight within the single rule-book; and three within supervision), and for each sub-activity set a key objective and main ‘outputs’. It also set out key performance indicators (KPIs).294 The objectives and outputs were cast in fairly general terms,295 and the KPIs were q uantitative rather than linked to particular market outcomes.296 287 ESMA, 2012 Work Programme (ESMA/2011/330). 288 ibid, Annex 3. 289 ESMA, Strategic Orientation 2016–2020 (ESMA/2015/935). 290 ESMA, Annual Report on 2016 (2017) 6. 291 ESMA, 2018 Work Programme (ESMA20-95-619) 6 and 8. 292 Respectively, ESMA42-114-540, ESMA20-95-823, and ESMA20-95-839. ESMA’s supervision work programme for 2018 was set out seperately in its 2018 Work Programme for rating agencies, trade repositories, and third country CCPs (ESMA80-199-153). 293 The related sub-work programmes took different approaches. The Regulatory Work Programme took the form of a table of proposed BTSs and technical advice, which indicated whether the work was mandatory or discretionary, time-lines, and the nature of the consultation/impact assessment to be undertaken. The Supervisory Convergence Work Programme set out the context for ESMA’s work (including the NCA and market environment); over-arching priorities and how they were set; thematic and cross-cutting activities; and a detailed narrative specification of the key objective and main outputs for the different activity areas addressed. The Risk Assessment Work Programme was different again, setting out for each major of activity the key activities, deliverables, and a table identifying which of ESMA’s objectives and activities were engaged. 294 2018 Work Programme, n 291, Annex III, 31–32. KPIs first appeared in ESMA’s 2014 Work Programme and have since become more specific. 295 The ‘key objective’ for the investment management ‘sub-activity’ within ESMA’s supervisory convergence activities, eg, was to ‘achieve measurable outcomes in the level of convergence regarding the application by [NCAs] of EU legislation on investment management through the development of guidance and application of supervisory convergence tools’, and the ‘main outputs’ were guidance on investment fund legislation; peer review in identified areas; ongoing identification and mitigation of non-convergence; stress testing; and the Money Market Fund data-base: ibid, 11. 296 The KPIs for ESMA’s supervisory convergence activities, eg, were: compliance with guidelines and recommendations; percentage of IT systems delivered against plans; number of peer reviews conducted and opinions issued; and number of Q&As issued: ibid, Annex III, 31.

ESMA’s External Governance Arrangements 95 Nonetheless, this evolution in ESMA’s reporting underscores ESMA’s capacity to support the development of meaningful accountability review. To take an example, the differentiation in ESMA’s Regulatory Work Programme between mandatory and discretionary activity should facilitate monitoring of ESMA’s entrepreneurialism and any related bureaucratic creep and legitimation risks. The addition of new sub-work programmes, most recently the Risk Assessment Work Programme, also augurs well for ESMA’s capacity to adapt its reporting as its activities evolve. Enhancements can be expected. The Board of Supervisors now discusses the development of KPIs297 and appears committed to an outcomes-based approach.298 The enhancement of agency KPIs is also being sought by the Commission.299 These developments are welcome. As ESMA’s supervisory convergence agenda expands, and along with it ESMA’s capacity to shape NCA action and market behaviour (as discussed in chapter 4), the need for the identification of performance metrics, such as identified outcomes or outputs, against which ESMA’s activities can be reviewed, will become more acute. This is not to suggest that ESMA’s reporting is sufficient for meaningful accountability review, particularly given the evidence of sporadic institutional attention to ESMA. The legislative objectives against which ESMA is accountable are porous, ESMA is not subject to review against outcomes or other performance metrics set by the co-legislators, and its proprietary metrics are still developing. The setting of objectives and the identification of related outcomes or other performance metrics for (or by) ESMA are, as they are for any financial regulator, complex tasks. Objectives can conflict – the trade-off between financial stability and investor protection, for example, can be a complex one with distributional consequences, while a competitiveness objective can be difficult to achieve given the costs of regulation. Objectives can also be overly open-ended; to what extent, for example, should consumer protection be pursued, given the costs of such regulation?300 Further, by contrast with the objectives and related performance metrics typically deployed to review central banks (for example, the ECB’s inflation target301), they generate measurability difficulties, particularly given the preventative nature of much of a financial regulator’s mandate and also the need to accommodate regulatory judgement and discretion.302 The elusive nature of objectives and of related performance metrics underscores, however, the need for clear specification if legitimation is to be secure.303 In the ESMA context, specification of 297 BoS, Minutes, 31 January 2018 (ESMA22-106-900) and 14 December 2016 (ESMA22-24740098-55), reporting on the need to develop KPIs. 298 BoS, Minutes, 27 September 2017 (ESMA22-106-432). 299 2012 Common Approach, n 5, 9 and 2012 Commission Roadmap n 5, Action 28. The Commission has since adopted KPI guidelines for agencies. 300 On the difficulties raised by objective-setting, see J Black and M Hopper, ‘Breaking Up is Hard to Do: The Future of UK Financial Regulation?’, Herbert Smith/LSE Law Paper (2011). 301 An ECB Executive Board member has highlighted the legitimation that follows from the clarity of the ECB’s inflation target and the related relative ease in ensuring ECB accountability, as compared to the difficulties in setting accountability measures for the ECB’s bank supervision mandate, noting that ECB/ SSM objectives are diverse and multifaceted, not quantifiable, and require trade-offs and judgement calls: Y Mersch, Speech on ‘Central Bank Independence Revisited’, 30 March 2017. 302 For a pre-crisis view, see Hüpkes et al, n 39, 10–14. 303 IOSCO has adopted the principle that the responsibilities of financial regulators should be clear and objectively stated: IOSCO, Objectives and Principles of Securities Regulation (2017), principle A.1. Similarly, the OECD’s principles for regulators include that the purpose of the regulator and the objectives

96 ESMA’s Governance objectives and of related performance metrics such as outcomes is all the more necessary given ESMA’s at times entrepreneurial and often dynamic quality. ESMA has amplified its legislative objectives, but objective setting is a legislative task, which engages political choices with distributional and public interest consequences. Further, with greater legislative specification of ESMA’s objectives, more granular performance metrics could be developed, reporting could be more evidenced-based, and accountability monitoring could become more meaningful. The risk of accountability review’s being a function of protecting the distinct institutional prerogatives of the co-legislators should also be reduced. This is not to suggest that ESMA’s currently open-ended objectives, such as the promotion of financial stability or investor protection, should be reduced to a legislative list of operational targets and outcomes; not only would this be almost impossible to achieve, it would prejudicially shackle ESMA in responding to a highly dynamic market context and obstruct its effectiveness. But there is a need for a clearer legislative articulation of the objectives and outcomes ESMA should be pursuing and their relative importance; of the regulatory standards to which ESMA is subject, including in relation to proportionality and transparency and, in particular given the uncertainties unleashed by the UK’s withdrawal from the EU, competitiveness; and of what is to be avoided, whether excessive regulatory costs, disproportionate action, threats to competition, or similar. Such granularity is necessary if accountability mechanisms are to carry the legitimation weight required of them in the ESMA context. Greater legislative specification would also structure ESMA’s discretion more clearly, and thereby support not only legitimation through accountability, but also legitimation through judicial review.

iv. Accountability to the Commission ESMA is not formally accountable to the Commission, although the Commission must be provided with the reports noted in the preceding section. The Commission, however, monitors ESMA’s resource management. It is closely engaged with ESMA’s staffing policy, overseeing the EU Staff Regulations which apply to persons employed by the EU institutions. Similarly, ESMA’s internal financial rules must follow the EU’s Financial Regulation and the related Commission Regulation.304

v. Budgetary Accountability The Commission also sits within ESMA’s accountability arrangements through its budgetary oversight role, which is shared with the Council and European Parliament. As outlined in section VI, ESMA’s proposed budget and related staffing plans are transmit-

of regulation should be clear to staff, regulated entities, and citizens, and that the expectations for regulators should be clearly outlined: OECD, n 2, 30 and 80. 304 Regulation (EU, Euratom) No 966/2012 [2012] OJ L298/1 and Commission Delegated Regulation 1271/2013, which govern budgetary and reporting procedures for agencies (Official Journal references are provided only for legislative measures in this book).

ESMA’s External Governance Arrangements 97 ted to the Commission, Council, and Parliament; the Commission proposes the EU subsidy element of ESMA’s budget, which is adopted by the Council and Parliament as the EU’s joint budgetary authority; and the Parliament subsequently acts as discharge authority, typically using discharge decisions to send messages to ESMA.

vi. Financial Accountability ESMA is also subject to specific financial accountability arrangements, including in relation to its compliance with the EU’s Financial Regulation,305 and to review by its external auditors and the European Court of Auditors. ESMA is audited annually by the Court of Auditors, which produces an annual ‘Statement of Assurance’ on ESMA’s accounts. The Court of Auditors also examines discrete areas of ESMA’s activity: its audit of ESMA’s supervision of rating agencies found that while good foundations had been laid, there was room for improvement.306

vii. Inter-ESA Relations and International Financial Governance Chapter 6 examines ESMA’s place within the ESFS and its relationship with its sister ESAs (EBA and EIOPA) and the Banking Union structures. As discussed in that chapter, these relationships can be uneasy and, by generating incentives for ESMA to protect its institutional territory, can give rise to legitimacy risks. They can also be productive, however, prompting competitive behaviour and thereby sharpening ESMA’s incentives to pursue its mandates in an imaginative and efficient manner, so enhancing output legitimacy. Further, the incentives these relationships create for ESMA to maintain its inter-ESA credibility can be regarded as enhancing legitimation through a form of interagency accountability.307 ESMA’s sister ESAs can be expected to look askance at ESMA action that has legitimacy risks, given the spill-over risks to their legitimacy generated thereby. A similar legitimacy dynamic can be associated with ESMA’s international activities, also discussed in chapter 6. ESMA’s engagement with the standard-setters of international financial governance strengthens its technical capacity, with productive spill-over effects for output legitimacy. The potential for peer accountability also arises, however, as ESMA’s ability to impose its preferences internationally depends in part on its credibility; ESMA accordingly has incentives to hone its technical capacity and its authority as a legitimate actor.308

305 ESMA is audited by the Commission’s Internal Audit Service (IAS). 306 See further ch 5. 307 See also Chiu, n 52, identifying ESFS and Banking Union relationships as providing a form of interagency accountability. 308 Agency executives have incentives to maintain their reputation ‘in the eyes of their international colleagues’ and to avoid compromising their credibility and capacity to cooperate internationally: Majone, n 72.

98 ESMA’s Governance

VI. ESMA’s Funding Arrangements A. Funding Sources and Budgetary Procedures ESMA’s funding arrangements, set out in the ESMA Regulation, shape the extent of its ability to act effectively. At the same time, they fulfil a legitimation function; ESMA’s funding delimits its operations and oversight of its budget forms part of its accountability framework. ESMA is currently funded by a mixture of Member State and EU funding. Its funds derive from the Commission’s budget (the EU element); an NCA funding obligation (the Member State element), imposed in accordance with a QMVrelated weighting; and any fees paid to ESMA (thus far, from credit rating agencies, trade repositories, and the third country actors required to register with ESMA) (ESMA Regulation, Article 62(1)). The NCA/EU component currently applies in a 60:40 ratio, although Article 62(1) of the ESMA Regulation refers to ‘any combination’ of NCA, EU, and ESMA fee income.309 The EU component, which is subject to oversight by the Council and European Parliament as EU budgetary authorities, takes the form of an EU subsidy proposed by the Commission and which forms part of the Commission’s general budget line (Article 62(1)). For 2018, ESMA’s budgeted revenues came to €44,481,189, composed primarily of a contribution from NCAs (€18,425,189), the EU (€11,768,296), and fees (primarily from rating agencies (€8,786,407) and trade repositories (€2,548,051)).310 ESMA’s budget has increased over time,311 although, as noted in section VI.B, sustainability is a recurring concern. ESMA’s complex budgetary procedures address the establishment (Article 63) and subsequent implementation and oversight (Article 64) of its budget. Under Article 63, a draft budget (estimates of revenue and expenditure, prepared by the Executive Director and Management Board) and related draft ‘establishment plan’ (setting out staff costs) is adopted by the Board of Supervisors and transmitted to the Commission by end March annually for the subsequent year.312 ESMA’s budgetary proposals and establishment plan are then transmitted to the Council and Parliament as the EU’s joint budgetary authority, along with the Commission’s draft budget of the EU, which includes the Commission’s appropriation to ESMA (based on ESMA’s estimates). The Council and Parliament, as joint budgetary authority, authorise ESMA’s EU subsidy and its

309 The 60:40 ratio was designed to apply for the first year but has persisted. 310 ESMA, Budget for 2018 (ESMA63-43-874). ESMA’s budget also includes contributions from observers, contributions from NCAs for the tasks they delegate to ESMA, and fees from administrative operations. 311 ESMA’s 2017 budget was similar to the 2018 budget (amounting to €42,184,919, of which the NCA component was €16,938,947, the EU component €11,019,552, and fees €9,342,139 (rating agencies) and €2,457,142 (trade repositories) (ESMA63-43-485)), but overall its budget has expanded, reflecting ESMA’s widening remit (the second (2012) budget amounted to €20,279,000, of which the NCA component was €9,748,289, the EU component €7,120,000, and supervisory fees €3,001,000: ESMA/2012/108). 312 Since January 2016, ESMA provides a multi-annual ‘Single Programming Document’ to the EU institutions, which includes a multi-annual work programme with a financial and staffing outlook, as well as a detailed annual work programme and related budget and staffing requests. The Single Programming Document is required under the EU’s Financial Regulation and must set out a three-year work programme, annual work programme, and budget and resourcing plans.

ESMA’s Funding Arrangements 99 e stablishment plan. ESMA’s budget is then adopted by the Board of Supervisors. Further oversight applies, in that the Management Board must notify the joint budgetary authority of any project that may have significant financial implications for the budget (the budgetary authority can offer an opinion on the proposed project) and also inform the Commission. ESMA’s implementation of its budget is overseen by the Commission and the joint budgetary authority. ESMA’s provisional annual accounts (with a report on budgetary and financial management), prepared by the Executive Director, must be transmitted to the Commission, which consolidates ESMA’s provisional accounts within the provisional accounts of the EU institutions and agencies. After review by the Court of Auditors, the accounts are reviewed by ESMA’s Management Board and then transmitted in final form to the Board of Supervisors, the European Parliament, Commission, Council, and Court of Auditors, following which they are published. The Parliament acts as discharge authority, granting (following a Council recommendation) a discharge on the implementation of ESMA’s budget.

B. Funding Reform ESMA’s funding arrangements were a source of contestation from the outset, with the risks to its independence repeatedly raised. The incorporation of a Member State/NCA element, while allowing ESMA some independence from the EU, risks making ESMA overly dependent on NCAs and embedding the conflict of interests associated with NCA dominance on the Board of Supervisors. At the same time, the rolling-up of the EU element of ESMA’s funding within the Commission’s budget line, and its dependence as a result not only on Commission decision-making but also on the vagaries of the Commission’s wider budgetary environment, competing claims on Commission resources, and Commission incentives, poses a threat to ESMA’s independence, as does the control the Council and European Parliament exercise.313 Commission control extends beyond the EU subsidy; ESMA’s ability to levy fees on supervised actors is governed by detailed administrative rules adopted by the Commission.314 However, EU institutional oversight over ESMA’s funding provides a form of accountability oversight and strengthens ESMA’s legitimacy; loose budgetary arrangements could facilitate an entrepreneurial ESMA in engaging in bureaucratic creep. Sustainability concerns have also arisen. ESMA’s mixed funding model should support sustainable funding as it reduces ESMA’s dependence on NCAs, which may come under funding pressure domestically, and provides backstop EU support to ESMA. Nonetheless, from the outset there were concerns as to the adequacy of ESMA’s funding: in an early Board of Supervisors meeting, the Chair noted ‘uneasiness

313 ESMA’s budget is also subject to the wider conditions that shape the EU budgetary process. Under the 2014–20 Multi-Annual Financial Framework, the Commission, Council, and European Parliament all committed to progressively reducing by 5% the staffing level of all EU institutions, bodies, and agencies. The UK withdrawal from the EU is expected to lead to further reductions. 314 The rules governing ESMA’s supervision of rating agencies, eg, specify in detail how initial registration and ongoing supervisory fees are to be assessed: Commission Delegated Regulation 272/2012.

100 ESMA’s Governance about ESMA’s funding’.315 Member States and NCAs certainly have strong incentives to resist ESMA funding calls given the consequent diversion of funds from national regulatory priorities, particularly in conditions of economic constraint, but also where the Member States/NCAs have interests in curbing ESMA’s development. At the EU-level, the Commission may have similar incentives. At a very early stage, the Board of Supervisors raised the desirability of a 100 per cent EU funding model and of a separate EU budget line (separate to the Commission’s budget line),316 and since then ESMA/Commission budgetary relations have often been fractious,317 with ESMA repeatedly contesting Commission reductions to its draft budgets and reducing its planned activities in response to such reductions.318 Relations between NCAs and ESMA have also been difficult at times, with NCAs regularly querying proposed budget increases in light of the budget cuts being imposed on NCAs, often reflecting domestic austerity measures.319 ESMA’s funding arrangements have been a recurring feature of ESMA reform discussions. The 2013–14 ESA Review reported on stakeholder concern that the ESAs’ funding model risked undermining their independence and was in addition unsustainable, given NCAs’ domestic funding pressures,320 while the European Parliament also raised independence concerns.321 Subsequently, the Parliament repeatedly warned of sustainability risks, although it also called on ESMA to ensure it deployed its resources efficiently and focus more closely on its mandates.322 While ESMA also called for

315 BoS, Minutes, 12 April 2011 (ESMA/2011/BS 141). 316 eg, BoS, Minutes, 11–12 July 2011 (ESMA/2011/BS/79), 20 December 2011 (ESMA/2012/BS/14), and 14 February 2012 (ESMA/2012/BS/29). 317 One of the first ESMA/Commission spats concerned whether the Commission would refund ESMA against an underspend in an early budget: BoS, Minutes, 20 March 2012 (ESMA/2012/BS/46). 318 In its 2014 Work Programme, and for the first time, ESMA identified tasks it would remove from its original proposed Work Programme following the cuts: ESMA, 2014 Work Programme (2013/1355 rev1) Annex 5, 44. Tensions arose between ESMA and the Commission again over the 2015 budget process. ESMA had based its proposed Work Programme on a budget of €38,639,000 and a staff base of 202. The draft budget prepared by the Commission reduced ESMA’s budget to €33,627,920 and 186 staff. In response, ESMA identified activity cuts including in relation to the single rule-book (it warned of delays to technical advice), supervision (delays to CCP stress testing), and supervisory convergence (delays to IT projects and the cessation of all work on equivalence assessments): ESMA, 2015 Work Programme (ESMA/2014/1200) Annex 4, 32. ESMA also warned that this re-prioritisation of work raised the risk that ‘ESMA will not fully meet its legal obligations’: ESMA Letter to the Commission, ECON Chair, and Chair of the Council Budget Committee, 18 February 2015 (ESMA/2015/168). ESMA adopted a similar strategy in 2016, setting out the work reductions required if the Commission’s proposed budget was adopted by the EU institutions: ESMA, 2016 Work Programme (ESMA/2015/1475) Annex 4, 38. 319 These tensions were clear from the outset. An early Board of Supervisors meeting noted NCA unease as to the impact on domestic supervision of NCA resources being allocated to ESMA: Minutes, 12 April 2011 (ESMA/2011/BS/141). The difficulties echo down the years, with Board meetings frequently noting NCA concern as to the disconnect between national budgetary cuts and increases in ESMA’s budget. See, eg, Minutes, 7 August 2012 (ESMA/2012/BS/46); 14 March 2013 (ESMA/2013/BS/28); 2 February 2014 (ESMA/2014/BS/33); and 29 January 2015 (ESMA/2015BS/32). More recently, Board discussions on funding seem to be more muted, perhaps reflecting the lifting of austerity-era constraints. 320 2013–14 Commission ESA Review Report, n 8, 11 and 13; and 2013–14 ESA Review SWD, n 8, 19–20. 321 2014 Parliament ESFS Review Resolution, n 129, paras BI–L. 322 The European Parliament’s budget discharge resolutions repeatedly reference its support for enhanced funding but also call for ESMA efficiencies (eg, 2016 Discharge Resolution (n 262), accepting that an ‘expansion in resources may be necessary’ as ESMA is given additional tasks and warning that its funding arrangements were ‘inadequate, inflexible and burdensome’).

ESMA’s Funding Arrangements 101 action,323 and some reforms were mooted over the 2013–14 ESA Review,324 and while the Commission signalled its support for a 100 per cent EU funding model,325 it was not until the 2017 ESA Review that funding reform came to prominence. In its pathfinder 2017 consultation, the Commission reported on stakeholder calls for ESA funding arrangements to be as transparent, efficient, and simple as possible, and acknowledged that ESA funding had become a reform priority.326 In response, the Commission proposed the introduction of an industry funding element,327 which would ensure stable and sufficient funding levels and be detached from political control and competition with other policy goals, and thereby support ESA independence.328 The Commission underlined, however, the importance of retaining an EU funding element, given the EU interests protected by the ESAs, the accountability provided by EU budgetary oversight, and the risk of industry funding stress in times of market disruption. It also suggested that Member States continue to act as a funding source, but that their contributions be calibrated to the size of their national financial markets and not adjusted, as currently, in accordance with the QMV thresholds.329 Reaction was cool, although there was a degree of support for some form of industry contribution.330 Countering concerns, however, related to the potential loss of an accountability line to the EU budgetary authorities, recognition of the wider EU public interest in secure ESA funding and the value of an EU element, and doubts as to whether there was a legal basis for levying an industry funding requirement given the ESAs’ very limited direct supervisory role.331

C. The 2017 ESA Proposal Despite the muted support for reform,332 the Commission’s 2017 ESA Proposal proposes a new ESA funding model that incorporates an industry-based contribution in place of Member State/NCA contributions, but which retains an EU ‘balancing contribution’.333 The reforms are designed to establish a proportionate, diversified, and sustainable funding basis for ESMA (and the ESAs generally); the Commission also noted that funding

323 ESMA highlighted funding reform in its response to the 2013–14 ESA Review, raising concerns that an increase in NCA contributions could generate undue NCA difficulties, and calling for an independent EU budget line and an industry funding element: ESMA, Review of the European System of Financial Supervision. Letter to Commissioner Barnier, 31 October 2013. 324 The European Parliament, eg, argued that ESMA’s EU funding element should be based on a separate budget line: 2014 Parliament ESFS Review Resolution, n 129, Annex of Detailed Recommendations. 325 BoS, Minutes, 11–12 July 2011 (ESMA/2011/BS/179), reporting on early Commission support for a 100% funding model and separate budget line. 326 2017 ESA Public Consultation, n 130, 21. 327 The Commission suggested potential metrics for assessing the industry contribution which were tied to the size and importance of the relevant industry sector and to its relative importance within individual Member States. 328 2017 ESA Public Consultation, n 130, 22. 329 ibid. 330 2017 ESA Proposal, n 1, Explanatory Memorandum, 11–12. 331 2017 ESA Consultation Feedback Statement, n 130, 18–19. 332 Which included some NCA support, eg from the French NCA (response available at https://ec.europa.eu/ eusurvey/publication/esas-operations-2017?surveylanguage=en). 333 2017 ESA Proposal, n 1, ESMA Regulation, Arts 62 and 62a.

102 ESMA’s Governance contributions were not currently falling evenly across the Member States.334 The Proposal provides for a funding model based on a balancing EU contribution (within the Commission’s budget line, as is the current position) of not more than 40 per cent of ESMA’s estimated revenues; annual contributions from financial institutions based on ESMA’s annual estimated expenditure for each category of financial institution within its remit;335 supervisory fees; voluntary contributions from Member States or observers; and charges for training and other services requested by NCAs. The inclusion of a voluntary Member State contribution is an innovation (linked to the emerging practice of NCAs delegating tasks to the ESAs336), but the major reform relates to the removal of the mandatory Member State/NCA contribution and the inclusion of the proposed industry funding component, which the Commission has linked to these entities’ being ‘indirectly supervised’ by ESMA;337 entities which are directly supervised would not be subject to this charge as they already pay supervisory fees. These contributions would be collected annually from financial institutions by designated national authorities in accordance with assessment criteria to be adopted by the Commission. The Proposal does not specify these criteria. It simply provides that the Commission would adopt administrative rules, which would set out a methodology for allocating the estimated expenditure to different categories of financial institution and which would also provide appropriate and objective criteria to determine the related contributions payable by individual financial institutions, based on their size, so as to appropriately reflect their market importance. There are benchmarks available for such rules, including the methodologies developed for levying the contributions relevant financial institutions must pay into Banking Union’s Single Resolution Fund, which, while specific to resolution, illustrate how a levy can be tied to the characteristics of financial institutions.338 The Proposal also proposes a series of refinements to ESMA’s budgetary procedures, which would provide for the proposed new Executive Board, working through its ‘member in charge’, to prepare the different budgetary documents and adopt them, following approval by the Board of Supervisors. ESMA’s funding arrangements attempt to compromise between different interests and to manage what can be competing priorities as regards effectiveness and legitimation. The current funding settlement is arguably over-weighted to legitimation, as, by linking ESMA’s budget to NCA and EU budget lines, it makes it dependent on the goodwill of both constituencies and exposes it to prevailing opinion on how it is or should be using its powers. The addition of an industry component would strengthen ESMA’s independence and also reflect what is regarded as good regulatory practice; the funding of regulators by means of an industry levy is now a well-established funding

334 ibid, Explanatory Memorandum, 3 and 24. 335 The Commission addressed the legal basis issue by noting that Art 114 TFEU provided the competence for revisions to the funding regime and the levying of charges on the industry: ibid, 25. 336 While task delegation by NCAs to ESMA remains limited, there is a move in this direction, as noted in ch 4, particularly in relation to data infrastructures. 337 2017 ESA Proposal, n 1, Explanatory Memorandum, 25. 338 Commission Delegated Regulation 2015/63 and Council Implementing Regulation 2015/81.

Conclusion 103 mechanism across the EU.339 It should also put ESMA’s funding on a more sustainable basis, particularly as an EU backstop would remain in place. The addition of an industry component has further attractions in signalling that the cost of regulation should be internalised by the industry and so not carried directly by the public purse. The removal of the NCA component may, however, weaken ESMA’s legitimation framework, as the more budgetary freedom ESMA has, the more entrepreneurial and dynamic it is likely to be – although the industry can be expected to resist increased funding calls and to provide some form of friction against expansionism, while the Commission would exercise control over the methodologies governing ESMA’s industry funding. There are no easy solutions to the legitimacy/effectiveness conundrum raised by ESMA’s funding. Whether the funding proposals will survive remains to be seen, but they represent a workable compromise, retaining an EU funding component that reflects the public interest in ESMA’s mandate and provides for accountability, and injecting an industry funding component that should lead to greater sustainability. If, as discussed in chapter 5, ESMA’s direct supervisory powers are significantly increased, more far-reaching reforms which focus on ESMA’s capacity to independently levy fees on the industry within a bespoke accountability arrangement are likely to be required.

VII. Conclusion ESMA’s governance arrangements equip it with the operating technology it needs to achieve the mandates given to it as a technocratic non-majoritarian agency established to support the EU financial market within the ESFS, and do not generate material challenges to effectiveness. As discussed in subsequent chapters, ESMA has emerged as a technically expert actor, responsive and agile in adjusting to its operating environment, and capable of infusing NCA expertise and experience while acting in the EU interest. Certainly, its governance arrangements have not hindered ESMA in expanding its technocratic influence, but it usually operates in an effective manner. Strains can, however, be identified in its legitimation arrangements, which may be exacerbated by the 2017/2018 reform waypoint. But these legitimation arrangements are also multi-faceted and adaptive, and appear capable of responding to ESMA’s dynamic character and expanding influence. ESMA is also showing adaptiveness, as indicated by its strengthening engagement with the European Parliament and the growing sophistication of its reporting. Taken in the round, ESMA’s different legitimation arrangements appear sufficiently robust, capable of legitimating ESMA’s current activities and its entrepreneurial bent. If ESMA is further empowered to any material extent (which would also require a liberal interpretation of Meroni/Short Selling), additional legitimation devices may be required, such as the Monitoring Board suggested earlier in this chapter.

339 Across the EU, several NCAs (in the banking, financial markets, and insurance/pension sectors) are fully or partially funded by industry contributions. While 14 NCAs are entirely funded through public resources, these are all either central banks or insurance/pension regulators: 2017 ESA Public Consultation, n 130, 22.

3 ESMA and Regulatory Governance I. Assessing ESMA and the Regulatory Governance Setting This chapter considers ESMA’s role in regulatory governance. ESMA supports the development of the European Union’s (EU’s) massive ‘single rule-book’ for financial markets by adopting proposals for/technical advice to the Commission on the single rule-book’s administrative rules and by adopting related soft law.1 ESMA also supports the single rule-book’s legislative superstructure as the Commission’s main source of technical expertise. The recent re-orientation of ESMA’s priorities towards supervisory convergence and the supervisory orientation of the 2017 European Supervisory Authorities Proposal (ESA Proposal)2 (which envisages only minor reforms to ESMA’s regulatory governance powers3) have brought ESMA’s supervision mandate centre stage. But ESMA’s soft regulatory governance powers4 have allowed it to shape the single rule-book and build an immense corpus of related soft law. The nature of ESMA’s related influence, and whether any effectiveness or legitimation risks are arising, accordingly requires examination. ESMA is the de facto author of the great mass of technical administrative law within the single rule-book that, since the epochal crisis-era reforms, governs but also shapes the EU financial market; is coming to influence how the rule-book’s underpinning legislative framework is designed; and is the first port of call for the market and NCAs for soft but authoritative clarification of the rule-book. Its now pivotal position in EU financial market regulatory governance is well illustrated by the reporting of ESMA’s key role in leading the behemoth pan-EU implementation exercise required by the coming into force on 3 January 2018 of the transformative Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation 20145 (MiFID II/MiFIR), an

1 ESMA’s Executive Director Verena Ross has characterised ESMA’s role as ‘building a single rule-book for EU financial markets’: ‘Keynote Address’, 30 November 2017. 2 COM (2017) 536. 3 The Commission’s 2017 ESA Consultation and the stakeholder responses were primarily focused on supervisory matters: Commission, Public Consultation on the Operations of the European Supervisory Authorities (2017) (consultation responses available at https://ec.europa.eu/eusurvey/publication/esasoperations-2017?surveylanguage=en). 4 ESMA’s ‘regulatory capacity’ is technically limited in this area as it does not have binding powers. It has, however, significant other resources, including (as discussed throughout this chapter) access to data, technical credibility, institutional, political, and market support, and an adaptive legitimation framework, all of which can be associated with its strengthening ability to exert technocratic influence over the EU rule-book. 5 Directive 2014/65/EU [2014] OJ L173/349 and Regulation (EU) No 600/2014 [2014] OJ L173/84.

Assessing ESMA and the Regulatory Governance Setting 105 exercise estimated to have cost in the region of €2.5 billion.6 ESMA had earlier shaped the immense MiFID II/MiFIR administrative rule-book, but as the application date loomed it adopted a host of soft law to address multiple thorny issues of acute operational importance, including: • Q&As on the application of the MiFID II/MiFIR investment research rules;7 • Q&As opining that authorisations and notifications under the precursor MiFID I regime would remain valid in the event of late transposition by Member States of MiFID II;8 • opinions clarifying how the MiFIR trading rules on commodity derivatives and on trade transparency reporting would apply to transactions on third country trading venues;9 • an informal postponement (in the absence of the data necessary for ESMA to perform the required calculations) of the application of the MiFIR ‘volume caps’, which limit certain forms of trading off-exchange (in ‘dark pools’);10 and • the announcement, just days before MiFID II/MiFIR came into force, of an informal six-month transitional period to allow market participants to acquire the ‘Legal Entity Identifier’ (LEI) code required under MiFID II/MiFIR for all transaction reporting by investment firms and trading venues, as the lack of industry preparedness emerged.11 In this last instance ESMA impliedly claimed a form of ‘no action’ competence familiar from US securities regulation12 but not formally conferred on ESMA. Common to all these soft measures is their acute market concern13 and consequence.14 But despite their agility, pragmatism, and attractive responsiveness, these soft measures, 6 eg, P Stafford and H Murphy, ‘Investor Relief at Smooth Launch of MiFID II Reforms’, Financial Times (3 January 2018). 7 ESMA, MiFID II Investor Protection and Intermediaries Q&A, section 7 (4 April 2017) (ESMA3543-349). The Q&A was reported to have influenced how the industry approached the MiFID II-required reorganisation of investment research payment models (L Noonan, H Murphy, and K Martin, ‘Investment Banks to Clash over MiFID II Rules on Free Research’, Financial Times (11 September 2017)). 8 ESMA, MiFID II Investor Protection and Intermediaries Q&A, section 14 (18 December 2017) (ESMA3543-349); and MiFID II Market Structure Q&A, section 7 (18 December 2017) (ESMA70-872942901-38). 9 ESMA, Opinion on Third Country Venues and Commodity Derivatives (15 December 2017) (ESMA70154-466); and Opinion on Third Country Venues and Transparency (15 December 2017) (ESMA70-154-467). 10 ESMA, ESMA Delays Publication of Double Volume Cap Data (9 January 2018) (ESMA71-99-925). 11 ESMA, Public Statement to Support the Smooth Introduction of the LEI Requirements (20 December 2017) (ESMA70-145-401). 12 The US Securities and Exchange Commission (SEC) can issue ‘no action’ letters to market participants recommending that its enforcement unit take no action given identified circumstances. ESMA is not empowered to take enforcement action generally or to adopt related ‘no action’ decisions, but the LEI opinion can be associated with this form of pre-emptive regulatory action (see further section V). 13 In relation to the LEI action, market participants met with ESMA to highlight the lack of industry preparedness and to ask for informal forbearance to avoid market disruption: P Stafford, L Noonan, and H Murphy, ‘Banks Lobby for Reprieve on Key Part of MiFID II Rules’, Financial Times (14 December 2017). ESMA’s December 2017 opinions on the third country application of MiFID II/MiFIR were also in response to market and NCA calls for guidance: 2017 Opinion on Commodity Derivatives, n 9, para 5. 14 ESMA’s postponement of the ‘volume cap’ calculation (and the de facto postponement of the cap itself) led to reports that the ‘dark pool trading’ MiFID II/MiFIR seeks to restrict was not reducing: P Stafford, ‘Dark Pool Share Trading Flourishes after MiFID II Delay’, Financial Times (19 January 2018).

106 ESMA and Regulatory Governance which sit in the grey zone between EU rules and national competent authority (NCA) supervisory practice, are of non-binding, non-definitive15 quality but have market effects and are troubling from a legitimation perspective.16 There are few signs of ESMA’s central role in EU financial market regulatory governance diminishing. New mandates for the development of administrative rules continue to be granted to ESMA,17 including under Capital Markets Union’s two flagship legislative measures, the 2017 Securitisation Regulation18 and the 2017 Prospectus Regulation.19 Similarly, the 2016 Benchmark Regulation, one of the EU’s first major post-financial-crisis legislative reforms and which came into force in January 2018, requires ESMA to propose a series of amplifying administrative rules.20 This chapter accordingly probes ESMA’s central and expanding role in EU financial market regulatory governance. It is not concerned with the design of EU financial market regulation and the many questions it prompts – including as to the optimality of the degree of standardisation imposed by the single rule-book and the quality of its rules, and as to the appropriateness of locating regulatory governance powers within ESMA.21 It instead explores the features of ESMA’s regulatory governance powers and the forces that have shaped them, how ESMA has used these powers and the technocratic influence it has come to exert, and any strains on effectiveness or legitimacy that may be emerging. ESMA’s regulatory governance powers have much in common with the supervisory convergence and direct supervision powers examined in subsequent chapters, in that they can be associated with an incremental intensification of ESMA’s technocratic influence over EU financial market governance which may be generating risks to effectiveness and legitimacy. There are, however, points of difference that place ESMA’s regulatory governance powers in a distinct setting. The first such difference concerns the evidence – there is most experience with ESMA’s regulatory governance powers. Since 2011, ESMA’s intensive engagement with the construction of the now great mass of EU financial market administrative rules

15 The Court of Justice of the EU (CJEU) remains the final arbiter on EU financial market regulation, a point often made by ESMA in its soft-law measures. 16 See further section V. 17 ESMA’s 2018 Regulatory Work Programme (ESMA20-95-823) identifies 48 separate legislative provisions requiring amplification through Binding Technical Standards (drafts to be provided by ESMA to the Commission) and 21 requiring technical advice (to be provided by ESMA to the Commission). 18 Regulation (EU) No 2017/2402 [2017] OJ L347/35. The extensive mandates to ESMA for BTS preparation concern areas of central operational importance to the new ‘simple, transparent, and standardised’ (STS) securitisation regime (see ESMA’s related 2017 consultations ESMA33-128-33 (draft BTSs on STS notification requirements); ESMA33-128-108 (draft BTSs on STS verification requirements); and ESMA33-128-107 (draft BTSs on disclosure, operational, and access requirements for securitisations)). 19 Regulation (EU) No 2017/1129 [2017] OJ L168/12. The Regulation contains mandates for ESMA to develop administrative rules on key aspects of the regime, including the new summary ‘key information’ to be provided by issuers. ESMA’s technical advice followed in March 2018 (ESMA31-62-800). 20 Regulation (EU) No 2016/1011 [2016] OJ L171/1. 21 See, eg, N Moloney, ‘EU financial governance after Brexit: the rise of technocracy and the absorption of the UK’s withdrawal’ in K Alexander, C Barnard, E Ferran, and N Moloney, Brexit and Financial Services. Law and Policy (Hart Publishing, Oxford, 2018) 61; H Marjosola, ‘Regulating Financial Markets under Uncertainty: the EU approach’ (2014) 39 European Law Review 338; and E Ferran, ‘Crisis-driven regulatory reform: where in the world is the EU going?’ in E Ferran, N Moloney, J Hill, and JC Coffee, The Regulatory Aftermath of the Global Financial Crisis (Cambridge University Press, Cambridge, 2011) 1.

Assessing ESMA and the Regulatory Governance Setting 107 and soft law22 has put its regulatory governance powers through a rigorous testing process and opened a rich empirical seam on ESMA’s use of these powers. ESMA has adopted a vast array of regulatory governance ‘products’,23 from proposals for administrative Binding Technical Standards (BTS), to technical advice for the Commission on other administrative Delegated Acts, to guidelines, to a dense thicket of other soft law. As discussed throughout this chapter, this evidence suggests that notwithstanding the soft quality of ESMA’s powers, it has incrementally but purposefully (in that ESMA habitually seeks opportunities to reinforce its regulatory governance mandate and technocratic position) acquired a significant technocratic influence over EU financial market regulatory governance, often deploying an ambitious and expansionist approach. A further point of difference relates to effectiveness and legitimation. In this chapter ESMA’s effectiveness is considered in terms of whether ESMA, in deploying its powers, provides the EU with a technically expert, responsive, and agile regulatory support function that manages the complexities and contingencies of financial market rule-making, including through being informed by extensive consultation and impact assessment; and also, reflecting the EU-level setting for ESMA’s powers, whether ESMA can reflect the EU interest but incorporate NCA experience and promote NCA regulatory learning. ESMA is not unique in providing technical support to financial market rule-making in a transnational context. International financial governance and its international standard-setting bodies (ISSBs) have been identified as developing regulatory governance processes that support expertise-led, responsive standard-setting for the international market, informed by local experience and encouragement of regulatory learning.24 This chapter examines whether a similarly positive assessment can be made of ESMA, or whether effectiveness strains are emerging. Legitimation also raises distinct challenges, as here ESMA edges close to the territory of rule-making and into the making of public interest choices that shape the EU’s single rule-book. For example, while most of ESMA’s regulatory governance powers are heavily p roceduralised, ESMA’s soft law powers are sometimes only thinly proceduralised, generating legitimation risks. This chapter’s conclusion is optimistic. At the time of their establishment, the ESAs, including ESMA, were welcomed as having the potential to construct a ‘genuinely responsive’ approach, which would facilitate productive national input into EU financial market regulatory governance.25 Since then, the ESAs’ ability to bring an experimentalist quality to regulatory governance has been praised as providing a means for allowing local experimentation and frontline experience to inform the development of the

22 One report over the 2013–14 ESA Review noted that of all the ESAs, ESMA was confronted with the most intensive regulatory workload: Review of the New European System of Financial Supervision. Part 1: The Work of the European Supervisory Authorities, Study by Mazars for the European Parliament (IP/A/ECON/ ST/2012-23) (2013) 93 (‘Mazars Report’). 23 This term is borrowed from the European Banking Authority (EBA), which refers to its regulatory governance outputs as ‘regulatory products.’ 24 A Riles, ‘Is New Governance the Ideal Architecture for Global Financial Regulation?’ (2013) 31 Monetary and Economic Studies 65. 25 M Everson, A Technology of Expertise: EU Financial Services Agencies, LSE LEQS Paper No 49/2012 (2012), available at http://www.lse.ac.uk/europeanInstitute/LEQS%20Discussion%20Paper%20Series/LEQSPaper49.pdf.

108 ESMA and Regulatory Governance EU’s single rule-book.26 This chapter’s assessment is similarly positive. It suggests that while ESMA has adopted a purposeful and often ambitious and expansionist posture in this area, and while its influence over regulatory governance for the EU financial market has burgeoned, its approach to its regulatory governance powers is, for the most part, technically informed, responsive, and agile, supported by extensive consultation and impact assessment processes, and capable of reflecting the EU interest but shaped by NCA deliberation, challenge, and experience. Under ESMA’s stewardship, administrative regulatory governance for the EU financial market has become progressively thicker and is leaching out national flexibility, but the evidence so far suggests that ESMA is at the same time adopting a data-rich, responsive, and iterative approach. While ESMA’s approach supports (output) legitimation, there are, however, some signs of legitimation strain, particularly as regards the legitimation of ESMA’s growing soft-law activities. The chapter assesses the nature of ESMA’s regulatory governance powers and ESMA’s characterisation as a regulatory governance actor (section II); the context within which ESMA deploys its regulatory governance powers (section III); and ESMA’s role in relation to administrative rule-making (section IV), the adoption of soft law (section V), and the EU legislative process (section VI). Section VII recaps the chapter’s findings.

II. Examining ESMA’s Role in Regulatory Governance A. Capturing ESMA’s Regulatory Governance Role i. ESMA as a Rule-maker Like its roles in supervisory convergence and direct supervision, ESMA’s regulatory governance role is not easy to pin down. ESMA primarily advises the Commission on the adoption of administrative rules and adopts soft law. Behind this straightforward taxonomy lies a classification conundrum. ESMA claims a ‘standard-setting’ function, describing itself as a ‘standard setter in relation to securities markets’.27 Its activities defy, however, easy classification. Domestic financial market regulators, usually empowered to adopt technical rules and soft law, can also be regarded as standard setters. But unlike such regulators, ESMA is not empowered to adopt technical rules (only soft law) and operates under the ‘shadow’ of Commission hierarchy28 – the Commission adopts technical (administrative) rules advised by ESMA. ESMA does not fit easily into the classic EU agency regulatory governance role either, as EU agencies are only rarely directly associated with binding rule-making in the way ESMA is29 – ESMA’s powers to

26 J Zeitlin, ‘EU Experimentalist Governance in Times of Crisis’ (2016) 39 West European Politics 1073; and E Ferran, ‘The Existential Search of the European Banking Authority’ (2016) 17 European Business Organisation Law Review 285. On experimentalist governance, see ch 1 and section III of this chapter. 27 ESMA, Annual Report on 2017 (2018) 13. 28 A Héritier and D Lehmkuhl, ‘Introduction: the shadow of hierarchy and new modes of governance’ (2008) 82 Journal of Public Policy 1. 29 E Chiti, ‘European Agencies’ Rulemaking: powers, procedures and assessment’ (2013) 19 European Law Journal 93.

Examining ESMA’s Role in Regulatory Governance 109 propose Binding Technical Standards for Commission adoption make it significantly more powerful than any other EU agency.30 The ISSBs of international financial governance are (like ESMA) primarily soft-law actors, and like ESMA adopt soft m easures and guidelines, but their informal operating models render them very different animals from ESMA.31 But however ESMA is characterised, examination of its role and influence suggests that it has developed the de facto capacity to impose its regulatory authority on EU financial market governance and is very close to – although still short of – a traditional rule-maker.

ii. ESMA’s Regulatory Governance Powers There are three aspects to ESMA’s regulatory governance role. First, ESMA is coming to shape EU financial market legislative and policy change by advising the Commission and the c o-legislators, although it is not a legislative actor and not formally engaged with the legislative process. Second, it is heavily involved in administrative rule-making for the EU financial market, although it is not formally a rule-maker. Under the ESMA Regulation, ESMA is charged with proposing a particular form of EU administrative rule specific to the financial sector and constructed over the crisis era to address the design defects in EU financial regulation: the Binding Technical Standard (BTS), which is adopted by the Commission but proposed by ESMA (and the other ESAs). The BTS process is proceduralised under the ESMA Regulation (Articles 10–15), which sets out the operating and oversight procedures that apply to the two forms of BTS – R egulatory Technical Standards (RTSs) and Implementing Technical Standards (ITSs). These procedures reflect the status of BTSs as derivations of the EU’s two forms of administrative rule: RTSs are a derivation of Delegated Acts, which are adopted under Article 290 TFEU and in accordance with the procedures required in the relevant legislative act that mandates the adoption of a Delegated Act; ITSs are a derivation of Implementing Acts, which are adopted under Article 291 TFEU and in accordance with the procedures in Regulation 182/2011.32 ESMA is also closely engaged with the adoption by the Commission of Article 290 Delegated Acts and Article 291 Implementing Acts for the financial market sector, by providing the Commission with related ‘technical advice.’ Finally, ESMA is empowered to adopt soft law on its own initiative under the ESMA Regulation (Articles 16 and 29), and can also be mandated by the co-legislators to adopt specific soft measures.

B. Dynamism and Reform ESMA’s regulatory governance powers have not been changed by the co-legislators since its establishment in 2011, reflecting the location of these powers within well-established 30 P Craig, UK, EU and Global Administrative Law. Foundations and Challenges (Cambridge University Press, Cambridge, 2015) 536; and M Busuioc, ‘Rule-Making by the European Financial Supervisory Authorities: walking a tight rope’ (2013) 19 European Law Journal 111, 113. 31 See further ch 1. 32 Regulation (EU) No 182/2011 [2011] OJ L55/13.

110 ESMA and Regulatory Governance Treaty procedures and oversight mechanisms and also relatively low levels of political and institutional contestation over the initial ESMA negotiations as to ESMA’s regulatory governance role. Subsequently, the 2013–14 ESA Review suggested strong stakeholder support for ESMA’s (and the ESAs’) ‘single rule-book’ activities – ESMA was regarded as having demonstrated an efficient capacity to develop draft BTSs and soft law and as having engaged in intensive and innovative regulatory activity.33 By the 2017 ESA Review, the ESAs’ regulatory governance powers had almost disappeared from the EU reform agenda (save with respect to soft law), with the Commission commending the ‘remarkable work’ of the ESAs in contributing to the building of the single rule-book.34 Even in relation to soft law, where the Commission reported on some stakeholder concern as to excessive prescription and over-reach, the Commission described ESA soft-law measures as ‘very useful tools.’ This is not to suggest that ESMA’s regulatory governance powers have not experienced contestation or dynamism. ESMA has been purposeful in applying its powers, often displaying an ambitious and expansionist approach that has generated some contestation, and its de facto technocratic influence on EU financial market regulatory governance is now considerable. The nature of this influence and of the related risks that may be emerging has been shaped by the distinct context within which ESMA’s regulatory governance powers have developed and are applied, discussed in the following section.

III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy A. Financial Markets and Administrative Regulatory Governance: Context and Challenges Financial market regulatory governance is closely associated with detailed administrative rules typically (although not always) adopted by financial market regulators; with the raft of guidelines, opinions, and similar soft measures deployed by such regulators to achieve outcomes; and, if to a lesser extent, with the technocratic expertise such regulators can deploy upstream to influence legislative choices. The strongly administrative quality of much of financial market regulatory governance and the pivotal role of financial market regulators are not new phenomena. Administrative rules and measures, adopted and amplified by financial market regulators, have always been a feature of financial market regulation, although their form and style has changed. Prior to the financial crisis, financial market regulation had become associated with what became regarded as a rigid and bureaucratic ‘command and control’ approach, which was insufficiently responsive to financial market risks or to the market’s ability to self-police. But although

33 Commission, Report on the Operation of the European Supervisory Authorities and the European System of Financial Supervision (COM (2014) 509) 5 and related Staff Working Document (SWD (2014) 261) 6–7; and Mazars Report, n 22, 119 and 123. 34 2017 ESA Consultation, n 3, 2 and 7–8.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 111 different forms of ‘new governance’ developed in response, most famously in the form of ‘principles-based regulation’,35 financial market regulation never lost its reliance on administrative regulatory governance and its delivery by financial market regulators. In the UK, for example, the much-studied and ill-fated ‘principles-based regulation’ model deployed by the Financial Services Authority was supported in practice by a dense matrix of administrative regulatory guidance and similar soft measures, and did not lead to a ‘bonfire of regulation’.36 Since the financial crisis, which exposed the over-reliance of new governance techniques on self-regulation and on the (as became clear) weak incentives of regulated actors to pursue the public interest,37 administrative prescription has thickened very substantially but new governance has not been abandoned. It has become associated instead with the enhancement of administrative regulatory processes through regulatory approaches that are variously, adaptive, flexible, reflexive, responsive, and/or smart.38 The post-crisis embedding within administrative financial market regulatory governance internationally of concerns to, variously, achieve identified outcomes, engage with stakeholders in the rule design process, ensure rule design is data-informed, adopt rules which are flexible and responsive to emerging threats, deploy a wide regulatory tool-kit that includes nimble soft law measures, and promote regulatory learning can all be associated with new governance approaches to regulation, but also with a continued reliance on administrative regulatory governance.39 As custodians of administrative financial market regulatory governance, financial market regulators exemplify the traditional benefits of agencies to the regulatory state. They provide a technocratic, expert capacity for dealing with highly complex risks and markets;40 allow for operational autonomy as regards rule adoption and for the timeinconsistency risks from short-term political horizons to be managed; and so provide governments with a means for showing their credible commitment to reducing risks through regulatory action. Financial market regulators should also bring an adaptive, flexible, and expert capacity to bear on the development of, and the ability to experiment nimbly with, new forms of administrative regulatory governance. But, and in common with agencies generally, the legitimacy of financial market regulators as nonmajoritarian actors not legitimated by direct representation has been challenged41

35 See, eg, J Black, ‘The Rise, Fall, and Fate of Principles-based Regulation’ in K Alexander and N Moloney (eds), Law Reform and Financial Markets (Elgar, Cheltenham, 2011) 3. 36 J Black, ‘Regulatory Styles and Supervisory Strategies’ in N Moloney, E Ferran, and J Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University Press, Oxford, 2015) 217. 37 C Ford, ‘New governance in the teeth of human frailty: lessons from financial regulation’ (2010) Wisconsin Law Review 442. 38 Black, n 36. 39 eg, C Ford, Innovation and the State. Financial Regulation and Justice (Cambridge University Press, New York, 2017); L Willis, ‘The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension’ (2017) 3 Russell Sage Foundation Journal of the Social Sciences 74; and J Black, ‘Paradoxes and failures: “new governance” techniques and the financial crisis’ (2012) 75 Modern Law Review 1037. 40 The complexity of financial markets and the related challenges for regulation have been extensively examined. See, eg, Ford, n 39; D Awrey, ‘Complexity, Innovation and the Regulation of Modern Financial Markets’ (2012) 2 Harvard Business Law Review 235; and S Schwarcz, ‘Regulating Complexity in Financial Markets’ (2009) 87 Washington University Law Review 211. 41 For a domestic analysis (of the US SEC), see D Langevoort, Selling Hope. Selling Risks (Oxford University Press, Oxford, 2016); and for an international/ISSB analysis, see M Barr, ‘Who’s in Charge of Global Finance?’ (2014) 4 Georgetown Journal of International Law 971.

112 ESMA and Regulatory Governance as wider ‘trust in technocracy’ has ebbed.42 Administrative financial market regulation will often have distributive consequences and require the discretionary weighing of public interests, while failures in regulatory design can lead to the socialisation of financial sector losses.43 Technocratic regulatory preferences can be as easily shaped by self-interest and industry capture as by the expert deliberation and effectiveness assumed to (in part) legitimate agency action.44 Further, the stylised notion of a technically expert financial market regulator identifying and delivering a single ‘correct’ technical regulatory solution can be a chimera, particularly as financial market administrative rules, even if informed by extensive data and consultation, are still developed in conditions of often considerable uncertainty and can have unforeseen effects.45 Legitimation of financial market regulatory technocracy can accordingly struggle.

B. The EU Context In the EU, financial market regulatory governance has also become associated with administrative prescription and agency (ESMA) delivery. But the EU context is distinct, in that ESMA is charged with supporting an administrative rule-book of EU-wide application. The single rule-book provides the regulatory infrastructure for the single financial market. But it is also designed to limit, if not remove, national optionality, exemptions, and discretions, and so reduces the potential for national experimentation and for nationally-specific rules to act as safety valves against EU-level regulatory error. The EU financial market, however, remains characterised by structural difference.46 This context intensifies the challenges already posed by administrative financial market regulatory governance generally, given the additional regulatory design challenges associated with cross-border risk management and also the additional risks of systemic regulatory error and of bureaucratic rigidity that must be managed. ESMA’s role in financial market regulatory governance must also be situated within its distinct institutional setting. ESMA’s regulatory governance powers reflect long EU experience with administrative regulatory governance, the Article 290/291 TFEU settlement on administrative rule-making, and the crisis-era political/institutional commitment to strengthening financial market regulatory governance through a single rule-book.47 The Commission’s proposed suite of ESMA/ESA regulatory governance powers did not accordingly generate material political contestation, although the relevant procedures were fine-tuned over the Council and European Parliament negotiations.48 42 See further ch 2. 43 S Omarova, ‘Bankers, Bureaucrats and Guardians: Towards Tripartism in Financial Services Regulation’ (2012) 37 Journal of Corporation Law 622. 44 eg A Levitin, ‘The Politics of Financial Regulation and the Regulation of Financial Politics’ (2014) 127 Harvard Law Review 1992; and L Senden, ‘Soft post-legislative rulemaking: a time for more stringent control’ (2013) 19 European Law Journal 57. 45 See F Partnoy, The Timing and Source of Regulation (2014), University of San Diego Legal Studies Research Paper No 14-155, available at https://ssrn./com/abstract=2435318. 46 See further ch 1. 47 See further ch 1. 48 The Commission’s proposals did not, eg, protect ESMA’s position where the Commission declined to adopt or revise an ESMA BTS proposal, a gap addressed during the Council/European Parliament n egotiations.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 113 Since then, there have been inter-institutional skirmishes and flashpoints as ESMA has developed. While the Council has generally been sanguine, the European Parliament can be suspicious of ESMA’s regulatory governance powers, reflecting its long battle to secure oversight over administrative rule-making and its concern to protect its oversight prerogatives.49 Similarly, the Commission has sought to guard its Treaty role as administrative rule-maker against ESMA over-reach. Overall, however, and certainly by comparison with ESMA’s supervisory governance competences, there has not been material institutional or political contestation on ESMA’s regulatory governance powers. This lack of contestation also reflects the EU’s long experience with agencies as supporting EU regulatory governance. Different accounts have developed for why EU agencies have evolved to the extent that and at the rate at which they have, and which emphasise intergovernmental, supranational, and technocratic forces to differing degrees. These accounts all, however, acknowledge the importance of single market regulatory governance needs.50 ESMA fits within this narrative of agency evolution, as discussed in chapter one, and contestation of its regulatory governance role has, as a result, been limited.

C. ESMA in Action: Influence, Effectiveness, and Legitimacy The distinct challenges of administrative financial market regulation, as well as the particular features of ESMA’s setting, have shaped how ESMA exercises its powers and the risks that may be arising. In particular, the cautious incrementalism that can be associated with the conferral of ESMA’s other powers stands in marked contrast with the degree of institutional comfort in ESMA’s regulatory governance role. This relatively uncontested and stable operating environment has allowed ESMA a degree of freedom to manoeuvre and to develop its role and powers, and thereby to strengthen its ability to exert technocratic influence. ESMA’s burgeoning influence generates questions, however, as to whether its approach is effective and whether legitimation risks arise. At first glance, legitimation risks should not be material. Alongside the legitimation framework discussed in chapter two, most of ESMA’s regulatory governance processes are heavily proceduralised, European Parliament and Council oversight is provided for as regards its role in the adoption of binding administrative rules, and the power to adopt such rules is reserved to the Commission. Nonetheless, ESMA comes very close to the territory of adopting rules given the extent to which its BTS proposals and technical advice are followed by the Commission, sharpening the legitimacy risks. Further, particular difficulties arise with ESMA soft law, in relation to which there are few procedural controls but ESMA’s measures have close to binding effect in practice. The greater challenge relates to ESMA’s effectiveness, which is also linked to its legitimacy through the output legitimation channel. This chapter does not seek to

49 On the European Parliament’s preferences on administrative rule-making, see GJ Brandsma and J Blom-Hansen, ‘Controlling Delegated Powers in the Post-Lisbon European Union’ (2016) 23 Journal of European Public Policy 531. 50 See further ch 1.

114 ESMA and Regulatory Governance examine the normative appropriateness or technical quality of the financial market administrative rules, shaped by ESMA, which have been adopted since 2011; such an exercise would require a different book, as well as a material degree of speculation on their market impact. Its focus instead is on ESMA’s effectiveness as a regulatory governance actor, and so on powers, processes, and approach. The ESMA Regulation does not provide benchmarks for the assessment of ESMA’s exercise of its regulatory governance powers, although their exercise is repeatedly tied to unamplified notions of effectiveness, as well as of consistency, efficiency, quality, and responsiveness.51 Effectiveness can, however, be related to the extent to which ESMA is adopting a technically-informed, responsive, and agile approach to its powers. This formula reflects the rationale for locating regulatory governance powers in technocratic financial regulators (in order to provide a specialist and agile administrative response to the complexities and challenges of financial market regulation and the delivery of related public policy goals), as well as the EU’s reliance on agencies to inject nimble transnational and national technical expertise, and specialisation in regulatory design processes, into EU administrative rule-making. It also reflects the technically-informed and responsive approach implied by the ESMA Regulation’s requirements for impact assessment and consultation, as well as the agility implied by ESMA’s extensive soft-law powers. Effectiveness can also, given the EU/single rule-book setting of ESMA’s powers, the location of decision-making within the Board of Supervisors, and the repeated references across the ESMA Regulation to consistency, be related to ESMA’s ability to reflect EU interests but also to appropriately inject national expertise and NCA deliberation so that regulatory products can apply consistently, and so that, in addition, the distinct risks the EU setting poses for administrative financial market regulation are addressed. Finally, given the extensive proceduralisation of ESMA’s regulatory governance powers, effectiveness can be related to ESMA’s capacity to engage responsively and openly with the institutions that oversee its activities. Effectiveness can accordingly be related to the extent to which ESMA deploys its powers in a manner that is technically-informed, responsive, agile, and sensitive to NCA experience, and which engages openly with the processes through which it is overseen by the Commission, Parliament, and Council. Some encouraging indications as to ESMA’s effectiveness can be drawn from the resonances its approach has with ‘new governance’ approaches to financial regulation.52 New governance approaches are associated with state-of-the art regulatory processes that are, to varying extents, technically informed and data-driven, agile and capable of experimentation, responsive and capable of revisability where necessary, and supportive of regulatory learning and capable of corralling experience from different sources.53

51 ESMA Regulation, Art 1(5) charges ESMA with contributing to a ‘sound, effective and consistent level of regulation’ and to the ‘consistent, efficient and effective’ application of EU legislation; Art 8(1) requires ESMA to contribute to the establishment of ‘high-quality’ regulatory standards’; Art 16 (on soft-law guidelines) requires ESMA to ensure a ‘common, uniform and consistent’ application of EU law; and Art 29 requires ESMA to review administrative rules and soft law. 52 Black, n 39. 53 For a review, see G de Búrca, ‘New Governance and Experimentalism: an introduction’ (2010) Wisconsin Law Review 227.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 115 In particular, experimentalist governance, which has been identified as a productive form of new governance process, can be usefully applied in assessing ESMA’s effectiveness, as it is concerned with supporting the development of optimal regulatory responses in conditions of uncertainty and complexity – conditions which can be associated with financial market regulation generally and specifically with ESMA’s EU-level setting. Broadly, experimentalist governance eschews central steering through legislative fiat in favour of: the setting of high-level goals by central actors and the granting of discretion to lower levels as regards goal implementation; information pooling and review of implementation; and revision of goals in light of results.54 Experimentalist governance has been identified and examined in a range of regulatory settings,55 but it has particular appeal in international/transnational financial regulatory settings such as ESMA’s given the prevailing conditions of uncertainty and complexity.56 ESMA’s approach to regulatory governance does not map directly on to but certainly has productive resonances with these new/experimentalist governance processes, which promise much in terms of data-rich expertise, responsiveness and agility, and local engagement. As outlined across this chapter, ESMA feeds local experience and expertise from NCAs into its BTS/Delegated Act processes and related Board of Supervisor decision-making; has developed extensive data collection/interrogation and consultation capacities; displays responsiveness and agility in addressing NCA and market concerns and in refining its processes; and, at least in relation to its soft measures, revisits and revises its regulatory products – all actions that resonate with experimentalist governance.57 For example, and as discussed in section IV, ESMA’s approach to the development of the MiFID II/MiFIR administrative rule-book was, by and large, empirically informed and reflected NCA deliberation and experience, while the slew of MiFID II/MiFIR soft measures adopted over 2017 in response to market and NCA concerns suggest an agile and responsive approach.58 ESMA’s growing influence, its purposeful approach to protecting its powers, and the relative lack of contestation in its operating environment may, however, lead to a more bureaucratic and less responsive approach, while procedural strains that may hinder effectiveness are increasingly emerging.

54 For an agenda-setting analysis, see C Sabel and W Singer, ‘Minimalism and Experimentalism in the Administrative State’ (2011) 100 Georgetown Law Journal 53. 55 Including in the EU, where the ‘open method of coordination’ has been examined as an experimentalist form of governance (see C Sabel and J Zeitlin (eds), Experimentalist Governance in the European Union. Towards a New Architecture (Oxford University Press, Oxford, 2010), and in international governance, where it has been termed ‘global experimentalist governance’ (eg G de Búrca, RO Keohane, and C Sabel, ‘Global Experimentalist Governance (2014) 44 British Journal of Political Science 477). 56 The setting of standards by the ISSBs of international financial governance has been identified as a productive form of experimentalist governance given the reliance on local expertise, experimentation, and collective learning which can be associated with the ISSBs’ operating methods. See E Posner, ‘International financial regulatory cooperation: an experimentalist turn’ in J Zeitlin (ed), Extending Experimentalist Governance (Oxford University Press, Oxford, 2015) 196. 57 For a positive experimentalist analysis of the ESAs, see Zeitlin, n 26; and Ferran, n 26. Earlier, experimentalist features had been identified in the precursor Lamfalussy structures: E Posner, ‘The Lamfalussy Process: polyarchic origins of networked financial rule-making in the EU’ in Sabel and Zeitlin (eds), n 55, 215. 58 Initial market reaction to ESMA’s support of the MiFID II/MiFIR implementation process was broadly favourable: P Stafford, ‘Steven Maijoor, European Regulator who became Mr MiFID’, Financial Times (5 January 2018).

116 ESMA and Regulatory Governance

IV. Building the Single Rule-book: ESMA as Architect of EU Administrative Financial Market Regulation ESMA’s burgeoning technocratic influence over financial market regulatory governance can be associated with two trends that have intensified since its establishment in 2011. First, the co-legislators have come to rely ever more heavily on administrative rule-making, adopting extensive mandates for Delegated Acts, Implementing Acts, and BTSs: administrative financial market rule-making on a very large scale has become normalised. Second, ESMA has emerged as a decisive influence on administrative financial market rule-making by providing technical advice to the Commission on the adoption of Delegated and Implementing Acts and proposing BTSs, as discussed in the following subsections.

A. Procedural and Institutional Context i. Technical Advice to the Commission ESMA’s technical advice role in relation to Article 290/291 TFEU Delegated and Implementing Acts is crucial but informal. Under the Article 290 Delegated Acts procedure, a legislative act may delegate to the Commission the power to adopt ‘nonlegislative acts of general application to supplement or amend certain non-essential elements of the legislative act’; Delegated Acts accordingly have a legislative colour. Article 290 further provides that the nature (objectives, content, scope, and duration) of the delegation, and also the oversight mechanism, must be specified in the relevant delegating legislative measure. Article 290 additionally provides that the relevant delegating legislative act must explicitly lay down the conditions to which the delegation is subject, and specifies that these conditions may be as follows: the European Parliament or the Council may revoke the delegation; and the Delegated Act may enter into force only if no objection has been expressed by the Parliament or Council within the period set by the legislation.59 For example, MiFID II provides that its delegations to the Commission of powers to adopt Delegated Acts (which are for an indeterminate period of time) may be revoked at any time by the Parliament or by the Council;60 and that Delegated Acts adopted by the Commission enter into force only if no objection has been expressed by the Parliament or the Council within three months of notification of the Act, or if, before the expiry of that period, the Parliament and Council have informed the Commission that they will not object.61 The 2017 Prospectus Regulation, to take a recent example, also follows this scheme.62 The procedural content of Article 290

59 The Commission regards the objection procedure as the ‘ordinary means of control’: Commission, Implementation of Article 290 of the Treaty on the Functioning of the EU (COM (2009) 673). 60 MiFID II, Art 89(3). 61 MiFID II, Art 89(4). The three-month period can be extended by another three months at the initiative of the European Parliament or Council. 62 Prospectus Regulation, Art 44(3) and (6).

Building the Single Rule-book 117 is otherwise thin, however, and it does not specify how advice is to be provided to the Commission. The Article 290 process has, however, been amplified in a series of interinstitutional arrangements that cover the taking of advice by the Commission (although not ESMA’s role). In its initial 2009 Communication on Article 290, which pre-dates ESMA, the Commission set out arrangements for ensuring that the Article 290 procedure was as ‘homogeneous and predictable’ as possible, and in which it committed to consulting with national experts.63 The 2009 Communication did not expressly address financial services, but the earlier Article 290 Declaration,64 which was adopted by the Lisbon Treaty Intergovernmental Conference, noted the Commission’s commitment to consult with national financial regulation experts. The Article 290 procedural framework and the role of advice has since been amplified in a series of inter-institutional agreements, most recently the 2016 Interinstitutional Agreement for Better Lawmaking.65 This Agreement sets out procedures governing arrangements/time-lines for communication between the Commission and the co-legislators; provides for standard delegation clauses to be used in legislative acts providing for Article 290 delegations; and also addresses Commission consultation practices and engagement with Member State experts.66 These arrangements focus on Commission/Parliament/Council relations, however, and not on Commission/ESMA relations, which, despite the material reliance on Delegated Acts in the single rule-book, have developed in a more ad hoc and informal manner. In practice, as discussed in this section IV, the Commission almost always calls on ESMA for technical advice over the Article 290 process. Article 291 addresses executive powers and administrative implementing rules. It provides that the Commission (and exceptionally the Council), where uniform conditions for implementing legally binding EU acts are needed, may be conferred through a legislative act with ‘implementing’ powers to adopt implementing rules of general application (or individual administrative decisions). By contrast with Delegated Acts, Implementing Acts do not have a quasi-legislative quality.67 The procedural framework for the adoption of Article 291 Implementing Acts is set out in Regulation 182/2011, which provides for a comitology-based proceduralisation of Commission oversight, based on two committee-based oversight procedures: the ‘advisory’ procedure, which cannot result in Commission action being blocked;68 and the more intrusive

63 Commission Art 290 Report, n 59. 64 Declaration on Article 290 of the Treaty on the Functioning of the EU, Declaration 39 ([2008] OJ L115/352). 65 The Agreement covers the EU law-making process generally, but specifically addresses Delegated and Implementing Acts (pt V) and includes an annexed Common Understanding: Interinstitutional Agreement between the European Parliament, the Council of the EU, and the European Commission on Better Law Making, 13 April 2016 [2016] OJ L123/1. 66 In the financial markets sphere, Commission consultation with national experts is usually carried out through the European Securities Committee (which also operates as a comitology committee under Art 291 TFEU, as noted in this subsection) or specially formed expert groups, which are constituted as needed. 67 Commission Art 290 Report, n 59, 3. See further J Mendes, ‘Delegated and implementing rule making: proceduralisation and constitutional design’ (2013) 19 European Law Journal 22. 68 Under the advisory procedure (Art 4), the relevant committee adopts an opinion on the Commission’s proposal. The Commission is to take ‘the utmost account of the conclusions drawn from the discussions within the committee and of the opinion delivered’ but is not required to follow the opinion.

118 ESMA and Regulatory Governance ‘examination’ procedure.69 Article 291 Implementing Acts in the financial markets sphere are typically adopted under the examination procedure and so are overseen by the European Securities Committee (chaired by the Commission and composed of national representatives, usually finance ministries), which acts as the required comitology committee and operates under a qualified majority vote (QMV) system.70 The examination procedure activates once the Commission adopts a draft Implementing Act (it accordingly only comes into play late in the adoption process) and is designed to allow for a veto of the Commission’s draft Implementing Act by the Committee. In essence, the Committee can suggest amendments until it votes, over which time the Commission chair is to ‘endeavour to find solutions which command the widest possible support’. If the Committee comes to a positive opinion, the Commission is to adopt the draft Act; if a negative opinion is formulated, the Commission can submit an amended version or convene an Appeal Committee; and if no opinion is submitted, the Commission cannot adopt the measure71 but can submit an amended version or resubmit the original version. If the Appeal Committee gives a positive opinion, the Commission must adopt the Act; if an opinion is not given, the Commission may adopt the Act; and if a negative opinion is given, the Commission cannot adopt the act. In practice, Implementing Acts are relatively rare in the financial market sphere and, while used, are most usually deployed for technical operational matters, although ITSs are now more usually used for technical matters. ESMA’s technical advice role is not accordingly as prominent here as it is with Delegated Acts. This is not to suggest that Implementing Acts and ESMA’s role in their adoption is without interest: the Commission’s equivalence decisions in relation to third country regimes are adopted as Implementing Acts and have been strongly influenced by ESMA’s advice.72 ESMA is accordingly not procedurally embedded within the Article 290/291 processes, although there is an expectation that the Commission will consult and take expert advice. Nonetheless, in practice ESMA exerts a decisive institutional influence on Article 290 Delegated Acts, which form a critical part of the single rule-book, through its technical advice to the Commission. The ESMA Regulation does not expressly refer to the technical advice function, although ESMA is empowered to issue opinions to the European Parliament, Council, and Commission (Articles 8(1) and (2) and 34). But given that one of the imperatives driving the establishment of ESMA was the need to enhance technical support for administrative rule-making, as the Commission advisory role had already been trialled successfully by the Committee of European Securities Regulators (CESR), and given the expectation, noted above, that the Commission would take advice in developing Delegated Acts, it was natural that the Commission would come to mandate ESMA for technical advice. And experience since 2011 shows that the Commission typically requests technical advice from ESMA shortly after it receives a mandate from the co-legislators to adopt a Delegated Act. For example,

69 Regulation 182/2011 [2011] OJ L55/13, Art 5. 70 MiFIR, Art 51, eg, provides for Implementing Acts to be adopted under Art 5 of Regulation 182/2011, as does the Prospectus Regulation (Art 45). 71 Financial measures are distinct in this regard (Art 5(4)(a)); for most other measures, the Commission can adopt the Act if an opinion is not provided. 72 See further ch 6.

Building the Single Rule-book 119 ESMA was mandated to provide technical advice on the three major MiFID II/MiFIR Delegated Acts (the 2017 MiFID II Delegated Acts on the organisation and operating conditions for investment firms; and the 2017 MiFIR Delegated Act on definitions and on NCAs’ new product intervention and position management powers – all central elements of the MiFID II/MiFIR regime73) in April 2014, shortly after the adoption of MiFID II/MiFIR.74 Commission mandates to ESMA for technical advice usually set out in detail the areas on which advice is sought; set timelines; require that policy options are identified and that an assessment of costs and benefits is made; and set out governing principles/over-arching objectives, typically relating to appropriate differentiation, proportionality, cross-sector consistency, and consultation. Mandates usually also reinforce the Commission’s institutionally pre-eminent position, often warning that any technical advice received does not pre-judge the Commission’s final policy position, albeit that they also usually note ESMA’s operational autonomy. Mandates have developed over time. ESMA’s first mandate related to the 2011 Alternative Investment Fund Managers Directive (AIFMD)75 and was based on an earlier 2010 mandate to CESR as the AIFMD negotiations pre-dated ESMA.76 The Commission’s April 2014 mandate to ESMA for MiFID II/MiFIR technical advice was significantly more articulated than the AIFMD mandate – the specific requests for advice were more detailed, setting out the criteria and conditions on which ESMA should reflect; and the principles to guide ESMA were more developed, indicating increasing Commission experience of and comfort with ESMA as an expert adviser.77 Mandates have also, however, come to specify the procedural context and the Commission’s pre-eminent role in more detail. The MiFID II/MiFIR mandate, for example, specified that the Commission reserved the right to revise and/or supplement the mandate and would continue, separately, to consult with national experts (reflecting the 2016 Interinstitutional Agreement on Better Lawmaking). Over time, mandates have also become more standardised, suggesting growing Commission familiarity with the technical advice process. The June 2017 mandate for technical advice on the 2017 Prospectus Regulation, for example, is very similar to the April 2014 MiFID II/MiFIR mandate as regards the principles governing the mandate.78

73 Respectively, Commission Delegated Directive 2017/593 and Commission Delegated Regulation 2017/565; and Commission Delegated Regulation 2017/567 (Official Journal references are provided only for legislative measures in this book). 74 Commission, Request for Technical Advice on Possible Delegated Acts and Implementing Acts concerning MiFIR and MiFID II, 23 April 2014. 75 Directive 2011/61/EU [2011] OJ L174/1. 76 Commission, Provisional Request to CESR for Technical Advice on Possible Level 2 Measures Concerning the Future Directive on Alternative Investment Fund Managers, 2 December 2010. 77 The MiFID II/MiFIR mandate included, eg, the principle that ESMA be ‘proactive’ in suggesting advice and guidelines that might not be directly addressed by the mandate, and responsive in addressing queries to the Commission where necessary. 78 Commission, Request for Technical Advice on Possible Delegated Acts and Implementing Acts concerning the 2017 Prospectus Regulation, 28 February 2017 (updated 26 January 2018). The principles are very similar to those in the MiFID II/MiFIR mandate, covering: that the Lamfalussy method be followed; ESMA’s internal market mandate be reflected; proportionality; comprehensive advice; coherent advice; ESMA’s autonomy in working methods; consultation; advice to be evidenced and justified; clarity of advice; responsiveness; and the provision of a clear and structured text – although the mandate does not contain the expansive, ‘proactive’ direction given to ESMA under the MiFID II mandate.

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ii. Binding Technical Standards By contrast, ESMA’s role in the multi-staged and highly articulated BTS procedure for administrative rule-making is detailed in the ESMA Regulation. The procedures are designed to reflect the Commission’s institutional prerogatives as the a dministrative rule-maker, but also to protect ESMA as the location of technocratic expertise and deliberation. Different procedures apply to RTSs, which derive from Article 290 TFEU and have a similar quasi-legislative hue, and thus inter-institutional s ensitivity, to Delegated Acts (ESMA Regulation Articles 10–14), and to ITSs, which have an executive/implementing character and derive from Article 291 TFEU (Article 15). RTSs are characterised as technical and as not implying strategic decisions or policy choices, and their content is delimited by the legislative acts on which they are based (Article 10(1)). ITSs are similarly designed to be technical and not imply strategic decisions or policy choices, but, in contrast to RTSs, their content is to determine the conditions of application of legislative acts (Article 15(1)). The adoption of RTSs is heavily proceduralised under ESMA Regulation Articles 10–14. Under Article 10(1), where the co-legislators delegate power to the Commission to adopt an RTS, ESMA is to develop the RTS in question. ESMA must engage in public consultations and engage in impact assessment, unless it would be disproportionate or given the urgency of the issue in question, and consult with its stakeholder group. Proposals on RTSs are adopted by the Board of Supervisors, in practice by consensus, but a QMV requirement applies where a vote is needed.79 Reflecting the Article 290 TFEU framework, the Commission must immediately forward a draft RTS received from ESMA to the Parliament and Council (Article 10(1)). The Commission must then decide whether or not to endorse the RTS (within three months), and may endorse, or endorse in part or with amendments; the revising power to endorse in part or with amendments can only be exercised where the interests of the Union so require. Where the Commission intends not to endorse (in effect veto) an RTS proposal or to endorse in part or with amendments, it must remit the RTS proposal to ESMA, with reasons. Within six weeks, ESMA may amend the draft RTS based on the Commission’s revisions and resubmit it to the Commission, in the form of a formal opinion (which must also be sent to the Council and European Parliament). Where ESMA does not act within the six-week period, or submits a draft RTS which is not consistent with the Commission’s amendments, the Commission may adopt the draft RTS with the amendments it deems relevant, or reject it. Underlying this procedure is the Article 10(1) requirement that the Commission may not change the content of a draft RTS without prior coordination with ESMA. Where ESMA does not submit an RTS proposal within the time limit set out in the relevant legislative measure, or within any new time limit set by the Commission, the Commission may request a draft; it is only when a draft is not supplied by ESMA that the Commission may adopt an RTS without a prior ESMA proposal. The preparation of such a draft by the Commission is subject to impact assessment and consultation requirements (including consultation of the stakeholder group), and to transmittal of the draft to the Council and Parliament. The draft must also be submitted to

79 ESMA

Regulation, Art 44(1).

Building the Single Rule-book 121 ESMA, which may, within a six-week period, amend the RTS (and must send the related formal opinion to the Council and Parliament). Where ESMA does not submit an amended draft to the Commission within the review period, the Commission may adopt the RTS. Where ESMA provides revisions, the Commission may amend the RTS accordingly or adopt such amendments as it considers relevant. Once the Commission has adopted the RTS, it must notify the Council and Parliament (Article 11(2)). Reflecting Article 290, the Parliament and Council are empowered to object to an RTS within three months of the date of notification (this period can be extended by a further three months at the initiative of either institution); where the RTS adopted by the Commission is the same as the draft RTS proposed by ESMA, the review period is reduced to one month, although the Parliament and Council can extend this period by another month (Article 13(1)).80 If on the expiry of the review period neither the Council nor Parliament has objected, the RTS enters into force; it may enter into force before this period where the Council and Parliament inform the Commission of their intention not to object (Article 13(2)). Where an objection is raised (the relevant institution must state reasons), the RTS does not enter into force (Article 13(3)). The Council and Parliament are further empowered to revoke the foundation Article 10 delegation at any time (Article 12). The C ouncil and Parliament are also engaged where the Commission does not endorse a draft RTS or revises it (Article 14). In these cases, the Commission must inform ESMA, the Council, and Parliament, stating its reasons, and, where appropriate, the Parliament or C ouncil may invite the responsible Commissioner, together with the ESMA Chair, for an ad hoc meeting of the competent committee of the Parliament or Council to present and explain their differences. The power to adopt RTSs is subject to a sunset clause. The original Article 10 power was conferred on the Commission for four years from 16 December 2010 but is automatically extended for successive four-year periods, unless the Parliament or the Council revokes the power. A truncated procedure with (reflecting Article 291 TFEU) significantly less Parliament and Council oversight applies to ITSs. The procedures governing ESMA/ Commission interaction track those that apply to the adoption of RTSs, with the difference that the Commission may add an additional month on to the three-month period at the end of which the Commission must decide on its approach to the ESMA draft (Article 15(1)). In terms of Parliament and Council oversight, the Commission must simply forward draft ITSs (whether based on an ESMA draft or a Commission draft) to the Parliament and Commission (Article 15(1) and (2)), while ESMA must also forward its opinions responding to Commission revisions/refusals to endorse. The Council and Parliament do not have veto powers over ITSs.

iii. The Rise of RTSs Administrative rule-making has come to form a core element of EU single market governance as the Commission and co-legislators have become familiar with the

80 An additional one-month review period can be added by the European Parliament and Council following revisions to the Regulation by Directive 2014/51/EU [2014] OJ L153/1.

122 ESMA and Regulatory Governance inter-institutional balance implied by Article 290/291 TFEU,81 but it is growing apace in the financial market sphere, where RTSs are coming to dominate the administrative financial market rule-book. While this development suggests increased institutional comfort with the new RTS procedure and with ESMA, it has also created greater opportunities for ESMA influence and expansionism, given the procedural protections for ESMA’s RTS proposals (which do not apply to ESMA’s technical advice on Delegated Acts). The first major ESMA-era legislative measure to be amplified, the 2011 AIFMD, did not rely heavily on BTSs. At the heart of its administrative regime is a Delegated Act (a Regulation) setting out the operational conditions governing alternative investment fund (AIF) managers.82 Clustering around this Regulation are a further Delegated Act (on reporting requirements), two procedurally-oriented Implementing Acts, and an RTS classifying different forms of AIF,83 but the substance of the administrative regime is contained in the main Delegated Act. Similar patterns obtain under the 2012 Short Selling Regulation,84 the pillar administrative measure for which is a Delegated Act85 around which cluster two more technical RTSs and one ITS.86 A shift towards heavier reliance on RTSs took place with the amplification of the credit rating agency regime over 2012–14. Here, the administrative rule-book primarily takes the form of seven sets of RTSs governing the many reports rating agencies must transmit to ESMA as the exclusive EU supervisor of rating agencies.87 Only two Delegated Acts were deployed under the credit rating agency regime.88 The pattern of delegation shifted decisively towards RTSs with the 2012 EMIR,89 a highly technical and complex measure, which, with MiFID II/MiFIR, is a pillar of the EU’s financial market rule-book, reorganising and regulating the EU’s derivatives markets. EMIR is amplified by 17 RTSs, at the heart of which is a cluster of operationally critical RTSs that sets out the substantive administrative rules of the new regime;90 the RTSs that identify the classes of derivatives 81 Greater reliance on delegated rule-making following procedural reform is a feature of EU administrative law. See C Moury and A Héritier, ‘Shifting competences and changing preferences: the case of delegation to comitology’ (2012) 19 Journal of European Public Policy 1316. 82 Commission Delegated Regulation 231/2013. 83 Commission Delegated Regulation 2015/514 (on reporting by NCAs to ESMA); Commission Implementing Regulations 447/2013 (on procedures for opting-in to the AIFMD) and 448/2013 (on procedures governing the allocation of supervisors to third country fund managers); and Commission Delegated Regulation 694/2014 (on types of alternative investment fund manager). 84 Regulation (EU) No 236/2012 [2012] OJ L86/1. Approximately 11 Arts are subject to Art 290/291 TFEU amplification, while 8 or so are subject to BTS amplification. 85 Commission Delegated Regulation 918/2012. 86 Respectively, Commission Delegated Regulation 919/2012 on certain calculation methods and Commission Delegated Regulation 826/2012 on notification and disclosure requirements; and Commission Implementing Regulation 827/2012 on reporting formats and certain procedural timelines. 87 Including Commission Delegated Regulations 448/2012 and 2015/2 (content of data to be made available to ESMA); 446/2012 (content of ratings and other periodic data to be made available to ESMA); 2015/1 (data required on fees charged by rating agencies); 2015/3 (content of disclosures required on structured finance products); and 449/2012 (information required in relation to rating agency registration and certification by ESMA). 88 Commission Delegated Regulations 272/2012 (supervisory fees) and 946/2012 (enforcement procedures). 89 Regulation (EU) No 648/2012 [2012] OJ 201/1. 90 Commission Delegated Regulations 153/2013 (CCP regulation), 152/2013 (CCP capital), and 876/2013 (CCP colleges); and Commission Delegated Regulations 149/2013, 2016/2251, and 2017/323 (risk mitigation requirements).

Building the Single Rule-book 123 which must be cleared through central clearing counterparties (CCPs);91 and an array of RTSs addressing discrete technical issues.92 EMIR was also the first measure to deploy ITSs systematically; five ITSs govern a range of procedural matters, ranging from report formats93 to supervisory procedures.94 Article 290/291 measures are used under EMIR but in a significantly more limited manner than previously: six Delegated Acts are used, to revise EMIR’s timelines and to finesse its exemptions,95 and to specify the sanctions ESMA may impose and the fees it may charge as direct and exclusive supervisor of the EMIR-required trade r epositories;96 and over 20 Implementing Acts are used to make equivalence determinations in relation to third countries under EMIR. EMIR’s partner measure, MiFID II/MiFIR, the leviathan of post-crisis EU financial market regulatory governance, has been amplified by a host of administrative rules, the scale of which represents a watershed for EU financial market regulatory governance. The substantive core of this administrative rule-book is primarily, although not entirely, in the form of 31 RTSs. The RTSs cover a wide range of pivotal requirements, extending from the regulation of trading venues,97 to the massive new cross-asset-class trading transparency regime,98 to the expanded financial reporting regime,99 to the interaction between the MiFID II/MiFIR derivatives trading rules and EMIR’s derivatives clearing requirements,100 to investment firm regulation,101 and to supervisory cooperation.102 MiFID II/MiFIR also deploys Delegated Acts, but to a significantly lesser degree, primarily in substantive areas including the amplification of definitions and the conferral of

91 Commission Delegated Regulations 2015/2205 (interest rate derivatives in G4 currencies); 2016/592 (credit default swaps); and 2016/1178 (interest rate derivatives; forward agreement derivatives). 92 Including in relation to the prevention of EMIR avoidance (Commission Delegated Regulation 285/2014); reporting requirements of varying types, including the pivotal requirements governing reporting to trade repositories (148/2013 and 2017/104) and trade repository data publication requirements (151/2013); trade repository regulation (150/2013); and deadlines (2017/751). 93 Commission Implementing Regulations 1247/2012 and 2017/105 (trade repository reporting formats and frequency); and 1249/2012 (formats for CCP record keeping). 94 Commission Implementing Regulation 1248/2012 (format for trade repository applications for ESMA registration). 95 Respectively, Commission Delegated Regulations 1002/2013 and 2017/979 (revising the list of exempted entities); and 2017/610 and 2015/151 (revising certain transitional periods for pension funds under EMIR). 96 Commission Delegated Regulations 667/2014 (rules of procedure for penalties) and 1003/2013 (fees to be charged by ESMA). 97 Including Commission Delegated Regulations 2017/566 (disorderly trading); 2017/568 (admission of instruments to trading); 2017/569 (suspension/removal of instruments); 2017/570 (trading halts); 2017/573 (algorithmic trading and colocation); 2017/574 (business clocks); 2017/575 and 2017/576 (execution data quality); 2017/578 (market making); 2017/584 (organisational requirements for venues); and 2017/588 (tick sizes). 98 Including Commission Delegated Regulations 2017/583 (transparency requirements for non-equity asset classes; 2017/587 (transparency requirements for equity asset classes); 2017/577 (the volume cap mechanism); and 2017/572 (offering of trading data and level of data disaggregation). 99 Including Commission Delegated Regulations 2017/585 (rules governing reporting data submission – the ‘FIRDS’ system); 2017/571 (regulation of data reporting services providers); 2017/580 (maintenance of data); and 2017/590 (transaction reporting to NCAs). 100 Including Commission Delegated Regulations 2017/579 (evasion rules); 2017/581 (clearing access by trading venues and CCPs); and 2017/582 (clearing obligation for certain traded derivatives). 101 Including Commission Delegated Regulations 2017/589 (algorithmic trading) and 2017/591 (position limits). 102 Including Commission Delegated Regulation 2017/586 (on information exchange and investigations).

124 ESMA and Regulatory Governance new supervisory powers on NCAs and ESMA;103 the organisational and operational requirements applying to investment firms and the new rules governing conflicts of interest and investment advice;104 and the operation of certain exemptions.105 Like EMIR, MiFID II/MiFIR also deploys ITSs, primarily in relation to the format for reports106 and templates for supervisory procedures.107 The 2014 Market Abuse Regulation108 has a similar design model to EMIR and MiFID II/MiFIR, being primarily amplified by RTSs (six in this case) which cover substantive and operational manners.109 A Delegated Act is, however, used to amplify the Regulation’s exemption regime as well as a range of other substantive matters.110 Five sets of ITSs are used to address the different formats and templates required for reporting and procedural matters.111 Unusually, an Implementing Act is also used, here to set out NCA reporting arrangements as regards actual or potential infringements of the Market Abuse Regulation.112 The 2014 Central Securities Depositories Regulation113 also relies heavily on RTSs, being amplified by three sets of RTSs, one of which covers the core substantive requirements applying to central securities depositories (CSDs).114 Two sets of ITSs cover templates and formats,115 while one Delegated Act addresses the rules governing financial penalties for settlement failures as well as the rules governing the operation of CSDs in host Member States116 The 2014 Packaged Retail and InsuranceBased Investment Products (PRIIPs) Regulation,117 one of the last legislative measures to be adopted over the crisis era, is amplified primarily by means of an RTS, which governs the detailed presentation, content, review, and revision rules that apply to the key PRIIPs reform – the new Key Information Document for PRIIPs.118 103 Primarily Commission Delegated Regulation 2017/567 on definitions and supervisory measures relating to product intervention and positions. 104 Commission Delegated Regulation 2017/565 and Commission Delegated Directive 2017/593. 105 Including the pending Commission Delegated Regulation on the availability of the central bank exemption. 106 Including Commission Delegation Regulations 2016/824 and 2017/953 (format of position reports). 107 Including Commission Delegated Regulation 2017/1110 (format of forms for authorisation as a data service provider); 2017/1111 (format for NCA reporting on sanctions imposed); 2017/998 (format for forms relating to NCA cooperation in relation to trading venue supervision); 2017/981 (format for templates for NCA consultation in relation to investment firm authorisations); and 2017/980 (forms, templates, and procedures for NCA cooperation). 108 Regulation (EU) No 596/2014 [2014] OJ L173/1. 109 Including Commission Delegated Regulations 2016/1052 (stabilisation and buy-back programmes); 2016/960 (the new market soundings regime); 2016/908 (arrangements governing reliefs for ‘accepted market practices’); 2016/957 (the suspicious transactions reporting regime); and 2016/958 (investment recommendations). 110 Commission Delegated Regulation 2016/522. 111 Commission Implementing Regulations 2016/378 (NCA notifications); 2016/959 (market soundings); 2016/1055 (disclosure and delay of inside information); 2016/347 (insider lists); and 2016/523 (managers’ transactions). 112 Commission Implementing Directive 2015/2392. 113 Regulation (EU) No 909/2014 [2014] OJ L257/1. 114 Commission Delegated Regulation 2017/392. The other two sets of RTSs cover the content of reporting requirements (2017/391) and the specific prudential requirements that apply to identified banking-like ancillary activities (2017/390). 115 Commission Implementing Regulations 2017/393 and 2017/394. 116 Commission Delegated Regulation 2017/389. 117 Regulation (EU) No 1286/2014 [2014] OJ L352/1. 118 Commission Delegated Regulation 2017/653.

Building the Single Rule-book 125 Measures adopted in the final stages of the crisis-era reform programme and since have followed a similar pattern as regards the dominance of RTSs over Delegated Acts. While two of the three new EU fund regimes adopted in the final stages of the c risis-era reform programme (the 2013 European Venture Capital Fund (EUSEF) and Social Entrepreneurship Fund (EUSEF) Regulations119) are amplified mainly by ITSs, which specify the formats to be used for different notifications,120 ESMA has delivered five sets of proposed RTSs amplifying various substantive aspects of the 2015 European Long Term Investment Fund Regulation.121 ESMA has also delivered 10 sets of proposed RTSs under the 2016 Benchmark Regulation,122 which address various substantive aspects of the Regulation, and two sets of procedurally-oriented ITSs.123 This trend has continued with the EU’s current major policy agenda for financial markets, the Capital Markets Union (CMU) agenda, notably under the 2017 Securitisation Regulation.124 However, CMU’s 2017 Prospectus Regulation is an outlier to this trend. Its substantive delegations are primarily in the form of mandates for Delegated Acts.125 Use is made of RTSs to a notably less material extent here, being largely confined to supervisory/procedural matters, including the omission of prospectus information, the incorporation by reference of disclosures, NCA cooperation, and the new ‘notification portal’ to be developed to facilitate supervisory cooperation in relation to prospectus passporting.126 The heavier reliance on Delegated Acts in this case can be associated with the dominance of Delegated Acts in the amplification of the precursor 2003 Prospectus Directive, which took place for the most part over the CESR era, but is unusual for more recent financial market measures. The RTS procedure is an attractive one for the European Parliament and Council, as it allows them direct control over the Commission (through their revocation and veto powers) and as ESMA’s procedural protections further structure the Commission’s discretion.127 While tensions have arisen (as discussed further in section IV.B), institutional and particularly political trust in the RTS procedure and in ESMA’s role appear strong. Council support for RTSs rather than Delegated Acts to be deployed was consistent over the MiFID II/MiFIR negotiations, for example,128 while the negotiations on the PRIIPs regime129 also saw the Council support greater reliance on RTSs than on Delegated Acts.130 There are few signs of this trajectory changing. The two major 119 Regulation (EU) No 345/2013 [2013] OJ L115/1 and Regulation (EU) No 346/2013 [2013] OJ L115/18. 120 Commission Implementing Regulations 593/2014 and 594/2014. 121 Regulation (EU) No 2015/760 [2015] OJ L123/98. ESMA has delivered proposals on: the rules governing hedging risks; the life-cycle of a European Long Term Investment Fund and related asset coverage; valuation; and definitions and calculations (ESMA, Table of Binding Technical Standards, 3 April 2018). 122 Regulation (EU) No 2016/1011 [2016] OJ L171/1. 123 ESMA, Table of Binding Technical Standards, 3 April 2018. 124 See n 18. 125 2017 Prospectus Regulation, Arts 13(1), 16(5), 14(3), and 15(2). 126 ibid, Arts 18(4), 19(4), 30(4), and 25(7). 127 The political economy literature on institutional preferences on delegations suggests that the European Parliament will prefer delegation modes (such as BTSs) that allow it to control the Commission directly, and that the Council also seeks to monitor the Commission: Brandsma and Blom-Hansen, n 49. 128 Danish Presidency Progress Report on MiFID II/MiFIR, 20 June 2012 (Council Document 11536/12) para 64. 129 COM (2012) 352/3. 130 PRIIPs Regulation ECOFIN General Approach, 24 June 2013 (Council Document 11430/13).

126 ESMA and Regulatory Governance agendas currently shaping EU financial market regulatory governance, the CMU agenda and the ‘stock-take’ reform agenda (which is directed to refining and correcting EU financial market regulation), can be expected to lead to an ever greater thickening of financial market administrative regulatory governance and to generate additional mandates to ESMA for RTSs proposals.131

B. ESMA’s Expanding Technocratic Influence The mass of administrative financial market regulation with which ESMA has been engaged, whether by developing BTS proposals or by giving technical advice on Delegated Acts, tells one story as to the scale of ESMA’s influence, but the reach of its technocratic influence is a function of a number of factors.

i. Procedure, Process, and Institutional Relations The first factor is procedural and institutional. The vast bulk of the financial market administrative rule-book is in the form of Regulations, which apply directly in Member States and without an implementation filter: administrative Directives are very rare. ESMA’s technocratic influence accordingly runs directly from the EU measure to national markets. In addition, the rule-book is primarily in the form of RTSs, in relation to which ESMA has significantly more procedural control than it has over Delegated Acts. Further, as ESMA ‘holds the pen’ at the outset of the RTS process, it can set the parameters of the subsequent policy and institutional debate. Finally, ESMA has become embedded within the administrative regulatory process for financial markets, as is suggested by the rarity of Commission overrides of ESMA’s judgement, outlined ahead. ESMA’s institutionally subordinate role in the administrative rule-making process – whether as regards BTS proposals or Delegated Act technical advice – prompted early predictions of destabilising institutional tensions, particularly with the Commission (given the Commission’s incentives to protect its institutional position) but also the European Parliament (given the Parliament’s sensitivity to protecting its rule-making prerogatives), which could have compromised ESMA’s role.132 By and large these tensions have not materialised – or at least not to the point where ESMA’s role has been weakened. ESMA’s technocratic position and ability to exert influence is most vulnerable to being undermined by Commission override in the Delegated Act technical advice process, where it has few formal procedural protections. Nonetheless, there are restraints on the Commission. The Commission’s internal Regulatory Scrutiny Board (which oversees Commission impact assessments) has required that the Commission explain the extent to which its administrative rules follow ESMA’s technical advice and provide

131 Moloney, ‘EU financial governance after Brexit’, n 21. 132 See Busuioc, n 30; and N Moloney, ‘The European Securities and Markets Authority and Institutional Design for the EU Financial Market – a Tale of Two Competences: Part I, Rule-making’ (2011) 12 European Business Organisation Law Review 41.

Building the Single Rule-book 127 ‘clear arguments’ justifying any deviations,133 while the Council has called on the Commission to take due account of the ESAs’ technical advice and only to depart from it where necessary.134 Tracing the fate of ESMA’s technical advice is not a straightforward exercise given the limited proceduralisation of the technical advice route, but the extent to which the Commission has relied on ESMA’s advice can be assessed by comparing Commission proposals for Delegated Acts with ESMA’s earlier technical advice, and by examining the Commission’s related impact assessment and explanatory materials. Initial indications suggested a potentially disruptive institutional environment. The Commission made major revisions to ESMA’s first significant set of technical advice, which related to the 2011 AIFMD administrative rule-book. The subsequent industry clamour objecting to perceived Commission politicisation of a process designed to have become more technocratic with ESMA’s engagement was loud.135 The Commission’s approach garnered institutional support from the European Parliament and Council, however,136 and ESMA’s reaction to being overridden was sanguine.137 While the episode exposed market concern that ESMA’s technical credibility was being undermined right from the start, it can now be associated with the febrile atmosphere that attended the development of the AIFMD regime (to which the industry was hostile), as well as some initial institutional awkwardness towards ESMA as a new actor. Since then, the technical advice process has generally been smooth, and the Commission and ESMA appear to have developed a workmanlike relationship. The Commission usually follows ESMA’s technical advice and appears sensitive to not overriding ESMA without clear justification – the Commission policy discussions and impact assessments that accompany major Delegated Acts typically explain how the Commission has used technical advice. The most significant recent example of Commission/ESMA relations concerns ESMA’s very extensive technical advice on MIFID II/MiFIR,138 which informed three Delegated Acts, all pivotal to the MiFID II/ MiFIR regime: Delegated Regulation 2017/565 on the investment firm organisational and operating regime; Delegated Regulation 2017/567 on definitions, the trading transparency regime, and the new product intervention regime; and Delegated Directive 2017/593 on the new product governance and inducements regimes.139 The extent

133 eg, Regulatory Scrutiny Board, Impact Assessment on Commission Delegated Regulation 2017/567 (Ref Ares (2015) 1750123) (considering a MiFID II/MiFIR measure), asking the Commission to explain why, in identified areas, it had gone beyond ESMA’s technical advice. 134 As is clear from the procedures the Council has adopted to ensure adequate oversight of the Commission: Council, Financial Services Committee, FSC Report on Level 2 Processes – Endorsement, 9 July 2015 (Council Document 10602/15). See further section IV.D on these procedures. 135 B Masters and A Barber, ‘EU Warned on new Fund Rules’, Financial Times (12 July 2012); and AIMA, Analysis of Divergences between the EU Commission’s draft regulation implementing the AIFMD and the ESMA Advice (2012) 1. 136 Which had been extensively consulted by the Commission: Deloitte, Regulatory News Alert. AIFMD: the level 2 regulation for Christmas (2012) 2. 137 ESMA Chair Maijoor noted that the differences between the Commission’s and ESMA’s positions were not as substantial as implied by the media, and related Board discussions noted that ESMA and the Commission would diverge on issues: BoS, Minutes, 17 April 2012 (ESMA/2012/BS/66). 138 ESMA/2014/1569. The vast set of advice runs to some 500 pages. 139 The extent of the Commission’s reliance on ESMA’s technical advice can be traced across the Commission’s Impact Assessments: SWD (2016) 157 and 138 (both documents contain the same analysis but were separately attached to the different packages of Delegated Acts). This discussion refers to SWD (2016) 157.

128 ESMA and Regulatory Governance to which the Commission adopted ESMA’s advice and its approach to engaging with ESMA evidences not only the scale of ESMA’s influence, but also the Commission’s comfort with ESMA’s technical advice role. For example, the Commission emerges as concerned to engage with ESMA after the delivery of technical advice and not to close off communication with ESMA following receipt of its advice; the Commission’s preparatory work on Delegated Directive 2017/593 notes that the measure was based on ESMA’s technical advice but also on ESMA’s participation as an observer in the relevant expert group that provided subsequent national input to the Commission.140 The Commission also emerges as supportive of ESMA’s technical expertise. The development of Delegated Directive 2017/593 was controversial, given ESMA’s technical advice to the effect that the provision of ‘bundled’ investment research to asset managers be treated as an ‘inducement’ and regulated accordingly, an approach which generated immense industry hostility and material political contestation, but ESMA’s approach was largely accepted by the Commission.141 ESMA’s technical advice on the Delegated Regulation 2017/567 transparency regime, which was similarly controversial as the rules have market-structuring effects, was also broadly accepted by the Commission.142 Heavy reliance by the Commission on ESMA’s earlier empirical analysis and datagathering is also evident across the MiFID II/MiFIR Delegated Act package.143 The Commission’s detailed analysis of why it chose to reconsider only certain aspects of ESMA’s technical advice by means of an impact assessment (following which the Commission for the most part accepted the technical advice) sheds further light on how the Commission approached ESMA’s technical advice over the MiFID II/MiFIR process.144 Its default position appears to have been to accept ESMA’s advice (without an impact assessment) unless there was an evidenced reason not to. The Commission decided against reconsidering ESMA’s advice by means of an impact assessment for a range of reasons, chief amongst them where ESMA’s policy option was not novel; did not impose major costs; was not supported by data or strong stakeholder agreement; was not appropriate and proportionate; was an adjustment to a pre-existing regime; built on existing rules; had minor impact; was only clarifying in nature; or, more generally, where was there was no convincing argument against the ESMA policy option. Overall, the recent MiFID II/MiFIR experience suggests that Commission/ESMA relations have stabilised, and that their respective technical and executive roles are dovetailing reasonably well. Earlier, the 2013–14 ESA Review exposed some stakeholder concern as to the Commission’s largely untrammelled ability to reject or revise ESMA’s technical advice,145 but the 2017 ESA Review did not reveal material anxiety on 140 C (2016) 2031, Explanatory Memorandum to Directive 2017/593. Similar observations are made in the documents accompanying Delegated Regulations 2017/565 and 2017/567. 141 The Commission made only minor operational amendments to ESMA’s approach: Impact Assessment SWD (2016) 157, 21–25. 142 The Impact Assessment examined ESMA’s technical advice in detail, typically accepted it, and found identity between ESMA’s advice and the additional data-gathering carried out by the Commission: eg, ibid, 28–31 (on the equity market liquidity calculations). 143 In accepting ESMA’s advice on the proposed client money regime, eg, the Commission relied on ESMA’s earlier data-gathering and consultations: ibid, 19–20. 144 ibid, Annex 3. 145 eg, the responses by leading trade associations, including the British Bankers’ Association and the European Fund and Asset Management Association, available at http://ec.europa.eu/finance/consultations/ 2013/esfs/index_en.htm.

Building the Single Rule-book 129 this issue, although there were calls from some private sector respondents for clearer Commission explanations for when technical advice is not followed.146 Certainly, the MiFID II/MiFIR experience suggests significant Commission deference in practice to ESMA’s technical authority, and a concern to depart from ESMA’s advice only where there is clear supporting evidence. Given the dominance of RTSs in the administrative rule-book and the priority the RTS process attaches to ESMA’s technical capacity, the greater potential challenge to ESMA’s role and credibility, and to its ability to exert technocratic influence, relates to the RTS process. Draft BTSs should be amended by the Commission only ‘where the Union’s interests so require’, and draft RTSs ‘in very restricted and extraordinary circumstances’ given ESMA’s status as the ‘actor in close contact with and knowing best the daily functioning of financial markets’.147 The related criteria are widely cast, however, and include where the draft RTS is incompatible with EU law, does not respect the proportionality principle, or ‘run[s] counter to the fundamental principles of the internal market for financial services as reflected in the acquis’. In practice, the RTS process has stabilised over time and a productive division of labour, which does not pose material challenges to ESMA’s ability to exert technocratic influence, has emerged. All but a very small number of the vast swathe of RTSs proposed by ESMA since January 2011 have been adopted without Commission revision or veto, underscoring, therefore, ESMA’s ability to manage its institutional environment. Unsurprisingly, given the policy importance of the technical regulatory design choices at stake, most tensions have arisen under the AIFMD, EMIR, and MiFID II/MiFIR.148 The Commission’s first rejection of an ESMA-proposed RTS concerned a draft AIFMD RTS, which was rejected by the Commission as not conforming with the AIFMD legislative text.149 ESMA subsequently revised the RTS but was robust in response, highlighting that the Commission’s approach was not the only reasonable interpretation and underlining that draft RTSs should be revised only in ‘very restricted and extraordinary circumstances’;150 ESMA’s robust approach can also be seen in its proposal of the RTS in question, despite earlier indications of Commission concern regarding ESMA’s proposed approach.151 A similar Commission concern as to the conformity of a proposed RTS with the related legislative text arose under the EMIR process. The Commission rejected a proposed RTS that covered how to address deadlocked CCP colleges of supervisors on

146 Commission, Feedback Statement on the Public Consultation on the Operations of the European Supervisory Authorities (2017) 20. 147 ESMA Regulation, Arts 10(1) and 15(1) and rec 23. 148 Difficulties also arose in relation to an operational, reporting-related ITS under the 2014 Market Abuse Regulation. The Commission was of the view that the ESMA draft imposed a double disclosure requirement on issuers of emission allowances and related products given the parallel disclosures required under another EU measure. In response, ESMA argued that the Commission’s approach was not in compliance with the Market Abuse Regulation and concluded that it would maintain its original drafting: ESMA/2016/982. 149 Commission Letter to ESMA, 4 July 2013 (Ref Ares (2013) 2569526). 150 ESMA, Opinion on the Draft RTS on types of AIFM (ESMA/2013/119) 6. Subsequently, ESMA Chair Maijoor noted that ESMA regarded the RTS draft as ‘valid and legally sound’, ‘but in order to move the process forward – and recognizing that the Commission ultimately holds the pen’ had presented a revised draft: Speech on ‘ESMA – Issues and Priorities’, 5 November 2013. 151 BoS, Minutes, 14 March 2013 (ESMA/2013/BS/30) and 6 November 2012 (ESMA /2012/BS/143).

130 ESMA and Regulatory Governance the grounds that ESMA’s draft went beyond the EMIR mandate for administrative rules on CCP colleges.152 ESMA was assertive in justifying its approach, but it recognised that the EMIR RTS mandate in question was not sufficiently broad for it to address college operations appropriately and accepted the Commission’s revisions. ESMA did not abandon the issue, though, adopting guidelines on the issue instead. More substantive contestation arose following the Commission’s rejection of a second EMIR BTS proposal, in which ESMA proposed that the application of certain EMIR reporting requirements be delayed to allow ESMA sufficient time to adopt amplifying soft law. The Commission’s revisions here were couched in sharp terms – the Commission rejected the proposed ITS, as postponement would ‘run counter to the principle of ensuring the stability of the financial system and the functioning of the internal market for financial services’153 – as was ESMA’s response,154 although the Commission prevailed. Substantive issues were also at stake with the third and similarly contested Commission revision of a proposed EMIR BTS, in this case an RTS proposed jointly by ESMA, EBA, and EIOPA on the risk mitigation requirements for derivatives not cleared through CCPs. The Commission took a different substantive position to the ESAs on the treatment of pension funds by the draft RTS and made a series of notionally minor drafting changes.155 The ESAs rejected the Commission’s revisions, disagreeing with the Commission’s substantive rationale and also underlining their disagreement with changes regarded by the Commission as technical drafting changes but which, they argued, had led to unintended consequences.156 Nonetheless, the ESMA/Commission relationship was relatively harmonious over the EMIR process, with most EMIR BTSs being accepted by the Commission. The ESMA/Commission relationship was more harmonious again over the vast and complex MiFID II/MiFIR BTS process. The bulk of the over 40 highly detailed MiFID II/MiFIR BTSs prepared by ESMA was adopted by the Commission, with only three being revised. The revisions related to substantive, if highly technical, regulatory design matters on which the Commission took a different view from ESMA. The Commission adopted a more calibrated, phased-in approach to the determination of the different liquidity levels to be applied to non-equity asset classes (which drive the new trading transparency regime); a different approach to the calculation of the position limits to be imposed on commodity derivatives; and a wider approach (based on a greater number of factors) to the determination of when certain business is ‘ancillary’ to the main business of a group for the purpose of applying the commodity derivatives regime.157 Common to all three Commission revisions were the contestation the relevant issues had generated during the earlier ESMA development process, the Commission’s concern to adopt a cautious approach given the likely impact of these contested rules on market structure, and the limited data available during the earlier ESMA design phase.

152 ESMA, Opinion on RTSs on Colleges for CCPs (ESMA/2013/312) para I.4. 153 Commission, Communication, 7 November 2013. 154 ESMA argued that the postponement was needed to ensure that sufficiently accurate data were available: Letter from ESMA Chair to Commission, 14 November 2013 (ESMA/2013/1655). 155 Commission, Letter to the Chairs of EIOPA, EBA, and ESMA, 28 July 2016. 156 Opinion of the European Supervisory Authorities, 8 September 2016 (ESAs 2016 62). 157 Commission Letters to ESMA, 20 April 2016.

Building the Single Rule-book 131 ESMA accepted the Commission’s rationale for a phased-in approach to non-equity asset class liquidity but suggested a different solution, based on an automatic phase-in of the relevant rules (which the Commission did not adopt); accepted the Commission’s position limits changes; and rejected the Commission’s revision of its approach to the ancillary business test, arguing that these revisions had significant drawbacks, but suggested metrics that could be used by the Commission in designing a new test (the Commission maintained its position).158 These limited AIFMD/EMIR/MiFID II/MiFIR episodes remain isolated examples of ESMA/Commission contestation. The more-or-less wholesale adoption by the Commission since 2011 of a vast swathe of proposed BTSs, often of great market and policy sensitivity, underlines the extent to which the BTS process, and particularly the RTS process, has been institutionally embedded, and the extent to which ESMA has developed the ability to navigate its relationship with the Commission deftly and to protect and exert its technocratic influence. The rare occasions on which the Commission has revised or rejected BTSs do not suggest serious strains in the Commission/ ESMA relationship but rather a constructive degree of tension between the Commission (as the constitutional location of administrative rule-making power) and ESMA (the location of technical expertise), which is ensuring careful attention to institutional mandates and useful mutual oversight. The Commission’s MiFID II/MiFIR revisions, for example, were not quixotic, were justified at some length, and related to concerns also raised by the European Parliament and the Council during the BTS oversight process;159 they did not undermine ESMA’s technical credibility or point to a distrustful Commission/ESMA relationship. On the ESMA side, ESMA appears sensitive to the need to manage its relationship with the Commission and to avoid disruptive tensions that could undermine its technocratic position and influence. ESMA has, for example, asked the Commission for an opinion where it has been uncertain how to proceed with a BTS,160 and appears sensitive to the need to operate within its mandates.161 Nonetheless, ESMA has also been careful to protect its procedural rights, for example publicly writing to the Commission on receipt of informal Commission indications in March 2016 that its draft MiFID II/MiFIR BTSs were to be revised, to advise that it would assume the BTS revision process had been formally triggered, although a formal indication had not been received from the Commission.162 But while ESMA was here careful to insist on its procedural prerogatives, it was also willing to accommodate the Commission, given that MiFID II was ‘a complex and extraordinary project’. The relatively low number of formal revisions/rejections of draft BTSs may mask Commission efforts to influence BTSs at an early stage through its (non-voting) seat on 158 ESMA Opinions ESMA 2016/666, 2016/668, and 2016/730. 159 The ‘ancillary business’ test revisions related to concerns raised by the European Parliament and some Council members; the position limits revisions to concerns raised by the Parliament; and the liquidity revisions to concerns raised by Parliament and some Council members. 160 eg when preparing the related BTSs, ESMA asked the Commission for its view on the time period over which the EMIR CCP clearing obligation should apply to classes of derivatives (Letter from ESMA Chair Maijoor to Commissioner Barnier, 8 May 2014 (ESMA/2014/483) and Commission Response, 8 July 2014). 161 ESMA’s major March 2018 set of technical advice on the Prospectus Regulation, eg, acknowledged some stakeholder concern as to the burdens imposed by the new Regulation but noted that its technical advice must be related to the Commission’s mandate and could not cover legislative issues: ESMA31-62-800, 15. 162 Letter from ESMA Chair Maijoor to the Commission, 21 March 2016 (ESMA/2016/404).

132 ESMA and Regulatory Governance the Board of Supervisors. Board minutes suggest that the Commission has, on o ccasion, sought to shape the development of a BTS, but these episodes appear rare and to relate to differing interpretations of ESMA’s legal mandate to produce draft BTSs and not to attempts to impose a different technical view. During the development of the Market Abuse Regulation BTS proposals, for example, the Commission expressed its ‘strong reservations’ on an ESMA approach it warned was outside its mandate.163 But these incidences are relatively rare164 and are increasingly being dealt with through the ‘early legal review’ process noted in section IV.B.ii. Similarly, while the Commission has on occasion revised draft BTS proposals and not advised ESMA accordingly (on the grounds that its revisions were not material), a procedural framework has since been put in place to limit such changes.165

ii. ESMA Entrepreneurialism and Reform The extent of ESMA’s influence can also be related to its agility in seeking to finesse and refine its role. For example, over the Commission’s 2015 EMIR review, ESMA called for reforms to the RTS process that would allow it to revise RTSs quickly, without going through the full round of RTS procedural requirements, where necessary to protect financial market stability.166 The Commission did not support these reforms, but their greater significance lies in ESMA’s seeking to exert bottom-up, technocratic influence on how the RTS process might develop. Also in 2015, to expedite the delivery of BTS proposals, ESMA and the Commission agreed on an ‘early legal review’ procedure, designed to provide for an early legal review by the Commission of draft BTSs in advance of their final adoption by the ESMA Board of Supervisors and before their formal submission to the Commission. The procedure allows the Commission to flag legal concerns at an early stage (legal review was previously carried out following ESMA’s submission of the draft BTS to the Commission).167 While the new procedure has not eliminated all ESMA/Commission friction, it is regularly reviewed and finetuned to reflect experience, and overall both ESMA and the Commission have been supportive.168

iii. A Transformative Rule-book Finally, ESMA’s burgeoning influence can be related to the transformative nature of the administrative rules it has crafted. The post-crisis financial market administrative rulebook is designed to be transformative and to deliver behavioural, business-model, and market structure change; it is also highly granular, directing internal firm processes, drilling deep into firms’ business models, and reorganising market structure.169 163 BoS, Minutes, 7 May 2015 (ESMA/2015/BS/90) and 24–25 September 2015 (ESMA/BS/2015/202). 164 The minutes also note, eg, early Commission concerns relating to the Short Selling Regulation BTS proposals: BoS, Minutes, 20 December 2011 (ESMA/BS/2012/4). 165 Under the 2015 reforms recommended by the Council’s Financial Services Committee, discussed further in section IV.D. 166 ESMA, EMIR Review Report No 4 (ESMA/2015/1254) 8–10. 167 Letter from ESMA Chair Maijoor to the Commission, 11 May 2015 (ESMA/2015/841). 168 BoS, Minutes, 23 March 2016 (ESMA/2016/BS/110). 169 Moloney, ‘EU financial governance after Brexit’, n 21.

Building the Single Rule-book 133 The current generation of RTSs includes, for example, detailed rules governing which instruments must be cleared through CCPs and traded on trading venues; the exact percentage limits on the commodity positions which may be held by persons; and the particular levels of securitised derivatives trading that render that asset class liquid or illiquid and which drive the imposition of related trading transparency rules. These highly technical and instrument-specific RTSs have little in common with the broad rules previously associated with administrative rule-making in the pre-ESMA era, and their ability to shape markets is very significant. While these qualities can be found across the financial market administrative rule-book, they are particularly strongly associated with the two pillar financial market measures: EMIR; and MiFID II/MiFIR. The EMIR administrative rule-book provides the operational manual for the structure and operation of the EU’s over-the-counter (OTC) derivatives market, covering, for example: the classes of derivatives that must be cleared through CCPs; organisational, conduct, capital, and prudential requirements for CCPs; the risk mitigation requirements for non-cleared OTC derivatives; and the data to be reported to and published by the trade repositories that now collect derivatives market data. This dense matrix of administrative rules is reshaping the structure of the EU derivatives market.170 ESMA’s role in the development of this regime has been well captured by ESMA Chair Maijoor’s characterisation of ESMA’s EMIR activities as supporting an ‘OTC Derivatives Union’ within which there is a high level of regulatory and supervisory consistency.171 The scale of ESMA’s influence on this new ‘Union’s’ transformative rule-book is underscored by the Commission’s endorsing, without change, the vast bulk of the highly detailed RTSs submitted by ESMA under EMIR. The MiFID II/MiFIR rule-book is similarly transformative. It is reshaping EU bond and derivatives markets, and how dealers and liquidity providers behave in these markets, by imposing trading transparency requirements; driving share trading from OTC bilateral trading to regulated trading venues; and changing long-established business practice through new conduct rules, which are shaping, for example, how investment research is paid for by asset managers and how investment advisers are remunerated by clients.172 Detailed MiFID II/MiFIR administrative rules, on which ESMA has been the primary influence, are the means through which this change is being effected.

C. The Administrative Rule-book and ESMA’s Effectiveness This chapter examines ESMA’s effectiveness as a regulatory governance actor in relation to its ability to deploy its powers in a technically informed, responsive, and agile manner 170 For an assessment of the transformative effect of EMIR on how derivatives markets operate, see, eg, ESRB, Market Liquidity and Market-Making (2016); and FCA, Analysing the Impact of EMIR Variation Margin Requirements (2017). 171 ESMA Chair Maijoor, Statement to the European Parliament ECON Committee, 14 September 2015 (ESMA/2015/1349). 172 See, eg, D Busch and G Ferrarini (eds), Regulation of the EU Financial Markets (Oxford University Press, Oxford, 2017). For a regulatory perspective on the potential for MiFID II/MiFIR-related market/trading disruption, see ESRB, n 170. Initial indications from early 2018 were that market disruption was less than feared, and in June 2018 ESMA Chair Maijoor suggested that the evidence pointed to liquidity’s not being weakened by the transparency-related reforms: Speech on ‘MiFID II Implementation – Achievements and Current Priorities’, 21 June 2018.

134 ESMA and Regulatory Governance that can support the EU interest but also reflect NCA experience and deliberation, and that allows ESMA to navigate its procedural and institutional environment in a manner that does not disrupt achievement of its mandate. By the end of 2017, administrative rule production for the EU financial market had peaked with the completion of the MiFID II/MiFIR process. It remains to be seen how these new rules will fare in practice and over time. There is, however, much that is attractive from an ESMA effectiveness perspective from the evidence from this period as to ESMA’s technically informed and in particular data-informed approach to rule design, responsive consultation practices, and agile processes, including in relation to rule revisability, and also as to deliberative NCA decision-making and the injection of national experience. While there are weaknesses, by and large ESMA’s expanding technocratic influence does not appear to be generating material effectiveness risks.

i. Data Informed Technically informed regulatory design requires close engagement with relevant data. The ESMA Regulation requires ESMA to engage in impact assessment when designing BTS proposals (and guidelines), and in practice the Commission typically requires ESMA to engage in impact assessment when mandating it to provide technical advice. The 2017 ESA Proposal seeks to strengthen impact assessment further through an obligation on ESMA to have due regard to the principles of better regulation, including on impact assessment.173 ESMA appears to have embraced its mandate to engage in data-informed regulatory design. Although calls for better impact assessment are a perennial feature of ESMA reviews,174 ESMA’s ability to adopt a data-informed approach to regulatory design has strengthened over time as its data capacity has become more sophisticated (as discussed in chapter 4). The path-finding 2011 AIFMD Delegated Act/technical advice process was not a data-rich one, given ESMA’s difficulties in gathering relevant market data.175 Similarly, ESMA’s technical advice on the 2012 Short Selling Regulation rules did not benefit from a secure empirical basis,176 although its advice was subject to internal empirical review and drew, to the extent available, on market intelligence and experience.177 The 2012 EMIR process was also challenging for ESMA, given the lack of relevant data on the derivatives markets,178 although market data, to the extent available, as well as market experience, were used by ESMA over the EMIR rule development process.179 173 2017 ESA Proposal, n 2, ESMA Regulation, Art 8. 174 Most recently, 2017 ESA Consultation, n 3, 20. 175 ESMA’s cost–benefit assessment was sketchy and short on quantitative analysis, reflecting the difficulties ESMA experienced in sourcing quantitative evidence during its related consultations: ESMA/2011/379, Annex II. 176 Both the Commission and ESMA noted the paucity of available evidence: Commission, Delegated Regulation 918/2012 Impact Assessment (SWD (2012) 198) 33. 177 eg, the proposed liquidity threshold at which NCAs could suspend the Short Selling Regulation’s requirement for sovereign debt short sales to be ‘covered’ was tested by ESMA against real sovereign debt histories to assess its resilience: ibid, 38. 178 In its EMIR technical advice ESMA noted the difficulties it had in obtaining sufficient data to perform an in-depth quantitative impact assessment: ESMA/2012/600, 7 and Annex VIII, 2. 179 ESMA/2012/600, 7.

Building the Single Rule-book 135 By the time of the 2014 MiFIR II/MIFIR process, however, ESMA was benefiting from the EMIR-related enhancement of market data, and also from a strengthened internal capacity to gather and interrogate data. This was particularly the case in relation to ESMA’s development of the administrative trade transparency rules for nonequity asset classes, which are among the most contested and transformative of the MiFID II/MiFIR reforms given their novelty and their market-shaping effects. While relevant data on trading activity in many non-equity asset classes were, at the time of the MiFID II/MiFIR rule development process, limited and fragmentary, derivatives market data had been significantly strengthened by EMIR. ESMA’s related RTS proposals180 accordingly reflected this emerging data-set. They were also informed by ESMA’s application of bespoke models and analytics,181 external technical support,182 and detailed cost–benefit assessment.183 The 2014 PRIIPs Regulation process, to take another example, was informed by a rich data-set, which included technical input from a specially constituted Consultative Expert Group, an impact assessment, and an extensive market study184 commissioned by the Commission but in relation to which ESMA had significant input.185

ii. Consultation ESMA has also developed responsive consultation practices, which provide a further means for supporting a technically-informed and data-rich approach to rule design. ESMA typically consults through calls for evidence, policy papers, and open hearings, as well as through consultation with relevant Consultative Working Groups and its Stakeholder Group.186 It provides feedback on its consultation processes, most fully in its final technical advice/BTS proposals, although ESMA also provides feedback as its policy position develops across consultations. ESMA’s first major consultation, under the 2011 AIFMD technical advice process, for example, included an initial call for evidence, two Consultation Papers, and two open hearings.187 In ESMA’s early days consultation was operationally difficult at times, particularly in the thick of the crisis era reform period, as was the case with the 2012 Short Selling Regulation administrative rules, where only three weeks were available for consultation on ESMA’s proposed BTSs and technical advice.188 The later 2014 180 ESMA/2015/1464. 181 These models were examined and applied across two extensive Consultation Papers (ESMA/2014/548 and ESMA/2014/1570). 182 ESMA engaged an external contractor to prepare an in-depth impact assessment and gather data: ESMA/2014/548, 13. 183 Annexed to ESMA/2015/1464 (Annex II) and running to over 700 pages. The data sources used included market responses to two earlier Consultation Papers, as well as responses to a specific cost–benefit questionnaire that was designed to elicit detailed and meaningful data and which incorporated in its design industry feedback from a related ESMA/industry workshop. 184 ESMA, EBA, and EIOPA, Final Draft Regulatory Technical Standards (JC 2016 21) 3. 185 Study by London Economics and Ipsos for the European Commission, Consumer Testing Study on Possible New Format and Content for Retail Disclosures of Packaged Retail and Insurance-based Investment Products (2015). 186 See further ch 2. 187 ESMA/2011/379, 7. 188 ESMA/2012/236, 5.

136 ESMA and Regulatory Governance MiFID II/MiFIR process, by contrast, involved an extensive sequence of stakeholder consultations, including initial Discussion and subsequent Consultation Papers on the proposed BTSs,189 a Consultation Paper on the technical advice,190 and public hearings. The development of ESMA’s approach to the new MiFIR trading transparency rules provides a useful case study of ESMA’s generally responsive and iterative approach throughout. With respect to ESMA’s proposed approach to the determination of whether particular non-equity asset classes were ‘liquid’ (which governs how the MiFIR transparency regime applies), for example, stakeholders expressed concern regarding the quality of the data being used by ESMA to make the liquidity assessments, the short data collection period, and a lack of granularity in the data – and thus as to a related insufficient calibration of the relevant proposed rules.191 In response, ESMA reflected some (not all) of the industry’s concerns, adopting, for example, a more granular and asset-class-specific approach to the assessment of liquidity192 and providing for liquidity thresholds to be re-assessed regularly.193 ESMA also made efforts to ‘clean’ the data it used and to work with key stakeholders where there were particular data difficulties.194 Since then, consultation has continued to shape ESMA’s approach to regulatory design. Its major 2018 technical advice on the Prospectus Regulation Delegated Acts, for e xample, contained extensive coverage of and feedback on the consultations in which ESMA engaged.195

iii. Agility and Revisability ESMA’s agility as regards regulatory governance is most easily evidenced by its responsive and multi-stranded soft-law activities (discussed in section V). But agility can also be identified in its attempts to drive revisions to administrative rules where market conditions so require. ESMA has, for example, sought revisions (only the Commission can revise an RTS) to an EMIR RTS on the derivatives-market data trade repositories must publish, following experience with how that RTS operated in practice and refinements to the related international standards that apply.196 ESMA has also, and similarly in light of market experience, proposed that three EMIR RTSs (which impose clearing obligations on identified classes of derivatives) be revised so that the ‘phase-in’ of these clearing obligations is extended for the smallest financial counterparties who have experienced difficulties in ensuring the relevant derivatives are cleared.197 ESMA’s ability 189 ESMA/2014/548, ESMA/2014/1570, and ESMA/2015/319. 190 ESMA/2014/549. 191 ESMA/2015/1464, 57. 192 ESMA’s approach to bond market liquidity, eg, changed over the BTS development process in part in response to stakeholder feedback. ESMA ultimately proposed a regulatory solution based on an ‘instrumentby-instrument’ model (see n 211), which was designed to more appropriately reflect observed liquidity levels in the bond markets: ibid, 94–97; and ESMA Chair Maijoor, ECON Scrutiny Speech – MiFID 2, 10 November 2015. 193 Bond liquidity is reassessed at the end of every quarter, based on the previous three months’ activity (ESMA, MiFID II Briefing on Investment Firms Topics (ESMA/2015/1469). 194 ESMA Executive Director Ross, ‘Keynote Speech’, 9 June 2015. 195 ESMA31-62-800. ESMA engaged in three separate consultations on different aspects of its technical advice. 196 ESMA70-151-370. 197 ESMA/2016/1565.

Building the Single Rule-book 137 to identify and drive rule revisions in response to market conditions can be expected to strengthen, particularly in relation to MiFID II/MiFIR which is likely to generate unintended consequences. Even prior to the regime’s coming into force in early 2018, though, ESMA was already identifying potential loopholes that threatened to subvert key MiFID II/MiFIR legislative design decisions, and proposing remedial revisions to administrative rules.198 ESMA’s appetite for revising rules can also be associated with its strengthening data-gathering capacity; it is not unusual for ESMA to highlight that it will revisit an issue once data are more complete.199 There are limits to ESMA’s ability to drive nimble and responsive revisions to the administrative rule-book it has shaped. The RTS process that governs most of the administrative rule-book can be lengthy and cumbersome, and is ill-suited to the speedy revisions or suspensions which may be required by market conditions. For example, it is not possible under the ESMA Regulation for ESMA to withdraw or suspend the EMIR CCP clearing obligation from a particular derivative instrument (this obligation takes the form of an RTS) where market conditions, such as the default of the CCP that clears the derivative, so require. Counterparties could, however, face significant risks were they required to clear instruments which could not, in practice, be so cleared. To take another example, the MiFID II/MiFIR transparency rules (primarily in the form of RTSs) may require suspension if unforeseen and market de-stabilising liquidity contractions are generated by the new rules, but this is not easily achieved under the RTS process. The 2018 application of the PRIIPS Regulation provides another example of how the complex and transformative nature of administrative EU financial market regulation can require speedy revisability. In the first days of the regime’s application a modelling defect emerged deep within the PRIIPs Regulation disclosure methodology (contained within an RTS), which led to heavily distorted (but still mandatory) product provider disclosures of potential product returns in the region of millions of per cent – raising acute industry concern as to mis-selling risks.200 ESMA has highlighted the need for an expedited RTS withdrawal/suspension process. During the Commission’s 2015 EMIR review it called for the introduction of a bespoke, expedited RTS withdrawal process, which would allow it to make a decision (through its Board of Supervisors) withdrawing an RTS imposing a CCP clearing obligation, subject to procedural conditions.201 During the 2017 ESA Review it called

198 In November 2017, eg, ESMA proposed amendments to a MiFID II/MiFIR RTS on the ‘systematic internaliser’ (SI) trading regime (for investment firms that internally execute trades for clients on a large scale and are akin to trading venues), which are designed to achieve greater alignment between the trading venue and SI regimes in the treatment of ‘tick sizes’ (or the minimum increments in which trade prices move), following evidence that SIs, who are not subject to minimum tick sizes, might be benefiting from an unfair competitive advantage over trading venues, and that the MiFID II/MiFIR policy objective of ensuring trades are not diverted from the major trading venues might be subverted: ESMA, Consultation Paper on RTS 1 (ESMA70-156-275) (2017). 199 ESMA has, eg, indicated that it may revisit its 2017 technical advice to the Commission on its review of the short-selling regime, given the limited feedback it received and pending experience with the MiFID II/ MiFIR regime and its impact on short-selling: Statement by Executive Director Ross, ECON Committee, 22 February 2018 (ESMA70-145-441). 200 C Flood, ‘Mis-selling Fears Erupt over ‘Returns of 1m% plus’, Financial Times (14 January 2018); and EFAMA, ‘EFAMA Alerts that the new PRIIPs rules will Confuse and Mislead Investors’, December 2017. 201 2015 ESMA EMIR Review Report No 4, n 166, 8–10.

138 ESMA and Regulatory Governance more generally for a power to suspend the application of administrative rules through some form of ‘no action letter’ power.202 While the Commission is accommodating of some change, it appears supportive only of limited reforms that protect its own institutional prerogatives. The 2016 CCP Recovery and Resolution Proposal proposes a new mechanism for suspending an RTS which imposes a clearing obligation where a CCP is in resolution and unable to clear,203 based on the CCP resolution authority’s requesting a suspension from ESMA,204 who must (within 24 hours) issue an opinion, following which the Commission (within 48 hours) can temporarily suspend the relevant RTS. A similar procedure, subject to tightly confined conditions, has been proposed under the 2017 EMIR Reform Proposal for situations outside the resolution context.205 In both cases, the RTS suspension decision would rest with the Commission and not ESMA. However functionally appealing, an independent ESMA power to suspend an RTS would imply the exclusion of the Commission, European Parliament, and Council, all of which would have been formally engaged in the original RTS adoption process, and is unlikely to gather institutional support – the Parliament has already been quick to signal its concerns as regards any conferral of RTS suspension powers even on the Commission.206 The Meroni difficulties are also significant, given the degree of discretion an independent suspensive power would confer on ESMA. ESMA’s capacity to support revisability is accordingly likely to remain a function of its ability to identify difficulties and drive the current process for revising administrative rules. In an indication of its entrepreneurial bent, ESMA is, however, beginning to deploy its soft powers to informally suspend the application of rules, in a form of de facto ‘no action’ jurisdiction which, whatever its functional attractions, poses legitimation risks, as noted in section V.

iv. Expert Deliberation and the Injection of National Experience ESMA’s ability to act in the EU’s interest can be implied from its technically informed approach, its commitment to consultation, and its growing capacity to support revisability. It can also be seen in the extent to which NCA experience, but also expert deliberation, appears to shape rule development. The Board of Supervisors is designed to operate as a deliberative, expert forum (although, as discussed in chapter 2, there is also a national- and peer-oriented legitimation quality to the Board), and in practice it appears to adopt a deliberative posture when taking decisions on technical advice and BTS proposals. Board of Supervisor minutes provide some insight into how decisionmaking operates, although this insight is limited, as most development work takes place at the subordinate Standing Committee (SC) level, which is not transparent. Although the Board will typically discuss major themes at an early point in the rule design process 202 ESMA, Response to the 2017 ESA Consultation (ESMA03-173-194) 7–8. It made a similar call in its response to the Commission’s mid-term review of the CMU agenda: ESMA, Response to the Commission CMU Mid-Term Review (ESMA31-66-147) (2017) 3. 203 COM (2016) 856, inserting a new Art 6a into EMIR. 204 Conditions apply, including that the suspension is necessary to avoid a serious threat to financial stability. 205 COM (2017) 208, inserting a new Art 6b into EMIR. 206 ECON Draft Report on the EMIR Review, 26 January 2018 (2017(0090)COD), amendment 16 (noting that any expedited amendment of an EMIR RTS would require consultation with the co-legislators).

Building the Single Rule-book 139 and before SC positions have crystallised,207 it is usually only once the SC process has become advanced that Board of Supervisor discussions take place. Nonetheless, Board minutes provide something of a window into decision-making. A review of Board minutes over 2011–18 suggests that formal votes and direct contestation are rare. The overwhelming majority of decisions are taken by consensus, with the minutes simply noting that Consultation Papers and final versions of technical advice or proposed BTSs are adopted or approved. An early set of minutes report, for example, that ESMA’s technical advice on the 2011 AIFMD (ESMA’s first major set of technical advice) was, despite its sensitivity, simply approved, and do not note points of difference;208 this may suggest a careful approach to minute publication at this very early stage of ESMA’s development, and may also mask high levels of SC contestation. But it is unlikely that major differences would not have been reported in the minutes. A formal voting record (tabulating abstentions, for, and against) does not appear in the minutes until those of 24–25 September 2015, and in relation to the MiFIR trade transparency RTS, showing that NCAs were split on how best to calculate the different liquidity levels which drive the transparency regime.209 Since then, while voting tables do occasionally appear in the minutes, they remain exceptional, with the vast majority of BTS/technical advice proposals being noted as approved or adopted. The absence of formal votes and the evidence of only limited dissent could suggest passivity rather than deliberation – but it may equally indicate a lack of disruptive, nationally-driven contestation, particularly as minutes frequently note that a wide range of technical issues is discussed, reducing the likelihood that the Board is passive. The MiFID II/MiFIR process, for example, saw NCAs discuss a range of regulatory design choices, including in relation to the MiFID II inducement rules, where the Board made a number of changes to the technical advice proposals developed by the relevant SC.210 The Board also assessed in detail the quantitative regulatory design choices required in relation to the MiFID II/MiFIR bond market transparency regime.211 The EMIR BTS proposals were similarly discussed in some technical detail by the Board,212 as were ESMA’s draft technical advice and BTSs on the Short Selling Regulation.213 Contestation is not absent, as the occasional appearance of voting tables suggests,214 but overall the Board appears to operate in a broadly deliberative manner. 207 The Board was engaged at a very early stage in the development of the MiFID II/MiFIR proposals, eg: BoS, Minutes, 19 March 2014 (ESMA/BS/2014/60), which note discussion of initial path-finder papers from the relevant SC. 208 BoS, Minutes, 8 November 2011 (ESMA/BS/2011/233). 209 BoS, Minutes, 24–25 September 2015 (ESMA/BS/2015/202). See further n 211. 210 eg Bos, Minutes, 20 May 2014 (ESMA/BS/2014/89). 211 eg BoS, Minutes, 17 December 2014 (ESMA/BS/2015/4). The minutes suggest significant Board deliberation on whether the liquidity thresholds that govern the MiFIR bond transparency rules should have been derived from data on an ‘instrument by instrument approach’ (IBIA) or ‘class of financial instrument approach’ (COFIA). See, eg, BoS, Minutes, 7 May 2015 (ESMA/BS/2015/90) and Minutes, 24–25 September 2015 (ESMA/BS/2015/202), recording, unusually, the results of a vote on this issue, which saw five NCAs disagree with the majority (IBIA) position. 212 eg BoS, Minutes, 17 April 2012 (ESMA/BS/2012/66). 213 ibid; and 11 September 2012 (ESMA/BS/2012/96). 214 The minutes occasionally record specific instances of NCA dissent during discussions: eg BoS, Minutes, 17 December 2014 (ESMA/BS/2014/4) reporting on the objections of France and Germany to the MiFID II technical advice on the inducement rules.

140 ESMA and Regulatory Governance

v. Institutional Sensitivity Finally, as suggested in section IV.B.i, ESMA is developing the ability to navigate its institutional environment deftly. Flashpoints have arisen, but ESMA has proved a nimble institutional actor, protecting its prerogatives but showing a willingness to engage responsively with its institutional stakeholders.

D. The Administrative Rule-book and Legitimation While these indicators of ESMA’s effectiveness support output legitimation, the reach of ESMA’s influence demands that the multiple legitimating arrangements outlined in chapter 2 (input and procedural as well as output-oriented) are meaningful. Some weaknesses can, however, be identified. ESMA’s regulatory governance activities are structured ex-ante by legislative mandates for BTS proposals and by (informal) Commission mandates for technical advice. But accountability over mandate compliance can be patchy. Administrative rules advised on/proposed by ESMA and adopted by the Commission are subject to ex-post judicial review by the Court of Justice under Article 263 TFEU, but this has yet to emerge as a meaningful form of accountability review.215 Institutional accountability is emerging as a more muscular form of oversight. While the Council and European Parliament act as accountability fora for ESMA, the Parliament, reflecting its institutional interests in administrative rule-making, has emerged as most concerned to hold ESMA to account as regards its role in the administrative rule-making process. Its January 2016 Stocktaking Resolution on the Commission’s review of EU financial regulation216 is indicative. While broadly supportive of ESMA, the Resolution called on ESMA and the Commission to ensure they operated within their empowerments, raised concerns as to the implications of the new ESMA/Commission ‘early review’ process for the Parliament’s BTS oversight powers, and called for more transparency over internal ESMA decision-making and for the Parliament to be provided with early drafts of proposed BTSs and technical advice.217 The Parliament has also deployed its accountability function as budgetary discharge authority to challenge ESMA as regards its role in administrative rule-making. Its 2017 decision discharging the 2015 budget, for example, called on ESMA to provide better insight into how its Board of Supervisors makes decisions, and highlighted the need to keep the Parliament and Council informed in a timely, regular, and comprehensive manner.218 At the heart of ESMA’s legitimation arrangements, however, are the bespoke

215 See further ch 2. 216 European Parliament, Resolution on Stocktaking and Challenges of the EU Financial Services Regulation, 19 January 2016 (P8_TA(2016)0006). 217 ibid, paras 48 and 52. 218 European Parliament, Resolution on Discharge of the ESMA 2015 Budget, 27 April 2017 (P8_TA_ PROV(2017) 177). The 2014 discharge resolution had a similar tone, admonishing ESMA for not keeping the Parliament adequately informed in a ‘sufficient and comprehensive’ manner, and regretting that a draft regulatory text had been leaked to the Member States and third party stakeholders but not given to the Parliament: European Parliament, Resolution on Discharge of the 2014 ESMA Budget, 28 April 2016 (P8_TAPROV(2016) 181).

Building the Single Rule-book 141 procedural and oversight requirements that apply to its technical advice on Delegated Acts and to its proposed RTSs.219

i. Technical Advice The Commission only rarely rejects ESMA’s technical advice on Delegated Acts, but it is not a passive recipient either, as noted in section IV.B.i.220 Further, the 2016 Interinstitutional Agreement on Better Law Making,221 which supports oversight by the Council and Parliament of the Commission’s adoption of Delegated Acts, indirectly facilitates oversight of the ESMA technical advice that shapes Delegated Acts. At the core of the 2016 Agreement is the Commission’s commitment to consulting with Member State experts (in the financial markets sphere this takes place through the European Securities Committee (ESC)222 or a specialist expert group).223 The ‘Common Understanding’ annexed to the Agreement amplifies this commitment by affirming the Commission’s commitment to: consulting with national experts in a timely manner; reporting on the outcomes of these consultations; allowing national experts the opportunity to react where a draft Delegated Act is changed materially; transmitting all documents sent to national experts to the Council and Parliament; and supporting the Council’s and Parliament’s participation in expert group meetings.224 The Commission’s Explanatory Memorandum to the three MiFID II/MiFIR Delegated Acts indicates that consultation with national experts and with the Council and Parliament is now embedded in the Delegated Act process.225 ESMA’s technical advice is accordingly subject (if indirectly) to challenge and contestation by national experts, and by the Council and Parliament. Alongside the 2016 Interinstitutional Agreement is a series of financial servicesspecific arrangements and commitments that also support indirect review of ESMA’s role in rule-making.226 These practices, recommended by the Council’s Financial Services Committee (FSC), derive from Member State concern that, given the increasing volume of financial administrative rule-making, improvements were needed to the Commission’s Delegated Act (and RTS) processes to make them more efficient, transparent, and streamlined, and fit to cope with an increasingly voluminous mass of rules.227 The FSC

219 These two classes of ESMA measure pose most challenges for legitimacy given the quasi-legislative colour of Delegated Acts and RTSs. In practice, Implementing Acts and ITSs have not (reflecting their more limited use and impact) generated material institutional or stakeholder concern as regards legitimation. See, eg, Council, Financial Services Committee, FSC Report on Level 2 Processes, 27 June 2015 (Council Document 1759/15) 4. 220 The Commission’s concern to engage proactively with ESMA on rule-making can be traced in its relations with all three ESA. See Centre for European Policy, European Supervisory Authorities. Room for Improvement at Level 2 and Level 3, Study on behalf of the fpmi Munich Financial Centre Initiative (2016) 19. 221 See n 65. 222 The ESC is chaired by the Commission and composed of national representatives, usually of finance ministries. It can also, as noted earlier, act as a comitology oversight committee for the adoption of Implementing Acts. 223 2016 Interinstitutional Agreement on Better Law Making, n 65, section V, para 28. 224 ibid, Annex, Common Understanding between the European Parliament, Council and Commission on Delegated Acts, section II. 225 See n 140. 226 Set out in 2015 June FSC Report, n 219; and 2015 July FSC Report Endorsement, n 134. 227 2015 June FSC Report, n 219, 3 and 7.

142 ESMA and Regulatory Governance was also concerned as to a lack of systematic consultation by the Commission over the rule-making process, the diversity of ways in which expert groups were handled, and a lack of transparency regarding Commission deviations from ESA advice.228 The FSC accordingly recommended mandatory Commission impact assessments where Delegated Acts were expected to have significant impact; consultations with national experts and receipt of ESA technical advice as Delegated Acts were prepared; thorough consultation with national experts once a draft Act was settled; and explanations of any deviations from the ESAs’ technical advice.229 The FSC also called for ‘priority acts’ to be identified (based on their political sensitivity and potential to create significant impacts) and subject to enhanced oversight arrangements, including as regards national consultation.230 The FSC further highlighted the Council’s difficulties in objecting to Delegated Acts (given the need to form a QMV), and recommended enhancements to facilitate coordination between national delegations where a possible objection (as envisaged under Article 290 TFEU) was contemplated.231 The Parliament’s engagement with the Delegated Act process (and thereby with ESMA’s related technical advice) is similar to the Council’s, involving participation in the different expert groups and meetings organised by the Commission and the potential exercise of Article 290 objection powers. But the Parliament has also developed additional scrutiny mechanisms.232 The Parliament’s ECON committee, for example, organises regular ESMA scrutiny sessions on major Delegated Acts (such as those sessions arranged for the MiFID II/MiFIR process233), although levels of scrutiny tend to vary depending on the interests and preferences of different MEPs.234 There are also frequent ad hoc interactions between ESMA and the Parliament, including exchanges of letters and informal engagement during ESMA’s consultations.235 There is accordingly evidence of a Council/Parliament commitment to the ESAs’ technocratic function and to protecting their technical advice, but also of a commitment to providing meaningful oversight of the Commission’s adoption of Delegated Acts and thereby of the related technical advice provided by ESMA (and the other ESAs). While Council/Parliament vetoes of Delegated Acts (and indirectly of ESMA’s technical advice) are likely to remain a last-resort option, the proceduralistion of Delegated Act scrutiny by the Parliament and Council is becoming thicker and so bringing more oversight, if indirectly, of ESMA’s technical advice. This is not to suggest that direct political contestation and review is now a significant feature of the Delegated Act oversight process and, indirectly, of the technical advice scrutiny process.236 The very limited evidence of 228 ibid, 8. 229 ibid, 10. 230 ibid, 14. 231 ibid, 20–22. 232 The European Parliament’s stronger engagement (as compared to the Council’s) has been associated with the identity between MEPs assigned to scrutinise Delegated Acts/RTSs with those originally involved with the negotiations on the related legislative measure: 2016 CEP Report, n 220, 37. 233 See, eg, ECON MiFID II/MiFIR Scrutiny Sessions 21 June 2016 (ESMA/2016/940); 10 November 2015 (ESMA/2015/1639); 15 July 2015 (ESMA/2015/1133); and 16 June 2015 (ESMA/2015/936)). 234 2016 CEP Report, n 220, 33. 235 ibid. 236 On the deliberative nature of administrative rule-making, see, eg, R Dehousse, A Fernández Pasarín, and J Plaza, ‘How Consensual is Comitology?’ (2014) 21 Journal of European Public Policy 842.

Building the Single Rule-book 143 Council/Parliament contestation on or veto of Delegated Acts, and the emphasis on the Commission engaging ex-ante with national experts, suggests a deliberative process driven by technical expertise. Given that the Delegated Act process is designed to deliver technical rules, this form of legitimating oversight of ESMA’s technical advice has attractions, particularly as it is likely to minimise disruption of the administrative process by intergovernmental/political contestation, which is best located in the legislative process. The nuclear option of objection/veto remains available to the Council and Parliament.

ii. Draft RTSs Oversight of ESMA as regards its draft RTSs is more direct and transparent. The Commission appears to have developed a productive relationship with ESMA, but does not shy away from revising/rejecting draft RTSs, albeit usually in exceptional circumstances and typically where mandate concerns arise, as discussed in section IV.B.i. The European Parliament has similarly proved to have an appetite for challenge. It flexed its RTS oversight powers for the first time over the EMIR process, when the Parliament’s ECON committee threatened to veto the swathe of EMIR RTSs on substantive grounds (including lack of proportionality) as well as on procedural grounds (related to the Commission’s failure to communicate effectively with the Parliament).237 A plenary debate on the ECON veto motion was averted by an ECON/Commission compromise, under which the Commission acknowledged the Parliament’s concerns, committed to enhancing communication, and agreed to phase in certain of EMIR’s obligations.238 Nonetheless, the episode marked the emergence of the Parliament as an engaged actor within the ESMA Regulation’s oversight scheme for RTS adoption, as was also signalled by the 2013–14 ESA Review.239 More recently, the extensive MiFID II/MiFIR RTS process, while characterised by close engagement between ESMA and the Parliament including through multiple scrutiny sessions,240 was relatively smooth. The threat of a Parliamentary veto of an RTS did not crystallise until 2016 and the PRIIPs RTS process. The PRIIPs Regulation requires the production of a summary ‘Key Information Document’ (KID) for a wide range of packaged investment products; the very detailed rules governing the KID’s content and format were to be contained in RTSs proposed by all three ESAs. In September 2016, the Parliament, for the first time since the 2011 establishment of the RTS process, vetoed the draft RTS package on substantive grounds,241

237 ECON Committee, Motion for a Resolution, 4 February 2013 (B7-0078/2013). 238 Statement to the European Parliament by Commission Member Hedegaard, 7 February 2013. 239 Over which the European Parliament warned, eg, of the importance of its receiving timely responses to any queries it raised on draft BTSs: European Parliament, Resolution with Recommendations to the Commission on the ESFS Review, 11 March 2014 (P7_TA(PROV)(2014)0202), Detailed Recommendations. 240 See n 233. 241 Including in relation to how the RTSs dealt with complex PRIIPs containing multiple investment options; ‘performance scenarios’ (the Parliament wanted greater emphasis on the losses that could arise); and the required ‘comprehension alert’ (on which the Parliament wanted more guidance): European Parliament, Objection to a Delegated Act: Key Information Documents for Packaged Retail and Insurance-based Investment Products, 14 September 2016 (PS_TA(2016)0347).

144 ESMA and Regulatory Governance generating significant market consternation.242 The subsequent RTS revision process was not straightforward. The Commission’s proposed revisions, designed to meet the Parliament’s concerns,243 struggled at the ESA level. While EBA and ESMA approved the revisions (albeit through a QMV), the EIOPA Board of Supervisors was not able to reach agreement, and the RTS package was ultimately adopted without ESA agreement and alongside material ESA concern that certain of the Parliament-required revisions could lead to misleading disclosures.244 While the saga has troubling legacies (including that the Parliament overrode an ESA consensus position on technical regulatory design issues of significant complexity, which had been informed by extensive consultation and data assessment; and that the ESAs were compelled to publicly convey their concerns to the Commission as to the potentially market-misleading effect of the revisions), it points to active Parliament oversight of the RTS process. The Council’s role has been less publicly prominent, although the FSC recommendations that now apply to the RTS process suggest a Council concern to ensure meaningful oversight. The FSC focused in particular on ensuring that the Commission appropriately notifies an ESA once it has amended a draft RTS, and that the Commission does not make RTS amendments it characterises as non-material and as not requiring ESA notification – a practice the FSC regarded as creating a grey zone of uncertainty.245 The FSC recommended accordingly that the Commission put in place an ‘early warning system’ for notifying the Member States, Council, Parliament, and the relevant ESA that it intended to deviate from a draft RTS, and that it systemically transmit any amendments to the responsible ESA. The Commission for its part committed to improving cooperation with the ESAs, particularly as regards any technical amendments made to RTSs by the Commission’s ‘lawyer-linguists’.246 The FSC recommended further that for ‘high priority’ RTSs, Member State experts should be consulted by the Commission on the draft RTS once submitted by an ESA, and that expert consultation should also follow where the Commission planned to introduce a material amendment to a draft RTS.247 The FSC also, however, called for closer engagement by the ESAs with the Council (similar to the engagement the ESAs have with the Parliament’s ECON Committee), and invited the ESAs to discuss their progress on ‘high priority’ draft RTSs with the Council.248 While the Council is accordingly concerned to protect ESMA’s technocratic role, it also clear that these recommendations are designed to ensure closer Council oversight of ESMA over the RTS process. There are no easy solutions to the legitimation conundrum generated by ESMA’s role in financial market administrative rule-making. On the one hand, its technocratic role must be protected, on the other it is not a rule-maker and oversight must be active and meaningful. In practice, the legitimation arrangements within which ESMA operates, while not optimal, are proving to be adaptive, dynamic, and flexible as the institutions respond to ESMA and develop new means for ensuring adequate oversight – if, at

242 A

Mooney, ‘Industry Frustrated by EU Retail Regulation Saga’, Financial Times (9 January 2017). Letter to the ESA Chairs, 10 November 2016. EBA, and ESMA, Letter to the Commission, 22 December 2016 (ESAs 2016 81). 245 2015 June FSC Report, n 219, 10–11. 246 ibid, 20. 247 ibid. 248 ibid, 12. 243 Commission 244 EIOPA,

Building the Soft Law Rule-book 145 times, indirectly. The PRIIPs fracas remains an exception as the only example so far of a full-scale veto by the Parliament of an ESMA-proposed RTS, but it also signals that veto (whether of an RTS or a Delegated Act) is a credible threat.

V. Building the Soft Law Rule-book: ESMA as the Designer and Custodian of EU Financial Market Soft Law A. Procedural and Institutional Context Non-binding soft-law measures, such as guidelines, Q&As/FAQs, ‘letters to CEOs’, and similar measures that amplify and explain rules, have long formed part of financial market administrative regulatory governance. Sitting outside the procedural and oversight formalities that apply to administrative rule-making, soft law affords financial market regulators a nimble means for speedily explaining, adjusting, and finessing regulatory governance in a complex and at times uncertain regulatory environment. Soft law can, for example, address how rules apply in practice and clarify complex regulatory methodologies; provide case studies and examples of best practice; clarify how regulation applies to emerging risks; send signals to regulated actors as to the regulator’s priorities; and address, at least temporarily, gaps which may emerge in binding rules. In EU financial market regulatory governance, ESMA soft law serves similar f unctions.249 But it also provides ESMA with a powerful tool for expanding its t echnocratic influence. When it adopts soft law, ESMA is not dependent on a prior legislative mandate or Commission mandate. ESMA is also free from most of the procedural and oversight mechanisms that apply to its technical advice and BTS functions. There are two main forms of soft law: ESMA Regulation Article 16 guidelines, which are subject to (thin) procedural control but which benefit from a ‘comply or explain’ hardening mechanism; and other soft measures adopted under Article 29, which are not proceduralised to any material extent.

i. Article 16 Guidelines Under the ESMA Regulation, Article 16, ESMA may, with a view to, first, establishing consistent, efficient, and effective supervisory practices within the ESFS, and, second, ensuring the common, uniform, and consistent application of EU law, issue guidelines and recommendations (hereinafter ‘guidelines’) addressed to NCAs or to financial market participants. A Board of Supervisors QMV requirement applies, reflecting the quasi-binding effect implied for Article 16 guidelines.250 Guidelines can be adopted by ESMA on its own initiative (in addition, EU legislation can and does provide mandates for guideline adoption) as long as the guidelines meet the two Article 16 ‘supervisory 249 The ESMA Regulation acknowledges the need for ESMA soft law: ‘[I]n areas not covered by regulatory or implementing standards, ESMA should have the power to issue guidelines and recommendations on the application of Union law’ (rec 26). 250 ESMA Regulation, Art 44(1).

146 ESMA and Regulatory Governance support’ and ‘consistent EU law application’ threshold requirements,251 and also come within the scope of its activities. Public consultation and impact assessment must be undertaken,252 and the Stakeholder Group consulted (Article 16(2)). ESMA cannot enforce its guidelines, but a hardening agent applies in that NCAs and financial market participants are injuncted to ‘make every effort’ to comply with guidelines (Article 16(3)).253 A stronger hardening effect comes from the ‘comply-or-explain’ requirement, which allows ESMA to mould its guidelines into national binding rules or embedded NCA supervisory practices. Within two months of an Article 16 measure’s being issued, each NCA must confirm whether it complies or intends to comply; where it does not comply, or intends not to comply, it must inform ESMA, providing reasons (Article 16(3)). ESMA must publish any NCA non-compliance (or intended non-compliance) and, on a case-by-case basis, may publish the relevant NCA’s reasons (Article 16(3)); in practice, ESMA publishes NCA compliance status in its regularly updated online compliance tables.254 ESMA must also address NCA compliance in its Annual Report to the Council, European Parliament, and Commission; identify noncompliant NCAs; and outline how it ‘intends to ensure’ that NCAs follow Article 16 measures in the future (Article 16(4)).255 In practice, guidelines typically direct NCAs to comply by incorporating the guidelines in their supervisory practices and to notify ESMA of their compliance – or reasons for non-compliance – within two months of the guidelines’ publication:256 the absence of reasons is interpreted as non-compliance.257 The comply-or-explain mechanism accommodates NCA non-compliance and national variation, allowing NCAs, perhaps defeated under a QMV, to disregard certain guidelines it and explain the non-compliance by reference to, for example, local market conditions or a difference of interpretation. But the public quality of the ‘explain’ element and the related ESMA reporting requirements makes it more difficult for NCAs to disregard Article 16 guidelines on narrow national interest grounds that are not easily justifiable. ESMA regards its guidelines as being of a different order from simple statements of best practice,258 and they are viewed by the regulated sector as having de facto 251 The Commission is of the view that both requirements must be met: 2013–14 Commission ESA Review Report, n 33, 5. 252 Although only ‘where appropriate’, and consultations and impact assessment exercises must be proportionate to the scope, nature, and impact of the measures. 253 ESMA may also, at its discretion, require financial market participants to ‘report in a clear and detailed way whether they comply’ with Art 16 measures; typically, ESMA guidelines simply repeat the Art 16(3) injunction to financial market participants to ‘make every effort’ to comply. 254 Available at https://www.esma.europa.eu/convergence/guidelines-and-technical-standards. 255 These different obligations are met by means of ESMA’s Annual Report disclosures, which include reference to ESMA’s compliance tables (eg, ESMA, Annual Report on 2017 (2018) 26). 256 For recent examples under MiFID II/MiFIR, see ESMA Guidelines on the Management Body of Market Operators and Data Reporting Services Providers (ESMA70-154-271) (2017) 6; and ESMA/EBA Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders (ESMA71-99-598) (2017) 16. 257 In some (relatively rare) cases NCAs report on their ‘intention to comply’. Where an NCA has not moved from this status as at the date the guidelines apply, it is recorded as non-compliant unless the guidelines relate to a type of institution or instrument that does not exist at the time in the Member State, or proceedings have been initiated to bring into force national measures to comply with the guidelines. 258 ESMA Chair Maijoor has noted that while guidelines are not binding, they are not best practice statements, and has underlined the Art 16 requirement that every effort should be made to comply: BoS, Minutes, 19 March 2014 (ESMA/BS/2014/60).

Building the Soft Law Rule-book 147 binding effect.259 The hard quality of Article 16 guidelines was also acknowledged at an early stage by the ESA Board of Appeal. In its first Decision it relied on EBA guidelines to interpret the (now repealed) 2006 Capital Requirements Directive I (CRD I) as potentially requiring relevant NCAs to impose suitability requirements on the management of a bank branch. EBA had argued that such an obligation was not required under CRD I, and that its related guidelines were not binding and could not extend the scope of EU law. The Board, however, found that even if the EBA guidelines were not binding, they were of practical relevance and assisted in the interpretation of CRD I.260 The Commission has similarly suggested that non-compliance with guidelines could indicate an underlying breach of EU law by an NCA.261 The hard quality of guidelines has been further intensified by ESMA’s subjecting guidelines to peer review.262 In practice, ESMA guidelines are only very rarely not complied with.263 Of the over 40 sets of Article 16 guidelines adopted by ESMA as at June 2018,264 only five of the 22 sets that have tables recording comply/explain status265 in fact record noncompliance. In three cases, only one NCA dissented: the Maltese NCA did not comply with elements of the 2013 AIFMD remuneration guidelines, on the grounds that it did not agree with ESMA’s interpretation of the classes of fund manager to which the AIFMD remuneration rules applied; the Dutch NCA recorded its non-compliance with the 2014 joint ESA guidelines on complaints handling, as it did not systematically use complaints data as a means for identifying risks; and the Danish NCA recorded its n on-compliance with the 2016 Undertakings for Collective Investment in Transferable Securities Directive (UCITS) remuneration guidelines, based on the Danish interpretation of the UCITS legislation.266 In only two cases has substantial non-compliance occurred. Seven NCAs recorded their non-compliance with ESMA’s 2014 guidelines on enforcement of financial information; these incidences do not indicate material NCA dissent, however, but rather national legal and other constraints, which meant that the NCAs in question were not empowered or able to comply.267 On only one occasion has there 259 See n 349. 260 SV Capital OÜ v EBA, Decision 24 June (BoA 2013-008). 261 The Commission was responding to the reporting by a group of NCAs of their non-compliance with ESMA’s 2013 guidelines on the exemption for market-makers under the 2012 Short Selling Regulation (Commission, Report from the Commission to the European Parliament and Council on the Short Selling Regulation (COM (2013) 885) 6). The Commission also indicated to ESMA that it might request it to take action (BoS, Minutes, 4 July 2013 (ESMA/2013/BS/125)). Ultimately, the non-compliance which, as noted below, remains unusual, was not subject to further action. 262 ESMA’s peer review power extends to assessments of the degree of convergence reached in the application of guidelines (ESMA Regulation, Art 30(2)(b)). Peer reviews have been undertaken of, eg, guidelines originally issued under the MiFID I regime (ESMA/2016/584 – Suitability Guidelines; ESMA/2015/592 – Automated Trading Guidelines; and ESMA42-111-4285 – Compliance Guidelines) and of the Complaints Handling Guidelines (ESMA/2015/1791). See further ch 4. 263 NCAs implement guidelines in different ways, including through binding administrative rules, soft circulars and other measures, and supervisory practices. See M van Rijsbergen, ‘On the Enforceability of EU Agencies’ Soft Law at the National Level: the Case of the European Securities and Markets Authority’ (2014) 10 Utrecht Law Review 116. 264 Tables available at https://www.esma.europa.eu/convergence/guidelines-and-technical-standards. 265 In some cases guidelines do not apply to NCAs (eg the rating agency guidelines, which are directed to the market) or are not yet required to be applied. 266 Guidelines Compliance Tables 2016/675, JC/2014/43, Appendix 1, and ESMA34-43-352, respectively. 267 The German NCA, eg, did not have legal authority to request certain enforcement action or to publicise certain enforcement decisions; the Croatian NCA noted that it could not comply as it did not have final

148 ESMA and Regulatory Governance been material substantive dissent. ESMA’s 2013 guidelines on the exemption for marketmaking activities under the 2012 Short Selling Regulation triggered non-compliance from five NCAs: Denmark (in part), France (in whole), Germany (in part), Sweden (in part), and the UK (in part).268 Although reasons varied, Denmark, Germany, Sweden, and the UK all shared the view that ESMA’s interpretation of the 2012 Short Selling Regulation, limiting the availability of the exemption, was incorrect (although the guidelines expressly refer to the Commission’s support of ESMA’s position). France refused to comply on entirely different grounds: it made its compliance conditional on all NCAs fully applying the guidelines to avoid competitive distortion between the French financial industry and that of other Member States. Article 16 guidelines have quickly become embedded within EU financial market regulatory governance. The co-legislators have regularly had recourse to Article 16 guidelines, charging ESMA with developing guidelines where a degree of standardisation was thought desirable but formal rule-making, whether through the Article 290/291 or BTS route, was not appropriate, given technical complexity or other constraints. For example, the AIFMD required the adoption of Article 16 guidelines on remuneration policies;269 EMIR required guidelines on CCP interoperability;270 and MiFID II/ MiFIR required five sets of guidelines.271 The majority of guidelines, however, are owninitiative ESMA measures. Of the 46 guidelines ESMA had adopted as at June 2018,272 27 were own initiatives by ESMA.

ii. Article 29 Measures ESMA can also adopt other soft measures without the Article 16 hardening agent or procedural requirements. Under the ESMA Regulation, Article 29, ESMA is empowered to adopt an array of ‘soft’ supervisory convergence measures that, in practice, have quasi-regulatory effects. Article 29 empowers ESMA to provide opinions to NCAs (Article 29(1)(a)); to contribute to the development of high-quality and uniform supervisory standards (Article 29(1)(c)); and to develop new practical instruments and convergence tools to promote common supervisory approaches and practices (Article 29(2)). Article 29(2), for example, has been used by ESMA as the basis for a range of soft-law measures, including extensive Q&As on the two pillar measures of EU financial market regulation – EMIR and MiFID II/MiFIR. ESMA maintains a regularly updated EMIR Q&A,273 as well as MiFID II/MiFIR Q&As on market structure,

enforcement responsibility on financial reporting; and the Swedish NCA noted that financial enforcement was formally the responsibility of market operators: ESMA 32-67-142 (2017). 268 Guidelines Compliance Table ESMA/2013/765. 269 AIFMD, Art 13(2). 270 EMIR, Art 54(4). 271 On cross-selling (MiFID II, Art 24(11)); distribution of complex debt instruments and structured products (Art 25(10)); board governance for market operators and data reporting services providers (Arts 45(9) and 63(2)); knowledge and competence requirements (Art 25(9)); and board member/key function holder suitability (Art 9(1)). 272 Excluding the six sets of MiFID I guidelines given the application of MiFID II/MiFIR from January 2018. 273 ESMA/2016/1176.

Building the Soft Law Rule-book 149 investor protection and intermediaries, commodity derivatives, and data reporting.274 All these Q&As provide typically detailed and often practically-oriented answers to questions submitted by stakeholders and NCAs, and are designed to support common supervisory approaches and practices.

B. ESMA’s Expanding Technocratic Influence i. The Reach and Style of Article 16 Guidelines Over 40 sets of Article 16 guidelines now amplify the single rule-book and expose the extent to which ESMA is exerting technocratic influence on how the single rule-book is applied in practice by NCAs. As at June 2018, guidelines had been adopted under: the AIFMD (four sets); the Central Securities Depositories Regulation (six);275 the credit rating agency regime (six);276 EMIR (seven); the Market Abuse Regulation (three); MiFID II/MiFIR (nine); the Money Market Fund Regulation (one);277 the Short Selling Regulation (one); the Transparency Directive (one);278 and the UCITS Directive (five).279 Two sets of cross-sectoral guidelines address complaints handling by regulated actors (adopted with EBA and EIOPA) and information exchange procedures between ESMA’s NCAs.280 There are no signs of the flood of guidelines ebbing. The co-legislators are continuing to mandate ESMA to adopt guidelines281 and ESMA’s own-initiative guidelines are ballooning.282 While the evidence that NCAs (and the market283) regard guidelines as being of quasi-binding status underscores the extent of ESMA’s influence, so does the nature of these measures. ESMA’s own-initiative guidelines are not dictated by legislative mandate, and so provide a useful insight into the purposeful and often expansionist manner in which ESMA uses the guideline tool and the nature and scale of its related technocratic influence. In the investment fund area, for example, ESMA’s guidelines are designed to amplify and clarify how the rule-book applies, have a strong, quasi-regulatory colour, and exert a thickening effect on the rule-book. The UCITS structured fund guidelines, for example, are designed to bring technical clarity and greater standardisation to risk management procedures in areas where the rule-book is silent and where Member

274 ESMA/70-872942901-38; ESMA35-43-349; ESMA70-872942901-28; and ESMA70-1861941480-56. 275 Regulation (EU) No 909/2014 [2014] OJ L257/1. 276 The EU’s rating agency regime is split across four legislative measures, one of which (the 2011 Credit Rating Agency Regulation (EU) No 513/2011 [2011] OJ L145/30) confers supervisory power on ESMA. References in this book are to the Commission’s informal consolidation of the texts in the Consolidated Credit Rating Agency Regulation (CCRAR) (ELI: available at http://data.europa.eu/eli/reg/2009/1060/2015-06-21). 277 Regulation (EU) No 2017/1131 [2017] OJ L169/8. 278 Directive 2004/109/EC [2004] OJ L390/38. 279 Directive 2009/65/EC [2009] OJ L302/32. 280 JC/2014/43 and ESMA/2014/298. 281 The 2016 Benchmark Regulation, eg, mandates ESMA to adopt guidelines for non-significant benchmarks (being consulted on through ESMA70-145-105). 282 ESMA’s 2018 Supervisory Convergence Work Programme, eg, identified 13 sets of guidelines to be developed over 2018: ESMA42-114-540, Annex III, 39–40. 283 See n 349.

150 ESMA and Regulatory Governance States practices diverge.284 The UCITS exchange-traded fund (ETF) guidelines285 are designed to address the (then-emerging) risks associated with the ETF sector, given that existing regulatory requirements ‘were not sufficient to take account of the specific features and risks’ of the ETF sector.286 Although the ambition of the ETF guidelines is greater, both sets of UCITS guidelines shape how funds address risk management under the UCITS regime, have the de facto effect of thickening the rule-book through amplification, and in practice are not easily distinguishable from administrative rules. The AIFMD guidelines are similarly designed to amplify and clarify – addressing AIFMD reporting obligations and ‘key concepts’ under the AIFMD287 (they also, more procedurally, address the Memorandum of Understanding that supports NCA supervisory cooperation288) – and have a similar quasi-regulatory colour and thickening effect. The AIFMD reporting guidelines, for example, supplement the already detailed AIFMD reporting requirements, include over 130 specific guidelines directing how firms should provide AIFMD disclosures, and have required operational changes of firms.289 The ‘key concepts’ guidelines ‘illustrate and explain in more detail’ how the scope rules of the AIFMD apply,290 and in so doing steer NCA decisions on the scope of the AIFMD and have substantive effects291 – evident from industry nervousness that the guidelines might lead to NCAs’ operating outside the AIFMD and ESMA’s affirmation that the guidelines are ‘in no way’ to alter the AIFMD.292 The EMIR guidelines have a similar quasiregulatory and thickening quality. ESMA’s 2017 EMIR guidelines on CCP conflict of interest management,293 for example, are similar in design and substantive impact to the EMIR administrative rules that apply to CCPs. So are its EMIR trade repository guidelines,294 which are designed to ‘foster and facilitate a consistent application’ of EMIR as regards the data trade repositories are required to collect and publish; these guidelines have the look and feel of administrative rules on data management. Finally, the EMIR guidelines on the operation of CCP colleges295 are primarily procedural, but their substantive effect is significant.296 They allow ESMA to side-step an unintended EMIR effect and prevent an NCA from obstructing the establishment of a CCP college.

284 ESMA/2011/112. 285 ESMA/2014/294 and ESMA/2012/474. 286 The guidelines define ETFs, clarify how the UCITS reporting requirements apply and when such funds should be open to investors for redemption, and address a range of risk management obligations and procedures. 287 ESMA/2013/1339 and ESMA/2013/600. 288 ESMA/2013/998. 289 Evident from the industry resistance to certain of ESMA’s proposed guidelines, particularly in relation to risk disclosures, reported in the related ESMA feedback statement: ESMA/2013/1339, 5–10. 290 ESMA/2013/600, 30. 291 Similar effects follow from ESMA’s own-initiative guidelines on the scope of the rating agency regime, which set out, inter alia, ESMA’s position on the conditions ‘private ratings’ should meet to ensure they stay outside the scope of the regime and also on the treatment of third country branches of EU rating agencies: ESMA/2013/720, guidelines 14–15 and 16–19. 292 N 290, 30. 293 ESMA70-151-1094. 294 ESMA70-151-552. 295 ESMA/2013/661. 296 A fourth set of EMIR own-initiative guidelines specifies that the EU has met certain IOSCO standards for the purposes of IOSCO’s reporting requirements: ESMA/2014/1133.

Building the Soft Law Rule-book 151 Their adoption followed the Commission’s rejection (on lack of legal mandate grounds) of a related ESMA draft RTS, through which ESMA earlier sought to achieve the same outcome (the Commission recognised the difficulty ESMA had identified in the draft RTS but regarded enforcement action against the obstructing NCA as the legally sound response). Guidelines have, accordingly, been used to provide a soft but substantive fix to a potentially serious EMIR defect. ESMA has also used own-initiative guidelines to amplify how the behemoth MiFID II/MiFIR regime applies; three sets of own-initiative guidelines have been adopted to support the regime. ESMA’s lengthy 2016 guidelines on the application of the MiFID II/MiFIR transaction reporting rules contain little in the way of quasi-regulatory content, but their specification of the technical operational details on how transaction reports are to be designed and completed is of fundamental importance to the successful operation of the new reporting regime.297 These guidelines, in effect the operating system of the new transaction reporting regime, have also placed ESMA at the epicentre of the new MiFID II/MiFIR data-reporting eco-system.298 ESMA’s 2017 MiFID II/MiFIR guidelines on product governance299 have a more quasi-regulatory quality. They are designed to ensure a ‘consistent and harmonised implementation and application’ of the new product governance rules, in particular by specifying how the new requirement to undertake a ‘target market’ analysis as part of the product development process should be undertaken in practice. The detailed guidelines, which are supported by practical case studies, are designed to shape and standardise firm procedures300 and drill deep into firms’ processes – allowing ESMA to stamp its imprimatur on what is a novel form of regulation for the EU retail market. Finally, ESMA’s 2018 guidelines on the MiFID II suitability regime, which are designed to ‘enhance clarity and foster convergence in implementation’, have a similarly quasiregulatory quality.301 The design of these different own-initiative guidelines further emphasises their quasi-regulatory natures and thickening effects, and ESMA’s related technocratic influence. They are designed in a manner similar to legal texts: the style in which the typically detailed obligations are expressed is very similar to that of a BTS or Delegated Act, they are framed by defined terms and by scope determinations, and they set out compliance and reporting obligations. The guidelines mandated by the co-legislators and adopted by ESMA, while less revealing as to ESMA’s approach, have a similarly quasi-regulatory and rule-bookthickening quality. The impact of ESMA’s mandated Short Selling Regulation guidelines302 is clear from the level of NCA resistance, discussed in section V.A.i. The mandated AIFMD and UCITS remuneration guidelines,303 to take another example, are 297 ESMA/2016/1452. The guidelines, which run to almost 300 pages, provide an operating manual for the industry on the detailed technical specifications of mandatory transaction reports. 298 See further ch 4. 299 ESMA35-43-620. 300 They cover, eg, how firms should categorise different client types against five categories of client features; how target market construction should reflect the nature of the product; how the manufacturer should align its distribution strategy with its target market assessment; how the manufacturer (and distributor) should assess whether an instrument is reaching the target market; and how the ‘negative’ target market assessment (the market for which the product is not suitable) should be undertaken. 301 ESMA35-43-869. 302 ESMA/2013/74. 303 ESMA/2013/201 and ESMA/2016/411.

152 ESMA and Regulatory Governance immensely detailed and cover a range of substantively material issues, forming a dense manual on how remuneration processes and structures are to be organised by the industry. Similarly, although the mandated guidelines for the credit rating agency regime concern procedural/operational matters, including methodology review and regulatory cooperation procedures,304 they have allowed ESMA to build a proprietary operational model for supervising rating agencies. They have also allowed ESMA to stamp its authority on how the rating agency third country regime operates, at a time when Brexit has given third country arrangements a very high salience.305 The mandated Market Abuse Regulation guidelines all address operationally critical aspects of the regime,306 allowing ESMA to shape how the regime is applied in practice, while the MiFID II/ MiFIR mandated guidelines also address matters of substantive importance, covering how the new cross-selling rules apply;307 the specification of the complex debt instruments and structured products subject to heighted investor protection regulation;308 and firm governance arrangements.309 The ratchet effect the guideline power is having on ESMA’s influence can also be seen in its astute approach to managing the growing institutional sensitivities and to protecting this power. As outlined in section V.C.ii, Commission and Parliament wariness over ESMA’s burgeoning guidelines activities has led to both institutions seeking to check ESMA, but ESMA is proving sensitive to this context. It has, for example, adopted a ‘position’ on guidelines that affirms the need for ESMA to meet all of the Article 16 ESMA Regulation criteria governing guidelines, for guidelines to have a clear basis in EU law, and for guidelines to be within ESMA’s scope.310 ESMA also appears increasingly to be consulting with the Commission before it issues guidelines on potentially contested areas, as was the case with its 2015 guidelines on the definition of ‘derivatives’ under MiFID I311 and in 2017/2018 in relation to the Money Market Fund Regulation.312

304 ESMA/2016/1575; ESMA/2011/188; and ESMA/2011/139. 305 Over 2017–18, ESMA made changes to its rating agency ‘equivalence’ guidelines, which can be associated with its increasingly assertive approach to equivalence/third country matters and its entrepreneurial approach to the opportunity created by Brexit. See further ch 6. 306 Covering the new ‘market soundings’ regime and the delay of disclosures (ESMA/2016/1130) and the application of the regime in the commodity derivatives market (ESMA/2016/1412). 307 These guidelines are a joint ESA product: JC 2015/1872. 308 ESMA/2015/1783. 309 Covering management board suitability requirements (EBA/GL/2017/12 and ESMA71-99-598); management body requirements for market operators and data services providers (ESMA/70-154-271); and the application of the knowledge and competence rules (ESMA/2015/1886). 310 BoS, Minutes, 20 May 2014 (2014/BS/89). 311 ESMA/2015/675. ESMA initially requested the Commission to take action to address the ambiguities relating to the definition, following which the Commission suggested that ESMA adopt guidelines. 312 Over its development of draft ITSs for the Money Market Fund Regulation, ESMA interpreted the Regulation as not permitting share cancellation, an interpretation strongly rejected by industry stakeholders as not representing market practice and not in accordance with the Regulation (ESMA34-49-103, 7). ESMA subsequently sought interpretive advice from the Commission and indicated that its ‘follow-up action’ and ‘precise tool’ in response would depend on this legal advice (ESMA Letter to the Commission, 13 November 2017 (ESMA-34-49-107)). The Commission confirmed its support of ESMA’s interpretation that cancellation was not permitted and suggested that ESMA adopt guidelines to secure converging supervisory approaches (Letter to Chairman Maijoor, 19 January 2018).

Building the Soft Law Rule-book 153

ii. The Range and Nature of Article 29 Measures Sitting alongside Article 16 guidelines is the host of more informal measures ESMA has used in a similarly purposeful and often expansionist manner to shape the single rule-book and NCA and financial market behaviour. These include the Article 29 ‘opinions’ to NCAs,313 which are typically issued where divergences are identified in how NCAs apply the rule-book or where there is a lack of clarity.314 These opinions do not have the quasi-binding effect of Article 16 guidelines but there is little evidence that they are not followed by NCAs.315 They also have the capacity to have material effects on the EU financial market. ESMA’s four 2017 opinions on the relocation of regulated actors to the EU-27 in the context of Brexit represent a decisive intervention in the highly sensitive debate on how NCAs should approach Brexit-related relocations.316 Similarly, as the January 2018 MiFID II/MiFIR application deadline loomed, ESMA adopted a series of opinions on operationally critical matters, including the meaning of ‘traded on a trading venue’ (which is not defined in MiFID II/MiFIR, although it is relied on as a form of regulatory perimeter control); and on the international/third country application of aspects of the new commodity derivatives regime and trading transparency rules.317 ESMA’s other soft Article 29 measures include the ‘principles’, which are designed to steer market behaviour,318 and the ‘public statements’, which ESMA typically uses in the financial reporting area, often to ‘urge’ issuers of securities to comply with objectives, principles, and outcomes set by ESMA.319 Public statements are distinct in ESMA’s Article 29 soft-law arsenal, as they are hardened by the enforcement priorities ESMA adopts for the different national authorities that enforce the EU’s financial reporting regime.320 Other Article 29 ‘statements’ can also have material effects on market behaviour: a ‘statement’ was used to implement ESMA’s decision to allow informal forbearance for a six-month transitional period in relation to firms’ non-application of the Legal Entity Identifier (LEI) requirement, which applies under MiFID II/MiFIR to the transaction reports made by investment firms and trading venues.321 Finally, ESMA’s Article 29 arsenal includes the 30 or so ‘Q&As’ it has developed to advise the market and NCAs on the application of the single rule-book. Most of

313 Discussed further in ch 5 as they also act as a supervisory convergence mechanism. 314 In January 2017, eg, ESMA used an opinion to set out a common ESMA view on the different share classes a UCITS fund can use (ESMA34-43-296), and later in 2017 it used an opinion to clarify how the EMIR portfolio margining requirements apply (ESMA70-70803281-186). 315 Although there is some NCA restiveness, expressed throughout the 2017 ESA Review, regarding the fact that these measures are not subject to the procedural formalities that apply to Art 16 guidelines, notably the QMV requirement. 316 See further chs 4 and 6. 317 Respectively, ESMA/70-156-117; ESMA70-154-466; and ESMA70-154-467. 318 Notably the Benchmark Principles (ESMA/2013/659) and the Proxy Adviser Code of Conduct Principles (ESMA/2013/84). 319 These ‘public statements’ are typically deployed in relation to the International Financial Reporting Standards (IFRS) reporting regime, which applies to publicly listed EU issuers, and set out ESMA’s stance on various reporting issues, often in response to regulatory change or market disruption (eg, ESMA/2016/1563 on the application of the new IFSR 9 standard; ESMA/2015/1609 on improving the quality of disclosures; and ESMA/2012/397 on sovereign debt treatment in financial statements). 320 See further ch 4. 321 ESMA70-145-401.

154 ESMA and Regulatory Governance the major financial market measures are accompanied by ESMA Q&As, including the AIFMD; the UCITS regime; the EUSEF and EUVECA fund regimes; EMIR; MiFID II/ MiFIR; the Market Abuse Regulation; the Short Selling Regulation; the Transparency Directive; the prospectus regime; the benchmarks regime; the central securities depositories regime; and the PRIIPs Regulation.322 Q&As are also used to provide guidance on emerging and novel issues.323 They are adopted by the Board of Supervisors but are procedurally informal, designed to be flexible, and regularly updated. Since early 2017, and in an indication of its increasing reliance on the Q&A tool, ESMA has made a customised platform available for question submission.324 ESMA responds to questions after applying a priority-based filter,325 and provides typically detailed and lengthy answers. Q&As are not subject to procedural formalities such as consultation, although ESMA may consult with its Consultative Working Groups, Stakeholder Group, or other experts.326 ESMA is cautious in how it characterises its Q&As and does not ascribe to them the quasi-binding effects often associated with other Article 29 measures. Q&As are typically negatively characterised as not being exhaustive, constituting new policy,327 or adding an extra layer of requirements,328 and as, more positively, promoting common supervisory approaches and practices and bringing clarity for market participants.329 ESMA is also usually careful to note that only the CJEU can provide a definitive interpretation of EU law.330 Nonetheless, a series of agents combine to give these informal and iterative measures a hard quality, including the efficiency and transaction-cost reduction benefits compliance brings to the regulated sector; the close attention they are given by the market;331 the authority they carry as representing a collective NCA p osition; the 322 Respectively: ESMA/34-32-352 (AIFMD); ESMA/2016/181) (UCITS – consolidating a series of earlier Q&As); ESMA/2016/774 (EUSEF and EUVECA); ESMA/2016/1176 (EMIR); ESMA70-872942901-35 (MiFID II/MiFIR transparency), ESMA70-872942901-28 (MiFID II/MiFIR commodity derivatives), ESMA70-1861941480-56 (MiFID II/MiFIR data reporting), ESMA/70-872942901-38 (MiFIR II/MiFIR market structure), and ESMA35-43-349 (MiFIR II/MiFIR investor protection and intermediaries); ESMA/2016/1644 (Market Abuse Regulation); ESMA/2013/159 (Short Selling Regulation); ESMA/2015/1595 (Transparency Directive); ESMA-31-62-780 (prospectus regime); ESMA70-145-11 (Benchmarks Regulation); ESMA 70-708036281-2 (Central Securities Depositories Regulation); and JC 2017 2 (joint ESA Q&A on the PRIIPs Key Information Document. 323 eg ESMA’s Q&A on crowdfunding (ESMA/2015/1005) and ESMA’s Q&A on the novel product intervention measures it used (for the first time) in 2018 (under MiFID II/MiFIR) to restrict the marketing, distribution, and sale to retail clients of Contracts for Differences (CfDs) and binary options: ESMA35-36-1262. 324 https://www.esma.europa.eu/questions-and-answers. 325 ESMA has adopted criteria for refusing questions, including where the question is unclear/incomplete; not related to a legal text within ESMA’s scope; asks for explanation of a text; is related to national implementation; or seeks advice on specific factual circumstances: ESMA, Questions and Answers. Overview (available at https://www.esma.europa.eu/questions-and-answers). ESMA prioritises responses according to type of stakeholder (trade associations have higher priority); geographical origin (EU questioners have priority); level of public attention (topics receiving a higher number of questions have priority); and relevance (questions addressing matters with high market impact, significant cross-border effects, addressing important legal risks, or related to a wide population of affected stakeholders have higher priority). 326 As is typically indicated in each Q&A. 327 eg MiFID II/MiFIR Investor Protection/Intermediaries Q&A, 11. 328 eg AIFMD Q&A, 3 and Market Abuse Regulation Q&A, 4. 329 eg MiFID II/MiFIR Investor Protection/Intermediaries Q&A, 11 and Market Abuse Regulation Q&A, 3. 330 https://www.esma.europa.eu/questions-and-answers. 331 The Q&A in the MiFID II/MiFIR Investor Protection/Intermediaries Q&A on ESMA’s interpretation of whether certain forms of research in the debt markets might not constitute ‘research’ for the purposes of

Building the Soft Law Rule-book 155 indications from ESMA and its NCAs that compliance is closely m onitored;332 and their 333 potential as a springboard to subsequent Article 16 guidelines.

C. Effectiveness and Legitimacy: Guidelines i. Effectiveness Soft guidelines are an attractive means for injecting responsiveness and agility into financial market regulation, given the challenges of financial market regulatory governance and the diversity of actors, actions, and risks it addresses. These attractions are all the greater in the EU single rule-book context, and for the achievement of the EU interest, as guidelines can provide a flexible and reasonably nimble means, informed by NCA and market experience of rules in practice, for addressing regulatory ambiguities and gaps; support supervisory convergence and limit arbitrage and supervisory failure risks; and provide regulated actors with greater operating certainty, thereby facilitating cross-border activity. The need for guidelines has become all the greater as EU financial market regulatory governance has recently become more heavily proceduralised, particularly in relation to reporting and data obligations. ESMA’s MiFID II/ MiFIR transaction reporting guidelines, for example, specify how the complex MiFID II/MiFIR transaction reporting regime applies in a standardised, technically detailed, and operational manner that would be very difficult to achieve in a formal administrative rule; the guideline form also facilitates nimble revisability. By contrast, EBA has struggled with the ITS format that governs the vast data reports required of banks under the banking rule-book given the formalities which apply to ITS revisions.334 But whatever the functional appeal of ESMA guidelines, their reach, thickening effect on the single rule-book, and quasi-binding nature, and the scale of ESMA’s related strengthening technocratic influence, calls for ESMA’s effectiveness as regards its guidelines power – regarded in terms of a technically-informed, responsive, and agile approach which can support the EU interest and draws on national experience – to be assessed.

the new MiFID II/MiFIR rules that apply to payment for research by asset managers (and so fall outside the new and highly contested restrictions on how investment research is paid for), eg, has been associated with changes to market practice: Noonan et al, n 7. The industry typically plays close attention to new Q&As (eg, International Capital Market Association and AMIC, Briefing Note (2017)). 332 ESMA has stated that while Q&As are not legally binding, their application will be rigorously scrutinised by ESMA and NCAs given their practical significance to achieving a level playing field: https://www.esma. europa.eu/questions-and-answers. 333 Q&As typically state that although they do not have the status of Art 16 guidelines, they are periodically reviewed by ESMA to identify whether there is a need for conversion into guidelines: eg, MiFID II/MiFIR Investor Protection/Intermediaries Q&A, 11; and Market Abuse Regulation Q&A, 4. 334 The bank reporting regime and its data validation rules are contained in an ITS that runs to over 1,000 OJ pages, which is held in a zipped file on EBA’s website. Although the Commission and EBA have agreed an expedited process for making technical changes, EBA has called for a power to revise the ITS directly: EBA, Opinion on Improving the Decision-Making Framework for Supervisory Reporting Requirements (EBA/Op/2017/03) (2017) (in the 2017 ESA Review the Commission suggested that EBA could instead rely to a greater extent on guidelines).

156 ESMA and Regulatory Governance ESMA’s approach to its guidelines power is often ambitious, but it is also responsive: guidelines are often used to address practical stakeholder concerns,335 while ESMA has proved responsive to industry concerns that guidelines apply proportionately.336 Similarly, guidelines have an iterative quality; they are consulted on and contain often lengthy feedback statements.337 The agility that can be associated with this responsiveness is also evident in the revisability of guidelines. The ETF guidelines, for example, were revised by ESMA to reflect market experience, which suggested the guidelines were impacting adversely on funds’ risk management capacity.338 ESMA’s approach can also be associated with data-informed and technical deliberation. Guidelines will often (although not always) include cost–benefit analysis339 and reflect relevant market data.340 Similarly, guidelines can be rooted in practical operational experience, often containing worked examples and case studies.341 They are typically adopted by Board consensus, but seem to emerge from a process of expert technical deliberation, which suggests that national interests do not prejudicially dominate discussions; while Board minutes typically simply note the adoption of guidelines, they also note points of technical discussion.342 Engagement with NCAs also appears to be strong. Compliance levels are high, and guidelines typically capture NCA learning and experience. The MiFID II suitability guidelines, for example, are designed to reflect recent NCA experience and engagement with technological advances.343 There are effectiveness risks from the scale on which ESMA has had recourse to guidelines, including from ESMA’s construction of a process geared to intervention and potentially at risk of leaching out local flexibility and of generating legal certainty risks, particularly (in those rare cases) where NCAs do not comply with guidelines. Overall, however, the effectiveness that can be associated

335 Speech by ESMA Chair Maijoor, ‘Looking to the Future’, 7 June 2017, in the context of MiFID II/MiFIR and soft law. eg ESMA’s proposed (March 2018) guidelines on how it will apply its new approach to the ‘endorsement’ of third country credit ratings are being developed in response to industry calls for supplementary guidance: ESMA33-9-235, 5. 336 eg, the 2017 guidelines on management body suitability (ESMA71-99-598, 23–24) and the 2017 MiFID II/MiFIR product governance guidelines (ESMA35-43-620) 35) – in each case also reflecting a proportionality direction in the related legislative/administrative rules. 337 ESMA/industry interaction on guidelines is usually extensive and can generate contestation as well as accommodations. The ETF guidelines process, eg, saw ESMA change its draft guidelines in certain key respects to reflect industry concerns: ESMA/2012/474, 6–17. The AIFMD guideline process, to take another example, tended to be fractious; while ESMA changed its guidelines in some respects, elsewhere it did not accept industry arguments (ESMA/2013/201, 5–41). More recently, the MiFID II product governance guidelines generated significant industry concern, reflecting the novelty of the regime and the related industry costs, to which ESMA was, in relation to some proposals, responsive (ESMA35-43-620, 14–30). 338 ESMA/2014/294, 2 noting the practical difficulties experienced by money market funds under the original 2012 ETF guidelines. 339 For recent examples see ESMA’s 2017 product governance guidelines (ESMA35-43-620, 8–13) and the joint ESMA/EBA management body suitability guidelines (ESMA71-99-598, 69–84). 340 The MiFID II suitability guidelines, eg, reflect behavioural finance research: ESMA-35-43-748, 5. 341 The structured UCITS guidelines, eg, contain only two formal guidelines but provide several worked examples, cases, and scenarios (ESMA/2011/112). The lengthy AIFMD reporting guidelines, to take another example, contain several worked examples of how to apply the different reporting requirements (ESMA/2014/869). 342 The Board discussed initial policy orientations as well as more technical issues over the development of the ETF guidelines, eg: BoS, Minutes, 11–12 July 2011 (ESMA/BS/2011/179) and 11 September 2012 (ESMA/ BS/2012/96). 343 ESMA-35-43-864, 5.

Building the Soft Law Rule-book 157 with ESMA’s approach to guidelines mitigates against the risks of the related de facto thickening of the rule-book by ESMA.

ii. Legitimacy The more significant challenges arise from the associated risks to legitimation. There is an almost inevitable ambiguity to the legitimacy of guidelines given their troublesome hard/soft quality. But their functional attractiveness has led to their becoming a ‘go-to’ tool for many regulators internationally. In the EU, their functional, technocratic attractions are reflected in ESMA’s express legislative competence to adopt guidelines, which carries out much of the heavy lifting on legitimation. But as ESMA’s guideline activities and particularly its own-initiative activities have burgeoned, and as guidelines have come to shape market behaviour and express policy choices in a manner similar to administrative rules, some stakeholder uneasiness has emerged and the perception of legitimation risks has taken root. Legitimacy concerns dogged guidelines from the outset. The 2013–14 ESA Review was sanguine, but warned that while guidelines were a useful tool, they required a sound legal basis.344 Regulated actors were already sceptical, warning that guidelines should not subvert legislation or add an additional layer of quasi-regulation.345 The 2017 ESA Review did not focus closely on regulatory governance, but it did address ESA soft law, with the Commission finding that guidelines were ‘very useful tools’ but noting a series of legitimation weaknesses, including that ever more expansive guidelines were at risk of going beyond the original purpose of guidelines under the ESA Regulations and increasing compliance costs and legal certainty risks.346 Stakeholders highlighted the increasingly prescriptive nature of guidelines347 and the risk that an additional layer of regulation, without adequate legal mandate or impact assessment, was under construction.348 While the regulated sector can be expected to resist further prescription through guidelines, the intuition that ESMA’s guidelines activities, however functionally attractive, rest on insecure legitimacy foundations – notwithstanding Article 16 – is not unreasonable, given the difficulties. These difficulties include that ESMA guidelines are most usually the result of owninitiative action by ESMA and are not formally mandated or structured by specific legislation; they can accordingly ratchet up the risk of bureaucratic expansionism. Also, the borderline between appropriate rule-book clarification and troublesome rule-book expansion or revision can be thin; clarification can nudge ESMA into the territory of remedying defects and so subverting legislative or administrative rules. Further, it is not always easy to draw a line between soft guidelines and administrative rules: they are articulated in similar ways and employ similarly directive language; share similar

344 2013–14 Commission ESA Review Report, n 33, 5. 345 eg, the Review responses by the European Fund and Asset Management Association and the British Bankers Association. 346 2017 ESA Consultation, n 3, 7–8. 347 eg response by the European Financial Services Roundtable (available at https://ec.europa.eu/eusurvey/ publication/esas-operations-2017?surveylanguage=en). 348 eg response by the European Fund and Asset Management Association (ibid).

158 ESMA and Regulatory Governance levels of prescription; and engage with matters of similar policy and operational significance. In addition, while guidelines are formally soft, their quasi-binding effect is now significant given NCA and also market practice.349 Their quasi-binding effects are all the greater where guidelines are subject to ESMA peer review350 or are used by ESMA in supervising actors (such as rating agencies351); ESMA thereby hardens its own guidelines without the additional legitimating filter that can be regarded as applying where NCAs use guidelines in their supervisory practices or adopt related implementing measures.352 Guidelines can therefore be regarded as representing an exercise of public power with de facto binding effects. But their legitimation arrangements could reasonably be regarded as weak. For example, as regards procedural legitimacy, A rticle 16 is thinly proceduralised and the threshold conditions it applies to guideline adoption are porous.353 ESMA often addresses these conditions fairly briefly. ESMA’s influential AIFMD guidelines on remuneration policy, for example, simply note that the purpose of the guidelines is to ensure common, uniform, and consistent application of relevant AIFMD provisions;354 more recently, ESMA’s operationally critical MiFID II/MiFIR product governance guidelines simply assert that the guidelines are expected to promote greater convergence in the implementation of relevant MiFID II r equirements.355 Guidelines also pose challenges to ESMA’s wider legitimation arrangements. For example, the technocratic influence ESMA can exert through guidelines exposes the extent to which ESMA is wielding a de facto discretion behind the formalities of Meroni,356 while ESMA’s guidelines sit awkwardly within the EU’s judicial review process. Their reviewability under Article 263 TFEU depends on whether they produce legal effects357 – a determination made on a case-by-case basis by the CJEU,358 and the relevant ‘legal effects threshold’ is not an easy one to pass.359 349 eg, response by the European Fund and Asset Management Association, noting a ‘significant impact on operating conditions of markets and participants’; European Association of Clearing Houses, noting the ‘de facto binding characteristics’ of guidelines; and European Issuers, noting that guidelines are ‘in practice binding’ (ibid). 350 See further ch 4 on peer review of guidelines. 351 As noted in ch 5, ESMA engages in supervisory thematic review of the guidelines it applies to rating agencies and requires follow-up action: eg ESMA, 2017 Annual Report on the Supervision of Credit Rating Agencies, Trade Repositories and Monitoring of Third Country Central Counterparties and 2018 Work Programme (2018) 32–33. 352 I am grateful to Dr Heikki Marjosola for discussion of this point. 353 On the limited proceduralisation of agency soft law, see Chiti, n 29. 354 ESMA/2013/232, para 5. 355 ESMA35-43-620, Guidelines, para 5. 356 ESMA’s wide-ranging guidelines/soft-law activities and their de facto binding effects evidence Chiti’s concern that the EU administrative system facilitates the taking of highly specialised and technical action, which requires balancing of multiple objectives and interests, but has not cast off the shackles imposed by the fiction that agencies cannot take discretionary action – and has become stunted accordingly as regards the development of the administrative law controls which should oversee agency action: E Chiti, ‘Is EU Administrative Law Failing in Some of its Crucial Tasks?’ (2016) 22 European Law Journal 576. 357 The ECJ has confirmed that soft-law measures are reviewable if they have legal effects: Case C-322/88 Grimaldi v Fonds des Maladies Professionelles (ECLI:EU:C:1989:646). 358 See further J Scott, ‘In legal limbo: post-legislative guidance as a challenge for European administrative law’ (2011) 48 Common Market Law Review 329. 359 Recently, in Case C-16/16P Belgium v Commission (ECLI:EU:C:2018:79), the ECJ found that a Commission recommendation (on online gambling) did not produce legal effects when examined in light of its content, the context, and the intention and powers of the Commission, although the Advocate General’s Opinion, which contained an extensive analysis of the role of soft law (and noted its proliferation and concerns as to the absence of judicial review), earlier found it was reviewable.

Building the Soft Law Rule-book 159 On the other hand, guidelines are procedurally efficient and functionally attractive tools, and it is not unreasonable to suggest that output legitimation can carry out much of the heavy lifting as regards legitimation. Further, Article 16 provides an express legislative mandate for ESMA, and Article 16 guidelines are subject to throughput/procedural requirements, including for consultation and impact assessment, which, although limited, bolster ESMA’s legitimacy. Guidelines similarly benefit from a relatively high degree of transparency: consultation processes offer clear sight of ESMA’s thinking and Board of Supervisor minutes shed some (if limited) light on NCAs’ deliberations; while ESMA’s recent development of an ‘interactive single rule-book’ further enhances transparency by providing easy access to all ESMA soft law and showing how it is connected to the rule-book.360 In addition, ESMA’s discretion here is not without ex-ante legal structuring, being constrained by the two Article 16 threshold requirements that govern guideline adoption. While these requirements are broadly cast and are often dealt with briefly by ESMA, they nonetheless require ESMA to show how the conditions are met and support accountability. Further, guidelines must respect the constraints on scope that apply to all ESMA activity under the ESMA Regulation. Article 16 requires that guidelines ensure the common, uniform, and consistent application of ‘Union law’, but it does not formally link Article 16 action to the ESMA Regulation, Article 1(2) list of EU legislative (and related administrative) measures which defines ESMA’s scope. It is accordingly not clear whether Article 16 extends to Article 1(3) of the ESMA Regulation (which allows ESMA to take action in ‘the field of activities of market participants’ in relation to issues (such as corporate governance) not directly covered by Article 1(2) measures – as long as such action is necessary to ensure the effective and consistent application of the Article 1(2) measures); to Article 9, which empowers ESMA in relation to consumer protection; or to Article 22, which gives ESMA coordination powers as regards systemic risk. In practice, ESMA has shown restraint; guidelines are typically closely linked to Article 1(2) measures. In some cases, particularly at the outset, the link to the Article 1(2) rule-book has been more tenuous. ESMA’s 2012 guidelines on automated trading, for example, addressed high frequency trading (HFT),361 an area since covered by MiFID II/MiFIR but which was not formally within the scope of EU financial market legislation at the time. The guidelines were, however, tied to MiFID I and the market abuse regime, and there is little evidence since of ESMA’s using Article 16 to extend by stealth the reach of the EU rule-book. The ESMA/EBA response to the Libor and benchmarks scandal provides a useful example. The 2013 EBA/ESMA principles for benchmarks362 were designed to bridge the interim period until binding EU rules for benchmarks were adopted (under the 2014 Market Abuse Regulation and the 2016 Benchmark Regulation). But they were adopted as ‘principles’ and not as Article 16 guidelines: ESMA and EBA ‘consider[ed] it important’ that the principles be applied by relevant market participants and national supervisory authorities, but they did not

360 ESMA’s interactive rule-book was launched in February 2018. It only covers the UCITS Directive, but it will be rolled out to other aspects of the single rule-book over time (https://www.esma.europa.eu/rulesdatabases-library/interactive-single-rulebook-isrb). 361 ESMA/2012/122. 362 ESMA/2013/659.

160 ESMA and Regulatory Governance bring the coercive force of Article 16 to bear.363 As the single rule-book has evolved and the EU has strengthened its capacity to adopt legislative measures in response to emerging risks, it has become increasingly rare for ESMA to adopt guidelines or other soft measures not directly related to Article 1(2) legislative or administrative texts. In addition, ESMA guidelines are adopted by the Board of Supervisors, which provides some degree of national/transnational legitimation, while the technical expertise, national experience, and challenge of ESMA provided by NCA members of the Board supports output legitimation. Overall, NCAs seem to support the guideline tool and ESMA’s approach. The 2017 ESA Review saw NCAs, variously, call for the scope of the guidelines power to be extended;364 affirm the importance of guidelines in supporting convergence and expertise sharing and in reducing NCAs’ costs;365 prefer guidelines over Article 29 soft measures given that guidelines must be subject to consultation;366 and find that while guidelines must have a clear basis in EU law, there was no evidence that ESMA had deviated from EU law as regards guidelines.367 At the same time, NCAs appear sensitive to legitimacy risks368 and concerned to provide mandate oversight and technical challenge. In January 2013, for example, the Board supported an internal policy note which affirmed that guidelines must have a secure legal basis in EU law and in ESMA’s scope of action.369 The guideline power was revisited in March 2014 when the Board discussed another note (a ‘position’) which emphasised the need to clarify the legal nature of guidelines and to share experience on how they are applied by NCAs.370 There is also evidence of specific challenge and contestation on particular guidelines. At a very early stage of ESMA’s development, there was significant Board contestation on the scope of proposed guidelines on the reporting to the market of sovereign debt exposures, and some NCA concern that the relevant guidelines would be adopted despite minority NCA opposition.371 Later, ESMA’s 2013 Short Selling Guidelines struggled to find consensus, generating NCA contestation on a range of technical issues as well as in relation to their level of prescription,372 while other guidelines have seen discussion of the appropriateness of the relevant legal base.373 The 2017 ESA Review evidenced NCA support for the guidelines tool, but it also revealed

363 The earlier consultation explained that the proposed principles were to provide a remedy until a formal regulatory and supervisory framework was devised, and that the principles were a ‘glide path to future obligations that are likely to be binding:’ ESMA/2013/12, 2–3. 364 Response by the Finnish NCA, calling for clarification that guidelines could be adopted in relation to ESMA Regulation Art 1(3) measures (available at https://ec.europa.eu/eusurvey/publication/esas-operations2017?surveylanguage=en). 365 Response by the Danish, Swedish, and Dutch NCAs (ibid). 366 Response by the French NCA (ibid). 367 Response by the Swedish NCA (ibid). 368 Evident in the recent commitment by the BoS to ensure the translation of all guidelines into all of the EU’s official languages and to make the necessary resources available to do so: BoS, Minutes, 14 December 2017 (ESMA22-106-785). 369 BoS, Minutes, 29 January 2013 (ESMA/BS/2013/30). 370 BoS, Minutes, 19 March 2014 (ESMA/BS/2014/60). 371 Bos, Minutes, 25/26 July 2011 (ESMA/BS/2011/180). The guidelines, which were discussed in several Board meetings across 2011–12, were finally adopted despite the opposition of four NCAs. 372 BoS, Minutes, 6 November 2012 (ESMA/BS/2012/143) and 18 December 2012 (ESMA/BS/2013/4). 373 eg BoS Minutes, 24 September 2013 (ESMA/BS/2013/125), noting legal base concerns regarding the guidelines on the enforcement of financial information.

Building the Soft Law Rule-book 161 a range of NCA/Member State concerns, from NCA calls for a more principles-based approach to guidelines374 to warnings on the need for stronger NCA compliance.375 There is also evidence that if ESMA’s reach over financial market regulatory governance continues to expand through guideline adoption, national political oversight may strengthen; the German Parliament in 2016 called for soft ESA guidelines/measures not to be adopted by the German NCA (BaFIN) where they did not correspond to the objectives of the German Parliament.376 Finally, ESMA’s guidelines are subject to the institutional accountability arrangements that apply to its activities. The Commission and the co-legislators do not play a formal role in guideline adoption. Nonetheless, the Commission has taken a close interest in ESMA’s Article 16 guideline activities and has repeatedly warned where it regards a guideline as not complying with the related legislative measure.377 It has also raised the possibility of producing interpretative Communications where it regards ESMA guidelines as conflicting with legislative provisions.378 Parliamentary oversight is strengthening, with guidelines repeatedly being identified by the Parliament as a source of concern. The Parliament’s response to the 2014–13 ESA Review recognised the value of guidelines, but it also recommended that they only be adopted where there was a specific legislative empowerment.379 Since then, Parliament scepticism has grown as ESMA’s technocratic influence has expanded. The 2016 Resolution on Stocktaking, for example, called for less reliance on guidelines, particularly where their adoption was not expressly mandated by a legislative act,380 while the Parliament’s budgetary discharge decisions have sought to constrain ESMA’s guideline activities.381 There are no signs of its concerns dissipating: February 2018 saw a group of MEPs challenge the Commission’s suggestion to ESMA that ESMA adopt guidelines to ensure supervisory convergence and industry compliance under the Money Market Fund Regulation, arguing that the Commission’s interpretation of the Regulation and its related direction to ESMA to adopt guidelines were contrary to their interpretation of the Regulation, and highlighting that any ESMA guidelines must remain within the limits of what is politically agreed in legislation and not address issues on which legislation is silent.382 Strains can certainly be identified in the legitimation framework for guidelines, but the multi-faceted and adaptive nature of this framework mitigates the legitimation risks somewhat, as does the output legitimation implied in the functional attractions and logic 374 Response of the Norwegian Ministry of Finance, available at https://ec.europa.eu/eusurvey/publication/ esas-operations-2017?surveylanguage=en. 375 Response by the French NCA (ibid). 376 2016 CEP Study, n 220, 42–43. 377 eg, with respect to ESMA’s proposed guidelines on UCITS remuneration (BoS, Minutes, 24/25 June 2015 (ESMA/BS/2015/140); ESMA’s proposed guidelines on AIFMD reporting (Minutes, 22 May 2013 (ESMA/2013/BS/86)); and ESMA’s proposed guidelines on the Short Selling Regulation (Minutes, 18 December 2012 (ESMA/2013/BS/4). 378 BoS, Minutes, 14 March 2013 (ESMA/2013/BS/30), relating to ESMA’s Short Selling guidelines. 379 2014 Parliament ESFS Review Resolution, n 239, para AL and Detailed Recommendations. 380 ibid, para 54. 381 The Parliament has, eg, called on ESMA to ‘check the necessity of drafting guidelines and recommendations’: European Parliament, Resolution on Discharge of the 2013 ESMA Budget, 29 April 2015 (P8_TAPROV(2015) 152), Observations. 382 Letter from ECON Committee Money Market Fund Regulation Negotiating Team to Commissioner Dombrovskis, 7 February 2018.

162 ESMA and Regulatory Governance of the guideline power and in ESMA’s approach. This framework does, however, require some strengthening, particularly as regards ESMA’s accountability a rrangements,383 but the 2017 ESA Proposal may have regressive effects if it is adopted. The Proposal suggests useful enhancements to Article 16, proposing that ESMA be always required to engage in consultations and to obtain the opinion of its Stakeholder Group, in each case save in exceptional circumstances. It also usefully proposes that ESMA be required to justify its adoption of guidelines and to summarise consultation feedback in its Annual Report.384 But it further proposes a new competence check procedure, which has troubling ramifications. Under the Proposal, if two-thirds of ESMA’s Stakeholder Group regarded ESMA as having exceeded its Article 16 competence, they would be empowered to send a reasoned opinion to the Commission, which could then request an explanation from ESMA justifying the relevant measure and could ultimately require ESMA to withdraw the measure. This reform, if adopted, may simply entrench the legitimation difficulties, as ESMA’s Stakeholder Group’s composition is dominated by industry representatives who can be expected to resist guidelines, while the strengthening of the Commission, at the expense of the Council and the Parliament, may also exacerbate the legitimation challenges.

D. Effectiveness and Legitimacy: Article 29 Similar issues arise with Article 29 measures. Under Article 29, ESMA is deploying an array of technically informed and easily revisable385 soft-law tools in an agile and responsive manner, often in direct response to NCA/market calls for technical clarification and where novel and complex regulation is having unforeseen effects. ESMA’s Q&As, for example, can be regarded as a technically informed, agile response, which reflects NCA expertise and experience,386 to ‘live’ market issues; so can ESMA’s different ‘opinions’ and ‘statements’, as exemplified by ESMA’s Article 29 efforts to provide clarification in advance of the application of MiFID II/MiFIR in January 2018. The informal forbearance regarding the MiFID II/MiFIR LEI reporting requirement, for example, provided through an Article 29 ESMA ‘statement’, can be regarded as a timely and pragmatic response to an acute and immediate functional need, and as an expression of the benefits of technocratic governance. But despite its functional appeal, Article 29 soft law poses legitimation challenges, particularly given ESMA’s often entrepreneurial and expansionist approach. Article 29 measures are largely uncoupled from institutional oversight, not subject to consultation requirements, not subject to a Board of Supervisors QMV requirement, and so not 383 See further ch 2. 384 2017 ESA Proposal, n 2, ESMA Regulation, Art 16(2) (the current Regulation only requires such consultation ‘where appropriate’) and (4). 385 In adopting the 2017 ESMA opinion on the meaning of ‘traded on a trading venue’ under MiFID II/ MiFIR, NCAs noted the importance of revising the opinion where necessary: BoS, Minutes, 29 March 2017 (ESMA22-106-216). 386 Additions to the EMIR Q&A, eg, are regularly discussed at the Board of Supervisors. eg, BoS, Minutes, 14 March 2013 (ESMA/BS/2013/58); 7 November 2013 (ESMA/BS/2013/97); and 25 September 2014 (ESMA/ BS/2014/159).

Building the Soft Law Rule-book 163 proceduralised to any meaningful extent. Further, ESMA has repeatedly indicated its support for such soft law,387 and has incentives to strengthen its ability to exert influence by means of these informal and easily deployed measures. ESMA’s Article 29 ‘public statements’ on financial reporting provide a useful example of ESMA’s agility in using soft law to claim ownership of emerging issues. The application of IFRS 9, required from January 2018, is one of the biggest operational challenges currently faced by the EU banking sector, as the standard transforms how banks report credit risk and loan losses. It is primarily of concern to EU bank regulators and EBA. ESMA has, however, been active in this space, claiming the markets agenda on IFRS 9 by stating how it expects banks to report to the market on IFRS 9 issues, reviewing banks’ market reporting on IFRS 9, and setting related enforcement priorities.388 ESMA’s expansionist incentives matter, as Article 29 measures have quasi-binding effects. The related legitimation risks become sharper where Article 29 measures are associated with enforcement strategies (as is the case with ESMA’s ‘public statements’ on the financial reporting regime) and display a high level of prescription (particularly associated with ESMA’s Q&As). New forms of legitimation risks are arising as ESMA’s recourse to Article 29 soft law increases. ESMA appears to be claiming a form of ‘no action’/forbearance jurisdiction, using Article 29 soft law to signal ESMA/NCA tolerance for the delayed application of rules where market conditions so require. In 2017, all three ESAs issued a statement in response to industry concern that smaller counterparties would not be able to meet the March 2017 deadline for the application of certain EMIR margin requirements.389 The ESAs noted that ‘from a legal perspective’, neither they nor NCAs were empowered to disapply directly-applicable EU rules, including through the ‘no action’ letters that some regulators internationally are empowered to use, and that any delay would require EU legislation. They noted, however, their expectation that NCAs would apply their ‘risk-based supervisory powers’ in a manner that, while not amounting to formal forbearance, would allow case-by-case assessment of non-compliance. Later in 2017 the ESAs announced that, given the challenges the industry was facing in meeting EMIR’s margin requirements for certain foreign exchange derivatives, they would propose amendments to the relevant RTS, and in advance of such changes coming into force called on NCAs to apply their risk-based supervisory powers proportionately in assessing compliance; again, the ESAs noted that neither they nor NCAs had the power to disapply directly-applicable EU law.390 This tentative ESA claiming of a form of informal forbearance jurisdiction took more assertive form in December 2017 when ESMA (alone) announced it would, subject to a series of conditions being met by the industry, suspend, in certain circumstances, the MiFID II/MiFIR LEI reporting requirement

387 Including over the 2017 ESA Review (eg 2017 ESMA ESA Consultation Response, n 202, 5, identifying measures such as guidelines, opinions, and Q&As as very important to the support of supervisory convergence; and Speech by ESMA Chair Maijoor, European Parliament ALDE Seminar on the 2017 ESA Review, 8 February 2017). 388 ESMA/2016/1563 (public statement on reporting); Summary of Findings. Fact Finding Exercise. 27 October 2017; and ESMA32-63-340) (public statement on common European enforcement priorities). 389 ESMA, EBA, EIOPA, Variation Margin Exchange under the EMIR RTS on OTC Derivatives, February 2017. 390 ESA Joint Committee, EBA, EIOPA, ESMA, Variation Margin Exchange for Physically-Settled FX Forwards under EMIR, 24 November 2017.

164 ESMA and Regulatory Governance (contained in an RTS) for six months.391 ESMA does not have a ‘no action’ power, the LEI requirement applies through a binding RTS,392 and ESMA is not responsible for enforcement of MiFID II/MiFIR compliance. Further, while, as with the earlier ESA EMIR statements, there was a compelling functional case for the action, ESMA’s response led to the suspension of a binding requirement, was not proceduralised, and was not based on a formal process for assessment of the scale of the market difficulties claimed. ESMA was careful to signal the exceptional nature of this intervention, to make it time- and scope-limited, and to emphasise that it, along with NCAs, was monitoring the market’s use of the transitional period to comply with the LEI requirement.393 Nonetheless, market calls for forbearance can be expected to increase if the ESAs/ ESMA continue to display this sympathetic, practically justifiable, but largely nonproceduralised approach and the legitimation risks will sharpen. As Article 29 soft law has burgeoned, stakeholder concerns have increased.394 The most persistent theme from the 2017 ESA Review as regards regulatory governance concerned the increasing ESA reliance on soft measures outside of the Article 16 guidelines framework, particularly the Q&A tool. Recurring concerns included a lack of transparency in the Q&A process, the danger of Q&As being used to subvert the more proceduralised guidelines process,395 and the lack of consultation on Q&As.396 There is, however, some evidence of the Article 29 legitimation framework strengthening in an adaptive if informal manner. The Commission exercises some oversight over Article 29 measures through its Board of Supervisors seat, often underlining that ESMA is not empowered to provide definitive interpretations of EU law through soft law.397 ESMA appears alert to the legitimacy risks398 and concerned to ensure that stakeholder concerns are addressed, including by engaging in consultation – which provides an element of procedural legitimation,399 and to avoid potentially sensitive areas.400 391 See n 11. The transitional remediation, which allowed investment firms to substitute their LEIs for clients’ LEIs, required firms to ensure that their clients applied for an LEI. 392 Commission Delegated Regulation 2017/590. 393 ESMA, Statement on LEI Requirements under MiFIR, 29 June 2018 (ESMA70-145-872), confirming that the transitional period would end on 2 July 2018 and reporting on ESMA’s monitoring (with NCAs) of market compliance with the LEI requirement. Similarly, Speech by ESMA Executive Director Ross on ‘MiFID II: an important step for the LEI’, 27 June 2018. 394 2017 ESA Consultation, n 3, 7–8. 395 eg response by International Capital Markets Association, available at https://ec.europa.eu/eusurvey/ publication/esas-operations-2017?surveylanguage=en. 396 eg response by the Association of Financial Markets in Europe, International Swap Dealers Association, Futures Industry Association, Federation of European Securities Exchanges, and European Banking Federation (ibid). 397 eg BoS, Minutes, 29 January 2013 (ESMA/BS/2013/30) and 17 December 2013 (ESMA/BS/2014/1). 398 ESMA Executive Director Ross, eg, noted that the 2017 Art 29 ESMA opinion on the interpretation of ‘traded on a trading venue’ under MiFID II/MiFIR represented a ‘pragmatic and cautious approach’, and that a more ambitious approach would follow only if necessary in light of market developments: ESMA Executive Director Ross, ‘Keynote Address’, 20 September 2017. 399 While ESMA does not usually consult on Art 29 measures, this may change. In February 2018, in an intervention that can be associated with criticism of its soft-law activities, ESMA launched a ‘stakeholder survey’, which ESMA Chair Maijoor linked to ESMA’s concern to ensure stronger stakeholder management as regards ESMA’s supervisory tools, including guidelines and Q&As: Keynote Address on ‘CMU, Brexit and ESA Review – What’s Next?’, 20 March 2018. 400 April 2018 saw ESMA raise with the Commission emerging interpretation difficulties relating to a MiFID II/MiFIR RTS (on the ‘ancillary business’ test applied to commodity derivatives firms) and ask for

The Legislative Process: Shaping Regulatory Governance from the Bottom Up 165 NCAs, who can provide some degree of national and transnational/peer legitimation and who also support output legitimation through technical and mandate challenge of ESMA, are increasingly monitoring ESMA’s activities. The 2017 ESA Review, for example, saw NCAs identify a range of concerns and recommendations, including that the Q&A tool not be used as a substitute for guidelines401 and that Q&A adoption be subject to a QMV.402 In their Board discussions, NCAs have raised legal risk403 and mandate concerns.404 They have also repeatedly discussed technical issues, notably as regards the EMIR Q&A405 and the MiFID II/MiFIR Q&A,406 while the LEI forbearance statement was also discussed at Board level.407 The Board has also considered how the Q&A tool might be improved, when it should be used, how consultation could be best achieved, the need to ensure conformity with legislation, and the need to revise Q&As.408 While these different forms of oversight and friction do not fit easily within traditional legitimation arrangements, they provide at least some form of check against bureaucratic expansionism. More generally, ESMA’s wider legitimation arrangements, and notably ESMA’s accountability to the European Parliament, which is sensitive to any encroachment by ESMA into its regulatory territory, apply. Ultimately, the legitimacy of Article 29 soft law is probably most securely based on output legitimacy. Soft law can be regarded as a classic expression of the technical benefits agency action can bring. ESMA uses Article 29 soft law, which it can deploy flexibly and nimbly, informed by expert judgment and NCA experience, to achieve agile and technical solutions to the complex issues which have been delegated to it as a nonmajoritarian actor with strong technical and problem-solving capacity – as is clear from the MiFID II/MiFIR experience. Much depends accordingly on ESMA’s accountability arrangements, and particularly on the Parliament as ESMA’s main accountability forum.409

VI. The Legislative Process: Shaping Regulatory Governance from the Bottom Up The support of administrative rule-making and soft law adoption are at the core of ESMA’s regulatory governance activities. A third channel for influence has recently ommission guidance, noting that as the issue related to ‘interpretation related to the scope of the Level 1 text, C and related amendments of the Level 2 text introduced by the Commission’, an ESMA Q&A response was not appropriate: ESMA Chair Letter to Commissioner Dombrovskis, 9 April 2018. 401 Response by the French NCA, available at https://ec.europa.eu/eusurvey/publication/esas-operations2017?surveylanguage=en. 402 Response by the Spanish NCA (ibid). 403 At an early stage an NCA queried whether ESMA would be exposed to legal liability in relation to its use of Art 29 opinions: BoS, Minutes, 8 November 2011 (ESMA/BS/2011/233). 404 eg BoS, Minutes, 29 January 2013 (ESMA/BS/2013/30). 405 See n 386. 406 eg, a specific vote was held on an aspect of the Q&A (the characteristics of an Organised Trading Facility), which led to six NCAs dissenting: BoS, Minutes, 29 March 2017 (ESMA22-1-6-216). 407 BoS, Minutes, 14 December 2017 (ESMA22-106-785). 408 Bos, Minutes, 14 December 2016 (ESMA22-247440098-55). 409 See further ch 2.

166 ESMA and Regulatory Governance opened in the form of ESMA’s slowly strengthening purchase over the development of EU financial market legislation. ESMA is not formally engaged in the inter-institutional legislative process. Its demonstrated technical capacity and its ability and obligation to capture market intelligence make it a key resource, however, for the EU institutions. Formally, it is empowered to offer (own-initiative) opinions to the institutions (ESMA Regulation, Article 29), and it is also required to provide reviews and reports to the European Parliament, Commission, and Council on request (Articles 22 and 34). ESMA is, for example, embedded in the review procedures now a standard feature of EU financial market legislation, usually being enjoined in sectoral financial market legislation to provide the Commission with a host of different reports; it produced four major, data-rich reports for the 2015–16 EMIR review, which can be associated with shaping the Commission’s commitment to a more proportionate and segmented approach to derivatives trading under EMIR.410 ESMA also provides own-initiative reports and studies to the institutions, such as the crowdfunding reports that have supported the Commission’s CMU workstream on crowdfunding.411 It also shapes the legislative agenda by identifying legislative problems and calling for revisions: ESMA recently warned the Commission of market developments that suggested certain MiFID II/MiFIR trading venue rules might be circumvented,412 and highlighted the risks which follow from the new MiFIR product intervention powers’ not applying to the UCITS sector.413 In both cases, Commission legislative reform proposals followed. ESMA also regularly participates in the Commission’s public consultations on legislative proposals,414 albeit partly to strengthen its powers,415 and on major policy initiatives, including the CMU agenda,416 the retail financial services agenda,417 and the European Personal Pension project.418 ESMA’s input into the EU legislative process can be associated with the technically expert and data-rich approach, informed by national experience, associated with its other regulatory governance activities. But it is hamstrung, in that it cannot directly participate as a technical adviser in the legislative process. ESMA’s p articipation in 410 As has been acknowledged by the Commission: Commission, Report on EMIR (COM (2016) 857) 9. 411 See, eg, ESMA’s review of national approaches (Investment-based Crowdfunding, Insights from Regulators in the EU (ESMA/2015/856)); examination of the regulatory implications for money laundering and terrorist financing rules (Q&A, 1 July 2015 (ESMA/2015/1005); and opinion on the regulatory challenges (Opinion, Investment-based Crowdfunding (ESMA/2014/1378)). 412 Letter from ESMA Chair Maijoor to Commission, 1 February 2017. 413 ESMA, Opinion. Impact of the Exclusion of Fund Management Companies from the scope of the MiFIR Intervention Powers (ESMA50-1215332076-23)(2017). 414 eg, it was actively engaged in the development of the 2017 Prospectus Regulation (ESMA, Response to Public Consultation on Review of the Prospectus Directive (ESMA/2015/857)) and sought to ensure that its experience with managing CCP colleges was reflected in the development of the 2016 CCP Recovery and Resolution Proposal (ESMA, Opinion on the Commission’s Proposal for an EU Regulation on CCP Recovery and Resolution (ESMA70-151-222)(2017)). 415 ESMA, eg, called on the Commission to strengthen its supervisory and sanctioning tools in its response to the Commission’s 2016 EMIR Review Report: ESMA, Letter to the Commission, 27 January 2017 (ESMA70708036281-19). 416 ESMA, Response to the Commission Green Paper on Building a Capital Markets Union (2015/ ESMA/856). 417 ESMA, Response to the Commission Green Paper on Retail Financial Services (ESMA/2016/648). 418 ESMA, Response to the Commission Consultation on a potential EU Personal Pension Framework (ESMA/2016/1573).

Conclusion 167 Council Working Groups was mooted soon after its establishment,419 and there is some institutional support for ESMA to be consulted during the legislative process on potential BTS empowerments.420 The 2013–14 ESA Review also saw some support for ESMA to be formally consulted over the legislative process,421 as did the 2017 ESA Review.422 ESMA appears sensitive, however, to the political and institutional interests at stake. Board of Supervisors discussions note some concern as to the appropriateness of ESMA’s offering an opinion on a legislative text during its negotiation423 and the need for caution when calling for involvement in the legislative process.424 The Commission’s response has thus far been austere, noting that the legislative process is an inter-institutional one governed by the Treaties,425 and the 2017 ESA Review process has not led to proposals for reform. This strand of ESMA’s activities can be expected to strengthen, but it is unlikely that ESMA will become formally part of the legislative process in the short term and most likely that it will remain a primarily administrative actor.

VII. Conclusion ESMA can reasonably be regarded as the lead architect of the burgeoning administrative single rule-book for the EU financial market, and as the designer and custodian of a vast corpus of soft law of close-to-binding quality and material market impact. It deploys its regulatory governance powers in a manner that is purposeful, in that ESMA habitually seeks opportunities to reinforce its regulatory governance mandate and technocratic position, and at times ambitious and expansionist. At the same time, ESMA’s approach is technically informed, responsive, and agile, and, while directed to supporting the EU rule-book, reflects NCA experience and NCA challenge. It is not too much of a stretch to suggest that it represents the ‘state of the art’ in transnational regulatory governance. ESMA’s growing technical expertise may also see it come to fill the post-Brexit gap in EU financial market governance caused by the absence of the UK, arguably the most experienced designer of financial market regulation in the EU. The rise of ESMA as a technocratic regulatory governance actor can be associated with a thickening of the single rule-book and with more prescriptive and heavily proceduralised regulatory governance. It is not the purpose of this inquiry to establish whether this thickening will lead to better outcomes, whether in terms of EU financial market depth and growth, stability and orderly functioning, or consumer protection – to identify the objectives most usually associated with EU financial market regulation. It can, however, be claimed that ESMA’s approach has attractions from an e ffectiveness

419 BoS, Minutes, 20 December 2011 (ESMA/BS/2012/4). 420 2015 June FSC Report, n 219, 23. 421 2014 Parliament ESFS Review Resolution, n 239, para AL. 422 2017 ESA Consultation, n 3, 4. 423 BoS, Minutes, 23 March 2016 (ESMA/BS/2016/110), noting some NCA concern as to the wisdom of offering an opinion on the developing text of the 2017 Prospectus Regulation, then under negotiation. 424 eg, discussions on ESMA’s response to the 2013–14 ESA Review, noting the need for level 1 to be approached ‘in a careful manner’: BoS, Minutes, 24 September 2013 (ESMA/BS/2013/155). 425 eg, 2013–14 Commission ESA Review Report, n 33, 5–6.

168 ESMA and Regulatory Governance perspective, and related productive resonances with new and experimentalist governance. Further, the absence of destabilising institutional tensions here can be linked to ESMA’s generally pragmatic and deft handling of its key institutional stakeholders – the Commission and European Parliament; while spats arise, they are more indicative of a healthy mutual scepticism than of dysfunction. The receding of stakeholder concern as regards ESMA’s role in regulatory governance between the 2013–14 and 2017 ESA Reviews, and the only limited reforms offered in the 2017 ESA Proposal, suggest that ESMA has developed its regulatory governance role in a credible and sustainable manner. This is not to say that ESMA’s burgeoning technocratic influence on EU financial market regulatory governance is without effectiveness weaknesses. Revisability, for example, is in need of support given the scale, complexity, and transformative quality of ESMA’s outputs, but the political, institutional, and legal roadblocks to ESMA’s taking suspensive or similar remedial action are significant. The legitimation challenges are more troublesome, particularly as regards ESMA’s now massive soft-law rule-book. Nonetheless, the choices ESMA makes remain largely technical, and while their execution has behavioural effects, these effects are still of a much lesser order of magnitude than those generated by the normative choices made over the legislative process. Further, institutional oversight procedures apply and are adapting as ESMA evolves and the Board of Supervisors provides a degree of useful legitimation. The functional benefits of agile, technocratic ESMA regulatory governance action, particularly in the soft-law sphere, suggest that output legitimation mechanisms, including accountability arrangements, are best equipped to carry the most legitimation weight in this area. This form of legitimation needs some bolstering, as suggested in chapter 2, but still holds the most potential as a means for supporting legitimation while not disrupting ESMA’s ability to provide effective technocratic support to EU financial market regulatory governance.

4 ESMA and Supervisory Convergence I. Assessing ESMA and the Supervisory Convergence Setting This chapter interrogates the second major element of ESMA’s role: supervisory coordination and convergence (hereinafter ‘supervisory convergence’1).2 ESMA’s supervisory convergence powers and activities are concerned with the development of a common approach to how the single rule-book is supervised in practice by national competent authorities (NCAs) – the ‘Europeanisation’ of supervisory practices in effect. ESMA’s supervisory convergence role can be regarded as something of an amalgam of its regulatory governance (chapter 3) and direct supervision (chapter 5) roles. Its supervisory convergence activities have, as regards NCA engagement, a horizontal, collective quality, which can be identified in its regulatory governance activities too. But they also display the more vertical and hierarchical quality associated with ESMA’s direct supervision powers – ESMA’s interactions with NCAs as regards supervisory convergence can have a directive quality. This mixed quality makes it difficult to pin down ESMA’s role here – a mixture of facilitator, coordinator, coach, and policeman.3 It is, however, clear that despite the soft quality of its supervisory convergence powers4 ESMA is shaping NCAs’ supervisory practices and also the behaviour of market actors, and the scale of its related influence calls for its effectiveness and legitimacy to be assessed, particularly as the 2017/2018 reform waypoint is likely to strengthen its role. ESMA’s supervisory convergence activities have only recently come to prominence. The 2013–14 Review of the European Supervisory Authorities (ESA Review) suggested 1 ESMA bundles its coordination and convergence activities together as ‘supervisory convergence’ (ESMA, Strategic Orientation 2016–2020 (ESMA/2015/593) 9). 2 Enforcement is typically included within the financial market supervisory governance tool-kit and provides regulators with an ex-post means for driving deterrence, signalling required behaviours, and delivering compensation (eg, International Organisation of Securities Commissions (IOSCO), Credible Deterrence in the Enforcement of Securities Regulation (2015)). EU financial market governance is only beginning to engage with enforcement, which remains a distinctly national competence and is subject to only limited (if strengthening) EU-level coordination, primarily in the form of harmonised requirements for the minimum administrative sanctions that must be available to NCAs and for how they should be applied. ESMA’s supervisory convergence activities are almost entirely concerned with ex-ante supervision. 3 As self-characterised by ESMA: 2016–2020 Strategic Orientation, n 1, 14. 4 As with its regulatory governance role, ESMA’s ‘regulatory capacity’ as regards its supervisory convergence function is technically limited as it does not have binding powers. It has significant other resources, including (as discussed throughout this chapter) access to data, operational expertise, and institutional, political, and market support, as well as an adaptive legitimation framework, all of which can be associated with its strengthening ability to exert technocratic influence over NCAs and market participants.

170 ESMA and Supervisory Convergence that ESMA had yet to prioritise its supervisory convergence role,5 but a shift in direction would not occur until 2015, signalled in ESMA’s 2016–2020 Strategic Orientation, which committed it to strengthening its supervisory convergence activities. Since then, ESMA’s supervisory convergence activities have increased very significantly,6 along with its ability to ‘Europeanise’ supervision by NCAs. This has been recently exemplified by ESMA’s pivotal role in supporting the 3 January 2018 application of the behemoth and transformative Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation (MiFID II/MiFIR)7 – which marked the first time the market application of a major EU financial market measure was supported by operational oversight at EU level.8 As the January application date loomed, ESMA deployed a host of executive and operational tools, including contingency planning relating to any adverse impact on critical infrastructures,9 as well as the guidance and other soft-law measures traditionally used to achieve supervisory convergence. ESMA also ‘operationalised’ key political decisions made under MiFIR. Early March 2018, for example, saw ESMA produce the data required for the application of the novel and controversial MiFIR ‘volume caps’, which limit the availability of certain waivers from MiFIR’s equity market trading transparency requirements. A temporary prohibition by NCAs on the trading of shares of hundreds of EU firms in ‘dark pools’, or outside public trading venues, followed.10 While this first, market-critical imposition of the MiFIR volume caps was an expression of a political decision earlier articulated in MiFIR, ESMA operationalised the caps. ESMA’s Brexit preparations have further intensified its supervisory convergence activities and have included examination of firms’ contingency planning, as well as discussion of live relocation issues.11 ESMA’s burgeoning supervisory convergence role has now come into the reform spotlight. The 2017 ESA Review was broadly supportive of the ESAs’ and ESMA’s supervisory convergence function;12 and if the related 2017 ESA Proposal13 is adopted, ESMA’s supervisory convergence powers are likely to be materially enhanced. 5 Commission, Report on the Operation of the European Supervisory Authorities and the European System of Financial Supervision (COM (2014) 509) and related Staff Working Document (SWD (2014) 261); and European Parliament, Resolution with Recommendations to the Commission on the ESFS Review, 11 March 2014 (P7_TA(PROV)(2014)0202), Annex of Recommendations. A 2013 International Monetary Fund (IMF) Report concluded that supervisory convergence was the area where ‘ESMA’s efforts must be intensified’: IMF, Financial Sector Assessment Program, European Union. European Securities and Markets Authority. Technical Note, IMF Country Report No 13/69 (2013) 25. 6 Supervisory convergence activities represented 57% of ESMA’s resources for 2018 (split into 24% for risk assessment and 33% for other activities), as compared to 15% for the single rule-book and 28% for direct supervision: ESMA, 2018 Work Programme (ESMA20-95-619) (2017) 7. 7 Directive 2014/65/EU [2014] OJ L173/349; and Regulation (EU) No 600/2014 [2014] OJ L173/84. 8 ESMA’s Board of Supervisors (BoS) noted afterwards that the application process had, overall, been smooth: BoS, Minutes, 31 January 2018 (ESMA22-106-900). 9 BoS, Minutes, 17 December 2017 (ESMA22-106-785). 10 More than three-quarters of the composition of the FTSE-100 was affected by the temporary trading prohibitions that followed ESMA’s 7 March 2018 assessment of trading volumes: P Stafford, ‘Hundreds of European Stocks Barred from Dark Pools’, Financial Times (7 March 2018). 11 ESMA, 2018 Supervisory Convergence (SC) Work Programme (ESMA42-114-540) (2018) 10. 12 Commission, Consultation on the Operations of the European Supervisory Authorities (2017). The Commission later reported that the ESAs ‘had already contributed to more convergent and effective financial supervision with visible results’ (Commission, Reinforcing Integrated Supervision to Strengthen Capital Markets Union and Financial Integration in a Changing Environment (COM (2017) 542) 6), while stakeholder responses to the 2017 Consultation were generally supportive (Commission, Feedback Statement on the Public Consultation on the Operations of the European Supervisory Authorities (2017) 5). 13 COM (2017) 536.

Assessing ESMA and the Supervisory Convergence Setting 171 As ESMA’s supervisory convergence powers have acquired greater salience, they have become associated with the multi-faceted debate on the optimal supervisory coordination architecture for the EU financial market,14 which this chapter does not explore.15 This chapter interrogates instead how ESMA has come to occupy a central position in EU financial market governance through exercise of its supervisory convergence powers. Its focus is on the features of ESMA’s supervisory convergence powers and how they have developed, how they are being exercised by ESMA and the extent of the technocratic influence it has come to acquire, and any effectiveness or legitimation strains that may be emerging. ESMA’s supervisory convergence powers are like its regulatory governance powers in that, despite their soft nature, they have allowed ESMA to intensify its influence incrementally over EU financial market governance, through a purposeful (in that ESMA habitually seeks opportunities to reinforce its convergence mandate and technocratic position) and often expansionist and ambitious deployment of its powers, raising potential challenges for effectiveness and legitimation. The setting for supervisory convergence is, however, distinct. The first point of difference relates to the extent of ESMA’s capacity to shape its supervisory convergence powers and thereby to strengthen its ability to exert influence. ESMA’s supervisory convergence powers are malleable, can be used pre-emptively without a specific legislative or Commission mandate, and are not heavily proceduralised, and so have afforded ESMA significant operating head-room – a useful resource, which strengthens its regulatory capacity to exert influence. The related ongoing and incremental Europeanisation of NCA supervision, while of a less dramatic order than the conferral on ESMA of direct supervisory powers, has the potential to lead to a material de facto centralisation of EU financial market supervision within ESMA; to borrow Ford’s term, there is a ‘sedimentary’ quality to ESMA’s extending influence as it sinks deeper into NCAs’ national supervisory practices.16 A further point of distinction relates to effectiveness and legitimacy. This chapter relates effectiveness to whether ESMA is deploying its supervisory convergence powers in a technically informed, responsive, and agile manner, which, while capable of responding to the EU interest, reflects NCA supervisory experience and is flexible and sensitive to NCA supervisory autonomy, given that supervisory convergence is a coordination/best practice tool. For the most part, ESMA’s approach can be regarded as effective, as it balances between the nudging of convergence and the steering of supervisory action, reflects NCA experience and NCA challenge, and can be associated with a technically informed, responsive, and agile approach that should be sustainable.

14 Over the 2017 ESA Review, the Commission linked reform of ESMA’s supervisory convergence powers to progress to a single capital market supervisor: 2017 Integrated Supervision Communication, n 12. 15 From the massive literature and for a legal perspective, see C Buttigieg, ‘Governance of Securities Regulation and Supervision: Quo Vadis Europa’ (2015) 21 Columbia Journal of European Law 411; and N Moloney, EU Securities and Financial Markets Regulation, 3rd edn (Oxford University Press, Oxford, 2014) 948–50. See further ch 5. 16 Ford has identified the phenomenon of ‘sedimentary innovation’, which refers to layers of apparently unremarkable and ‘unflashy’ innovation (including regulatory innovation) that collectively can be highly consequential and lead to a markedly different regulatory landscape: C Ford, Innovation and the State: Finance, Regulation and Justice (Cambridge University Press, New York, 2017) 194.

172 ESMA and Supervisory Convergence But as ESMA’s technocratic influence expands, and as it tests and develops its powers,17 flexibility and responsiveness may leak away and rigid direction may come to replace iterative and flexible convergence. To paraphrase Riles, collective supervisory learning supported by ESMA may slide into ESMA surveillance,18 to the detriment of effectiveness. Legitimation also raises distinct challenges. The logic of ESMA’s role in supporting administrative financial market regulatory governance is politically accepted and well established.19 The optimal design of EU-level supervision and ESMA’s role in this design remain sharply contested. Financial market supervision is a broadly national competence, reflecting myriad factors, including political reluctance to cede sovereignty over supervisory decisions with potential fiscal implications; varying national market structures, which drive different political preferences; functional challenges relating to the supervision at EU level of a vast population of financial market actors; and national technocratic resistance to the loss of supervisory power and to the reputational risks attendant on acting as an operational arm of a central authority.20 But there are powerful forces driving greater EU-level supervisory centralisation, chief among them the political and institutional interests in the securing of stronger financial stability – although the extent to which EU financial stability demands the mutualisation of financial market risk and the centralisation of supervision remains unresolved – and in completing the integration project and achieving Capital Markets Union (CMU) – although here too it is not clear that integration demands supervisory centralisation. As a result, ESMA’s supervisory convergence powers sit on an unstable fault-line running between current national supervisory competences and potential EU-level supervisory centralisation. As ESMA incrementally intensifies its influence over national supervision through its supervisory convergence activities, it risks destabilising this fault-line, by placing itself in a vertical relationship with NCAs as a hierarchically superior overseer of national supervision and by ratcheting down national supervisory autonomy. ESMA’s supervisory convergence powers accordingly bring it closer to politically contested territory than its regulatory governance powers do. Strains on the legitimation arrangements designed to constrain its discretion and restrict bureaucratic expansion may therefore arise. Within this distinct setting, this chapter examines ESMA’s role in supervisory convergence. Its conclusion is positive overall. It suggests that ESMA’s supervisory convergence powers have provided it with multiple channels through which to exert influence on EU financial market governance, and that it has deployed these powers in a purposeful and often ambitious and expansionist manner, which has deepened its

17 ESMA has been assertive in calling for stronger supervisory convergence powers, including over data collection and peer review. See, over the 2013–14 ESA Review, ESMA, Letter to Commissioner Barnier, 31 October 2013; and, over the 2017 ESA Review period, ESMA, Response to the 2017 ESA Consultation (ESMA03-173-194) (2017), ESMA, Response to the Commission CMU Mid-Term Review (ESMA31-66-147) (2017), and ESMA, Letter to Commission Dombrovskis, 29 May 2017 (ESMA03-173-194). 18 Sliding from learning into surveillance has been identified as a risk to optimal coordination in international financial governance: A Riles, ‘Is New Governance the Ideal Architecture for Global Financial Regulation?’ (2013) 31 Monetary and Economic Studies 65. 19 See further ch 3. 20 From the extensive literature, see D Howarth and L Quaglia, The Political Economy of European Banking Union (Oxford University Press, Oxford, 2016). See further ch 5.

Examining ESMA’s Role in Supervisory Convergence 173 ability to exert influence. The related challenges for effectiveness and legitimacy are, by and large, being met. ESMA can be regarded as executing its supervisory convergence mandate in a technically expert and responsive manner, which can reflect the EU interest but is informed by national settings and by NCA challenge. It is also showing some productive agility through an ability to adapt and experiment in an incremental and sustainable manner.21 ESMA’s legitimation arrangements appear fit for purpose and are bolstered by the forms of legitimation provided by the Board of Supervisors.22 There are, nonetheless, indications that responsiveness, agility, and flexibility may leach away if ESMA continues to slide into a more hierarchical posture over NCAs, with potentially troubling implications for effectiveness and legitimation. This movement may be accelerated if the 2017 ESA Proposal is adopted. The chapter assesses ESMA’s characterisation as a supervisory convergence actor (section II), considers the context within which ESMA deploys its powers (section III), examines ESMA’s supervisory convergence tool-kit (section IV), and then recaps the chapter’s findings (section V).

II. Examining ESMA’s Role in Supervisory Convergence A. Capturing ESMA’s Supervisory Convergence Role i. ESMA as System Supervisor and as ‘Europeanising’ Supervision There is no single definition of ESMA’s supervisory convergence function. It is expressed indirectly in the ESMA Regulation through ESMA’s array of convergence-related empowerments. The recitals to the ESMA Regulation, however, call on ESMA to foster supervisory convergence with the aim of establishing a common supervisory culture,23 while notions of supervisory coordination, commonality, and consistency are recurring themes in ESMA’s self-characterisation of its role. ESMA Chair Maijoor, for example, has characterised supervisory convergence as ensuring that NCAs take the best possible supervisory decisions and are alive to the cross-border risks their supervision may create,24 while ESMA’s response to the 2017 ESA Consultation related supervisory convergence to consistency of supervisory outcomes25 and its earlier 2016–2020 Strategic Orientation regarded it as being concerned with reducing supervisory risk in the single market by the ‘consistent implementation and application of the same rules using similar approaches’.26 More comprehensively, ESMA’s 2018 Supervisory Convergence

21 A capacity for experimentation is frequently associated with regulatory and supervisory best practice. See, eg, C Brummer and Y Yadav, Fintech and the Innovation Trilemma, Vanderbilt Law Research Paper No 17-46 (2017), available at https://ssrn.com/abstract=3054770 (in the Fintech context); and Ford, n 16 (generally). 22 See further ch 2. 23 Regulation (EU) No 1095/2010 [2010] OJ L 331/84, rec 41. 24 ESMA Chair Maijoor, Speech on ‘Review of the ESAs’, 8 February 2017. 25 2017 ESMA ESA Consultation Response, n 17. 26 2016–2020 Strategic Orientation, n 1, 8.

174 ESMA and Supervisory Convergence Work Programme recently described its supervisory convergence agenda as fostering the consistent and effective application of the single rule-book, facilitating exchange of NCA experiences, developing and coordinating effective national approaches, identifying best practices, and assessing NCA actions.27 The Commission has similarly if succinctly characterised supervisory convergence as the measures taken to ensure that EU financial regulation is interpreted and applied in a convergent and consistent manner and that compliance is supervised in a consistent way.28 A related ‘Europeanisation’ of supervisory decision-making29 is also taking place within Banking Union’s Single Supervisory Mechanism (SSM), but here supervisory decision-making has been operationally centralised within the SSM and its distinct institutional arrangements.30 The simultaneously arm’s length but close-up steering of operationally independent NCAs in which ESMA is engaging in is a novelty for EU financial governance. ESMA’s characterisation in this sphere has an elusive quality, having no direct counterpart in domestic or international financial market governance or in EU agency governance. As an EU-level convergence actor, ESMA has little in common here with domestic financial market regulators. ESMA’s supervisory convergence powers have, however, some resonances with the supervisory coordination functions exercised by the international standard-setting bodies (ISSBs) of international financial governance. The ISSBs, collective institutions that provide a platform for supervisory coordination and problem-solving in international financial governance,31 have primarily been concerned with standard-setting, but are increasingly turning to operational supervisory coordination and the consistent application of standards,32 including through support of colleges of supervisors and of peer review,33 and so their activities are in some respects like ESMA’s supervisory convergence activities. The ISSBs can, however, struggle to support coordination and best practices given the strong incentives national financial regulators have to protect their domestic supervisory autonomy,34 while the range of ESMA’s

27 2018 SC Work Programme, n 11, 4. 28 2017 ESA Consultation, n 12, 6. 29 The intensifying ‘Europeanisation’ of domestic regulatory decision-making associated with the establishment of EU agencies is well charted in the agency literature: eg E Ruffing, ‘Agencies between two worlds: information asymmetry in multilevel policy-making’ (2015) 22 Journal of European Public Policy 1109; and T Bach, E Ruffing, and K Yesilkagit, ‘The Differential Empowering Effects of Europeanization on the Autonomy of National Agencies’ (2015) 28 Governance 285. 30 On the relative weights of supervisory centralisation and decentralisation in the SSM, see A Pizzolla, ‘The Role of the European Central Bank in the Single Supervisory Mechanism: A New Paradigm for EU Governance’ (2018) 43 European Law Review 3. 31 See further ch 1. 32 Including, eg, Basel Committee, Frameworks for Early Supervisory Intervention (2018), IOSCO, Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (2017), and Financial Stability Board (FSB), Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture (2014). For a review of ISSB initiatives, see E Ferran, ‘Financial Supervision’ in D Mügge (ed), Europe and the Governance of Global Finance (Oxford University Press, Oxford 2014) 16. 33 See further M Barr, ‘Who’s in Charge of Global Finance?’ (2014) 4 Georgetown Journal of International Law 971; and E Helleiner and S Pagliari, ‘The End of an Era in International Financial Regulation? A PostCrisis Research Agenda’ (2011) 65 International Organization 169. 34 P-H Verdier, ‘Mutual Recognition in International Finance’ (2011) 52 Harvard International Law Journal 56.

Examining ESMA’s Role in Supervisory Convergence 175 supervisory convergence tools, the hardening devices it has to hand, and the related extent to which it is driving NCAs’ operational supervisory practices, all mark it out as an actor distinctive from the ISSBs. Similarly, within EU agency governance, while coordinating and convergence functions are at the heart of EU agencies’ mandates,35 the scale of ESMA’s activities, as well as the hardening effect of its powers to direct NCAs, represent points of distinction. The hierarchical quality and wide reach of ESMA’s supervisory convergence powers is accordingly a source of some elusiveness. ESMA’s supervisory convergence activities are mainly concerned with coordinating NCA supervision; collating, managing, and interrogating data; developing and sharing best practices; and providing overall system oversight. But there is a strengthening hierarchical/vertical quality to how ESMA exercises these powers, evident in its ever more robust approach to peer review, the increasingly granular and operational quality of its supervisory soft law, and its ever more directive ‘nudging’ of NCA supervisory practices. ESMA has acknowledged the elusiveness of its convergence role, characterising itself as facilitator, coordinator, coach, or policeman, depending on the power in question.36 Given how its convergence powers are evolving, ESMA might currently best be regarded as a ‘system supervisor’,37 overseeing the quality, consistency, and effectiveness of supervision in the EU financial market, and, increasingly, setting supervisory priorities and direction and taking different forms of operational action where required. But however ESMA is characterised, an encroaching Europeanisation of NCA supervisory decision-making is following from ESMA’s purposeful and often expansionist approach to its powers, and the scale of the influence it now exerts over NCAs and the behaviour of financial market participants is a defining feature of its convergence role.

ii. ESMA’s Supervisory Convergence Powers Article 8(1) of the ESMA Regulation confers a number of supervisory convergence tasks on ESMA, which include: • contributing to high-quality common supervisory standards and practices and the consistent application of legally binding Union acts, in particular by contributing to a common supervisory culture; ensuring consistent, efficient, and effective application of the EU law within its scope; preventing regulatory arbitrage; mediating and settling disagreements between NCAs; ensuring effective and consistent supervision of financial market participants; ensuring a coherent functioning of colleges of supervisors; and taking action, inter alia, in emergency situations; • stimulating the delegation of tasks and responsibilities among NCAs; • organising and conducting peer reviews; • monitoring and assessing market developments; and

35 See further ch 1. 36 2016–2020 Strategic Orientation, n 1, 14. 37 For an early analysis of ESMA as a ‘system supervisor’, see HM Treasury, Response to the Commission Services Consultation on the Review of the ESFS (2013).

176 ESMA and Supervisory Convergence • contributing to the consistent and coherent functioning of colleges of supervisors; monitoring and assessing systemic risk; developing and coordinating recovery and resolution plans; providing a high level of protection to investors; and developing methods for the resolution of failing market participants. This laundry list of tasks reflects the institutional battle over the 2009–10 ESA negotiations for control of ESMA’s remit,38 but it also underlines the potential for supervisory convergence to become a means for exerting technocratic influence. Article 8(1) is supported by Article 8(2), which sets out ESMA’s related powers, including powers to act under the Article 17–19 regime, which empowers ESMA to act in relation to breaches of EU law by NCAs, inter-NCA mediation, and emergency situations; collect information; and provide centrally accessible databases. These widely-cast empowerments are anchored to more specific powers under the ESMA Regulation. Article 16 empowers ESMA to adopt the guidelines and recommendations that form part of the single rule-book, but which also direct NCAs’ supervisory practices. ESMA is further empowered to coordinate colleges of supervisors (Article 21); support the delegation of tasks between NCAs (Article 28); engage in peer review (Article 30); and provide coordination generally, but particularly where adverse developments could potentially jeopardise the orderly functioning and integrity of markets or the stability of the EU financial system (Article 31). ESMA is also conferred with datarelated powers, including the monitoring and identification of systemic risk (Articles 22–24) and the assessment of market developments (Article 32), and with powers to collect information from NCAs where necessary to carry out its functions (Article 35). Article 29 directs ESMA to play an active role in ‘building a common Union supervisory culture and consistent supervisory practices’, including by providing opinions to NCAs, promoting effective information exchange, contributing to developing high-quality and ‘uniform’ supervisory standards, and establishing training programmes; ESMA is also charged by Article 29 with developing ‘new practical instruments and convergence tools to promote common supervisory tools and practices’.39 Beyond the ESMA Regulation, extensive sector-specific empowerments, including to develop databases, support delegation, require NCA reports on a multiplicity of matters, and coordinate information exchange, are embedded across sectoral EU financial market legislation, and support and amplify the empowerments in the ESMA Regulation.

B. Dynamism and Reform ESMA’s supervisory convergence powers by and large allow it to operate under its own initiative and free from the constraints the co-legislators impose on its regulatory 38 During the 2009–10 ESA negotiations there was some European Parliament support for ESMA to have an executive/operational role in resolution, eg, but, reflecting Member State resistance, this was watered down to a soft coordination function, which has since been overtaken by the establishment of Banking Union, which covers the resolution of certain complex investment firms, and by the development of a central clearing counterparties-specific (CCP-specific) resolution regime (currently under negotiation). 39 General directions to ESMA to support effective recovery and resolution procedures and to strengthen the EU’s investor compensation regime are contained in Arts 25–27, but these highly sensitive areas, which have fiscal risk implications, are in practice the preserve of the EU legislative process.

Examining ESMA’s Role in Supervisory Convergence 177 governance and direct supervision powers. In particular, its supervisory convergence powers are not subject to the extensive proceduralisation or institutional oversight associated with its regulatory governance and direct supervision powers, whether in the ESMA Regulation or otherwise in sectoral EU financial market regulation. Within this relatively loose operating environment, ESMA has proved to be a dynamic actor, using its supervisory convergence tools in an often expansionist manner to exert influence on the operational business of financial market supervision. During the first five years or so of its operation, ESMA was preoccupied with the construction of the massive administrative single rule-book.40 Its initial Annual Reports record only limited supervisory convergence activity, while Board of Supervisors minutes are similarly sparse. The year 2015 marked a significant shift towards supervisory convergence – an operational pivot that represented a natural shift in priorities as ESMA turned to the supervisory application of the massive new administrative rulebook, but also something of an agile and entrepreneurial re-setting of its priorities as its operating environment changed with the receding demands of its regulatory governance mandate. ESMA’s pivot also responded to European Parliament and Commission concern over the 2013–14 ESA Review that its convergence activities be strengthened.41 Its 2016–2020 Strategic Orientation, adopted in 2015, established ESMA’s vision for supervisory convergence as the consistent implementation and application of the same rules, using similar approaches, and as engaging the sharing of best practices and the realising of efficiency gains.42 ESMA asserted that NCA supervisory practices do not automatically converge and committed to deploying additional resources and focus, using a wider range of convergence tools, adopting clearer criteria for prioritising convergence action, and making internal governance reforms (including the establishment of a Supervisory Convergence Standing Committee).43 ESMA also articulated a twin-pillar model for its new convergence activities, based on, first, upfront assistance to NCAs and, second, ex-post review and remediation, which engaged four functions: ESMA as facilitator, coordinator, coach, and policeman. ESMA’s first 2016 Supervisory Convergence Work Programme expanded on this vision and is notable for its scale and ambition.44 At the core of this first Work Programme was the extensive range of supervisory convergence activities identified for eight distinct policy areas.45 The supervisory convergence agenda for the market

40 For initial discussion of ESMA’s supervisory convergence role, see P Schammo, ‘EU Day to Day Supervision or Intervention-Based Supervision: Which Way Forward for the European System of Financial Supervision’ (2012) 32 Oxford Journal of Legal Studies 771; and N Moloney, ‘The European Securities and Markets Authority and Institutional Design for the EU Financial Markets – a Tale of Two Competences: Part (2) Supervision’ (2011) 12 European Business Organisation Law Review 177. 41 ESMA related its pivot to the need to reflect on how it could best fulfil its mandate after the 2011–15 startup period; the continuing evolution of financial markets in response to regulatory change, political forces (Capital Markets Union), and other drivers (such as Fintech); and as cooperation deepened between ESMA and NCAs: 2016–2020 Strategic Orientation, n 1, 3–5. 42 ibid, 8. 43 ibid, 14. 44 ESMA, Supervisory Convergence (SC) Work Programme (ESMA/2016/203). 45 Corporate finance; corporate reporting; investment management; investor protection and intermediaries; market integrity; post trading; secondary markets; and IT infrastructure.

178 ESMA and Supervisory Convergence integrity policy area, for example, included guidelines for the 2014 Market Abuse Regulation (MAR);46 application workshops for NCAs; Q&As; opinions; refinement of the infrastructure for market surveillance (ESMA’s ‘TREM’ system); and enhancement of ESMA’s cooperation systems, including its Urgent Issues Group. The secondary market trading agenda, framed by the 2012 European Market Infrastructure Regulation (EMIR)47/2014 MiFIR, to take another example, was similarly extensive, including guidelines, opinions, data infrastructures, and Q&As. Subsequent ambitious agendas were pursued across the 2017 and 2018 Work Programmes.48 ESMA’s 2018 Supervisory Convergence Work Programme, for example, included new priorities relating to financial innovation and the withdrawal of the UK from the EU, as well as an extensive programme of activities for MiFID II/MiFIR, which included ‘setting a number of common supervisory priorities’.49 The 2017 and 2018 Work Programmes also extended ESMA’s supervisory convergence activities to cross-sectoral activities50 and included new convergence tools.51 Many of these supervisory convergence activities are directed to cross-border cooperation/coordination. But many more are directed to the operational business of domestic supervision and to shaping national supervisory approaches to a European template. This hybridity within supervisory convergence action and the tensions it can generate can be identified in ESMA’s commitment to delivering ‘the consistent implementation and application of the same rules using similar approaches’52 and to fostering a common approach and developing common EU solutions to new trends and risks53 – while, at the same time, ensuring that its activities emerge from an iterative process between ESMA and NCAs’54 and that ‘individual craftsmanship’ is not lost and ‘collective learning’ is promoted.55 While dynamism here is most strongly associated with ESMA’s articulation and execution of its supervisory convergence mandate, legislative reform has begun to impinge. The 2017 ESA Proposal seeks to enhance, albeit not radically, ESMA’s supervisory convergence powers. The proposed reforms, discussed in section IV, are not swingeing and can reasonably be regarded as targeted and calibrating.56 Nonetheless, the Proposal, if adopted, would lead to a material strengthening of ESMA’s ability to

46 Regulation (EU) No 596/2014 [2014] OJ L173/1. 47 Regulation (EU) No 648/2012 [2012] OJ L201/1. 48 ESMA, 2017 Supervisory Convergence (SC) Work Programme (ESMA71-844457584-345) (2017); and 2018 SC Work Programme, n 11. 49 2018 SC Work Programme, n 11, 9–11. ESMA committed to a wide range of MiFID II/MiFIR convergence measures, including workshops, guidelines, opinions, and Q&As, as well as data quality initiatives, data coordination arrangements, and peer reviews. 50 Including in relation to data quality: eg, 2017 SC Work Programme, n 48, 17–21; and 2018 SC Work Programme, n 11, 28–29. 51 Notably the commitment to ESMA’s stress testing of the asset management sector (previously ESMA stress testing activities had been focused on CCPs (see further section IV)): 2018 SC Work Programme, n 11, 20. 52 2016–2020 Strategic Orientation, n 1, 8. 53 2018 SC Work Programme, n 11, 5. 54 ibid, 4. 55 ibid, 12. 56 The Commission characterised the reforms as making ‘targeted changes to strengthen the EU supervisory framework’: 2017 ESA Proposal, n 13, Explanatory Memorandum, 8.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 179 drive supervisory convergence, particularly given the radiating effect the proposed direct supervisory empowerments discussed in chapter 5 might, if adopted, have on ESMA’s ability to exert technocratic influence over supervision generally. ESMA’s multi-faceted role in supervisory convergence is not easy to pin down for the purposes of examining its influence and the implications. It is all the more difficult to pin down given ESMA’s dynamism in this area. It is, however, clear that ESMA’s influence on the operational business of financial market supervision is now significant. The nature of this influence and of the related risks that may be emerging has been shaped by the distinct context within which ESMA’s supervisory convergence powers have developed and are applied, discussed in the following section.

III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy A. Financial Markets and Administrative Supervisory Governance: Context and Challenges Financial market rules are operationalised by the practical business of supervision,57 which is usually entrusted to a non-majoritarian agency in the form of a financial market regulator. Supervision engages the exercise by the financial market regulator of a wide set of tools,58 which may or may not be linked to the achievement of specific outcomes,59 and which range from teaching tools (including soft law and industry outreach); information/surveillance-based tools (such as requests for information, on-site inspections, annual supervisory visits, data interrogation, themed entity-level investigations, and sector-wide thematic investigations on specific issues); remediation tools (including the formal remediation plans adopted by financial market regulators for regulated actors); and follow-up action, ultimately engaging ex-post enforcement. The location of financial market supervision in a regulator brings with it the benefits of insulation from the political process and access to technocratic expertise associated with agencies generally. It also brings the associated challenges for legitimation and effectiveness. These are particularly acute for financial market supervision, as supervisory action can put pressure on regulators’ legitimation arrangements, pressure that can be increased by the effectiveness challenges supervision also generates and which may compromise output legitimation. The legitimation challenges include that financial market supervision, and particularly any failures by the regulator, can readily be associated with redistribution, particularly where fiscal costs are imposed on the public.

57 D Langevoort, ‘The Social Construction of Sarbanes-Oxley’ (2007) 105 Michigan Law Review 1817. 58 The standard supervisory ‘tool-kit’ is usually characterised as including inspection, investigation, surveillance, and enforcement tools: IOSCO, Objectives and Principles of Securities Regulation (2017), principles 10–12. 59 Outcomes, whether specified in legislative mandates or regulatory agendas, can run the gamut from compliance (to whatever degree) by the regulated sector, to more nuanced outcomes related to the regulator’s tolerance levels for market failure and loss, and on to specific market outcomes.

180 ESMA and Supervisory Convergence Further, supervisory strategies are used by regulators to send signals to the regulated community, and so can have norm-setting effects. The pressure that may be placed as a result on legitimation arrangements may not be alleviated by output legitimation, as supervision is still a work-in-progress in financial market governance, experiencing cycles of change and refinement as regulators seek supervisory strategies which equip them to deal with the complex, contingent, multi-polar, and highly dynamic quality of financial market risk. Supervision is a challenge for regulators generally, but sophisticated supervisory models, which are variously ‘nimble,’ ‘responsive,’ ‘flexible,’ ‘smart’ and ‘adaptive’, and which aim to equip regulators to engage with and learn from the regulated sector, adapt in a data-informed and iterative manner as environmental conditions require, and retain hierarchical authority, are being developed and refined.60 In the financial markets supervision sphere specifically, the financial crisis prompted a sharpened focus on how supervisory strategies and models should be designed.61 In the UK, for example, where supervisory strategies and models have been repeatedly reconsidered and adjusted, ‘outcomes-based’ supervision, based on a pre-emptive and interventionist approach which draws on data-informed and forward-looking judgement, is now in the ascendant.62 In practice, whatever its overall design and objectives, financial market supervision is usually operationalised through the regulator’s bespoke proprietary supervision model, which is typically amplified by supervisory manuals/handbooks and related risk assessment frameworks. ‘Risk-based’ models are common internationally and are based on identification of the extent to which risks may materialise, or on identification of when risks to the regulator’s mandate or objectives might arise.63 Risk-based supervision is an intuitively attractive operating model for financial market supervision, as it reflects the reality that regulators operate in a resource-limited environment and need to make choices as to how and when to intervene; it is forward-looking and evidence-based;64 and its institutional embedding and public communication give the regulator some protection against failures. But while increasingly hard-wired into regulatory governance generally65 and financial market governance specifically,66 risk-based

60 For a recent examination, see Ford, n 16. 61 C Ford, ‘New Governance in the Teeth of Human Frailty: Lessons from Financial Regulation’ (2010) Wisconsin Law Review 441; and A Lo, ‘Regulatory Reform in the Wake of the Financial Crisis of 2007–2008’ (2009) 1 Journal of Financial Economic Policy 4. 62 Financial Conduct Authority (FCA), Supervision Manual (August 2017), paras 1A, 3.1–3.2. 63 Risk-based supervision implies the use of a systematised framework of inspection or supervision to manage regulatory or institutional risk, and which allows a regulator to prioritise its supervisory activities: J Black, ‘Risk based regulation: choices, practices and lessons being learned’ in OECD, Risk and Regulatory Policy: Improving the Governance of Risk (2010); and J Black ‘The Development of Risk Based Regulation in Financial Services: Just “Modelling Through”?’ in J Black, M Lodge, and M Thatcher (eds), Regulatory Innovation: A Comparative Analysis (Elgar, Cheltenham, 2006) 156. 64 See J Black, ‘Regulatory Styles and Supervisory Strategies’ in N Moloney, E Ferran, and J Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University Press, Oxford, 2015) 217. 65 eg OECD, Recommendation of the Council on Regulatory Policy and Governance (2012), Recommendation 9.4, recommending that governments consider risk-based approaches in the design and enforcement of regulatory compliance strategies. 66 For an endorsement, see IOSCO, Guidelines to Emerging Market Regulators Regarding Requirements for Minimum Entry and Continuous Risk-Based Supervision of Market Intermediaries (2009). The IMF, in its Financial Sector Assessment Programs (FSAPs) (reviews) of major economies, regularly reports approvingly

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 181 models can be difficult to operationalise, particularly given the empirical uncertainties and cognitive limitations associated with risk assessment, model design complexities, the dangers that risks carrying the highest levels obscure all others even where low risks can collectively require action, and reputational risks to the regulator.67 But despite repeated cycles of experimentation, the determinants of optimal financial market supervision and the extent to which financial market regulators can develop and deploy effective tools remain uncertain, as is clear from the ongoing debate on how conduct and culture risk should be supervised.68 Further, opportunities for supervisory learning can be limited, as the factors that shape supervision and have a bearing on optimal outcomes are often context-dependent and reflect local markets, cultures, and political features.69 Effectiveness and legitimation can as a result be compromised. Mandated to support financial market supervision, ESMA’s operating environment, and the related effectiveness and legitimation challenges of its expanding influence, have been shaped by this distinct context.

B. The EU Context i. A Novel Competence Shaped by Distinct Interests ESMA’s supervisory convergence role has also been shaped by its distinct EU setting. Supervision at the EU level – whether in the form of convergence (this chapter) or centralisation (chapter 5) – is still a novelty for EU financial market governance, and generates distinct interests which have shaped ESMA’s operating environment and the implications of its expanding influence. Supervision has long been located with NCAs in EU financial market governance, reflecting the host of operational, organisational, fiscal (given the taxpayer costs supervisory failure can generate), and political complexities and sensitivities associated with financial market supervision. The need to coordinate locally-based supervision by NCAs has, however, also long been recognised; the allocation of primary supervisory competence to the ‘home’ NCA of a regulated actor and the specification of the ‘host’ NCA’s role has for some time been a feature of sectoral EU financial market legislation, as have related NCA information-sharing and cooperation requirements. The use of institutional reform to support NCA supervisory coordination and also to drive convergence in supervisory practices is a much more recent development. The first concrete steps

on economies’ using or adopting risk-based approaches for financial market supervision. See recently IMF, FSAP, Technical Note: Supervision and Oversight of Financial Market Infrastructures, IMF Country Report (Sweden) No 17/210 (2017). 67 eg J Black and R Baldwin, ‘When Risk-based Regulation Aims Low: Approaches and Challenges’ (2012) 6 Regulation & Governance 2. 68 In relation to which the FSB has been a pathfinder, developing a tool-kit for supervisors: eg FSB, Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (2017). 69 Financial Services Authority (FSA), The Turner Review. A Regulatory Response to the Global Financial Crisis (2009) 89–90, reporting that it was not clear which supervisory models were best equipped to deal with the crisis given the range of political, market, regulatory, societal, and other variables that influence supervision.

182 ESMA and Supervisory Convergence were taken over the 1999–2004 Financial Services Action Plan70 era, when the Lamfalussy Report identified progress in supervisory convergence as essential to the financial market integration project and as requiring institutional support from what would become the Committee of European Securities Regulators (CESR).71 A departure from the regulatory/harmonisation tools then familiar to EU financial market governance, with an operational bent, supervisory convergence was regarded as ‘one of the most innovative elements’ of the Lamfalussy model.72 But it did not threaten national supervisory autonomy, and was broadly supported politically and institutionally. The fleshing out of the notion of supervisory convergence was left to CESR, which regarded it as the encouragement of a common European way of approaching supervision, including in relation to resource allocation, risk management, and supervisory objectives,73 and which adopted related guidelines and templates for information exchange and supervision and also undertook an early version of peer review. While progress was slow,74 institutional support from the Council, Commission, and European Parliament for this light-touch and evolutionary approach to managing supervision at the EU level for the EU financial market – which was deceptively ambitious given its potential to reach deep into national supervisory decision-making over time – was strong. The Commission’s 2007 Lamfalussy Review, which proposed only minor enhancements to CESR’s role and was supportive of supervisory convergence, was supported by the Council, which was also concerned not to displace supervisory convergence as the organising principle for EU-level financial market supervision.75 While the subsequent financial crisis re-set the informal CESR institutional model with the establishment of ESMA, it did not materially disturb supervisory convergence as the frame within which EU financial market supervision was organised.76 The dominance of supervisory convergence in ESMA’s supervision mandate is a function of the political and institutional preferences on supervisory governance that shaped ESMA’s (and the other ESAs’) 2011 establishment. The financial crisis exposed the inability of the EU to respond to crisis in a coordinated manner, and the need to significantly strengthen supervisory coordination as well as supervisory best practices.77 At the same time, it amplified political hostility to any separation of

70 COM (1999) 232. 71 The Lamfalussy model segments EU financial market governance into: level 1 legislative measures, level 2 administrative regulatory measures, level 3 supervisory convergence, and level 4 Commission enforcement of Member State obligations (see further ch 1). 72 Commission, Review of the Lamfalussy Process. Strengthening Supervisory Convergence (COM (2007) 727) 7. 73 CESR, Preliminary Progress Report. Which Supervisory Tools for the EU Securities Markets? An Analytical Paper by CESR (CESR 04-333f) (2004). 74 Slow progress towards supervisory convergence (including as regards resources, application of powers, levels of supervisory intensity, and NCAs’ views on the purpose of supervision and appropriate risk levels) and the related risks to the management of pan-EU risks were repeatedly noted in CESR’s annual supervisory convergence reports to the Council’s Financial Services Committee. 75 ECOFIN Council Conclusions on the EU Supervisory Framework and Financial Stability Arrangements, 14 May 2008 (Council Document 8515/3/08). 76 On the establishment of ESMA and the debates on its supervisory coordination/convergence powers, see Moloney, n 15, 957–65. 77 The major supervisory failings were identified in the EU’s primary crisis-era diagnostic and remedial report: High Level Group on Financial Supervision (2009). See further G Ferrarini and F Chiodini, R egulating

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 183 perational supervisory decision-making and of related fiscal risks (by the movement o of supervision to the EU level and the retention of fiscal risk at the national level), given the scale of the fiscal costs generated by the financial crisis.78 It was only with the later euro area crisis and the emergence of an existential threat to the euro that the radical mutualisation of risk and the centralisation of supervision by Banking Union could be contemplated. The earlier ESA/ESMA reforms, by contrast, saw significant Member State hostility to the EU-level centralisation of supervision, as discussed in chapter 5. The pivotal June 2009 European Council ultimately supported some ‘binding and proportionate decision-making powers’ for the ESAs, but also stated that ESA decisions should not impinge on the fiscal responsibilities of Member States.79 Supervisory convergence, by contrast, represented a relatively benign organisational model for EU-level supervision, which, while already familiar, had the promise, once bolstered by the ESAs’/ ESMA’s enhanced powers, of supporting stronger pan-EU risk management and supervisory coordination. Institutionally, the Commission was supportive of the supervisory convergence model and sceptical of transfers of operational supervisory power to the ESAs, reflecting its interest in protecting its executive pre-eminence, while the Parliament was similarly supportive, albeit that it also called for the ESAs to have direct supervision/intervention powers.80 Since ESMA’s establishment, supervisory convergence has continued to enjoy institutional and political support. Following the 2013–14 ESA Review, the Commission did not propose major reforms to ESMA’s supervision powers, while the CMU agenda – a potential inflection point for reform – reinforced supervisory convergence as the organising principle of EU-level financial market supervision. The Commission’s 2015 CMU Green Paper identified supervisory convergence as a key tool for achieving CMU,81 and its subsequent 2015 CMU Action Plan called on ESMA to strengthen its supervisory convergence activities and underlined the importance of supervisory convergence (regarded as consistency in supervision and in supervisory outcomes) to the success of the CMU agenda.82 By the time of the June 2017 CMU Mid-Term Review the Commission was signalling a (partly Brexit-driven) need for some degree of supervisory centralisation, but supervisory convergence remained central to the Commission’s CMU agenda.83 The European Parliament has also emerged as a strong supporter of supervisory convergence.84 It is significantly less wary of ESMA’s burgeoning activities in this area than it is of ESMA’s expanding regulatory governance activities, some of which have drawn the Parliament’s fire in relation to legitimacy.85 Since 2011,

Multinational Banks in Europe. An Assessment of the New Supervisory Framework, ECGI Law WP No 158/2010 (2010), available at http://ssrn.com/abstract=1596890. 78 See C Burns, J Clifton, and L Quaglia, ‘Explaining policy change in the EU: financial reform after the crisis’ (2018) 25 Journal of European Public Policy 728. 79 European Council Conclusions, 18–19 June 2009 (Council Document 11225/92/09) 8. 80 See further ch 5. 81 Commission, Green Paper, Building a Capital Markets Union (COM (2015) 63) 22–23. 82 Commission, Action Plan on Building a Capital Markets Union (COM (2015) 468) 26. 83 Commission, Mid-Term Review of the Capital Markets Union Action Plan (COM (2017) 292) 10–11. 84 European Parliament, Resolution on Stocktaking and Challenges of the EU Financial Services Regulation, 19 January 2016 (P8_TA(2016)0006)). 85 See further ch 3.

184 ESMA and Supervisory Convergence the Council has, reflecting longstanding Member State preferences, remained a strong supporter of enhanced supervisory convergence, including as a means for achieving CMU, and sceptical of the merits of centralised supervision.86 The dominance of ESMA-led supervisory convergence as the preferred means for organising pan-EU financial market supervision can be seen from its repeated embedding within sectoral financial market legislation since ESMA’s 2011 establishment. The 2017 Prospectus Regulation, for example, directs ESMA to use its powers to promote supervisory convergence in relation to the NCA-based prospectus approval process and to engage in peer review.87 Technocratic interests have also shaped the setting of ESMA’s supervisory convergence powers. As supervision is now the main function of NCAs (regulation having largely moved to the EU level), they have incentives to restrict the Europeanisation of their supervisory practices. Further, as long as supervision remains a local competence it is exposed to domestic political and public reaction, and overly prescriptive central steering by ESMA could accordingly prejudice NCAs domestically, particularly as optimality in supervision, while elusive, can be regarded as at least in part a function of local factors, including market structure, prevailing risks, market culture, the legacy relationship between the NCA and the supervised sector, domestic supervisory mandates, NCA powers and resources, and the local political context. In addition, their incentives to use supervision as a competitive advantage cannot be discounted as influences on NCAs’ postures on supervisory convergence. The monolithic nature of the single rule-book has all but eliminated regulatory competition, but room remains for competition – or at least specialisation – in supervision. The early months of the EU/UK negotiations on the UK’s withdrawal from the EU witnessed quiet if real jockeying for position among certain NCAs for a share of the financial services business relocating to the EU-27 from the UK as a result of Brexit.88 Further, NCAs have incentives not to impose supervisory convergence measures on dissenting NCAs, even where ESMA’s mandate to act in the EU interest might so dictate: peer review, ESMA opinions that weigh heavily on a particular NCA, college of supervisor decision-making, or data requests, for example, can all become occasions on which NCAs seek compromise, whether to protect Board collegiality or their future position. Both the 2013–14 and the 2017 ESA Reviews charged the three ESAs with a culture of compromise on supervisory convergence,89 although, as discussed in section IV, the evidence suggests that over time ESMA has been able to take increasingly directive action. On the other hand, NCAs can be expected to be supportive of supervisory convergence measures where these measures support national supervision, provide operational clarity, and give NCAs leverage for demanding additional supervisory resources at national level. Further, NCAs 86 ECOFIN Council Conclusions on the CMU Mid Term Review, 11 July 2017 (Council Document 460/17) and ECOFIN Council Conclusions, 10 November 2015 (Council Document 791/15). 87 Regulation (EU) No 2017/1129 [2017] OJ L168/12, Art 20(12). 88 As was well reported (eg, O Walter, ‘Spooked Fund Managers Look at Rivals to London’, Financial Times (17 February 2018)). 89 eg, Review of the New European System of Financial Supervision. Part 1: The Work of the European Supervisory Authorities, Study by Mazars for the European Parliament (IP/A/ECON/ST/2012-23) (2013) (‘Mazars Report’), suggesting there was a structural inhibition within the ESA Boards of Supervisors (at 89); and 2017 ESA Consultation, n 12, 6–7.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 185 on the Board of Supervisors can be expected to act collectively, to some degree, as a technocratic, epistemic community that develops distinct transnational preferences and interests, particularly given the potential ESMA holds for strengthening the regulatory capacity and related influence of NCAs.90 Bearing out these different interests, Board of Supervisor minutes suggest some NCA wariness of ESMA’s supervisory convergence mandate but, overall, a supportive posture. Over 2011–15, a period when supervisory convergence was not a major priority of Board discussions, NCAs were, for example, broadly supportive of peer review but wary of data requests,91 and concerned to ensure that the impact of supervisory convergence activities on domestic supervision was considered.92 Similarly, while NCAs supported ESMA’s supervisory coordination role (notably in relation to NCAs’ management of the financial stability risks that rocked the euro area sovereign debt market over 2011–1293), they were alive to the risks to their autonomy.94 ESMA’s early years, however, also saw NCA support for a strengthening of ESMA’s ability to monitor risks,95 as well as for ESMA to develop and host infrastructures for managing the major reporting and data collection projects required of NCAs under sectoral EU financial market legislation.96 The expansion of ESMA’s supervisory convergence agenda over 2015–17 took place against a background of broad NCA support,97 including as regards supervisory convergence as a means for supporting CMU98 and for managing Brexit-related arbitrage risks.99 By mid-2017, as the 2017 ESA Review got underway, NCAs were emphasising the continued importance of supervisory convergence.100 Board discussions over this period also, however, record concern that ESMA data-collection demands on NCAs not be increased;101 90 eg Ruffing, n 29. See further ch 2. 91 A very early BoS Meeting noted support for ESMA peer review, but reported on some NCA resistance to ESMA data collection given the time and resource costs for NCAs: BoS, Minutes, 21 May 2011 (ESMA/2011/ BS/142). 92 eg BoS, Minutes, 12 April 2011 (ESMA/2011/BS/141). 93 Minutes over 2011–12 repeatedly note NCAs’ discussion of financial stability risks, coordination of related short-selling action, and concern that highly sensitive domestic decisions with implications for other markets be coordinated: eg, BoS, Minutes, 30 September 2011 (ESMA/2011/BS/209); 20 December 2011 (ESMA/2012/BS/4)); and 19 June 2012 (ESMA/2012/BS/96). 94 Early Board discussions on a coordinating role for ESMA as regards NCAs’ decisions on waivers from the application of the EU’s trading transparency rules reveal some concern as to the Board voting process, as well as to the precedential impact of the related decisions: BoS, Minutes, 20 March 2012 (ESMA/2012/BS/46) and 25 May 2011 (ESMA/2011/BS/142). 95 eg BoS, Minutes, 4 July 2013 (ESMA/2013/BS/125). 96 By September 2014 NCAs were discussing ESMA’s potential to support the data infrastructure requirements mandated of NCAs by MiFID II/MiFIR, as well as related governance and funding issues (BoS, Minutes, 25 September 2014 (ESMA/2014/BS/159)). 97 The BoS Meeting of 6–7 November 2014 was one of the first where supervisory convergence was discussed in a sustained manner, and noted NCA support for intensifying supervisory convergence action (ESMA/2014/ BS/201). Across 2015 the Board repeatedly discussed supervisory convergence and how it might be achieved, and expressed support for greater coordination (eg 29 January 2015 (ESMA/2015/BS/32), expressing support for greater coordination; 7 May 2015 (ESMA/2015/BS/90), agreeing with a shift in resources to supervisory convergence; 24/25 September 2015 (ESMA/2015/BS/202), supporting the 2016–2020 Strategic Orientation; and 5 November 2015 (ESMA/BS/2015/232), supporting the achievement of supervisory convergence in practice and the adoption of key priorities). 98 eg BoS, Minutes, 29 January 2015 (ESMA/2015/BS/32). 99 At its first meeting after the June 2016 UK referendum, the Board noted the potential for arbitrage and the relevance of supervisory convergence as a mitigant: BoS, Minutes, 12 July 2016 (ESMA/2016/BS/201). 100 BoS, Minutes, 5 July 2017 (ESA22-106-311). 101 BoS, Minutes, 7 May 2015 (ESMA/2015/BS/90).

186 ESMA and Supervisory Convergence some anxiety to ensure ESMA sensitivity to local contexts, particularly as regards local priorities and the application of risk-based supervision models;102 concern to ensure that key supervisory convergence decisions remained within the purview of the Board of Supervisors;103 and some sensitivity towards ESMA’s related accountability arrangements.104 Significant flashpoints can also be identified, notably in relation to certain Brexit-related actions, peer review, and ESMA’s powers to give opinions on sensitive NCA decisions, as discussed in section IV. Overall, however, the acceleration and intensification of ESMA’s supervisory convergence activities over 2015–17 appear to have been broadly accepted by NCAs. These different interests and preferences, which frame ESMA’s supervisory convergence role, also reflect accounts of why and how EU agencies develop. As outlined in chapter 1, accounts of agency formation typically relate use of the agency model to intergovernmental preferences regarding the taking of credible collective action; supranational preferences, exerted in particular by the Commission, to expand the EU’s administrative capacity to support the single market; or transnational, technocratic preferences to extend influence and agency governance. All these preferences can be associated, to different degrees, with the dominance of supervisory convergence tools in ESMA’s supervision tool-kit. Further, the status quo bias, which has been identified as a by-product of the competing interests and preferences on EU financial governance reform generally,105 can be associated with the persistence of the familiar, CESR-era supervisory convergence model, as can the incrementalism and related marginal adjustment to policy choices and designs, which tend to attend complex governance design choices in the EU.106

ii. The 2017/2018 Reform Waypoint The 2017 ESA Proposal, which proposes to embed the supervisory convergence model deeper within ESMA’s operating system, represents a natural progression in ESMA’s development given the consistent political, institutional, and technocratic preference for ESMA-based supervisory convergence over EU/ESMA-level direct supervision. Although by 2017 there was greater experience with the Banking Union reforms, a related normalisation of supervisory centralisation and risk transfer, and some institutional support for supervisory centralisation in EU financial market governance,107 there was little evidence of major shifts in preferences. The financial market governance 102 BoS, Minutes, 14 December 2016 (ESMA22-24740098-55). 103 BoS, Minutes, 26 January 2017 (ESMA22-24740098-103). 104 Board discussions note, eg, NCA concern to ensure that a clear rationale is given where ESMA adopts an opinion on NCAs’ ‘position limits’ for commodity derivatives markets (a supervisory tool under MiFID II/ MiFIR), given the need to ensure accountability: BoS, Minutes, 29 March 2017 (ESMA22-106-216). 105 Burns et al, n 78. 106 A Spendzharova, Becoming a Powerful Regulator: The European Securities and Markets Authority in European Financial Sector Governance, TARN Working Paper 8/2017, available at https://ssrn.com/ abstract=2965429. 107 The call by the ‘Five Presidents’ for a single capital markets supervisor to support the completion of Economic and Monetary Union (EMU) (Five Presidents’ Report, Completing Europe’s Economic and Monetary Union (2015)) was supported by the Commission in its 2017 reflection paper on EMU (Commission, Reflection Paper on the Deepening of the Economic and Monetary Union (2017) 20–21).

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 187 agenda had moved on from the financial crisis stabilisation period and had become framed instead by a policy concern to deepen integration, exemplified by the CMU agenda, and this policy concern was being associated with supervisory convergence. The management of Brexit-related risks was similarly being framed in terms of how best to buttress the single market by using supervisory convergence techniques. There was certainly little evidence of political appetite for a radical reorganisation of EU financial market supervision.108 By then, too, ESMA had established itself as a credible supervisory convergence actor; the 2017 ESA Review suggested consistent stakeholder support for ESMA’s supervisory convergence activities and concern to maintain the supervisory convergence model and, with it, local NCA supervisory autonomy.109 Reflecting this context, the 2017 ESA Proposal, notwithstanding its contested direct supervision proposals (discussed in chapter 5), relies on supervisory convergence as the main organising principle of ESMA’s supervisory governance function: the Proposal is designed to enhance supervisory convergence in the single market and contribute to more effective rule implementation in order to promote and support financial integration.110 Similarly, the Proposal is incremental in design, reflecting the evolutionary pattern associated with supervisory convergence. It seeks to build on ESMA’s supervisory convergence-based operating model, which it regards as working relatively well, and to achieve targeted change – references to adjustments, enhancements, targeted reform, and calibration abound111 – and builds on the earlier supervisory convergence reforms flagged by the 2013–14 ESA Review.112 Nonetheless, while the Proposal does not disrupt ESMA’s supervisory convergence powers materially, the cumulative effect of the reforms, if adopted, is likely to have a significant hardening effect and to increase ESMA’s ability to exert technocratic influence, as discussed in section IV.

C. ESMA in Action: Influence, Effectiveness, and Legitimacy In exercising its supervisory convergence function ESMA, accordingly, must grapple with the distinct operational challenges raised by financial market supervision, as well as with the operational challenges and political, institutional, and NCA-related sensitivities of its EU setting. While there is strong support for ESMA’s supervisory convergence mandate, and it has been conferred with relatively open-ended soft powers, some ESMA wariness might accordingly have been expected. Nonetheless, as section IV 108 eg the ECOFIN Council’s initial reaction to the 2017 ESA Proposal was guarded. While some delegations called for a more ambitious approach, others expressed a preference for only targeted and limited revisions, and the Presidency reported that initial discussions would focus on ‘targeted adjustments to address shortcomings in the current system’: ECOFIN Council Conclusions, 7 November 2017, 5–6 (Council Document 13932/17). 109 2017 ESA Consultation Feedback Statement, n 12, 5. 110 2017 ESA Proposal, n 13, Explanatory Memorandum, 2 and 8; and 2017 Integrated Supervision Communication, n 12, 4. 111 2017 ESA Proposal, n 13, Explanatory Memorandum, 2–3, 8, and 13. 112 The Commission called on ESMA to sharpen its focus on supervisory convergence, and suggested that its ability to access data might be strengthened, while the European Parliament produced a lengthy set of recommendations, including that ESMA be given stress-testing powers, that its peer review powers be enhanced, and that it be given an express mandate to construct a Supervisory Handbook: see the reports at n 5.

188 ESMA and Supervisory Convergence examines, ESMA has come to exert a material influence on how supervision is carried out across the EU financial market, deploying its supervisory convergence powers in a purposeful and often ambitious manner. It has, for example, deftly linked its supervisory convergence activities to the CMU project113 and Brexit,114 and also positioned itself to shape NCA supervisory practices as they develop ‘upstream’ – references to ESMA’s supporting NCAs as they deploy new tools abound across ESMA’s different supervisory convergence Work Programmes. ESMA has also emerged as an assertive interlocutor on supervisory convergence, using the 2017 ESA Review to call for a strengthening of its powers.115 This expansionism is not unexpected, notwithstanding ESMA’s complex operating environment: EU agencies have a tendency, despite the political and institutional preferences that shape them, to develop as transnational, epistemic networks of regulators,116 with interests distinct from national and EU-level political and institutional preferences and priorities.117 Even allowing for the friction NCAs with incentives to protect their territory might be expected to exert, and which might be expected to put a brake on ESMA expansionism, ESMA’s burgeoning influence has the potential, by Europeanising supervision and ultimately limiting NCA autonomy, to reframe over time how EU financial market supervision is organised. It generates questions, accordingly, as to whether ESMA’s approach is effective and whether legitimation risks arise. From the effectiveness perspective, supervisory convergence is an intuitively attractive way of organising EU financial market supervision. It relies on soft, coordination-based methods, supports flexibility and experimentation, and side-steps the risks of command-and-control-based EU-level centralisation that are acute in this area – not only because of the difficulties in identifying the determinants of optimal financial market supervision, whether domestically or in a cross-border context, but also because of the ongoing contestation on the organisation of EU-level supervision. Inquiry into whether ESMA’s expanding technocratic influence poses difficulties requires, however, that effectiveness be captured in some way. The conferral of supervisory convergence powers on ESMA, a non-majoritarian agency, is designed to bring the benefits of expert and specialised decision-making, flexibility and responsiveness, credible commitment to achieving policy outcomes, and political insulation associated with agencies generally. In addition, ESMA’s supervisory convergence powers respond to the distinct challenges associated with financial market supervision generally, as well as to those associated with the organisation of supervision for the EU financial market; they are designed to accommodate national supervisory autonomy but, at the same time, to identify and drive better supervisory practices and to support stronger pan-EU consistency and coordination. Effectiveness is accordingly most easily captured 113 eg 2016 SC Work Programme, n 44, 4 and 9. 114 As discussed in section IV. 115 2017 ESMA ESA Consultation Response, n 17, 5–6. Over the Review, ESMA Chair Maijoor repeatedly warned that ESMA’s supervisory convergence powers were too weak to prevent disruptive supervisory arbitrage and to address weaknesses in NCA supervision (eg 8 February 2017 Speech, n 24). 116 eg M Egeberg and J Trondal, ‘Researching EU Agencies: What Have We Learned (and Where Do We Go From Here)?’ (2017) 55 Journal of Common Market Studies 675. 117 Ruffing, n 29; and T Bach and E Ruffing, ‘Networking for Autonomy? National Agencies in European Networks’ (2013) 91 Public Administration 723.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 189 in terms of whether ESMA is using its tools in a technically expert manner and can respond in an agile manner to the distinct challenges posed by financial market supervision and by its EU setting, but is also responsive to the dominant role of NCAs in EU financial market supervision. Using these benchmarks, there are, as considered in section IV, grounds for optimism. ESMA’s approach to its stress-testing and data management powers, for example, suggests a capacity for technically-informed and agile action in the EU interest. There are also grounds for optimism in how ESMA engages with NCAs; ESMA has articulated the ESMA/NCA relationship as regards supervisory convergence as being based on a partnership/mutual support model, reinforced by a more hierarchical, top-down review process where necessary.118 It has also decried a ‘one size fits all approach’ and framed supervisory convergence in terms of ‘comparable regulatory outcomes’.119 Grounds for optimism also come from the attractive resonances ESMA’s developing approach has with experimentalist governance. Experimentalist governance techniques are based on cooperation between central (ESMA) and local (NCA) units in a pragmatic, interactive, and responsive manner, which supports mutual learning, local variation and adaptation, and revisability.120 They have been productively associated with regulatory environments characterised by political, institutional, and market contingency and complexity, and where the required technical choices and approaches are not clear,121 as is the case with financial market supervision generally and with ESMA’s EU-level operating environment. Where such techniques can be identified in ESMA’s approach they can accordingly be associated with effectiveness, given their ability to accommodate NCA supervisory autonomy but also to facilitate the EU’s interest in the development of convergent supervisory practices informed by collective experience and mutual learning. In practice, ESMA’s approach to supervisory convergence has experimentalist features. It supports NCA learning and problem-solving through a range of channels (including supervisory guidelines, colleges of supervisors, and data-gathering and interrogation), seeks to embed mutually agreed good practice by means such as peer review and ESMA opinions, and shows a capacity for agility and experimentation in developing new convergence tools, such as its stress-testing and data management competences.122 ESMA’s expansive approach may, however, come to squeeze out productive NCA difference to the detriment, ultimately, of the EU interest. Different national supervisory approaches protect national

118 2016–2020 Strategic Orientation, n 1, also emphasising that divergences in NCAs’ supervisory approaches reflect different economic, market, and business cultures, as well as differing resources and regulatory and supervisory philosophies, objectives, and techniques (at 12); and 2018 Work Programme, n 6, 9, asserting a commitment to continuously enhancing mutual understanding and peer learning. 119 2016 SC Work Programme, n 44, 3. 120 Classically, C Sabel and W Singer, ‘Minimalism and Experimentalism in the Administrative State’ (2011) 100 Georgetown Law Journal 53. 121 Experimentalist approaches have been linked to governance settings that have complex interdependencies and strategic uncertainties. The establishment of the ESAs has accordingly been characterised as an experimentalist-oriented response to the financial crisis: J Zeitlin, ‘EU Experimentalist Governance in Times of Crisis’ (2016) 39 West European Politics 1073. 122 Techniques such as supervisory coordination, peer review, data management, and soft law, all within ESMA’s supervisory convergence tool-kit, are typically associated with experimentalist forms of financial governance: M Campbell-Verduyn and T Porter, ‘Experimentalism in European Union and Global Financial Governance: Interactions, Contrasts, and Implications’ (2014) 21 Journal of European Public Policy 408.

190 ESMA and Supervisory Convergence autonomy and flexibility, offer the prospect of productive experimentation, and can hedge against groupthink.123 The delicate balance between ‘individual craftmanship and collective learning’124 on which ESMA’s effectiveness depends may become unsustainable, particularly if the 2017 ESA Proposal tilts supervisory convergence towards steering and prescription. Similar challenges arise in relation to legitimacy. Legitimation risks are potentially acute with ESMA’s supervisory convergence role given the political sensitivities concerning the organisation of EU-level supervision, which heighten the need for mandate oversight and for constraints against bureaucratic creep. Further, while ESMA’s convergence powers are soft, they are coming to shape national supervisory practices, and so are straying close to the political sphere by influencing how national supervisory decisions, which can engage value judgements and have distributive effects, are made. ESMA’s supervisory convergence activities sit within the legitimating arrangements that apply to ESMA decision-making generally, discussed in chapter 2, and which include the national and peer/transnational accountability channels the Board can provide, as well as the support Board expertise and challenge can give to ESMA’s technical ability and so to output legitimation. In addition, ESMA’s internal bespoke governance arrangements apply, which include (thin) internal proceduralisation of its supervisory convergence activities. ESMA’s annual supervisory convergence activities flow from its assessment of the regulatory, market and NCA environment,125 and the application of criteria to determine priorities,126 while ESMA’s Standing Committee on Supervisory Convergence is charged with promoting a common and consistent supervisory approach, developing new tools, acting as a forum for cooperation, and coordinating supervisory convergence activities across ESMA.127 Specific procedural requirements apply to certain convergence activities, notably peer review. There are weaknesses in these legitimating arrangements. The ESMA Regulation structures ESMA’s discretion only to a very limited extent, while ESMA’s powers sit outside the formalities that apply to regulatory governance and direct supervision, and are not proceduralised or subject to conditionality to any material degree beyond ESMA’s internal procedures. ESMA’s output legitimacy-oriented accountability arrangements can struggle given the difficulties in establishing benchmarks for desired supervisory convergence outcomes. Further, supervisory convergence has rarely attracted close institutional attention, with the Parliament, ESMA’s chief accountability forum, most preoccupied by ESMA’s regulatory governance powers. Nonetheless, as discussed in section IV, ESMA’s legitimation arrangements are proving to be adaptive and broadly fit

123 eg the UK FCA’s approach to supervising Fintech firms, including its innovative ‘sandbox’, within which Fintech products and services can be marketed to the public under a limited regulatory licence, is being monitored by other NCAs who take different positions on its merits: C Kociok, ‘No “Sandbox” in Germany’, Lexology (27 April 2017). 124 2016–2020 Strategic Orientation, n 1, 12. 125 eg, 2016 SC Work Programme, n 44. 126 These are: impact of supervisory effectiveness; whether EU action would add value; potential to increase efficiency; opportunity for change and response to market developments; relevance to NCAs; and feasibility: ibid, 7. 127 Terms of Reference, Supervisory Convergence Standing Committee (ESMA/2016/229).

Supervisory Convergence in Practice 191 for purpose. The 2017 ESA Proposal reforms, by enhancing ESMA’s powers and diluting the role of the Board of Supervisors (by locating more decision-making power within the proposed Executive Board), may, however, deepen legitimacy risks.

IV. Supervisory Convergence in Practice A. ESMA as Facilitator, Coordinator, Coach, and Policeman ESMA’s four-person self-characterisation of its supervisory convergence persona as facilitator, coordinator, coach, and policeman128 captures the range of supports, nudges, steers, and directions used to support convergence, as well as ESMA’s purposeful and at times expansionist approach to its powers and the scale of its influence. Formally, however, ESMA’s supervisory convergence powers under the ESMA Regulation can be organised as those set out in the specific Article 29 supervisory convergence competence (including to adopt guidelines and opinions, support information exchange, contribute to high quality supervisory standards, and provide training programmes); its risk assessment powers under Articles 22–23, 32, and 35; its guidelines power under Article 16; its coordination powers over colleges of supervisors in Article 21, the delegation of supervisory tasks in Article 28, and crisis conditions in Article 31; and its peer review powers under Article 30. Sitting alongside these powers are those contained in sectoral EU financial market legislation, which include sector-specific powers for ESMA to coordinate NCA cooperation and information exchange; collect data and build data infrastructures; adopt guidelines; and issue opinions on identified NCA decisions. ESMA retains significant operational discretion here, being empowered under Article 29(2) of the ESMA Regulation to develop new practical instruments and convergence tools to promote common supervisory approaches and practices. ESMA has corralled its supervisory convergence powers into three categories that underline their reach: preparatory tools for supporting the effective application of new rules; implementation tools to understand how rules or market developments are supervised in practice; and assessment/remediation tools to test supervision.129 The 2017 ESA Proposal does not radically change these powers, although the ‘harder’ tools, notably the peer review and data collection powers, are enhanced and new powers are proposed. With these powers, ESMA has produced a vast array of ‘convergence products’, including guidelines, opinions, and Q&As; supervisory briefings; templates for cooperation and information exchange; and opinions to NCAs on specific supervisory matters. There is also a distinctly (and intensifying) operational and executive quality to certain of ESMA’s supervisory convergence activities, particularly those directed to colleges of supervisors and IT infrastructures, while the hierarchical or vertical quality of ESMA’s activities is also strengthening, particularly in relation to peer review and colleges of supervisors. The following subsections examine the main features and implications of

128 2016–2020 129 eg

Strategic Orientation, n 1, 14. 2017 SC Work Programme, n 48, 13.

192 ESMA and Supervisory Convergence ESMA’s supervisory convergence powers and activities, which, to different degrees and as organised below, engage ESMA as facilitator, coordinator, coach, and policeman.

B. Facilitating Supervision: Risk Analytics and Data Management i. A Burgeoning ESMA Data Hub The extent of ESMA’s ability to exert technocratic influence and of any effectiveness or legitimation challenges is not only a function of its supervisory convergence powers and how they are deployed. ESMA’s ability to identify opportunities for convergence action and to exert influence is in large part a function of its ability to collect, manage, and interrogate data. Data collection and risk assessment were amongst ESMA’s tasks and powers from the outset.130 But ESMA’s original data mandate has combined with incremental empowerments over time, and its purposeful pursuit of its data/risk monitoring mandate, to considerable effect. In ESMA’s 2016–2020 Strategic Orientation, data management and risk assessment emerged as a fully-fledged ESMA activity (along with the single rule-book, supervisory convergence, and direct supervision).131 Two years later, risk assessment, now accounted for by ESMA as a separate activity stream, had come to account for nearly 25 per cent of its budget.132 ESMA has also become an immense repository of market data, acting as the central hub of a densely interconnected web of national and cross-border data channels. In consequence, it is well placed to influence and drive supervisory convergence, but also to adopt an empirically-informed, responsive, and agile approach, which augurs well for effectiveness. ESMA’s ability to shape, amass, and manage data-flows has become increasingly significant over time. From its establishment, ESMA’s data-gathering function has been supported by Article 35 of the ESMA Regulation, which requires NCAs to provide ESMA with all the necessary information to carry out its duties, provided they have legal access to the information and the request is necessary. Where information is not available from NCAs (or in a timely fashion), ESMA can address a ‘duly justified and reasoned request’ to other national supervisory authorities, statistical authorities, or the finance ministry or central bank of the state in question.133 As a last resort, ESMA can request information directly from market participants.134 This convoluted mechanism has limited ESMA’s ability to acquire data directly from NCAs and has been addressed by the 2017 ESA Proposal (see further chapter 5). Alongside Article 35, however, and embedded within sectoral EU financial market legislation, is the wide array of ESMA data empowerments and tasks that, along with ESMA’s own-initiative activities, has led to the construction of a dense ESMA data ecosystem.

130 ESMA Regulation, Art 8(1(f) requires ESMA to monitor and assess market developments. 131 2016–2020 Strategic Orientation, n 1, 9–10. 132 2018 Work Programme, n 6, 7. 133 ESMA must also take account of data produced by the European Statistical System and the European System of Central Banks: Art 35(5). 134 The request must be ‘duly justified and reasoned’: Art 35(6).

Supervisory Convergence in Practice 193 These include ESMA’s mandates to shape the different sectoral components of the EU’s financial market reporting regime. Most sectoral EU financial market measures require regulated actors to make public and supervisory disclosures (and, as noted later in this subsection, require NCAs to report to ESMA). The obligations imposed on regulated actors extend from the disclosures required under long-established if frequently revised measures, such as the 2009 Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (asset managers) and the 2004 Transparency Directive and 2017 Prospectus Regulation (issuers of securities);135 to those required under crisis-era measures such as the 2011 Alternative Investment Fund Managers Directive (alternative investment fund managers), the Consolidated Credit Rating Agency Regulation (rating agencies), and the 2012 Short Selling Regulation (trading counterparties);136 and on to those required under more recent measures, such as the 2014 Central Securities Depositories Regulation (CSDR) (central securities depositories and securities settlement systems), the 2016 Benchmark Regulation (indices and benchmarks), the 2017 Money Market Fund Regulation (money market funds), and the 2017 Securitisation Regulation (securitisations and relevant intermediaries).137 The 2012 EMIR, 2014 MAR, 2014 MiFID II/MiFIR, and 2015 Securities Financing Transactions Regulation,138 however, sit at the epicentre of the EU’s new financial market reporting regime, requiring investment firms, counterparties, and trading venues to provide a mass of transaction reports to NCAs (and to trade repositories139), as well as to provide public disclosures. ESMA has been a determinative influence on this new reporting system by means of its BTS proposals for and technical advice on the mass of highly detailed administrative rules that govern the content, format, and timing of this reporting. ESMA is continuing to shape the operation of the EU’s financial market reporting system with its own-initiative data quality agenda, a strategic priority of its supervisory convergence work.140 It is also providing ongoing technical support to the reporting rule-book, including through its development work on the operationally critical ‘Legal Entity Identifier’ (LEI), which must be used by a host of different regulated actors when fulfilling their EU reporting obligations.141 Further, ESMA is embedded within this data eco-system as an operational data hub and manager, being empowered to, variously, host a swathe of publicly-available 135 Directive 2009/65/EC [2009] OJ L302/32; Directive 2004/109/EU [2004] OJ L390/38; and Regulation (EU) No 2017/1129 [2017] OJ L168/12. 136 Directive 2011/61/EU [2011] OJ L174/1; ELI: http://data.europa.eu/eli/reg/2009/1060/2015-06-21 – unofficial consolidated version of the three EU Regulations (1060/2009; 513/2011; and 462/2013), which form the rating agency regime; and Regulation (EU) No 236/2012 [2012] OJ L86/1. 137 Regulation (EU) No 909/2014 [2014] OJ L257/1; Regulation (EU) No 2016/1011 [2016] OJ L171/1; Regulation (EU) No 2017/1131 [2017] OJ L169/8; and Regulation (EU) No 2017/2402 [2017] OJ L345/35. 138 Regulation (EU) No 648/2012 [2012] OJ L201/1; Regulation (EU) No 596/2014 [2014] OJ L173/1; Regulation (EU) No 600/2014 [2014] OJ L173/84/Directive 2014/65/EU [2014] OJ L173/349; and Regulation (EU) No 2015/2365 [2015] OJ L337/1. 139 Under EMIR and the Securities Financing Transactions Regulation, counterparties to derivatives and securities financing transactions must provide extensive reports to the ESMA-registered ‘trade repositories’ that hold and collate the related data. 140 ESMA’s data quality agenda is primarily concerned with OTC derivatives market reporting, but also includes the monitoring of data quality across a host of other reporting regimes. The importance of its data quality agenda is repeatedly referenced across BoS Meetings: eg, Minutes, 26 January 2017 (ESMA22247440095-103). 141 The LEI is a global standard, but ESMA has been instrumental in its application to EU financial markets. See, eg, ESMA, Supervisory Briefing – Legal Entity Identifier (ESMA70-145-238) (2017).

194 ESMA and Supervisory Convergence registers and databases;142 host different reports and disclosures from regulated actors and NCAs;143 and coordinate NCAs’ data-gathering activities and build data-gathering infrastructures. Through these different functions, ESMA has come to act as an immense data repository. For example, Data from NCAs flow into ESMA through the wide range of mandatory reports NCAs must submit to ESMA (on their supervisory actions as well as on the different data NCAs collect), which are specified in sectoral financial market legislation. All sectoral EU financial market legislation also requires NCAs to report annually to ESMA on sanctions imposed.144 In addition, data flow into ESMA through its direct supervision145 and supervisory convergence activities.146 The vast bulk of the data-flows into ESMA, however, relate to reporting by regulated actors. Under the rating agency regime, for example, ESMA acts as a repository for the new data-set on rating agencies and ratings, which includes the publicly available European Ratings Platform (ERP) and Central Repository database (CEREP) as well as ESMA’s internal supervisory data-set (the Ratings Data Reporting Tool – RADAR). ESMA also generates a wealth of data on the rating agency market, including its annual calculation of the market share of EU registered rating agencies.147 In addition, ESMA sits at the centre of a dense web of EMIR-related OTC derivatives market data through: its hosting of the ‘single EU access point’ for NCAs querying and retrieving derivatives transaction data from trade repositories (the Access to Trade Repositories Data (TRACE) system); its construction of a massive proprietary data-set on the OTC derivatives market from the derivative market reports made to trade repositories; its holding of the data that flows to ESMA directly from the reporting and notification obligations imposed on derivatives market participants;148 and its hosting of the different EMIR registers.149 The MAR has also strengthened ESMA’s access to market data, requiring trading venues to provide NCAs with a range of ‘reference data’ on the financial instruments admitted to trading on their venues which must be transmitted on to ESMA.150 142 These are available at https://www.esma.europa.eu/databases-library/registers-and-data and include: registers of market actors authorised under EU financial market regulation; links to national databases hosting issuer disclosures; links to issuer prospectuses; registers covering the NCAs competent for particular tasks; certain financial instruments, including derivatives subject to the EMIR clearing obligation; and registers on NCA enforcement activity. ESMA has also built a new ‘companies portal’, which provides a ‘one stop register’ on which actors are authorised in the EU (Press Release, 7 May 2018). 143 ESMA’s related competences are particularly marked in the issuer disclosure area, where ESMA has been charged with, eg, constructing the new ‘European Electronic Access Point’ for providing access to the issuer disclosures required to be held in ‘Officially Appointed Mechanisms’ nationally. 144 eg 2017 Prospectus Regulation, Art 43 and MiFID II, Art 71. 145 ESMA’s annual reports on its trade repository supervision activities give an indication of the vast range of supervisory data to which ESMA has access as a direct supervisor. See, eg, 2016 Annual Report on Supervision of Credit Rating Agencies, Trade Repositories and Monitoring of Third Country CCPs and 2017 Work Programme (ESMA80-1467488426-27)(2017) 23–34. 146 Peer review typically yields large volumes of data for ESMA on local market structure and operation. The 2016 peer review report on NCA prospectus approval (ESMA/2016/1055), eg, contains extensive data on market practices and structure. 147 For a review, see 2016 ESMA CRA/TR Annual Report, n 145, 13–15, and 18, reporting on ESMA’s development of a ‘forensic capacity’ to engage in data analytics. 148 eg, CCPs and counterparties must provide the EMIR-required reports to ESMA where a trade repository is not available. 149 ESMA’s EMIR registers cover: the CCPs authorised to offer services in the EU; the third country CCPs registered to offer services in the EU; the NCAs responsible for the authorisation and supervision of CCPs; and the instruments required to be cleared through CCPs (accessible at https://www.esma.europa.eu/databases-library/registers-and-data). 150 2014 MAR, Art 4.

Supervisory Convergence in Practice 195 The MiFID II/MiFIR reporting regime, however, is the main source of ESMA’s dataflows and has placed ESMA at the centre of a vast mass of trading and transaction data. A wide range of NCA reports must be submitted to ESMA, covering, for example, the trading data necessary for ESMA to calculate the key liquidity and other thresholds necessary for the MiFIR trading transparency regime to operate;151 notifications when NCAs withdraw waivers granted under the trading transparency regime;152 and records relating to NCA action taken in relation to the commodity derivatives markets.153 ESMA also hosts a wide range of regulatory data relating to firms under MiFID II/MiFIR,154 and is empowered to request transaction data directly from firms.155 Data also flow into ESMA through its MiFID II/MiFIR monitoring tasks.156 Furthermore, ESMA has built a number of data infrastructures under MiFID II/ MiFIR,157 which together create a data system without equal in the development of EU financial market regulation.158 First, ESMA coordinates the transaction-reporting exchange system (TREM) through which NCAs exchange the mandatory transaction reports investment firms must submit to their NCAs on a daily basis under MiFIR, and which are designed to support market surveillance and the monitoring of market abuse.159 Second, ESMA hosts and operates the FIRDS data system, which contains the detailed financial instrument ‘reference data’ required of trading venues and other data providers160 under MiFIR (and also MAR). The intricate new FIRDS database,161 which is freely accessible through ESMA, collects this immense (and changing) mass of financial instrument data from reporting entities and is updated daily. The FIRDs system is of particular note amongst ESMA’s new MiFID II/MiFIR databases, as it represents the first major delegation of powers from NCAs to ESMA. The FIRDS regime as originally designed by the co-legislators required NCAs to collect the relevant reference data and transmit them onward to ESMA, which was charged with making the data publicly available and with collating them for NCA access. Subsequently, NCAs

151 2014 MiFIR, Art 22 (enabling ESMA to carry out the calculations required to establish the ‘volume cap’ thresholds that apply to aspects of the trade transparency regime). 152 ibid, Art 4(5) and 9(4). 153 ibid, Art 44(2). 154 Including the list of investment firms identified as ‘Systematic Internalisers’ (which play a distinct role in trading in the EU) (ibid, Arts 15(1) and 18(4)). 155 eg, ESMA can request access to firms’ client transaction records (MiFIR, Art 25) and request NCAs to make a firm’s MiFIR Art 26 transaction reports available to it (Art 26(10)). 156 eg, ESMA’s obligation to monitor how NCAs apply the MiFIR transparency regime (MiFIR, Art 7(1), 11(1), and 19(1)). 157 See ESMA, Briefing Note. ESMA Data Systems for MiFID II/MiFIR and MAR (ESMA71-99-669) (2017) and Letter from ESMA Chair Maijoor (IT Projects) to the European Parliament, European Council, and European Commission, 19 June 2017 (ESMA70-156-158). 158 The MiFID II/MiFIR data infrastructures together require ESMA to connect to around 300 trading venues and allow it to collect data on some 15 million financial instruments: ESMA Executive Director Ross, ‘Keynote Address’, 20 September 2017. 159 MiFIR, Art 26. 160 Trading venues, Systematic Internalisers, and data-reporting services providers are all required to report financial instrument reference data (under MAR, Art 4 and MiFIR, Art 27). 161 The scale of the FIRDS system and ESMA’s related technical capacity is evident from the highly detailed ‘reporting instructions’ and access protocols that apply. See, eg, ESMA, Reporting Instructions. FIRDS Reference Data System (ESMA/2016/1522) and ESMA, Financial Instruments Reference Data System. Instructions on Access (ESMA65-8-5014) (2017).

196 ESMA and Supervisory Convergence delegated the critical function of reference data collection to ESMA in a material indication of ESMA’s growing capacity and influence.162 Third, ESMA has built an infrastructure (the Financial Instruments Transparency System, FITRS) that supports the MiFIR trading transparency regime by collecting, storing, and processing the data necessary for ESMA to perform the different transparency calculations it must make (ESMA draws these data directly from regulated actors and from NCAs) and which govern the application of the MiFIR transparency regime.163 Here again ESMA has been delegated powers from NCAs, with all NCAs, apart from the Polish one, delegating to ESMA the powers they hold to make calculations relevant to the MiFIR transparency regime. ESMA has also developed a related system that allows it carry out the trading volume-related calculations required for the MiFIR equity market transparency regime’s ‘double volume cap mechanism’, and to publish the related trading volume caps to the market (the DVCM system).164 Fourth, ESMA has constructed the SARIS system, which collects the MiFID II/MiFIR-required data on the suspension and restoration of instruments to trading. Finally, ESMA has constructed a set of databases and registers for the MiFID II/MiFIR-required data on the commodity derivatives market, which includes weekly aggregated position reports from trading venues, as well as the position management controls and limits imposed by NCAs. These new data infrastructures are not without risk; any technical failure by ESMA could lead to material market disruption and undermine its credibility.165 Nonetheless, the construction of these different MiFID II/MiFIR data infrastructures marks a waypoint in ESMA’s development that underscores ESMA’s expanding influence. ESMA’s MiFID II/MiFIR data competences have, for example, positioned it well to shape the operation of the EU trading market, and it has embraced the opportunity. ESMA’s March 2018 announcement of the first set of equity market volume caps (under the DVCM) had a material impact on the EU equity trading market,166 but it also evidenced ESMA’s purposeful approach: although the data required to support the volume cap decisions were not 100 per cent complete, ESMA ‘considered it of the utmost importance that the [cap] mechanism take effect’ and issued the caps (for liquid shares only) based on ‘sufficiently complete’ data.167 ESMA is also developing a capacity to refine and protect its data infrastructures, quickly b ringing in, over 2018, as the MiFID II/MiFIR system went live, adjustments

162 Not all NCAs have delegated reference data collection functions to ESMA: BoS, Minutes, 17 December 2014 (reporting on the non-participation of the Bulgarian NCA). NCAs that have not delegated collection functions must transmit the data to ESMA for inclusion in the FIRDS system. 163 ESMA published its first set of transparency calculations immediately prior to the coming into force of MiFIR: ESMA, Transparency Calculations, December 2017. This was subsequently updated and refined (see n 169). 164 The DVCM system is linked to the MiFIR exemptions from transparency reporting for certain types of equity trading, and requires ESMA to calculate the caps that apply under MiFIR and which limit the amount of trading that can take place under these exemptions. 165 ESMA appears alert to the dangers, warning in relation to the first set of December 2017 calculations under FITRS that whilst it had performed the calculations with the utmost care and to the best of its ability, they would, given the scope and complexity of the calculations and the range of different data sources, likely be revised by ESMA: n 163. Subsequently, ESMA revised its initial transitional transparency calculations for equity and bond instruments (ESMA Statement, 19 January 2018; and see n 169). 166 See n 10. 167 ESMA, Press Release, ‘ESMA Publishes Double Volume Cap Data’ (7 March 2018).

Supervisory Convergence in Practice 197 to the DVCM system to ease NCA, market, and public access to the data on which shares are subject to the cap,168 and also addressing data quality issues in relation to the bond liquidity calculations it makes through the FITRS system.169 ESMA’s infrastructure role can be expected to expand: additional ESMA-based data infrastructures are already under development and will support reporting under, for example, the Securitisation and Money Market Fund Regulations.170 There is also evidence of growing NCA comfort with ESMA’s emergence as a data-hub, clear from the extent to which NCAs have, despite the many fiscal and legal complexities engaged,171 delegated their MiFID II/MiFIR powers to collect data to ESMA. As its data collection capacity has increased, so has ESMA’s ability to interrogate data and assess risks. ESMA has an express mandate to identify and measure systemic risk under ESMA Regulation, Article 23(1), and is also required to monitor and assess market developments and, where necessary, inform EBA, EIOPA, the ESRB, the Council, the Commission, and the European Parliament about relevant micro-prudential trends, potential risks, and vulnerabilities (Article 32(1)); it is also required under Article 32(3), at least annually and more frequently as necessary, to provide assessments to the Parliament, Council, Commission, and ESRB of trends, potential risks, and vulnerabilities in its area of competence. ESMA has come to regard its risk assessment activities as the fourth of its core activities, alongside the single rule-book, supervisory convergence, and direct supervision, and, while concerned from the outset to build a risk assessment capacity,172 has materially expanded its activities in recent years. From an early stage it published a semi-annual report on ‘Trends, Risks, and Vulnerabilities in EU Securities Markets’ (the TRV), issued a quarterly Risk Dashboard for securities markets, and collaborated with EBA and EIOPA on a semi-annual Risk Report by the ESA Joint Committee.173 These activities have become significantly more extensive and sophisticated over time. While ESMA’s first TRV (published in 2013) was ambitious in its coverage (assessing trends and risks in relation to a wide range of different asset classes, investors, and market infrastructures; different risks (systemic stress, liquidity, market, contagion, and credit risk); and vulnerabilities174), by 2017 the risk analysis had become significantly more data-informed and was replete with statistical tables and risk metrics, while the vulnerabilities section had morphed into an extensive

168 ESMA, Press Release, ‘MiFID II: ESMA Issues Latest Double Volume Cap Data’ (8 May 2018). 169 ESMA, Press Release, ‘ESMA Launches Bond Liquidity System under MiFID II’ (2 May 2018). In this first full ESMA assessment of bond market liquidity, ESMA found that a lower number of instruments were liquid (and so subject to the full set of MiFIR transparency requirements) as compared to its earlier transitional assessments, reflecting data quality and data completeness issues with the data submitted to it, which ESMA committed to working on with NCAs and the industry. 170 2018 SC Work Programme, n 11, 1415. 171 Since 2014 ESMA’s BoS has repeatedly discussed the range of issues raised by the delegation of NCA data infrastructure projects to ESMA, including in relation to legal obligations, scope, funding, and the extent of NCA participation. 172 eg BoS, Minutes, 12 April 2011 (ESMA/2011/BS/141), reporting on discussions of ESMA’s early activities in this regard. 173 For a summary of its initial activities, see ESMA, Annual Report on 2012 (2013) 20–24. 174 ESMA, Trends, Risks and Vulnerabilities. Report No 1, February 2013.

198 ESMA and Supervisory Convergence discussion of identified emerging risks.175 ESMA does not shy away from robust risk warnings; its first TRV of 2018 warned of ‘very high’ risks in securities markets.176 It has also continued to strengthen its risk assessment tools; 2018 marked the emergence of ESMA’s new approach to monitoring operational risk, an increasingly acute risk as markets become more vulnerable to operational risks such as cyber-attacks.177 ESMA’s governance in relation to data interrogation and risk assessment has also been enhanced by a dedicated Standing Committee on Economic and Market Analysis (CEMA), which coordinates with ESMA’s Standing Committee on Financial Innovation on data analytical matters. ESMA’s initial development phase as a risk assessor culminated in the 2017 adoption of its first Risk Assessment Work Programme,178 which indicates a growing ambition and technical capacity.179 Despite its recent emergence as a data power house and risk assessor, there are limitations on ESMA’s powers, in particular on its ability to request information from NCAs, which reflect the delicate role ESMA plays here in mediating between respecting NCA powers and engaging in central steering of data management. Notwithstanding ESMA’s Article 35 data request empowerment and the directions to NCAs in sectoral EU financial market legislation to provide ESMA with all information necessary to carry out its duties,180 ESMA’s NCA data-collection powers are weak in practice: NCAs have proved resistant to providing data on request by ESMA,181 and legal and confidentiality restrictions on the use of NCA data can restrict ESMA’s ability to use such data when supplied. Although ESMA’s difficulties with requesting data from NCAs have regularly been aired since the 2013–14 ESA Review,182 they came to the fore over the 2017 ESA Review,183 and the 2017 ESA Proposal contains several proposed reforms to strengthen ESMA’s data request powers. Most significantly, as discussed in chapter 5, the Proposal suggests that ESMA be empowered to request information directly from market participants and to impose administrative sanctions for non-compliance.184 ESMA’s position as a datahub would be further strengthened by the proposal that regulated firms provide certain 175 ESMA, Trends, Risks and Vulnerabilities. Report No 2, September 2017. 176 ESMA, Trends, Risks and Vulnerabilities. Report No 1, February 2018. 177 ibid, 68–75, reporting on a new operational risk analytical framework. 178 ESMA, 2017 Risk Assessment Work Programme (ESMA50-1121423017-286) (2017). 179 The Work Programme covered securities financing; derivatives trading; high frequency and algorithmic trading; circuit breakers and trading halts; investment fund leverage and liquidity; risk indicators for alternative investment funds; the cost and performance of investment products; support of impact assessments and stress testing; retail investor trends; risk monitoring and analysis for the new MiFID II/MiFIR product intervention regime; and monitoring of blockchain and crowdfunding. The second Work Programme followed a similarly ambitious and extensive agenda but expanded ESMA’s activities relating to databases and committed ESMA to additional public reporting on EU market trends (ESMA, 2018 Risk Assessment Work Programme (ESMA20-95-839) (2018). 180 eg 2014 MiFID II, Art 87; 2016 Benchmark Regulation, Art 35; and 2017 Prospectus Regulation, Art 34. 181 Some NCA resistance was clear from the outset (BoS, Minutes, 25 May 2011 (ESMA/2011/BS/142)), arose in the context of the 2013–14 ESA Review (Minutes, 4 July 2013 (ESMA/2013/BS/125)), and appeared again in relation to the difficulties the Financial Innovation Standing Committee experienced in collecting NCA data (Minutes, 19 March 2014 (ESMA/2014/BS/33)). 182 Which noted that ESMA’s ability to access data directly from NCAs might need to be strengthened: 2013–14 Commission ESA Review Report, n 5, 12. 183 ESMA highlighted its difficulties in acquiring data from NCAs and in using such supervisory data (2017 ESMA ESA Consultation Response, n 17, 6–7). 184 2017 ESA Proposal, n 13, ESMA Regulation, Arts 35b–35h and Art 17.

Supervisory Convergence in Practice 199 transaction reports directly to ESMA rather than through NCAs.185 Other proposed data-related empowerments for ESMA are scattered across the Proposal, including that ESMA be mandated to assess market developments in relation to innovative financial services and to promote NCA exchange of information in relation to cyber security;186 that NCAs be subject to a general obligation to provide information that is ‘accurate, complete and submitted within the timeline prescribed’ in response to an ESMA request;187 that ESMA maintain a data storage facility to facilitate NCA exchange of information relating to market integrity and financial stability risks;188 and that ESMA be conferred with powers to develop a more unified EU data strategy, based on harmonised reports and templates.189

ii. Burgeoning Powers and Influence but Challenges? ESMA’s data-collection and risk-assessment activities have a humdrum, house-keeping quality. But ESMA’s purposeful and expansionist approach to these powers has strengthened its ability to exert influence – the stronger ESMA’s data capacity, the greater its ability to spot opportunities for supervisory convergence action and to engage in empirically secure action that strengthens its credibility. ESMA’s approach to its data empowerments, however, suggests a significant technical capacity, agility in managing data and in experimenting with technical solutions, and a responsiveness to NCA needs, which all augurs well for ESMA’s effectiveness as a supervisory convergence actor, particularly as reliable data-flows have been widely recognised as an essential prerequisite for optimal supervision.190 Further, as experimentalist governance theory predicts, ESMA’s expanding data capacity should strengthen ESMA’s ability to act in a responsive manner in the EU interest but which also reflects NCAs’ experience and their operating settings.191 But there are legitimation challenges. ESMA’s strengthening capacity to collect and interrogate data should enhance its ability to secure legitimacy through output legitimation of its activities. For example, its impact assessments and risk reports should become more evidence-based and reliable,192 while the greater

185 ibid, MiFIR, Arts 26 and 27, which would require relevant regulated actors to provide transaction reports and financial instruments reference data directly to ESMA, rather than to NCAs. Industry stakeholders, however, tended to prefer data collection through domestic systems and were opposed to any extension of the ESAs’ data-collection powers: 2017 ESA Consultation Feedback Statement, n 12, 10. 186 2017 ESA Proposal, n 13, ESMA Regulation, Arts 8(1)(f) and 29(1)(b). 187 ibid, Art 35. 188 ibid, Art 31b. 189 ibid, Art 35. 190 From the extensive literature, see J Black, ‘Global and EU Financial Regulation: character, capacities and learning’ in E Wymeersch, K Hopt, and G Ferrarini (eds), Financial Regulation and Supervision: A Postcrisis Analysis (Oxford University Press, Oxford, 2012) 3; and E Gerding, ‘Code, Crash and Open Source: The Outsourcing of Financial Regulation to Risk Models and the Global Financial Crisis’ (2009) 84 Washington Law Review 127. 191 Experimentalist methods of governance are associated with data-rich coordination and cooperation: G de Búrca, R Keohane, and C Sabel, ‘New Modes of Pluralist Global Governance’ (2013) 45 New York University Journal of International Law & Politics 723. 192 ESMA’s 2018 Risk Assessment Work Programme is designed in part to strengthen ESMA’s impact and risk-assessment capabilities.

200 ESMA and Supervisory Convergence a vailability of data on the impact of ESMA’s actions on markets should enhance the ability of ESMA’s accountability fora to hold it to account. But there is a countering challenge. As ESMA acquires greater sight over the EU financial market and builds what is likely to be an unrivalled data capacity within the European System of Financial Supervision (ESFS),193 its ability to identify opportunities for entrepreneurial expansion of its mandate and bureaucratic growth is also strengthening. In parallel, the ability of NCAs to provide some form of legitimation may decrease if the 2017 ESA Proposal’s suggestions regarding the empowerment of a new Executive Board are adopted.194

C. Facilitating Supervision: Stress Test Support Similar issues arise with ESMA’s powers to support and coordinate stress tests. Stress testing, particularly of banks, has emerged as among the most powerful of the new/ re-tooled mechanisms being used by supervisors since the financial crisis to ensure that regulated actors are resilient to major shocks. While stress testing facilitates ex-ante supervisory testing of financial system and firm resilience, and provides a hedge against regulatory/supervisory weaknesses,195 it is not without controversy. In particular, it places considerable power in the hands of regulators, who can impose often intrusive mitigating requirements on regulated actors on the foot of stress tests, including costly capital increases and prohibitions on dividend payments, even though methodologies are still developing.196 In the EU, the bank stress testing that, since the financial crisis, is regularly carried out in accordance with the requirements of the Capital Requirements Directive IV/Capital Requirements Regulation,197 coordinated through EBA, and executed either by NCAs or by the SSM within Banking Union, frequently attracts material industry and political contestation.198 Supervisory stress testing is a relative

193 A good example concerns derivatives market data and alternative investment fund market data. In 2017 ESMA published the first-ever major assessment of the EU derivatives market, based on its analysis of the immense data-set now held within EU trade repositories (ESMA, ‘EU Derivatives Markets – a First Time Overview’ in 2017 TRV No 2, n 175). Similarly, in early 2018 ESMA produced its first-ever major assessment of the EU alternative investment fund sector, based on AIFMD reporting (2018 TRV No 1, n 176, 40). 194 See further ch 2. The proposed Executive Board’s powers would include a new power to request data directly from market participants, discussed further in ch 5: 2017 ESA Proposal, n 13, ESMA Regulation, Art 47(3). 195 For a review, see C Goodhart, ‘In Praise of Stress Tests’ in R Anderson (ed), Stress Testing and Macroprudential Regulation: A Transatlantic Assessment (CEPR, London, 2016) 141. 196 M Goldman, Stress Testing Stress Tests. Challenging the Authority of Indicators of Indicators (2012), available at http://ssrn.com/abstract=2083594. 197 Directive 2013/36/EU [2013] OJ L176/338 and Regulation (EU) No 575/2013 [2013] OJ L176/1. 198 The 2016 EU stress test, eg, generated some contestation, including in the European Parliament, where MEPs queried a difference in the treatment of a Spanish bank and German bank in apparently similar situations: eg, European Banking Authority Letter to MEP Giegold, 20 October 2016 (EBA/2016/D/944). The techniques used in, and value of, stress tests are also contested. From the extensive literature on EU-level stress testing, see O-M Georgescu, M Gross, D Kapp, and C Kok, Do Stress Tests Matter? Evidence from the 2014 and 2016 Stress Tests, ECB Working Paper 2054 (2017); and S Steffen, Robustness, Validity and Significance of the ECB’s Asset Quality Review and Stress Test Exercise (2014), available at https://ssrn.com/ abstract=2517361.

Supervisory Convergence in Practice 201 newcomer to financial market governance,199 however, and is most strongly associated with systemically significant financial market infrastructures such as CCPs.200 Reflecting the crisis-era preoccupation with the management of financial stability risks and the emergence of stress testing as a key supervisory tool, ESMA was conferred with coordination-oriented stress-testing powers: it must, under ESMA Regulation, Article 32(2), in cooperation with the ESRB, initiate and coordinate EU-wide assessments of the resilience of financial market participants to adverse developments and develop related methodologies. Stress testing is not yet a material component of ESMA’s supervisory convergence tool-kit, reflecting not only the still novel quality of stress testing within financial market governance but also material NCA sensitivities here, as stress testing can lead to intrusive supervisory intervention and market disruption.201 The exception is CCP stress testing. ESMA’s general Article 32 stress-testing coordination powers have been operationalised under EMIR, which requires that ESMA initiate and coordinate EU-wide assessments of the resilience of CCPs to adverse market developments.202 The first ESMA-coordinated CCP stress test took place over 2015–16. Despite its novelty, it did not appear to generate material technical difficulties or NCA contestation and was relatively uncontroversial, finding that EU CCPs were resilient to major shocks.203 Over 2017 ESMA refined its approach, developing its methodologies and extending the scope of the stress test to cover additional risks.204 ESMA’s leadership of this new venture for NCAs underscores its ability to exert influence in a novel, technically complex, and sensitive area, but also the opportunities novel areas such as stress testing present for ESMA to extend its influence – it is not unexpected that ESMA is now signalling its intention to deploy its own-initiative stress-testing powers under ESMA Regulation, Article 32 more generally.205 ESMA can also be expected to acquire additional mandates for stress testing given its so-far successful deployment of the new CCP stress test tool. It has already been empowered to shape the new legislative stress test requirement that applies to money market funds under the 2017 Money

199 Fund stress testing, eg, is still developing. The FSB has called on national regulators to develop guidance on the investment fund stress-testing process and to develop system-wide stress-testing methods that could capture systemic risks: FSB, Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (2017). 200 For a supervisory perspective on the value of CCP stress testing see S Campbell and I Ivanov, Empirically Evaluating Systemic Risks in CCPs: the case of two CDS CCPs (2016), available via https://ssrn.com/ abstract=2841076. 201 ESMA’s BoS addressed the coordination of NCA-led stress testing at an early stage (BoS, Minutes, 20 March 2012 (ESMA/2012/BS/46), but it proved too complex to coordinate, notably as regards trading venues (Minutes, 29 January 2013 (ESMA/2013/BS/30)). 202 EMIR, Art 21(6). 203 ESMA, Report on EU-Wide CCP Stress Test 2015 (ESMA/2016/658). The test resulted in only two recommendations being addressed to CCP NCAs (relating to CCPs’ methodologies for assessing the creditworthiness of their members and to CCPs’ internal ‘price shock’ models). This first stress test focused only on the counterparty credit risk to which CCPs are exposed (their major risk). 204 The 2017 stress test (which found that EU CCPs were, overall, resilient, but which identified areas where CCPs displayed weaknesses: ESMA, Report. EU-wide CCP Stress Test 2017 (ESMA 70-151-1154) (2018)) saw ESMA develop additional methodologies and also include a new liquidity risk assessment in the stress test (ESMA, Methodological Framework, 2017 EU-Wide CCP Stress Test Exercise (ESMA70-708036281-51) (2017)). 205 ESMA has signalled its intention to promote and coordinate investment fund stress testing: BoS, Minutes, 29 March 2017 (ESMA22-106-216) and 2018 SC Work Programme, n 11, 20.

202 ESMA and Supervisory Convergence Market Fund Regulation, and the 2017 ESA Proposal suggests additional empowerments, including that ESMA be required to consider at least annually whether EU-wide stress tests are required and be empowered to disclose the results of such stress tests where appropriate.206 Effectiveness-wise, initial experience with ESMA’s CCP stress-testing powers suggests an ESMA ability to develop and apply the requisite technical capacity for a complex task, which demands high levels of expertise, where precedents are scarce, and where NCA sensitivities are acute. It also points to a pragmatic incrementalism in how ESMA approaches novel areas, which augurs well for ESMA’s ability to act in a responsive manner that builds on experience. The first 2016 CCP stress test was limited in scope to one major risk (counterparty credit risk) and was only later expanded to cover related risks as ESMA’s technical capacity deepened; ESMA has also committed to improving and refining its methodologies over future exercises and to strengthening its related data capacity.207 More generally, current indications suggest that cautious experimentation will, productively, continue to shape ESMA action more generally in this evolving and complex area.208 There are nonetheless legitimation challenges, particularly given the distributional implications. It is hard to argue against the value of ESMA’s coordination and leadership role here given the emerging indications of its effectiveness in using the stress test tool. Nonetheless, the design choices ESMA makes on how to conduct a stress test and which indicators to deploy could have material public interest consequences if a failed stress test generates market anxiety and impacts asset prices – or, alternatively, if an insufficiently demanding stress test fails to capture emerging risks. ESMA appears so far to be technically expert, responsive, and agile in developing its approach to stress testing, but stress testing nonetheless provides another illustration of the need for resilient legitimation arrangements.

D. Facilitation and Coordination: Colleges of Supervisors The single rule-book is replete with empowerments for ESMA to facilitate coordination across NCAs, particularly in relation to information exchange and supervisory inspections, while ESMA is also charged under ESMA Regulation, Articles 18(1) and 31 with facilitating NCA coordination in crisis conditions. ESMA’s most formalised and salient coordination powers, however, relate to colleges of supervisors.

206 2017 ESA Proposal, n 13, ESMA Regulation, Art 32 (2a). 207 2017 ESMA CCP Stress Test Report, n 204, 6; and 2018 Risk Assessment Work Programme, n 179, 3. 208 ESMA has underlined that its new guidelines for fund stress testing under the Money Market Fund Regulation do not specify certain technical parameters in order to accommodate changes to market conditions as well as the diversity in the sector, and that its approach is based on merging principles-based methods with methods based on quantitative prescription: ESMA, Technical Advice, Draft Implementing Technical Standards and Guidelines under the MMF Regulation (ESMA34-49-103) (2017) 47–48. ESMA Chair Maijoor has also emphasised the importance of flexibility and regulatory learning in this emerging area: ‘Keynote Speech’, 16 November 2017.

Supervisory Convergence in Practice 203 Colleges of supervisors, familiar features of international financial governance209 and with strong attractions for ESMA’s setting as they are associated with the establishment of supervisory trust, dialogue, and mutual learning,210 are formally-constituted (usually by a Memorandum of Understanding), permanent fora for managing supervisory cooperation between the different national supervisors of subsidiaries in cross-border financial groups, most usually banking and insurance groups. Colleges also support convergence in supervisory practices, as they are designed to lead to the adoption of agreed protocols for supervision. In the EU, colleges have long been associated with banking market governance. The SSM has removed the need for colleges for Banking Union’s banks, as supervisory coordination is managed through the SSM, but colleges remain relevant for coordination between SSM and non-SSM/NCAs211 and for the supervisory coordination of global banking groups. Colleges of supervisors have only recently acquired traction in EU financial market governance, in part because colleges are associated with the management of prudential risks and so with banking and insurance groups, and in part because of the dominance in the EU financial market of the ‘home/host’ NCA supervisory coordination model – the ‘home/home’ NCA coordination model, which requires college support, is more common in the banking market given the greater use of subsidiaries in cross-border banking. The dominance of the home/host model in the EU financial market reflects the tendency of financial market participants to operate under a cross-border services/ branch model, and the related supervisory pre-eminence of the home NCA that supervises most cross-border business, whether through branches or on a services basis. The college model is now becoming more prevalent in EU financial market governance. But these ‘new generation’ financial market colleges are being used in a different manner from the traditional EU banking colleges, as they are primarily concerned with coordination between the different NCAs directly but also indirectly engaged with the supervision of a regulated actor. For example, the first major EU-mandated financial market colleges, required for CCP supervision under EMIR, respond to the distinct coordination challenges CCPs generate by bringing together the network of NCAs that have an interest in CCP supervision. These colleges accordingly include the CCP’s NCA, but also a host of other NCAs, including those with oversight of CCP members, such as investment firms.212 The college model has been deployed since then for benchmark supervision under the 2016 Benchmark Regulation,213 and also used by the Commission to support coordination of CCP resolution under the 2016 CCP Recovery and Resolution Proposal.214 The growing reliance by EU fi nancial

209 Colleges are supported by the major ISSBs (see, eg, Basel Committee, Principles for Effective Supervisory Colleges (2014)). 210 Riles, n 18. 211 EU banking colleges operate under standardised guidelines and procedural templates, and are managed through EBA, which oversees over 70 ‘active colleges’ under the EU banking rule-book (see, eg, EBA, Report on the Functioning of Supervisory Colleges in 2016 (2017)). 212 See n 215 on CCP college composition. 213 Benchmark colleges are composed of ESMA, the relevant benchmark’s NCA, and the NCAs of the regulated actors who contribute to the benchmark: 2016 Benchmark Regulation, Art 46. 214 COM (2016) 856. The Proposal provides for CCP resolution colleges that would map the composition of EMIR colleges but also include national resolution authorities.

204 ESMA and Supervisory Convergence market policy on colleges where cross-border coordination needs are acute reflects their material attractions as a coordination/convergence tool: they avoid the legal contortions, fiscal risks, and political difficulties associated with coordination through centralised supervision; they preserve the autonomy and expertise of the local NCAs engaged but impose joint decision-making in critical contexts; and their coordination functions can be given institutional support, but also be monitored, by ESMA. ESMA’s college role is accordingly a key one for EU financial market governance, and calls for inquiry into the nature of ESMA’s influence and its effectiveness and legitimacy. ESMA is charged with a range of college tasks and conferred with related soft powers under the ESMA Regulation. Under ESMA Regulation, Article 21(1) and (2), ESMA is to: contribute to promoting and monitoring the efficient, effective, and consistent functioning of colleges established under EU law and to foster the coherence of the application of EU law among colleges; participate in college activities, including on-site supervisory examinations; and take the lead in ensuring the consistent and coherent functioning of colleges, taking into account systemic risk. It may also establish and manage college information systems, initiate and coordinate related EU stress tests, and promote effective and efficient supervisory activities. These coordinating powers are soft but are not without teeth: ESMA may request further deliberation by a college where it considers a college decision would lead to an incorrect application of EU law or not contribute to convergence in supervisory practices. The 2017 ESA Proposal has not proposed revisions to these powers, although ESMA’s ability to exert authority in a college context would likely be strengthened by the Proposal’s other reforms. In addition, sectoral financial market legislative measures have conferred discrete college powers on ESMA. For example, MiFID II empowers ESMA to participate in the activities of colleges of supervisors (where they are set up) in order to support supervisory convergence, although such colleges are not mandatory under MiFID II. By contrast, the 2012 EMIR and the 2016 Benchmark Regulation both require that colleges (which must include ESMA) be established to coordinate supervision, and contain specific empowerments for ESMA. EMIR requires that colleges of supervisors be established to coordinate the different NCAs (beyond the CCP’s NCA) that have an interest or a specific role in CCP supervision.215 These colleges are charged with a range of coordination-oriented tasks, including in relation to CCP authorisation, CCP risk model review, and the approval of any interoperability (connection) arrangements sought by the CCP (EMIR, Articles 17, 49, and 54).216 ESMA is a member of all CCP colleges under EMIR,

215 EMIR CCP colleges are composed of ESMA; the CCP’s NCA; the NCAs responsible for the supervision of the CCP’s clearing members (such as investment firms, although only NCAs from the three Member States with the largest exposure through clearing membership to the CCP sit on the college); the NCAs responsible for trading venues served by the CCP; the NCAs responsible for supervising any CCPs with which the CCP has an interoperability arrangement; the NCAs responsible for supervising central securities depositories to which the CCP is linked; relevant members of the European System of Central Banks responsible for CCP oversight; and the central banks of issue of the most relevant EU currencies of the financial instruments cleared by the CCP: EMIR, Art 18. 216 The college is also to ensure exchange of information, coordinate supervisory examination procedures, and determine procedures and contingency arrangements for emergency situations (Art 18(4)), as well as to receive reports from NCAs on the supervisory reviews carried out of CCPs (Art 21(4)).

Supervisory Convergence in Practice 205 rticle 18 (although it does not have voting rights) and is tasked under Articles 17 and A 19 with facilitating the adoption by colleges of the ‘authorisation opinion’ on which CCP authorisation depends, including by engaging in binding mediation where NCAs disagree on a CCP authorisation decision. ESMA is also charged with a coordination role217 and must carry out (at least annually) a peer review of college supervisory activities and facilitate colleges in the validation of CCP risk models.218 As outlined in section IV.C, ESMA also coordinates CCP stress testing. ESMA has proved a purposeful and ambitious actor in this area, giving CCP college coordination a high priority.219 ESMA has, for example, produced guidelines on the written agreements required for CCP college operation, and adopted an opinion on college composition and voting.220 It has also adopted supervision-oriented guidelines, including guidelines on how CCPs should address conflict-of-interest management that are designed to facilitate supervisory convergence; these guidelines were prompted by ESMA’s participation in CCP colleges and its ‘horizontal view’ of best practices.221 College supervisory practices have also been addressed by a 2016 ESMA opinion on how NCAs should exercise certain EMIR supervisory powers.222 ESMA further provides technical support to CCP colleges, including through its standard templates for college operation and its production of ‘operational issues notes’, which are designed to prompt discussion between relevant NCAs in ESMA’s Post Trading Standing Committee and to build a common supervisory culture.223 ESMA is also building a capacity to lead and coordinate CCP stress testing, as noted in section IV.C, and, as required under EMIR Article 21, engages in peer review of CCP colleges. ESMA’s first (2015) peer review,224 which focused on CCP authorisations, suggested close engagement by ESMA with CCP colleges,225 as well as an ESMA appetite for direct and robust reporting on CCP college weaknesses.226 Its second (2016) peer review was similarly direct, highlighting areas of supervisory divergence and a possible incidence of NCA non-compliance, as well as identifying best practices.227 The third (2017) review was similar in tone.228 217 ESMA is to build a common supervisory culture and consistent supervisory practices, ensure uniform procedures and consistent approaches, and strengthen consistency in supervisory outcomes. 218 ESMA has developed a process under which a CCP risk model decision is delegated to a Panel of the Board of Supervisors, with the decision’s being reserved to the Board where the Panel recommends rejection of the CCP’s risk model: BoS, Minutes, 29 January 2015 (ESMA/2015/32). 219 ESMA’s 2018 SC Work Programme noted the ‘high attention’ this area would continue to receive, and committed to a series of initiatives, including the adoption of guidelines and enhanced data exchange arrangements: n 11, 11. 220 ESMA/2013/661 and ESMA/2015/838. 221 ESMA, Guidelines on CCP Conflict of Interest Management (ESMA70-151-1094) (2018). 222 ESMA, Opinion on Common Indicators for New Products and Services under Article 15 and Significant Changes under Article 49 EMIR (ESMA/2016/1574). 223 ESMA, Review of CCP Colleges under EMIR (ESMA/2015/20) 11–12. 224 ibid. 225 ESMA reported that it had developed an internal review methodology for assessing CCP compliance with EMIR requirements and had used this to contribute to college discussions on authorisation and to request further information/clarification: ibid, 13–15. 226 ESMA reported on a generally good level of cooperation and engagement within colleges, but it also warned that college chairs could be more constructive on information sharing. 227 ESMA/2016/1683. The review focused on supervision of the margin and collateral requirements imposed on CCPs. 228 ESMA70-151-812 (the review focused on supervision of CCPs’ default management procedures). eg, it identified a potential case of EMIR non-compliance by an NCA.

206 ESMA and Supervisory Convergence By its own assessment ESMA has become a significant actor in CCP colleges.229 In practice, the range of its activities and its appetite for intervention certainly suggest a meaningful ESMA presence and capacity to exert influence within colleges, although the tightening by ESMA of its grip over CCP colleges has not been without Board of Supervisors/NCA contestation,230 which ESMA appears able to manage. ESMA’s CCP college activities are also strengthening its regulatory capacity and ability to exert influence more generally, by bringing it closer to operational supervision, affording it opportunities for soft law adoption, honing its peer review tools, and developing its technical tool-kit, including as regards stress testing. Further, they are normalising ESMA’s engagement with NCA supervisory decisions of the most acute systemic significance. There is little evidence yet on ESMA’s engagement with benchmark colleges, the requirement for which only came into force in 2018. The 2016 Benchmark Regulation requires that colleges of supervisors be established for ‘critical benchmarks’ and support coordination in relation to identified supervisory decisions.231 ESMA is to contribute to promoting and monitoring the efficient, effective, and consistent functioning of these colleges but, in an evolution from the CCP college model, has been expressly designed as an ‘NCA’ for these purposes.232 ESMA is also conferred with specific tasks, primarily to advise on college decisions and support the adoption of the written agreements under which colleges are to operate. The ESMA experience with CCP colleges – the most extensive body of evidence – should not be overplayed when assessing ESMA’s influence and any related effectiveness and legitimacy risks. ESMA certainly has a range of powers in relation to CCP colleges, but CCP colleges are not powerful bodies; CCPs’ NCAs retain significant autonomy, and colleges are concerned only with coordinating between the distinct and disparate NCAs affected by how these dominant NCAs supervise CCPs. Nonetheless, there are reasonable grounds for suggesting that ESMA’s technocratic influence is now significant within colleges, and that it has developed a technically-informed and committed approach, which should strengthen coordination and which augurs well for ESMA’s effectiveness. At the same time, however, ESMA is thereby pushing closer to the supervision boundary where decisions with distributional consequences can be made, and there are accordingly potentially troubling implications for legitimation given the systemic importance of CCPs and the acute fiscal risks they pose. There are also potentially troublesome momentum effects from ESMA’s commitment to its CCP college powers. The 2017/2018 waypoint reforms to strengthen ESMA’s CCP-related powers (discussed in chapter 5) have been proposed in two stages, both

229 ESMA’s third peer review noted that because of its central role on colleges, ESMA’s views have a ‘significant impact’ on college members: ibid, 6. 230 BoS meetings note some NCA concern regarding ESMA’s peer reviews as well as the importance of ESMA’s reflecting the national context of CCP supervision and NCAs’ powers (Minutes, 14 December 2016 (ESMA22-24740098-55)), while ESMA’s powers regarding the validation of CCP risk models have been the subject of Board discussion and legal analysis (Minutes, 29 January 2015 (ESMA/2015/BS/32)). 231 2016 Benchmark Regulation, Art 34. 232 ibid, Art 34(4).

Supervisory Convergence in Practice 207 of which can be associated with experience with ESMA as a college coordinator. First, in the 2016 CCP Recovery and Resolution Proposal the Commission proposed that the CCP college model be extended to the CCP rescue/resolution sphere and that ESMA play a facilitation role in these new colleges.233 The Commission also proposed that it be made easier for ESMA to engage in binding mediation within these new colleges; ESMA mediation requests in the CCP college context require a two-thirds majority of NCAs, but the Commission proposed that one NCA could trigger ESMA mediation under the new regime for rescue/resolution colleges.234 Second, the 2017 CCP Supervision Proposal suggested that ESMA’s powers over CCP colleges be materially strengthened given the supervisory weaknesses ESMA’s peer reviews of CCP colleges had exposed.235 Subsequently, the 2017 ESA Review indicated some stakeholder support for a voting role for ESMA in colleges.236 Although the 2017 ESA Proposal did not include this reform, the college device appears to be acting as something of a launch-pad for the expansion of ESMA’s powers. ESMA’s incentives for expansionism may accordingly be significant in this area, and pressure may be growing on its legitimation framework as a result.

E. Coaching: Supervision the ESMA Way i. Europeanising Supervision Many of ESMA’s supervisory convergence activities concern NCA ‘coaching’ or the steering of NCAs towards a common approach to supervision – the Europeanisation of supervision in effect. The ongoing Europeanisation of financial market supervision is in part a by-product of regulation; the ‘operationalisation’ of EU financial market regulation since the financial crisis, by means of the imposition of detailed procedural and reporting requirements on regulated actors, is in practice steering how NCAs carry out supervision. ESMA, however, is the main actor driving Europeanisation. Its mandate here mainly derives from ESMA Regulation, Article 29, which requires ESMA to play an active role in building a common EU supervisory culture and consistent supervisory practices, including by providing opinions, promoting information exchange, and

233 COM (2016) 856. See further ch 5. 234 Binding mediation by ESMA within CCP colleges (under EMIR, Art 17(4)) can only be activated when a dissenting opinion on a college CCP authorisation is adopted by two-thirds of NCAs, and an NCA from this majority requests mediation by ESMA. ESMA took a careful line in responding to the proposal in the Commission’s 2016 CCP Recovery and Resolution Proposal that ESMA’s binding mediation powers be activated instead when ESMA action was requested by only one NCA. It underlined its concern not to advise the co-legislators on specific arrangements, but also highlighted its experience with the EMIR college mediation system and noted the great difficulties an interested NCA can have in raising concerns given the two-thirds majority requirement: ESMA, Opinion on the European Commission’s Proposal for an EU Regulation on CCP Recovery and Resolution (ESMA/70-151-222) (2017). 235 COM(2017)331. The Commission’s impact assessment for the Proposal relied heavily on ESMA’s earlier assessments of CCP college operation: Commission, 2017 CCP Supervision Proposal Impact Assessment (SWD (2017) 246) 34–35. 236 2017 ESA Consultation Feedback Statement, n 12, 7.

208 ESMA and Supervisory Convergence contributing to the development of high quality and uniform supervisory standards. ESMA is also empowered to develop ‘as appropriate’ new ‘practical instruments and convergence tools’ to promote common supervisory approaches and practices. The Europeanisation of supervision in the banking sector is well advanced. Within the single market, bank supervision by NCAs is subject to extensive operational harmonisation, in large part driven by EBA’s ‘supervisory handbook’,237 at the core of which are EBA’s detailed guidelines for the annual ‘Supervisory Review and Evaluation Process’ (SREP)238 that NCAs must carry out on banks. Within Banking Union’s SSM, the ‘significant’ banks under direct ECB oversight are supervised in accordance with EBA’s supervisory handbook but also the SSM’s bespoke ‘SSM supervisory manual’, which is based on EBA’s handbook.239 ‘Less significant’ banks are not supervised directly by the SSM but by their NCAs, in accordance with EBA’s handbook and directions from the SSM.240 The Europeanisation of supervisory decision-making has been slower to develop for financial markets, notwithstanding ESMA’s supervisory convergence mandate and a political/institutional climate supportive of convergence. There are a number of reasons why. Banking Union generates distinct demands for operational convergence within the SSM, but also within the single market given the need to avoid SSM interests driving single market supervisory practices. Bank supervision is operationally a more tractable candidate for Europeanisation as it concerns a discrete population of deposit-taking actors, is heavily preoccupied with the supervision of risk models, and has long been subject to international coordination. ESMA’s operating environment is very different. The population of regulated actors within ESMA’s ambit is highly diverse. So too are the different supervisory tools in the financial markets sphere, which range from the conduct- and product-oriented tools used in the retail markets, to the monitoring and modelling tools that are a particular feature of wholesale market supervision. The fragmented nature of financial market integration means that pressure for supervisory convergence (and for a related reduction of the transaction costs of cross-border business) is uneven. Institutional factors, including the weight of ESMA’s administrative rule-making mandate, NCAs’ incentives to protect their autonomy, and the risks to ESMA were it to proceed ahead of NCAs’ appetite for supervisory convergence, have also militated against assertive Europeanisation by ESMA of NCAs’ operational practices. Over time, however, ESMA has begun to exercise

237 The establishment of the SSM led to EBA’s being given a new empowerment to develop a ‘single supervisory handbook’ to ensure convergence in supervisory practices across the single market and to limit any fragmentation risks the SSM might generate: 2013 EBA Regulation (Regulation (EU) No 1022/2013 [2013] OJ L287/5), Arts 8(1)(aa) and 29. EBA’s ‘European supervisory handbook’ is to set out ‘supervisory best practices for methodologies and processes’. 238 EBA/GL/2014/13. 239 The SSM SREP process follows a detailed operational manual, which proceduralises how supervision is carried out by the SSM through the Joint Supervisory Teams (composed of supervisors from the home NCA of the relevant bank and from other SSM NCAs) by which it directly supervises significant banks. While based on the application of models, the SSM SREP incorporates the application of ‘constrained judgement’ by supervisors: ECB Banking Supervision, SSM SREP Methodology Booklet, 2017 edn for 2018 application; and ECB Banking Supervision, SSM Supervisory Manual, March 2018. 240 The SSM dictates, eg, how NCAs of less significant banks should apply the different options and discretions available to EU NCAs under the banking rule-book: ECB Guideline (EU) No 2017/697 (Official Journal references are provided only for legislative measures in this book).

Supervisory Convergence in Practice 209 its supervisory convergence tools more expansively, and so far NCAs appear reasonably accommodating of its coaching activities. Four main coaching techniques can be identified and are discussed in what follows.

ii. The ESMA Coaching Manual: Guidelines, Q&As, and other Soft Measures ESMA’s burgeoning soft-law rule-book can be regarded as forming something of a coaching manual. As discussed in chapter 3, ESMA has developed a vast soft-law rule-book at the core of which are its Article 16 guidelines, typically directed to NCAs and subject to a ‘comply or explain’ requirement. While guidelines often have a quasiregulatory colour and are, ultimately, oriented to regulated actors (via NCAs), they are also designed to support practical supervisory convergence. Supervisory convergence is expressly incorporated within Article 16 – which requires that ESMA is to adopt guidelines with a view to establishing consistent, efficient, and effective supervisory practices within the ESFS, as well as to ensuring the common uniform and consistent application of EU law – while guidelines typically direct NCAs to apply them through incorporation in their supervisory practices.241 The MiFID II/MiFIR guidelines on cross selling, for example, have a quasi-regulatory quality, but are also designed to support a consistent and effective approach to supervision.242 Some guidelines are expressly directed to NCAs’ operational practices. While four of the five sets of AIFMD guidelines clarify the AIFMD’s application and have a quasi-regulatory colour, one sets out the procedures governing NCA consultation, cooperation, and information exchange;243 three of the six CSDR guidelines address how NCAs should engage in particular supervisory tasks;244 and two of the seven EMIR guidelines concern operational matters.245 For the most part, these more operational guidelines do not drill into how supervision is carried out but are concerned with inter-NCA cooperation procedures. Other guidelines, however, are more directly concerned with supervision. ESMA’s guidelines on the assessment of the suitability of the management of MiFID II/MiFIR firms, for example, have a strongly operational slant,246 addressing supervisory processes and how NCAs should interrogate suitability; the relevance of risk-based approaches; and the remediation which can be suggested by NCAs.247 The increasingly practical quality of ESMA’s guidelines also inevitably shapes supervisory decision-making by NCAs.248 241 eg, ESMA, Guidelines on CCP Conflict of Interest Management (ESMA70-151-1094) (2018) 15; and Guidelines on the Management Body of Market Operators and Data Reporting Services Providers (ESMA70154-271) (2017) 6. 242 JC/2015/1872. 243 ESMA/2013/998. 244 ESMA70-151-435 (supervisory cooperation) and ESMA 70-708036281-67/70-708036281-66 (data collection and calculation procedures). 245 ESMA/2013/661 (agreements supporting colleges of supervisors) and ESMA/2012/323 (the assessment of CCP interoperability arrangements). 246 The 2017 guidelines were adopted jointly by EBA and ESMA: EBA/GL/2017/12 and ESMA71-99-598. 247 ibid, 56–60. The guidelines ‘set out appropriate supervisory practices’ (at 16). ESMA and EBA considered whether the guidelines should exclude supervisory processes (as this coverage was not expressly mandated by the co-legislators), but ultimately included them as contributing to the development of a harmonised approach and to understanding of the overall framework for the assessment of suitability (at 72). 248 The 2017 MiFID II/MiFIR product governance guidelines (ESMA35-43-620), which contain detailed examples of good and bad practice, provide a recent example.

210 ESMA and Supervisory Convergence ESMA’s Q&As similarly encourage supervisory convergence: the more harmonised an approach NCAs take to the application of the single rule-book, the more likely it is that supervisory practices will not significantly diverge. Added to these measures are the array of ESMA supervisory briefings249 and standard forms and templates250 designed to support NCAs. These activities can be expected to expand if the suggestion under the 2017 ESA Proposal that ESMA produce a ‘supervisory handbook’ is adopted. This reform, which is designed to align ESMA’s (and EIOPA’s) mandate with EBA’s, and which has been in gestation for some time,251 would lead to ESMA’s being charged with developing and maintaining an up-to-date ‘EU supervisory handbook’ on the supervision of financial market participants.252 Support for such an operational handbook has already been signalled in sectoral financial market legislation; the 2017 Prospectus Regulation, for example, directs ESMA to adopt operational Article 16 guidelines on the NCA prospectus approval process.253 ESMA can accordingly be regarded as being in the process of constructing a soft ‘coaching manual’ with which it can influence NCA supervision. In its current form, this manual can be regarded as nudging NCAs as to how to engage in supervision and as having effectiveness attractions. It allows ESMA to be agile in response to environmental conditions and reflective of the EU interest, whilst also being responsive to NCA needs, and does not so far drill disruptively deeply into the practical business of how supervision is carried out by NCAs locally. This arm’s-length/coaching orientation may change if ESMA’s style becomes more intrusive and operational, and if ESMA’s related monitoring of NCAs becomes more assertive, particularly if the proposal for a supervisory handbook mandate is adopted. Already, ESMA’s 2018 Supervisory Convergence Work Programme draws heavily on guidelines, opinions, Q&As, and other soft-law measures to drive supervisory convergence, and also commits ESMA to developing ‘a more robust approach’ to monitoring where NCAs’ declare their non-compliance with guidelines.254 Effectiveness risks may arise if ESMA slips into steering and away from coaching as a result (although the proposed new mandate for a ‘supervisory handbook’ would require ESMA to be sensitive to business models and practices). Legitimacy risks can certainly be associated with the ever-increasing scope of the soft rule-book/ coaching manual, but these can be countered by the different legitimating mechanisms that apply, as discussed in chapter 3.

249 eg ESMA33-9-158 (2016), which sets out a common approach to be applied by NCAs in their supervision of issuers and other regulated actors covered by the EU rating agency regime. 250 These are usually concerned with NCA information exchange and notification procedures. 251 Over the 2013–14 ESA Review, the European Parliament called for ESMA (and EIOPA) to be conferred with a supervisory handbook mandate (alongside the EBA mandate) to improve consistent supervision and to support a common supervisory culture: 2014 Parliament ESFS Review Resolution, n 5, Annex, Supervisory Cooperation and Convergence. 252 2017 ESA Proposal, n 13, ESMA Regulation, Arts 8(1)(aa) and 29(1)(e). 253 2017 Prospectus Regulation, Art 20(12). 254 2018 SC Work Programme, n 11, 31.

Supervisory Convergence in Practice 211

iii. Delegation Arrangements An element of coaching can also be identified in ESMA’s delegation activities. Under ESMA Regulation, Article 28, ESMA is to ‘stimulate and facilitate’ the delegation of supervisory tasks and responsibilities between NCAs and to be informed of all NCA delegation agreements. Inter-NCA delegation did not take root during the initial phase of ESMA’s development,255 but by 2017 there were signs of growing NCA openness to delegation and to ESMA’s coordinating role.256 The greater significance of delegation for ESMA’s ability to steer NCA supervisory practices comes from the empowerment of NCAs (also under Article 28) to delegate tasks and responsibilities to ESMA. The delegation to ESMA of supervisory tasks might be expected to be an unattractive option for NCAs concerned to protect their national supervisory autonomy, but delegation can be efficient for resource-constrained NCAs, particularly in relation to highly complex, resource-intensive matters. The first major instance of delegation to ESMA came during 2015–16, with the delegation by the majority of NCAs of power to ESMA to construct and manage certain of the new data-collection channels and databases required under MiFID II/MiFIR. This delegation required the resolution of a host of complex issues relating to project design, the scope of the delegation, funding, and governance, to name but a view, but was successfully achieved.257 Information technology/data collection can be regarded as an area particularly amenable to delegation, but the precedent was nonetheless established. Since then, ESMA has also been delegated direct supervisory powers by an NCA: in 2016 the Greek NCA entered into a delegation arrangement with ESMA in relation to CCP supervision.258 Delegation to ESMA might best be regarded as related to ESMA’s emergence as a direct supervisor (chapter 5). Nonetheless, in exercising functions delegated from its NCAs, ESMA can thereby model supervision and accordingly strengthen its ability to influence supervisory practices.

iv. Coaching through Institutional Support ESMA’s coaching activities also include its institutional support of NCAs. This includes informal activities, such as the ESMA supervisory ‘application workshops’, which facilitate practical and collective ‘peer learning’,259 as well as formal institutional coordination mechanisms. ESMA’s institutional support of supervisory convergence is most marked in the financial reporting sphere and in relation to the application of International Financial Reporting Standards (IFRS), which govern the regulated public disclosures

255 Despite concern as to the failure to develop delegation techniques being noted early in ESMA’s development: Mazars Report, n 89, 99. 256 BoS, Minutes, 29 March 2017 (ESMA22-106-216), reporting on two NCAs’ entering into discussions on delegation arrangements and the possibility for a related ESMA opinion. 257 The scale of the effort is clear from the extensive ESMA/NCA Delegation Agreement and its host of related and very detailed Annexes: Delegation Agreement, 24 September 2015 (ESMA/2015/BS/175). 258 BoS, Minutes, 25 May 2016 (ESMA/2016/BS/151). 259 These workshops are being facilitated ever more frequently by ESMA and being linked more directly to specific convergence activities (eg, 2017 SC Work Programme, n 48, 23).

212 ESMA and Supervisory Convergence of EU issuers traded on public trading venues (or ‘regulated markets’). The EECS – ESMA’s ‘European Enforcers Coordination Sessions’ – coordinates NCAs’ enforcement practices (in accordance with ESMA’s Guidelines on the Enforcement of Financial Information260),261 maintains an enforcement database,262 and adopts common enforcement priorities and related follow-up reports on enforcement practices and outcomes.263 Its activities are mainly coordination-based, and so are attractive from an effectiveness perspective. More troublesome are the indications that ESMA is seeking to steer NCA supervision of financial reporting more directly. The application by bank issuers of the new ‘IFRS 9’ reporting standard, which has materially changed how banks report on credit risk,264 for example, has been accompanied by an ESMA public statement on how banks should approach their related market disclosures on the application of the standard,265 but also by an ESMA supervisory review into how banks are disclosing the impact of the standard.266 ESMA does not, however, have formal supervisory competences in relation to financial reporting. This purposeful and expansionist approach to the new standard has effectiveness attractions, in that ESMA is thereby supporting practical convergence in relation to the application of an important new financial reporting standard. But it is also taking ESMA into potentially troublesome legitimation territory, as can be seen from the 2017 ESA Consultation. The Consultation’s suggestion that ESMA be given additional empowerments over financial reporting, including direct enforcement powers, generated material hostility and was not included in the 2017 ESA Proposal,267 indicating the sensitivity of financial reporting for the market and NCAs. ESMA also provides institutional support to inter-NCA coordination of market abuse monitoring, through its Standing Committee on Market Integrity.268 Finally, in a development that augurs well for ESMA’s responsiveness and agility, and which sits well within ESMA’s mandate and has limited legitimation risks, ESMA is currently experimenting with different NCA coordination fora, including the new Enforcement Network, which supports exchange between enforcement specialists, and the Senior Supervisors’ Forum, which supports NCA coordination on issues of practical and strategic concern, such as cyber-security.269 More serious risks to ESMA’s effectiveness and legitimacy as a coach are posed by the proposed institutionalisation of ESMA oversight over NCAs’ supervisory planning 260 Which have also been subject to peer review (discussed in section IV.F). 261 eg ESMA, Report, 22nd Extract from the EECS Database of Enforcement (ESMA/32-63-427) (2018). 262 Extracts from the database are made publicly available to support supervisory convergence. 263 For the common priorities for supervision of the 2017 financial reports, see ESMA32-63-340 (2016), which set three priorities based on enforcers’ experience and on recurring problems with financial reporting. Their application was subsequently reported on in ESMA, Enforcement and Regulatory Activities of Accounting Enforcers in 2017 (ESMA32-63-424) (2018). 264 The impact of IFRS 9 on banks is being closely monitored by EBA (eg, Report on Results from the Second EBA Impact Assessment of IFRS 9 (2017)). 265 ESMA/2016/1563. 266 ESMA, Summary of Findings. Fact Finding Exercise, 27 October 2017. 267 2017 ESA Consultation, n 12, 12–14; and 2017 ESA Consultation Feedback Statement, n 12, 11–12. 268 The 2017 ESA Proposal acknowledges the attractions of ESMA coordination in this area and contains proposals to empower ESMA to recommend that NCAs initiate an investigation in identified circumstances: 2017 ESA Proposal, n 13, ESMA Regulation, Art 31b. 269 2018 SC Work Programme, n 11, 32.

Supervisory Convergence in Practice 213 cycles. The 2017 ESA Proposal suggests that ESMA would be required to adopt a three-yearly Strategic Supervisory Plan, which would set out strategic objectives and supervisory priorities,270 and that NCAs would be required to submit annual work programmes aligned with the Plan for assessment by ESMA. Where a material risk was identified of the Plan’s priorities not being met, ESMA would be required to issue recommendations to NCAs. Subsequently, NCAs would be required to report to ESMA on implementation,271 and ESMA would be required to issue recommendations to NCAs where it identified material risks that the Plan’s priorities would not be achieved. Although primarily designed to support greater convergence in the supervision by NCAs of regulated actors with material pan-EU, cross-border activities,272 the reform, if adopted, would represent a hardening of ESMA’s coaching powers and a marked shift towards its becoming a more command-and-control-oriented centralised bureaucracy. The effectiveness risks are considerable, including in relation to ESMA’s capacity to adopt an appropriately flexible Plan attuned to national market contexts, the potential overriding by ESMA of legitimate NCA discretion, and the potential resource drain on NCAs from the proposed new reporting cycle. While ESMA’s approach to supervisory convergence so far has been generally flexible and responsive, there are signs that it is hardening, particularly in relation to peer review, as discussed in section IV.F. The proposed Supervisory Plan power has the potential to further harden ESMA’s approach and to tip ESMA into an overly directive steering role and away from the attractive responsiveness and experimentalism that has characterised its supervisory convergence activities so far. Legitimation risks also arise. The Supervisory Plans could interfere with NCAs’ ability to make locally-sensitive policy choices, and the monitoring power would be located within the proposed new Executive Board and not with the Board of Supervisors where some degree of legitimation could be achieved.

v. Coaching through Nudging: Opinions on Supervisory Approaches and Decisions a. Article 29 Opinions A more directive and hierarchical style of coaching can be identified in ESMA’s opinions to NCAs. These take two forms: the own-initiative opinions adopted by ESMA under ESMA Regulation, Article 29, which are akin to the ‘coaching manual’; and the opinions that ESMA must provide, under sectoral financial market legislation, on identified NCA supervisory decisions, typically in potentially contested areas with material crossborder implications, which have a ‘harder’ quality. ESMA’s increasing recourse to Article 29 own-initiative opinions273 certainly underscores its expanding influence, but it also suggests a sensitivity to NCAs given

270 2017 ESA Proposal, n 13, ESMA Regulation, Art 29a. 271 The coverage of the proposed report is specified in detail as including a description of supervisory activities, examinations, and administrative measures; activities not foreseen under the Work Programme; and activities provided for in the Work Programme and not carried out, and reasons why. 272 2017 ESA Proposal, n 13, Explanatory Memorandum, 20. 273 See also ch 3.

214 ESMA and Supervisory Convergence the responsive quality of these opinions – ESMA has, for example, adopted a number of opinions clarifying the supervisory application of MiFID II/MiFIR in response to NCA (and market) requests for clarity.274 Generally, ESMA uses Article 29 opinions in a manner similar to its Article 16 guidelines, such as its 2013 opinion recommending that NCAs require additional periodic reporting from AIFMD funds on systemic risk,275 and its 2013 opinion setting out a methodology for how NCAs should assess third country prospectuses,276 both of which seek to shape NCA decision-making on fund and prospectus supervision, amplify and explain the related rules, and drive practical convergence. Similarly, in January 2017 ESMA used an Article 29 opinion to clarify the different share classes a UCITS fund can employ under the UCITS regime,277 and later in 2017 used an opinion to clarify how the EMIR portfolio margining requirements apply to the supervisory practices of CCP colleges, given a lack of clarity in EMIR and the need to foster coherent supervisory practices within CCP colleges of supervisors.278 ESMA also uses Article 29 opinions as a corrective agent where evidence emerges of diverging279 or obstructive NCA practices.280 ESMA’s deployment of its Article 29 opinion tool evidences the purposeful and sometimes expansionist approach that can be associated with its supervisory convergence activity generally. But ESMA also appears to be facilitating supervisory convergence in a manner which is usually technically-informed, agile in response to emerging difficulties, and responsive to NCAs’ requests for clarification. At the same time, there are some indications of a move away from supporting and into steering, which may generate effectiveness but also legitimation risks, particularly as Article 29 opinions are not subject to a QMV requirement, which limits the potential of the Board to act as a legitimating actor.281 b. Legislatively Required Opinions The second form of ESMA opinion is more operational and intrusive. These opinion powers are designed to apply EU-level oversight, albeit soft oversight, to identified NCA supervisory decisions (generally new to NCAs) given the spill-over implications of these decisions for single market risk management. While NCAs are not required

274 ESMA Executive Director Ross identified ‘an inexhaustible demand for clarification and guidance’ on MiFID II/MiFIR: Keynote Address, n 158. 275 ESMA/2013/1340. 276 ESMA/2013/317 (the relevant legislative rules did not specify how third country prospectuses were to be assessed). 277 ESMA34-43-296 (2017). 278 ESMA70-70803281-186 (2017). 279 The need to avoid the emergence of different supervisory approaches is often a recurring theme of ESMA’s Art 29 opinions. See, eg, Opinion on Determining Third Country Trading Venues for the Purposes of Position Limits under MiFID II (ESMA70-154-466) (2017) para 6. 280 A 2013 opinion on the application of the prospectus regime’s ‘base prospectus’ rules, eg, was designed to address obstructions arising from how certain host NCAs were applying the regime’s notification rules, and contained the warning that if non-compliance persisted, ESMA could pursue non-compliant NCAs under its breach of EU law powers (ESMA/2013/1944). 281 The 2017 ESA Review exposed some NCA concern that Art 29 measures were not subject to a QMV requirement. See further ch 3 on Art 29 legitimation risks.

Supervisory Convergence in Practice 215 to follow these ESMA opinions, they are typically required to publish their reasons for non-compliance. These opinion requirements are peppered across sectoral EU financial market legislation and typically apply to new, EU-derived NCA powers that either are directed to the supervisory execution of political decisions of high salience regarding market design and structure (notably the new MiFID II/MiFIR regime governing commodity derivatives markets and the transparency of equity/non-equity market trading), or relate to NCAs’ exceptional intervention powers (notably to intervene in relation to short selling and to restrict/prohibit products or services). In all these cases, the NCA supervisory decision leads to direct intervention in the market, is sensitive given the implications for local and cross-border markets, and relates to new or enhanced supervisory powers, which demand careful interrogation of often complex data. The potential for ESMA to exert influence on operational supervisory decisions of some salience and sensitivity is accordingly high. 1. Short Selling The ESMA opinion requirement that applies to NCA exceptional short-selling action exemplifies the delicate situations in which these opinion powers typically apply. The 2012 Short Selling Regulation, a measure redolent of the financial crisis era and heavily shaped by political concern in some Member States to dampen speculative practices, empowers NCAs to take exceptional actions in relation to short selling, including the imposition on market participants of notification and disclosure requirements, and also of restrictions and prohibitions on short selling. Any such supervisory action must be notified in advance to ESMA,282 who must provide an opinion on whether the action is necessary to address the exceptional circumstances in question: ESMA must state whether it considers that adverse events or developments have arisen that constitute a serious threat to financial stability or to market confidence in one or more Member States, and whether the measure is appropriate and proportionate to address the threat.283 Where the NCA does not follow the ESMA opinion, it must publish an explanatory notice.284 The criteria against which ESMA is to assess the NCA notification are diffuse and afford ESMA significant discretion.285 ESMA has not, however, typically questioned NCAs’ judgements, a posture which can be associated with concern not to destabilise Board of Supervisors relations or precipitously second-guess NCAs’ deployment of these novel and domestically-sensitive powers. As at June 2018, ESMA had issued 20 opinions, all to the Greek, Italian, or Spanish NCAs, all of which had notified their intention to take short-selling action in times of severe market stress during 2012–16. In all these cases bar one, ESMA supported the NCA action. Three opinions relate to ESMA’s support of the 2014 and 2016 prohibitions on short selling of specific bank instruments notified by the Italian NCA (CONSOB) on foot of significant selling pressure on the relevant banks, which, the NCA argued,

282 With details and supporting evidence, and at least 24 hours in advance, unless exceptional circumstances apply: 2012 Short Selling Regulation, Art 26. Fellow NCAs must also be notified. 283 ibid, Art 27(2). These conditions map those that apply to the original NCA decision to intervene (Arts 18(1), 19(1), 20(1), and 21(1)). 284 ibid, Art 27(3). 285 They are amplified in Delegated Regulation 918/2012.

216 ESMA and Supervisory Convergence had the potential to generate contagion effects in the Italian banking market.286 Two relate to ESMA’s support of short-selling prohibitions notified by the Spanish NCA (the CNMV), one relating to a 2017 prohibition on short selling covering a Spanish bank287 and the other relating to a 2012 extension of a more general prohibition on short selling, which was imposed by the Spanish authorities prior to the coming into force of the Short Selling Regulation and at the height of the euro area turbulence throughout 2012.288 All the other opinions relate to different short-selling measures notified by the Greek NCA across two periods of market turbulence and bank market restructuring: a series of prohibitions on short selling in financial instruments generally and in securities of specific banks were notified in 2012–13 and supported by ESMA;289 a second set of prohibitions were notified in 2015–16 regarding short selling in financial instruments generally and in relation to securities of specific banks, and were all, bar one, supported by ESMA.290 In all these cases, the political and NCA sensitivities were acute – the different prohibitions either were notified during the euro area turbulence over 2012–13, or responded to the major disruption experienced by individual banks following either EU-level resolution action/EU-level stress testing action (in the case of the Italian and Spanish notifications) or EU-led restructuring (in the case of the Greek notifications). ESMA has had to tread carefully amidst the EU-level and national sensitivities, supporting NCA action in all but one case. The lack of ESMA/NCA contestation might suggest a hands-off ESMA posture and a limited ESMA appetite for exerting influence and for this particular supervisory convergence mandate (although it might also reflect the acuteness of the prevailing market instability and the logic of the NCAs’ notified intentions to act). Nonetheless, ESMA’s approach has become more technically sophisticated, data-informed, and challenging over time. For example, ESMA’s reasoning is significantly more articulated in its 2016 and 2017 opinions on the Spanish and Italian NCAs’ notified actions as compared to its reasoning in its initial 2012–13 opinions, which simply record the NCAs’ reasoning and briefly note compliance with the requirements of the Short Selling Regulation. ESMA is also becoming more challenging of NCAs: its 2016 opinion on the Italian NCA’s proposed action, for example, queried the potential disruption that could arise from the NCA’s decision not to exempt market-makers from the prohibition;291 and it adopted 286 CONSOB notified ESMA in July 2016 of its intention to impose a short-selling prohibition on securities of Monte dei Paschi di Siena bank, following supervisory action by the ECB/SSM requiring a reduction in the bank’s non-performing loan exposure, and subsequent severe selling pressure on the bank’s shares. ESMA supported CONSOB’s determination that there was a serious threat to market confidence and financial stability in Italy, and that the measure was proportionate and appropriate; ESMA also supported subsequent renewals (ESMA/2016/431 and ESMA/2016/1078). In October and November 2014, ESMA supported the original imposition and subsequent renewal by CONSOB of a short-selling prohibition on the shares of two Italian banks following the restructuring the banks’ required after the significant shortfall in their capital positions exposed by the 2014 ‘Comprehensive Assessment’ (stress test) of banks entering Banking Union (ESMA/2014/1355 and ESMA/2014/312). 287 In June 2017, the CNMV notified a short-selling ban on the shares of a Spanish bank that had experienced steep price falls during the Spanish banking market turbulence which broke out at that time and which was related to the resolution of the major Spanish bank Banco Popular; the ban was supported by ESMA (ESMA70-146-10). 288 ESMA/2012/715. 289 ESMA/2013/542, ESMA/2013/149, and ESMA/2012/717. 290 The different measures are reviewed in ESMA/2016/28. 291 ESMA/2016/1078, para 18.

Supervisory Convergence in Practice 217 its first negative opinion in 2016 when it decided not to support proposed action by the Greek NCA. The intrusive nature of this only (to date) negative ESMA opinion should not be overplayed as it formed the last in a series of ESMA opinions which had previously supported a chain of Greek NCA prohibitions, and as it related to a renewal of an earlier ESMA-supported prohibition. The notification related to a proposed prohibition on short selling in the shares of Attica Bank. The ban had been originally imposed (and supported by ESMA) in early December 2015, but dated further back to the shortselling prohibitions imposed by the Greek NCA in September 2015 on the securities of a group of Greek banks (including Attica Bank) over a period of intense volatility related to the July 2015 Eurogroup agreement to support the Greek economy, including through funds to recapitalise the Greek banking system. These bans were renewed over November and December 2015 as severe financial stability and market confidence risks (associated with uncertainty as to the progress of the Greek bank recapitalisation programme) persisted.292 As the recapitalisation programme rolled out, a notification was made by the Greek NCA of its intention to renew the short-selling prohibitions, but only for Attica Bank, as its recapitalisation was still ongoing and lifting the ban could have increased market uncertainty. ESMA supported this action given the risks to market stability. But it did not support the subsequent notification by the Greek NCA of its proposed renewal of the prohibition. In this final notification, the Greek NCA argued that while the recapitalisation of Attica Bank had been approved at the end of 2015, trading in its new shares had not yet started, and an extension of the prohibition to cover the first few days of trading in the new shares would ensure equal treatment with the banks which were already capitalised and minimise market volatility. ESMA disagreed, finding that market instability had decreased considerably following the Bank’s successful share capital increase in December 2015. ESMA also noted that Attica Bank was a small bank within the Greek market and, from an EU perspective, was not a significant entity under the direct supervision of the ECB/SSM; that the risks to financial stability had become much less acute since the share capital increase; and that while there was a risk of increased volatility as the new Attica Bank shares had not yet commenced trading, the trading data did not indicate significant downward pressure on prices. The risk that falling Attica Bank share prices would endanger the orderly functioning and integrity of the whole Greek market was ‘not evident’, and accordingly it was not appropriate or proportionate to renew the measure. ESMA’s negative opinion, while an important waypoint in ESMA’s development, sits within a set of supportive opinions and was adopted over a less acute stage of the Greek banking crisis. Nonetheless, it underlines ESMA’s potential to exert influence by acting in a hierarchical capacity and seeking to shape NCAs’ supervisory decisions in a highly sensitive context – while the Greek NCA chose to retain the prohibition and to ‘explain’ its course of action rather than to ‘comply’ with the ESMA opinion, ESMA nonetheless had set down a marker. 2. MAR and MiFID II/MiFIR Beyond the short-selling context, ESMA’s opinion powers are scattered across EU financial market legislation, including under the 2011 AIFMD, under which ESMA has yet

292 The

circumstances of the 2015 prohibitions are detailed in ESMA/2016/28, paras 2–4.

218 ESMA and Supervisory Convergence to act,293 and the 2014 MAR, on which some limited evidence is available. The MAR opinion regime relates to ‘Accepted Market Practices’ (AMPs). The MAR permits the maintenance by NCAs of local exemptions (AMPs) from the MAR’s market manipulation requirements, in a concession to local market features that reflects the longstanding AMP mechanism originally introduced in the 2003 Market Abuse Directive. But it tightens the original 2003 AMP process by imposing an ESMA opinion requirement.294 Thus far there is little evidence on how the new AMP opinion regime is developing, but what is available suggests a purposeful and assertive ESMA approach.295 The new AMP regime was used for the first time in summer 2016, when four NCAs notified pre-existing AMPs to ESMA, all relating to liquidity contracts under which an intermediary enhances the liquidity of an issuer’s financial instruments, and another NCA notified its intention to establish a new liquidity contract-related AMP.296 ESMA’s first MAR/AMP opinion relates to this sequence of notifications and addresses the AMP for liquidity contracts notified by the Spanish NCA.297 While supportive of the NCA, ESMA’s opinion is notable for its signalling of ESMA’s willingness to press NCAs on their approach. ESMA highlighted that it regarded its AMP opinion power as of the ‘utmost importance’ given the market integrity risks associated with AMPs, and its opinion followed a preliminary ‘comment and review’ procedure through which ESMA indicated the changes it would require to the AMP before it would be approved. The opinion is also notable for its detailed analysis,298 its concern to avoid market integrity risks and to minimise pan-EU disruptions,299 and ESMA’s appetite for demanding (and receiving) changes to the AMP.300 Further evidence of an ESMA concern to probe AMPs and to Europeanise the AMP process comes from the Article 29 opinion it adopted in parallel, which sets out a common approach for how liquidity contract AMPs should be constructed.301 ESMA has also been conferred with opinion powers under MiFID II/MiFIR – again in sensitive contexts. The first set of opinion powers relates to the MiFIR transparency regime, which imposes extensive and transformative transparency rules on the EU’s equity and non-equity trading markets. Given the material political sensitivities and

293 ESMA’s opinion power (in this case cast in terms of ‘advice’) relates to decisions by NCAs to impose leverage limits on alternative investment fund managers (Art 25). 294 As under the earlier 2003 regime, NCAs must meet specified conditions when establishing an AMP, but ESMA’s opinion power is new. ESMA must publish an opinion assessing the compatibility of the NCA’s proposed AMP against the relevant MAR conditions, and also assessing whether the AMP would threaten market confidence in the EU financial market (2014 MAR, Art 13(3)–(5)). 295 Most AMPs adopted by NCAs prior to MAR’s coming into force have been terminated; a number relating to liquidity contracts are, as noted in this subsection, continuing. 296 ESMA, Opinion on Points for Convergence in Relation to MAR Accepted Market Practices on Liquidity Contracts (ESMA70-145-76) (2016). 297 ESMA/2016/1663. The AMP was designed to replace the earlier AMP adopted by the Spanish NCA under the 2003 regime. 298 The opinion contains a detailed assessment of the AMP’s benefits and risks, and of the proposed mechanics and conditions under which it would operate. 299 ESMA noted its concern that while five NCAs had different forms of liquidity contract-related AMP, these contracts were regarded as manipulative practices by other NCAs. 300 ESMA set out a series of revisions required to minimise market integrity risks. 301 See n 296.

Supervisory Convergence in Practice 219 the uncertainties associated with the new regime, particularly as regards the potential impact on market liquidity, a series of heavily negotiated waivers/exemptions are available, which can be granted by NCAs and which are designed to reflect local market conditions.302 ESMA is embedded in the NCA waiver system as a form of gatekeeper, empowered to review NCA decision-making for compliance with the MiFIR requirements, but is accordingly required to navigate a highly contested area with acute domestic sensitivities.303 The most significant waivers are those available from MiFIR’s heavily negotiated pre-trade transparency rules for equity and non-equity trading;304 these waivers have been shaped by national interests in protecting legacy market structures, as well as by concerns to manage liquidity risk. Before granting one of the waivers, NCAs must notify ESMA (and other NCAs), and ESMA must issue an opinion assessing the waiver’s compatibility with the relevant MiFIR conditions applicable to the waiver. Reflecting the sensitivities, NCAs are not subject to a ‘comply or explain’ obligation in relation to the opinion, but ESMA can mediate under ESMA Regulation, Article 19, where another NCA disagrees with the NCA waiver. An ESMA opinion requirement also applies to the similarly contested last-resort suspensions of MiFIR transparency requirements, which NCAs may make available for non-equity asset classes where liquidity is threatened.305 Previously, ESMA oversaw a voluntary arrangement under which NCAs notified their (more limited) MiFID I transparency waivers to ESMA and ESMA adopted an Article 29 opinion to support supervisory convergence.306 This voluntary process was broadly uncontested, with negative ESMA opinions being rare.307 The MiFIR opinion regime, by contrast, is significantly more formalised, applies to a much wider range of transparency waivers, and carries more supervisory salience given the uncertainties associated with the new transparency regime and the related importance of the waivers as safety valves for local markets. Initial indications suggest a pragmatic and collaborative approach by ESMA and NCAs. Given the very large number of waiver opinions required of ESMA prior to MiFIR’s coming into force in January 2018 and the absence of transitional procedures,308 ESMA and NCAs agreed on a process under which, for equity market transparency waivers (work on which was prioritised), NCAs were to notify ESMA in advance but, to avoid a bottleneck of waivers awaiting ESMA opinions, were to grant waivers based on their own assessment of MiFIR compliance, but these waivers would be either temporary, provisional, or subject to reconsideration following the subsequent issuance of the ESMA opinion. ESMA also published

302 See further Moloney, n 15, 481–85. 303 The sensitivity of the waiver regime and of ESMA’s role is illustrated by the Council split between those Member States in favour of granting ESMA binding powers in relation to waivers and those concerned to retain national autonomy: ibid. 304 Under MiFIR, Art 4(4) (equity pre-trade transparency) and Art 9(2) (non-equity pre-trade transparency). 305 Under Art 9(4) (pre-trade) and Art 11(2) (post-trade). 306 ESMA, Waivers from Pre-trade Transparency. CESR positions and ESMA opinions (last edition, 20 June 2016 (ESMA/2011/241h)). 307 Of the 25 or so opinions adopted by ESMA, only four indicated non-compliance with the MiFID I criteria. 308 ESMA estimated in September 2017 that some 700 opinions were required of it on MiFIR waiver notifications prior to MiFIR’s coming into force on 3 January 2018: ESMA, Public Statement, 28 September 2017 (ESMA70-154-356).

220 ESMA and Supervisory Convergence a Q&A that addressed key issues ESMA had identified in the related NCA notifications, in order to support convergence in NCA practices, and warned that any waivers notified to ESMA which did not include essential information or did not comply with the Q&A would not be eligible for the expedited process.309 This procedural fix suggests some ESMA pragmatism, agility, and responsiveness to NCAs’ operational pressures; at the same time, it underscores ESMA’s purposeful concern to retain oversight over NCA decision-making in this area. A similar (and likewise sensitive) opinion regime governs NCAs’ new MiFID II ‘position management’ powers over commodity derivatives markets, which require NCAs to play a significantly more interventionist role than previously in the commodity derivatives markets. The opinion mechanism applies to the new ‘position limits’, which NCAs must now put in place for commodity derivative trading under MiFID II, Article 59. ESMA must assess whether the limits adopted by an NCA are compatible with the objectives of Article 59 and with the prescribed methodology for calculating such limits, and a ‘comply or explain’ mechanism applies to the ESMA opinion. Thus far there is limited experience with ESMA’s approach. What evidence is available suggests that while ESMA is unlikely to disrupt NCA autonomy without cause, it is adopting a technically rigorous approach that is at the same time sensitive to the complexity of this form of supervisory decision-making. ESMA has recognised that setting position limits is a ‘new and technically challenging’ task for NCAs, which requires the gathering and examination of large volumes of complex data and which could only have been undertaken at a late stage prior to MiFID II/MiFIR’s coming into force, given the delays in adopting the related administrative rules on how position limits should be set.310 ESMA and NCAs accordingly agreed that (as with the MiFIR equity trading waivers) NCAs would publish their limits ahead of the relevant ESMA opinion, but that NCAs would modify their opinions where necessary in accordance with the subsequent ESMA opinion or provide explanations.311 This responsive and collaborative approach is also evident in the first three sets of ESMA opinions subsequently adopted in August 2017 on the French NCA’s position limits.312 While ESMA approved the NCA’s approach, the opinions include detailed empirical assessment of the limits and signal an ESMA intention to apply its oversight role purposefully.313 Finally, the opinion mechanism applies to the NCA product intervention powers introduced under MiFIR Article 33, which empowers NCAs to prohibit or impose conditions on services or products. The ESMA opinion must consider whether the action is justified and proportionate, as well as whether action by other NCAs is necessary to address the risk in question; an NCA ‘comply or explain’ requirement applies. 309 ibid. 310 ibid, 3. 311 ibid. The UK FCA, eg, noted, when adopting a subsequent set of position limits, that the limits had been published in advance of the required ESMA opinion and could be changed (FCA Statement, 25 January 2018). 312 ESMA70-155-993/983/and 988 (related to commodity derivative positions on rapeseed, milling wheat, and corn). 313 A similar observation can be made of ESMA’s second swathe of (October 2017) opinions, which address a range of UK FCA position limits. While all were positive, the opinions suggest close engagement with the factual context and with the FCA’s reasoning.

Supervisory Convergence in Practice 221 There is as yet no evidence on ESMA’s approach and whether it will defer to NCAs, but, based on ESMA’s other opinions, sensitivity to local decision-making contexts tempered by technically-informed and purposeful review can be expected. ESMA’s opinion powers, and its related ability to exert influence, can be expected to expand as it acquires more experience and as the institutions grow more familiar with this device, as is suggested by the 2017 ESA Proposal, which harnesses the opinion device to Brexit risk management. As discussed in chapter 6, the Commission has proposed that ESMA would be empowered to give an opinion where an NCA was to authorise a regulated actor, and where that actor planned to outsource or delegate a material part of its activities to a third country.314 3. Effectiveness and Legitimation These different legislatively-required opinions represent a further expansion of ESMA’s ability to exert influence, empowering ESMA to nudge a Europeanisation of how NCAs apply these new and sensitive powers. So far at least, effectiveness risks appear limited. Initial evidence suggests a technically-informed and data-rich approach by ESMA, which responds to the EU interest in how NCAs apply these powers but is sensitive to NCAs’ autonomy and local settings, and which is also agile and capable of pragmatic adjustment to operational realities. There is also evidence of some degree, at least, of NCA acceptance of ESMA’s authority, which suggests a productively sustainable and responsive ESMA approach. The 2017 ESA Proposal may tip the balance away from effectiveness benefits and towards legitimation risks, however, if it leads to these decisions being located in the proposed new bureaucratic Executive Board.315

F. Coaching … and Policing: Peer Review i. ESMA’s Approach to Peer Review Strong nudge effects also come from ESMA’s peer review powers, which engage ESMA’s role as coach but also as policeman – over time, ESMA has come to deploy its peer review powers more assertively.316 The 2013–14 ESA Review saw widespread support for ESMA’s peer review powers, albeit coupled to some concern that these powers were not being deployed in a sufficiently independent or robust manner and that ESMA followup was weak.317 Following a series of ESMA-led refinements, by the time of the 2017

314 2017 ESA Proposal, n 13, ESMA Regulation, Art 31a. 315 See further ch 2 on the proposed new Executive Board. 316 Peer review has featured prominently in ESMA’s 2016 to 2018 SC Work Programmes, which identify peer review as an ‘assessment’ and ‘remediation’ tool. 317 2013–14 Commission ESA Review Report, n 5, 12. The European Parliament called for peer review to become more independent and like IMF ‘FSAP’ reviews of national regulatory systems: 2014 Parliament ESFS Review Resolution, n 5, Annex, Supervisory Cooperation and Convergence. Similarly, the Mazars Report noted stakeholder concern that peer reviews were ‘heavily influenced by the interest of the NCAs’ and their support for peer reviews to be undertaken by independent experts: n 89, 100. Subsequently, the ECB also called on the ESAs to exercise strong peer review (ECB, Response to Commission Consultation on CMU (2015)).

222 ESMA and Supervisory Convergence ESA Review ESMA’s approach had become significantly more directive. Institutional and political support for peer review remained strong, however, with the European Parliament calling for more intensive peer review318 and the 2017 Prospectus Regulation, to take a legislative example, mandating ESMA to engage in peer review.319 Reflecting ongoing stakeholder (and ESMA) support for a strengthening of peer review,320 the 2017 ESA Proposal has suggested reforms to the governance of peer review, which, in order to remove potential NCA conflicts of interests, would locate decision-making power over peer review with the proposed new Executive Board, rather than, as now, with the Board of Supervisors. Peer review, a means for mutual benchmarking, learning and monitoring,321 and a key element of the experimentalist governance method,322 has been identified as an innovative and productive means for supporting information exchange, norm building, and peer accountability in international financial governance,323 and is increasingly being relied on by the ISSBs to assess progress on standard implementation. Peer review should accordingly have much to commend it as a tool for achieving supervisory convergence in the EU setting. The objectives associated with peer review by the FSB, for example – exchange of information and feedback, evaluation of adherence to commitments, fostering of a race to the top, and assessment of the effectiveness of underlying standards324 – all chime well with ESMA’s supervisory convergence mandate and its EU-level operating setting. Peer review also has the potential to be a responsive and agile tool, developing as NCAs become accustomed to the process.325 Further, peer review can foster a degree of peer NCA accountability, which can serve, if indirectly, to strengthen ESMA’s legitimation arrangements. Nonetheless, peer review is not a particularly tractable tool: it requires that priorities for review are set (which can require mediation between different supervisory interests) and that desired outcomes are identified; as considered in chapter 2, supervisory outcomes are not easy to establish. Appropriate priorities and outcomes are even more challenging to identify in the EU supervisory environment where NCAs must respond to local contexts. Peer review can also levy onerous time and management demands on NCAs, complex issues may

318 2016 Parliament Resolution on Stocktaking, n 84, para 55. 319 2017 Prospectus Regulation, Art 20(13). 320 Over the 2017 ESA Review, ESMA repeatedly called for stronger powers for it to follow-up on peer reviews (eg, 2017 ESMA ESA Consultation Response, n 17, 5–6), while the Commission reported on stakeholder support for wider use of peer reviews (2017 ESA Consultation Feedback Statement SWD, n 12, 6). 321 The different stages of peer review include the setting of priorities, preparation (including data collection), consultation (including with relevant supervisors and on-site visits), evaluation, and follow-up: FSB, Handbook for Peer Review (2017). 322 See Sabel and Singer, n 120, identifying the pooling of information and the creating of pressure for continuous improvement through peer review as a key experimentalist technique. In the global governance context, de Búrca et al (n 191) note peer review’s ability to support coordinated learning and to diffuse local expertise and knowledge. Specifically, ESA peer review has been identified as displaying productive experimentalist qualities, in that it accommodates local experimentation but ensures NCAs can be benchmarked in relation to their compliance with EU-level requirements and best practices: Zeitlin, n 121. 323 Riles, n 18. 324 2017 FSB Peer Review Handbook, n 321, 4. 325 eg FSB peer review, the major form of peer review in international financial governance, has developed over time. The current 2017 iteration of its peer review process reflects reviews of the process in 2014, 2015, and 2017, and also FSB members’ practical experiences: ibid, 2.

Supervisory Convergence in Practice 223 arise over the management of confidential information, and review reports are typically a matter of negotiation and can require deft handling.326 Further, peer review requires that a balance is maintained between ensuring that the review is based on sufficiently granular benchmarks and has a sufficiently hard quality so that it can drive improvements, but avoids tipping over into prescription and inflexibility. Much therefore depends on the peer review tool’s being applied effectively by ESMA, in that it engages in peer review in a technically-informed and committed manner (including follow-up of reviews), which reflects the EU interest but is also context-sensitive, proportionate, and does not slide into prescriptive steering of NCA action; and, given the novelty of the peer review tool, displays agility and a capacity for experimentation. While there are indications that ESMA is developing an effective approach, there are also signs of increasingly directive central steering, which will become more marked if the 2017 ESA Proposal reforms are adopted. Peer review was initially attempted over the CESR era327 but was institutionalised with the establishment of ESMA, which is charged with peer review under ESMA Regulation, Article 30; additional mandates to engage in sector-specific peer reviews are conferred on ESMA across sectoral EU financial market legislation.328 ESMA distinguishes between the Article 30 peer reviews, which in practice form the bulk of its peer review work and which it identifies as ‘discretionary’, as it can determine the scope, topic, and duration of the reviews, and the sectoral, mandatory peer reviews,329 although in practice the methodology ESMA uses is similar. Article 30 requires ESMA periodically to organise and conduct peer review analyses of NCAs’ activities to further strengthen consistency in supervisory outcomes; under recital 41 of the ESMA Regulation peer review is concerned with the ‘capacity of supervisors to achieve high quality supervisory outcomes’. ESMA must develop methods that allow for objective assessment and comparison between NCAs, and peer review should assess (but not exclusively): the adequacy of NCA resources and governance arrangements; the degree of convergence in the application of EU law and supervisory practices and the extent to which supervisory practices achieve the objectives of EU law; and good practices which might be of benefit to NCAs. The coercive effect of peer review is also addressed by Article 30: ESMA may subsequently issue guidelines and recommendations to

326 In a reflection of the sensitivities, the FSB has noted that FSB consensus on peer review reports is understood to mean that the views of all members are considered and compromises sought, but that dissenters cannot stand in the way of a decision; and that the final review report reflects the views of FSB peers as well as the reviewed jurisdiction: ibid, 13. 327 CESR adopted a Protocol on Peer Review (CESR 07/070b) and identified a range of potential review techniques, but it did not make significant progress in embedding rigorous peer review practices and its approach tended to be formalistic and technical, focusing on the extent of NCAs’ formal powers and not on how they were exercised (eg, its review exercises on the market abuse regime then in force: CESR /10-262, CESR/091120, and CESR/07-380). 328 The 2011 AIFMD, eg, grants ESMA a specific peer review function over how NCAs supervise non-EU alternative investment fund managers (AIFMD, Art 38). ESMA is also charged with engaging in peer review of CCP colleges of supervisors under EMIR (EMIR, Art 21); of supervision of central securities depositories (CSDR, Art 24); and of NCA approval of prospectuses (Prospectus Regulation, Art 20). 329 For an example of how specific procedures apply to sector-specific peer reviews, see ESMA, Methodology for Mandatory Peer Reviews in relation to CCPs Authorisation and Supervision under EMIR (ESMA711154262120-155) (2017).

224 ESMA and Supervisory Convergence NCAs, which NCAs must ‘endeavour to follow’ (Article 30(3)); peer reviews may also be disclosed publicly, subject to the relevant NCA’s agreement (Article 30(4)). Alongside peer reviews, ESMA also engages in informal thematic studies, which allow it to gather data on supervisory practices and to identify any necessary convergence measures.330 ESMA usually engages in two Article 30 peer reviews annually:331 as at June 2018, ESMA had reported on two peer reviews in 2017,332 three in 2016,333 two in 2015,334 one in 2014,335 three in 2013,336 two in 2012,337 and two in 2011.338 Reviews cover NCAs’ supervision of the rule-book but also of ESMA soft law.339 Reviews are usually undertaken of well-established supervisory areas central to the operation of the EU financial market.340 They have a bent towards retail market supervision341 and towards NCAs’ supervision of ESMA soft-law measures deemed to be of particular relevance to the achievement of supervisory convergence.342 ESMA’s approach has become more proceduralised and institutionally sophisticated over time, suggesting an ESMA capacity for adaptation, as well as an expanding ability to exert influence. Peer review was initially managed through an NCA-composed Peer Review Panel and in accordance with an ESMA protocol and methodology on peer review.343 The original methodology was refined in 2013; the 2013 methodology (which currently governs peer review) is designed to ensure peer review is independent and to reduce the risk, repeatedly raised over the 2013–14 ESA Review, that NCA interests in protecting their positions could diminish the effectiveness of peer review.344

330 See, eg, ESMA, Thematic Study among NCAs on Notification Frameworks and Home-Host Responsibilities under UCITS and AIFMD (ESMA34-43-340) (2017). 331 ESMA aims to carry out two peer reviews on average a year (recently, 2018 Work Programme, n 6, 9). 332 Peer Review on the Guidelines on Enforcement of Financial Information (ESMA42-111-4138) and Peer Review on the MiFID I Compliance Function (ESMA42-111-4285). 333 Peer Review on the Prospectus Approval Process (ESMA/2016/105); Peer Review on Suitability (ESMA/2016/584); and Peer Review on the Market Making Exemption under the Short Selling Regulation ESMA/2015/179). 334 Peer Review on the Automated Trading Guidelines (ESMA/2015/592) and Peer Review on Best Execution under MiFID I (ESMA/2015/494). 335 Peer Review on MiFID I ‘Fair Clear and Not Misleading’ Disclosures (ESMA/2014/148). 336 Mapping Report on Supervisory Practices under the Market Abuse Directive (ESMA/2013/806); Peer Review on Supervisory Practices under the Market Abuse Directive (ESMA/2013/805); and Peer Review on the Money Market Fund Guidelines (ESMA/2013/476). 337 Review of Good Practices in the Prospectus Approval Process (ESMA/2012/300) and Review of Actual Use of Sanctioning Powers under MAD (ESMA/2012/270). 338 Report on Mapping of the Transparency Directive (ESMA/2011/194) and Report on the Mapping of Contingency Measures (ESMA/2011/26). 339 Peer reviews have covered ESMA’s guidelines on the enforcement of financial information and its guidelines on the MiFID I compliance function (2017), its guidelines on automated trading (2015), and its money market fund guidelines (2013). 340 The reviews so far have been primarily focused on the prospectus/financial reporting, MiFID, and market abuse regimes. 341 Reflected in the peer reviews of NCA supervision of best execution, disclosure, and suitability requirements over 2014–16. 342 As can be seen in the peer reviews of ESMA’s guidelines on the enforcement of financial information and on automated trading. 343 ESMA/2011/BS/229; and ESMA, ESMA Review Panel Methodology (ESMA/2013/1709 (revised from the 2012 version)). 344 ESMA/2013/1709.

Supervisory Convergence in Practice 225 Peer review is conducted by an ‘Assessment Group’, which is chaired by an NCA Coordinator and composed of interested members of the Standing Committee on Supervisory Convergence, which oversees peer review, and ESMA officials.345 The Group drafts a peer review mandate, which is approved by the Standing Committee initially and subsequently by the Board of Supervisors, and adopts a detailed questionnaire sent to all NCAs to support the peer review. This questionnaire is essential to the peer review and is designed to elicit answers from NCAs that represent a ‘frank assessment by the [NCA] of its perceived weak or strong points’ and which are ‘underpinned by acceptable evidence’, and NCAs are required to devote ‘appropriate human resources’ in dealing with the questionnaire in a full and timely manner and in providing ‘complete, coherent and high-quality responses’.346 The methodology also provides for a small number of on-site visits to selected NCAs (the visits can include staff interviews, demonstrations, and file reviews) and governs the membership of the on-site inspection team and the management of any related conflict of interests; not all NCAs accordingly are subject to on-site inspection over a peer review.347 The peer review report is then drafted by the Assessment Group and is reviewed by the Standing Committee on Supervisory Convergence prior to discussion and approval by the Board of Supervisors.348 Once the report has been approved, any good practices that have emerged are to be published by ESMA. The peer review report is also published, if this is agreed by the Board of Supervisors (NCA responses to questionnaires are not), and includes references to named NCAs, unless an NCA objects.349 Follow-up review action may be taken, if approved by the Board of Supervisors.350 Peer review was identified as a key convergence tool in ESMA’s 2016–2020 Strategic Orientation351 and its importance reflected in the 2016 establishment of the new Standing Committee on Supervisory Convergence, which supports peer review and which replaced the earlier NCA-composed Peer Review Panel. The Standing Committee’s detailed terms of reference require it to propose topics for peer reviews (which are subsequently agreed by the Board of Supervisors for inclusion in ESMA’s annual Supervisory Convergence Work Programmes); propose mandates for the peer reviews conducted by Assessment Groups and monitor progress on the reviews; consider whether there are benefits from targeted or country-specific peer reviews; ensure

345 ibid, s 2. 346 ibid, s 4. 347 ibid, s 5. In the region of 5–7 NCAs are usually selected for the peer review’s on-site visits (selection is the responsibility of the Assessment Group, and the NCAs selected for on-site review are set out in the peer review mandate). The on-site visit team is typically composed of the NCA Coordinator, an ESMA expert, the ESMA rapporteur, and NCA representatives. See, eg, the discussion of the on-site review team for the 2016 Prospectus Peer Review (ESMA/2016/1055, 4–5). 348 ibid, s 6. 349 ibid, s 8. An objecting NCA is expected to state its reasons. 350 Follow-up reviews are common. They have covered the 2014 MiFID I disclosure peer review (follow-up in 2017); the 2015 best execution peer review (follow-up in 2017); the 2013 money market fund guidelines peer review (follow-up in 2016); and the 2013 Market Abuse Directive supervisory practices peer review (follow-up in 2015). 351 Which characterised peer review as an important tool, best suited to situations where it was necessary to assess the quality of implementation or existing practices: n 1, 14.

226 ESMA and Supervisory Convergence follow-up action; identify good practices and promote their application; and ensure consistent methodologies and rules of procedure.352 Further procedural enhancements have followed, including ESMA’s 2016 principles governing external stakeholder engagement with peer review, which are designed to inject practical stakeholder experience into the peer review process.353 Given the sensitivities associated with opening up NCA peer review to external stakeholders, the principles are cautious,354 but they nonetheless establish the principle of stakeholder engagement.355 In addition, specific methodologies have been adopted for the EMIR-required ESMA peer reviews of CCP colleges of supervisors.356 The peer review process is externally reviewed; following review by the EU’s Internal Audit Service, refinements were to be made over 2018.357 By contrast with EBA (which has been slower to engage with peer review, reflecting the high degree of practical convergence achieved by the SREP as well as the complexities of SSM/single market dynamics358), peer review is a standing item on ESMA’s Board of Supervisors meetings. In parallel with this formalisation and proceduralisation of peer review, ESMA’s approach has become harder and more hierarchical, even though the principle of NCAs overseeing and carrying out the reviews is still paramount. ESMA initially followed CESR’s informal approach, relying on NCA self-assessment and on subsequent benchmarking by the NCA Peer Review Panel, although ESMA sought to drill more deeply into supervisory practices than CESR had. Its 2013 peer review on the application by NCAs of the ESMA guidelines on money market funds, for example, was operationally focused, reporting on internal NCA organisation, technical expertise, resources, risk-based supervision, and the supervisory tools employed. ESMA’s early peer review exercises did not, however, identify weak practices, engage in on-site reviews, or challenge NCAs to any significant degree. Following the 2013 methodology reforms, peer review became more robust and granular, with the 2015 peer review on supervision of best execution requirements a waypoint in terms of its operational detail and direct and robust identification of NCA weaknesses.359 The review found that supervisory convergence, and the level of NCA monitoring of best execution, were relatively low; a lack of comprehensive supervision and little rigorous supervision of firms’ execution policies; an overly intense focus on the equity market; and that NCAs experienced

352 Current iteration (revised in 2018) at ESMA42-113-769. 353 ESMA/2016/632. 354 They provide, eg, that only stakeholders with an interest in the review topic should be involved; identify potential stakeholder proxies within ESMA (its Stakeholder Group and the Consultative Working Groups attached to Standing Committees), while acknowledging that other stakeholders can be consulted; note that stakeholder interaction should be reasoned and its use decided by the Board of Supervisors; and acknowledge that while NCAs must permit engagement with stakeholders that have some supervisory functions (such as consumer protection bodies, accounting standard-setters, and market infrastructures exercising delegated supervisory functions), they are not required to permit engagement with other stakeholders (such as regulated entities generally). 355 Stakeholders were, eg, consulted for the 2016 peer review on prospectus approval: ESMA/2016/1055, 5. 356 See n 329. The process is very similar to that which applies under the 2013 methodology, but injects the technical expertise of the Standing Committee on Post Trade. 357 2018 SC Work Programme, n 6, 15. 358 See further ch 6. 359 2015 Peer Review on Best Execution under MiFID I, n 334.

Supervisory Convergence in Practice 227 difficulties in prioritising resources. The review also drilled into NCAs’ supervisory practices. It found, for example, that while NCAs typically used risk-based supervision models to identify whether supervisory action was needed, in some cases NCAs had not established relevant qualitative and quantitative criteria; and that NCAs did not have sufficient processes for monitoring their actions and so for improving. ESMA also identified the six NCAs that had been subject to on-site inspection, and reported on improvement needs.360 The review’s recommendations were practical and specific, including that the frequency and intensity of NCAs’ monitoring of best execution, and their use of tools such as thematic review and complaints data, be reviewed, and that the adequacy of NCAs’ resourcing be addressed. The 2016 peer review of NCA supervision of the MiFID I suitability regime was more intrusive again. While the review found, overall, examples of good practices, it identified weaknesses and called for stronger NCA oversight of compliance with the suitability regime and for a related allocation of supervisory resources; it also highlighted the need for improvements in enforcement and as regards stakeholder communications.361 The tone of the review was assertive: it identified ‘a lack of a proactive and focused supervisory approach’ in some areas;362 too much focus on the distribution of complex products and insufficient attention to supervision of advice on less complex products; a need for supervisors to better adapt their supervisory practices to product complexity; and that NCAs had not sufficiently supervised the suitability regime over the review period. The review was also notable for the practical quality of the recommendations made, including that NCAs review telephone records, assess sales scripts, and simulate the client experience; consider using thematic reviews and mystery shopping techniques; communicate more frequently with firms, including through ‘Dear CEO’ letters; and make greater use of non-pecuniary sanctions. The 2016 peer review on the prospectus approval process363 had more positive findings to report, but it also identified operational weaknesses relating to resource allocation, wide varieties in risk-based assessments, and persistent difficulties in addressing comprehensibility defects in prospectuses. This trend appears to be continuing. ESMA’s follow-up 2017 report on its earlier 2014 peer review on NCA supervision of the MiFID I requirement that disclosure be ‘fair, clear and not misleading’364 took a similarly operational and interventionist posture. It noted, for example, that a risk-based approach to supervision (which was raised by some NCAs to explain supervisory deficiencies) should still allow for action where potential regulatory breaches were indicated; warned that supervisory deficiencies in one Member State

360 eg, ESMA called on the French NCA to place more emphasis on best execution in its thematic reviews; reported that the Luxembourg NCA had paid only limited attention to checking whether best execution was being achieved in practice; found that best execution was not a priority for the Spanish NCA and called for an increased intensity in supervision; found that the Liechtenstein NCA was largely non-compliant given how MiFID I was implemented; found deficiencies in the national implementation of MiFID I in Poland; and called on the Maltese NCA to increase its intensity of supervision: ibid, 13–14. 361 2016 Peer Review on Suitability, n 333. 362 ibid, 18. 363 2016 Peer Review on the Prospectus Approval Process, n 333. 364 The report is a follow-up on the earlier peer review and concentrates on those Member States which were previously found not to be fully applying criteria which had been identified as essential for effectively ensuring the application of the relevant MiFID I rules: ESMA42-113-627.

228 ESMA and Supervisory Convergence could leak into other national markets; and found, despite some progress, that certain NCAs were still displaying deficiencies. ESMA’s 2017 peer review on its guidelines on the enforcement of financial information was also direct.365 The review found inefficient resourcing or insufficient allocation of resources and organisation in four named NCAs; weaknesses in the risk models used by five NCAs for selecting enforcement cases; and a general tendency to not carry out in-depth inquiries. The peer review made several practical recommendations, including in relation to risk model design and resource allocation. The 2017 peer review of ESMA’s guidelines on the MiFID I compliance function requirement was similar. While it was broadly positive in relation to the on-site inspections undertaken over the review, it adopted a series of recommendations to be acted on by the relevant NCAs.366 Similar trends can be observed with ESMA’s sectoral peer reviews, which are currently focused on supervision by CCP colleges. ESMA’s second peer review of CCP colleges, for example, highlighted a range of divergent practices, suggested areas where supervisory convergence could be enhanced, and identified a potential case of NCA non-compliance with EMIR.367

ii. Effectiveness and Legitimacy ESMA’s peer review powers, and its increasingly assertive approach to their deployment, are affording it a further means for Europeanising NCA supervisory practices and for strengthening its technocratic influence. ESMA’s approach to peer review can, however, be regarded as effective. The peer review process draws on extensive NCA and ESMA technical expertise, and appears to be evolving over time and building on previous review experience in a responsive manner. A productive degree of caution can be observed. Peer review is not being used indiscriminately: ESMA limits it to situations where it is necessary to assess the quality of implementation or supervisory practices, and regards it as inappropriate where open debate or quick action is required, or where NCAs are approaching a supervisory issue for the first time.368 Further, ESMA’s peer review processes are becoming more proceduralised and refined, in an indication of some institutional agility. And the balance required between accommodation of national autonomy and responsiveness to NCAs’ contexts, and the monitoring of divergence and the driving of best practices, is, broadly, being maintained. The 2013 peer review methodology notes that identified good practices are ‘in no way’ intended to disqualify practices more suitable for a particular jurisdiction, do not have any normative or binding character, and are not subject to ‘comply or explain’.369 Overall, peer

365 2017 Peer Review on the Guidelines on Enforcement of Financial Information, n 332. 366 These were most extensive for the Cypriot NCA given the mis-selling scandal associated with complex contracts for differences (CfDs) sold from Cyprus (see section IV.H.ii) and the related importance of supervision of the compliance function. The review made several specific recommendations and called for additional resources for the NCA: 2017 Peer Review on MiFID I Compliance Functions, n 332, 9–10. 367 ESMA, Peer Review under EMIR Article 21 (ESMA/2016/1683). ESMA noted that one NCA had not required the application of an EMIR provision by the relevant CCP, that clarity as to the application of the relevant provision had been provided through an ESMA Q&A, and that the NCA had contacted the CCP in order to rectify the deficiency: at 31. 368 2016–2020 Strategic Orientation, n 1, 14. 369 2013 Peer Review Methodology, n 343, s 8.

Supervisory Convergence in Practice 229 reviews appear sensitive to local contexts;370 references to the appropriateness of supervisory divergence given particular contexts are peppered across peer reviews,371 while the merits of organic, NCA-led convergence, as compared to ESMA-driven convergence (through the adoption of guidelines or similar measures), has been acknowledged.372 Similarly, ESMA appears mindful of the coaching dimension of peer review, regarding the ‘very act of peer review’ (and not simply the assessment element) as contributing to convergence given the sharing of NCA expertise and knowledge which it prompts.373 And while ESMA’s approach has certainly become more assertive, this has been an incremental development and has not, for the most part, overrun NCAs’ tolerance. Actively involved in the review process as on-site inspectors and overseeing peer review through the Supervisory Convergence Standing Committee and the Board of Supervisors, NCAs have not been passive bystanders to the expansion of peer review – challenging review findings on occasion, particularly where they regard them as not reflective of local market contexts,374 and providing productive friction and challenge. But overall, peer review appears to be developing in a sustainable manner. As evidenced by their willingness to submit to on-site inspections,375 the ability of the Board of Supervisors to adopt peer review reports that are increasingly direct and critical, and their adoption of required remedial action following peer reviews,376 NCAs appear to be broadly supportive.377 There are certainly effectiveness challenges. Prior to the 2017/2018 reform waypoint, evidence was emerging that ESMA was drilling deeper into and shaping operational practices in a way that could lead to an overly rigid Europeanisation of NCA decisionmaking. The 2017 peer review on enforcement of financial information, for example, included specific recommendations on staffing levels, suggested that ESMA guidelines might be needed on the risk modelling used to identify enforcement priorities, and proposed that minimum procedural requirements be adopted for enforcement. The 2016 Prospectus Peer Review called for greater standardisation of the risk-based

370 The 2017 Peer Review on the MiFID I Compliance Function, eg, noted that supervisory divergences could be associated with national market specificities and underlined the importance of on-site visits to ensuring that the review appropriately reflected national conditions: n 332, 4. 371 The 2017 Peer Review on Enforcement of Financial Information, eg, acknowledged that the related guidelines are high-level and that divergence can be expected: n 332, 9–10. 372 2016 Prospectus Approval Peer Review, n 333, 10. 373 2017 Peer Review on Enforcement of Financial Information, n 332, 9. 374 The 2015 Peer Review on Best Execution, eg, led to three NCAs recording their disagreement with certain of the findings and suggesting a failure by the review to take account of the local context: n 334, Annex III. 375 The 2017 Peer Review on the MiFID I Compliance Function, eg, noted open and constructive NCA engagement with the on-site visits. 376 The 2017 follow up to the 2015 Best Execution Peer Review reported on clear improvements in a number of areas, a more proactive supervisory approach, and a greater prioritisation of best execution (ESMA421643088512-2962), while the 2016 follow up of the 2013 Peer Review on Market Abuse Directive Supervisory Practices reported that all of the NCAs subject to the follow-up review had taken important steps towards full application of the relevant practices (ESMA/2015/1905). 377 From the outset, peer review has been debated in the BoS, which has been broadly supportive of the different reforms adopted and concerned to ensure a more independent and challenging process. eg, BoS, Minutes 24 September 2013 and 25 September 2014 (ESMA/2013/BS/155 and ESMA/2014/BS/159), supporting the 2013 strengthening of the peer review methodology, including through on-site visits, and recording concern to avoid ‘box-ticking’ reviews.

230 ESMA and Supervisory Convergence approaches NCAs use to decide on the level of prospectus review; a standard ESMA template for the comments NCAs deliver to issuers; and measures to address the volatility in prospectus review timelines across NCAs, which are driven by different workflow peaks. Convergence measures at this level of detail not only generate costs for NCAs, but also risk changing the character of peer review from a mutual learning device to a vehicle for bureaucratic prescription. If ESMA peer review slides into surveillance and away from learning,378 its value may lessen. Further, sets of highly detailed recommendations not tied to the achievement of specified outcomes risk becoming check-lists, disconnected from actual supervisory improvements. The specification of the outcomes sought by peer review remains limited, however, although ESMA Regulation, Article 30 specifies that peer review should extend to the capacity of NCAs to achieve ‘high quality supervisory outcomes’. While individual peer review mandates are detailed, they are typically directed to identifying the rules and supervisory practices to be reviewed and do not quantify the outcomes being assessed (whether, for example, in terms of investor protection, financial stability, or convergence more generally), nor provide related benchmarks. Concepts like ‘effective’, ‘adequate’, or ‘sufficient’ supervision are used in mandates, but benchmarks against which they can be assessed are not usually specified.379 Legitimation challenges are also increasing, as the more ESMA seeks to shape national supervisory behaviour the closer it edges to the territory of shaping and making national policy choices. Peer review is proceduralised (if through internal ESMA procedures and not requirements set by the co-legislators), and a degree of legitimation derives from the Board of Supervisors’ engagement and the peer and national accountability it provides, as well as from the Board’s support of output legitimation through deliberation and challenge. Legitimation is further strengthened by oversight and review by the EU institutions, which includes audit by the Internal Audit Service.380 But if peer review becomes increasingly prescriptive and slips into surveillance, stronger legitimation may be required. The 2017 ESA Proposal may exacerbate these challenges. The Proposal, which in a non-trivial change relabels Article 30 ‘peer review’ as ‘review’, suggests that decisionmaking power in relation to peer review be moved away from the Board of Supervisors and located in the proposed new Executive Board, and that a new ‘Review Committee’, composed exclusively of ESMA staff, would carry out reviews.381 The Proposal also suggests that NCAs’ obligations be hardened, in that they would be required to ‘make every effort’ to comply with any guidelines or recommendations that followed a review, and that ESMA would be required to issue a follow-up report where NCAs did not

378 Riles has highlighted the danger of the ISSBs sliding from learning into surveillance, and called for related mitigants, such as greater proceduralisation and inclusivity and narrowly tailored peer reviews: Riles, n 18. 379 The 2017 Peer Review on Enforcement of Financial Information, eg, assessed the (undefined) ‘effectiveness’ of the examination procedures used in the enforcement process, although it did link effectiveness to some specific operational criteria, including the likelihood of identifying material errors in the relevant disclosures: n 332, 5. 380 An audit of ESMA’s peer review activities was undertaken by the IAS in 2017 (BoS, Minutes, 29 January 2017 (ESMA22-247440095-55) and enhancements are underway (2018 SC Work Programme, n 6). 381 2017 ESA Proposal, n 13, ESMA Regulation, Arts 30 (peer review) and 47 (the Executive Board).

Supervisory Convergence in Practice 231 take required actions. While there are effectiveness benefits to limiting the ability of NCAs to hinder the peer review process, the proposed lack of oversight by the Board of Supervisors of Executive Board decision-making in relation to peer review increases legitimation risks. Further, the Commission’s proposed recasting of the review process from a peer-oriented, mutual learning-directed process into a more bureaucratic, centralised process risks removing the useful flexibility and solidarity which currently still characterises ESMA’s approach. In particular, it may inject a degree of hierarchy and friction, which could ultimately weaken ESMA’s effectiveness, particularly if NCAs moved into a more defensive posture as a result.

G. The Policeman – a Hardening Agent ESMA’s supervisory convergence activities are for the most part related to its selfdescribed supervisory convergence roles as facilitator, coordinator, and coach. ESMA has also, however, adopted the role of ‘policeman’ in this regard.382 The role of policeman can be associated with ESMA’s opinion powers and with its peer review powers, but it is most closely connected to ESMA’s powers to impose decisions on NCAs where it engages in a binding mediation between NCAs (ESMA Regulation, Article 19), and to investigate an NCA for breach of EU law (Article 17). Both these powers can be regarded as having a hardening effect on ESMA’s otherwise soft convergence powers.383 ESMA regards these two powers as last-resort tools, which form part of a larger assessment/remediation tool-kit,384 and they have yet to be deployed. All the indications, however, are that its approach is becoming more intrusive. ESMA’s 2017 Supervisory Convergence Work Programme, for example, noted that ESMA would engage in more systematic monitoring of NCA guideline compliance and of NCA compliance with peer review recommendations, and that it would take Article 17 action where necessary.385 Whether or not the Article 17 and Article 19 powers are deployed to any material extent in the medium term will be a bellwether for whether ESMA’s supervisory convergence role is sliding away from coordination and into steering and policing, with related consequences for effectiveness and legitimacy. There is certainly growing pressure for ESMA to use these powers. Concerns that ESMA had not deployed these powers was a persistent if muted feature of the 2013–14 ESA Review, and more recently of the 2017 ESA Review. The 2017 ESA Proposal, which suggests that these powers be moved from the Board of Supervisors to the proposed new bureaucratic Executive Board, could, if adopted, strengthen ESMA’s ability to drive convergence and exert influence. At the same time, these reforms could prompt a more heavy-handed and hierarchical approach

382 2016–2020 Strategic Orientation, n 1, 14. 383 ESMA’s binding mediation and enforcement powers have been described as penalty default mechanisms, which tie NCAs into the achievement of common objectives: Zeitlin, n 121. 384 eg 2016 SC Work Programme, n 44, 6–7 and 8. 385 2017 SC Work Programme, n 48, 16 and 24. ESMA warned it ‘stands ready’ to purse NCAs where necessary.

232 ESMA and Supervisory Convergence from ESMA, to the prejudice of ESMA/NCA relations and thus of effectiveness, and also generate legitimation challenges. As these powers form part of ESMA’s small tool-kit of binding powers, they are considered with direct supervision in chapter 5.

H. Three Specific Supervisory Convergence Mandates and Brexit Three discrete areas can be identified within ESMA’s supervisory convergence activities, whether because of the specific competences and powers engaged or because of the distinct opportunities they afford ESMA to extend its technocratic influence. Added to these are the particular opportunities Brexit is generating for ESMA to deploy its supervisory convergence powers and exert technocratic influence.

i. Financial Stability Reflecting the paradigmatic crisis-era focus on financial market stability,386 ESMA was conferred with a (then) novel financial stability mandate and related supervisory convergence tasks,387 which it purposefully embraced and pursued from the outset.388 ESMA’s financial stability mandate and related tasks are primarily directed to ensuring that financial stability risks are monitored and that the management of financial stability is embedded within ESMA’s supervisory convergence agenda. But its financial stability mandate can also be regarded as affording ESMA a significant opportunity to expand its technocratic influence through supervisory convergence action. Financial stability has not traditionally loomed large in financial market regulators’ mandates, and the

386 Financial stability had previously been primarily associated with banking regulation and supervision. See, eg, B Haar, Freedom of Contract and Financial Stability through the Lens of the Legal Theory of Finance – LTF Approaches to ABS, Pari Passu-Clauses, CCPs, and Basel III, SAFE Working Paper No 141 (2016), available at http://ssrn.com/abstract=2831713; H Allen, ‘Financial Stability as indirect Investor/Consumer Protection Regulation: Implications for Regulatory Mandates and Structure’ (2016) 90 Tulane Law Review 1113; and A Anand, ‘Is Systemic Risk Relevant to Securities Regulation?’ (2010) 60 University of Toronto Law Journal 941. 387 ESMA is charged with an obligation to duly consider systemic risk (defined by reference to the 2010 ESRB Regulation (Regulation (EU) No 1092/2010 [2010] OJ L331/1) and to address any risk of disruption in financial services caused by an impairment of all or parts of the financial system (Art 22(1)). ESMA’s related tasks are primarily directed to monitoring and to ensuring that support of financial stability is embedded within its supervisory convergence agenda. They include that ESMA, in collaboration with the ESRB, develop a common approach for the identification and management of systemic risk (Art 22(2) and Art 23); draw up guidelines and recommendations for key financial market participants, which take account of systemic risk (Art 22(3)); ensure that systemic risk is taken into account in its BTS development activities (Art 22(3)); conduct inquiries (at its own initiative, or following a request from the European Parliament, Council, or Commission) to assess potential systemic risk and make related recommendations (Art 22(4)); and develop a permanent capacity to respond to the materialisation of systemic risk (Art 24). 388 eg ESMA, Annual Report on 2011 (2012), Foreword by ESMA Chair Maijoor; and ESMA Chair Maijoor, ‘Key Note Speech’, 5 July 2011, acknowledging that financial stability was a new area of activity for securities market supervisors and highlighting ESMA’s important role in this regard. Over 2011–12, when the euro area sovereign debt crisis was at its height, extensive contact and coordination took place between NCAs through ESMA, while ESMA also sought to influence related EU initiatives (there was extensive BoS discussion, eg, of the ESMA response to the Commission’s 2012 Consultation Paper on Shadow Banking (Minutes, 19 June 2012 (ESMA/BS/2012/96)).

Supervisory Convergence in Practice 233 new EU rule-book on the management of financial market stability risks (primarily EMIR and MiFID II/MiFIR) is novel. At the same time, prudential/banking regulators globally are increasingly becoming alert to the stability risks of financial markets and venturing on to the territory of financial market regulators.389 Its financial stability mandate is therefore an attractive one for ESMA, as it allows it to claim emerging territory for its supervisory convergence agenda and to defend its sphere of activity from the EU’s dominant financial stability/prudential actor, the ECB/SSM.390 ESMA’s ambitious and wide-ranging supervisory convergence activities in the CCP field, for example, have been linked by ESMA to its financial stability mandate.391 That ESMA’s supervisory convergence activities should be directed to the support of financial stability is uncontroversial given the acuteness of the EU interest here. The totemic nature of financial stability in EU financial governance,392 however, gives ESMA significant latitude in applying its supervisory convergence powers in this area. Additional strain could accordingly be placed on its legitimation framework and also on its effectiveness, particularly if convergence in this area becomes prescription.

ii. The Retail Markets and Consumer Protection ESMA has a specific mandate and tasks in relation to consumer protection, which derive from its general ESMA Regulation, Article 8 task to foster investor protection. Under ESMA Regulation, Article 9, a diffusely structured provision, ESMA is charged with taking a leading role in promoting transparency, simplicity, and fairness in the market for consumer financial products or services, including by data collection and analysis, financial literacy measures, developing training standards, and contributing to the development of disclosure rules. ESMA is also empowered to issue warnings where there is a threat to its objectives – a power which has become most closely associated with consumer protection in the retail markets.393 ESMA’s support of consumer protection in the retail markets can be traced across its different supervisory convergence measures and actions, but in particular in its MiFID II and PRIIPs activities.394 ESMA has been

389 Well-illustrated by the recent (and contested) efforts by the FSB to address the stability and liquidity risks generated by asset management: eg, FSB, Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (2017). Similarly, the ESRB has recently linked asset management to financial stability risks and called for regulatory/supervisory action: ESRB, Recommendations of 7 December 2017 on Liquidity and Leverage Risks in Investment Funds (ESRB/2017/6). 390 ESMA BoS discussions reveal heightening concern from 2014 onwards to influence the emerging EU and international agendas on the management of financial market stability risks: eg, Minutes, 9 July 2014 (ESMA/2014/BS/125), 12 July 2016 (ESMA/2016/BS/201), and 28 September 2016 (ESMA/2016/BS/259). Similarly, ESMA’s 2016–2020 Strategic Orientation underlined the importance of its financial stability mandate, noting the growing interest in the financial stability risks generated by financial markets and the related possibility of increasing the importance and visibility of ESMA’s work: n 1, 4. 391 eg, 2017 SC Work Programme, n 48, 4 and 9, warning of the potential risks associated with the increased systemic importance of CCPs and the need for ESMA action. 392 See G Lo Schiavo, The Role of Financial Stability in EU Law and Policy (Wolters Kluwer, 2017). 393 Art 9 also contains the enabling power for ESMA product intervention, which has since been activated by MiFIR (discussed in ch 5). 394 ESMA Chair Maijoor has highlighted that a distinctive aspect of ESMA’s MiFID II supervisory convergence agenda relates to its efforts to strengthen consumer protection, including through guidelines and Q&As: Opening Statement, ECON Committee, 2 October 2017 (ESMA22-105-239).

234 ESMA and Supervisory Convergence slower to develop Article 9-specific supervisory convergence measures, a reticence that can be associated with the deep embedding of optimal supervisory approaches to the retail markets in national market structures, cultures, and institutional environments.395 ESMA’s Article 9 mandate has, however, led to its coming under some pressure from stakeholders, particularly the European Parliament and consumer stakeholders, to take additional action in the consumer protection area. There is, however, evidence of an ESMA appetite for greater Europeanisation of supervisory practices in this area. Consumer protection has recently become a priority for supervisory convergence, with ESMA’s 2017 and 2018 Supervisory Convergence Work Programmes highlighting consumer protection.396 ESMA is beginning to take a more intrusive approach to national supervisory approaches through its peer reviews;397 developing a presence in financial literacy;398 and showing an appetite and capacity for operational action in response to emerging threats to the retail markets. Most notably, it adopted a responsive and multifaceted convergence agenda following the 2015–17 outbreak of aggressive marketing of complex CfDs to retail investors across the EU from Cypriot-based firms. This included the establishment of an ESMA CfD Task Force and a coordinating Joint Group of NCAs; supporting the Cypriot NCA in intensifying its supervisory and enforcement activities; investor warnings and directions to the industry; and the threat of market intervention by means of its MiFIR product intervention powers (discussed in chapter 5).399 Bouts of pan-EU mis-selling have repeatedly bedevilled the EU retail market, but the 2015–17 CfD saga marked the first time there had been an operationalised and coordinated EU-level response. This agile and purposeful response by ESMA to a live supervisory issue also underscores its strengthening coordination capacity; the UK FCA, an EU leader in relation to product intervention, suspended its development of new rules to address CfD distribution risks until ESMA had finalised its position.400 ESMA’s intensifying supervisory convergence activities also include its ad hoc interventions in response to market developments, such as the recommendations it issued to the investment fund industry on ‘closet indexing’ practices (where an asset manager

395 Moloney, n 15, 774–78. 396 eg 2018 SC Work Programme, n 11, 10. 397 Notably the 2015 Peer Review on Best Execution under MiFID I and the 2016 Peer Review on Suitability considered in section IV.F. 398 Speech by ESMA Chair Maijoor on ‘Financial Education and Investor Protection in Europe: The Role of ESMA’, 3 October 2017. 399 Over Summer 2017, and in a culmination of its previous activities, ESMA raised the possibility of taking direct product intervention action once its related MiFIR powers had come into force in 2018 (see ch 5). Earlier, ESMA had, through a ‘Joint Group of Supervisors’, coordinated supervisory action between the NCAs of those markets whose retail investors were at risk and the Cypriot NCA; it had also made a series of related information requests to the Cypriot NCA: ESMA, Statement, European Parliament Committee on Petitions, 17 July 2017; and ESMA Executive Director Ross, Speech on ‘Regulatory and supervisory developments, the challenges ahead – a European perspective’, 20 October 2016. On foot of recommendations from its newly constituted CfD Task Force, ESMA also re-issued and updated its Q&A on CfDs, which is designed to promote common supervisory practices in this area and give guidance to the market (ESMA, Questions and Answers Relating to the Provision of CFDs and other Speculative Products to Retail Investors under MiFID (ESMA35-36-794) (2017)), and issued two related warnings to investors. 400 FCA, Statement on CfD Products and CP 16/40, 29 June 2017.

Supervisory Convergence in Practice 235 charges a fee for active management but is in practice following an index) following stakeholder concern and as NCAs were beginning to take investigatory action.401 ESMA is also showing an appetite for addressing ‘upstream’ potentially problematic market behaviours, as evidenced by its repeated warnings on the responsibilities of banks and investment firms when selling complex, higher-risk ‘bail-in’ securities, at a time when banks were increasing their issuance of these instruments to meet the requirements of the EU’s bank recovery and resolution regime.402 Finally,403 ESMA is building a significant data-set on EU retail market risks and trends, which has the potential to fill a material gap in the EU’s financial market data-set: the retail markets tend to get only sporadic attention in the major annual reports on the EU financial market produced by the Commission (primarily the European Financial Stability and Integration Review) and the ECB (Financial Integration in Europe). The retail markets were not covered to any material extent initially in ESMA’s regular reports on ‘Trends, Risks and Vulnerabilities’ in the EU market, but this is changing, with recent reports building in coverage of retail market trends.404 ESMA has also begun to collect data relevant to the retail markets, notably the complaints data it collects through a regular survey of NCAs, and which it uses to support its retail market activities.405 Beyond these own-initiative activities, the Commission is increasingly calling on ESMA to provide retail market analysis, most recently in the context of the CMU agenda, which has led to ESMA’s being mandated to provide regular reports on the cost and performance of retail investment products.406 The retail market is slippery territory for ESMA as regards supervisory convergence. Retail market risks are an acutely local concern, which require local management. There are significant effectiveness and legitimation risks if ESMA encroaches too far into NCAs’ territory and tips over from coaching into directing.407 Thus far, however, ESMA’s coordination-based approach appears to be technically informed, responsive to NCA concerns, and sensitive to local market contexts. Legitimation also appears reasonably secure, particularly given a marked tendency by NCAs to protect their 401 ESMA, Statement, Supervisory Work on Potential Closet Index Tracking (ESMA/2016/165). 402 ESMA, Statement, MiFID Practices for Firms Selling Financial Instruments subject to the BRRD Resolution Regime (ESMA/2016/902); and ESMA, Statement, Potential Risks Associated with Investing in Contingent Convertible Instruments (ESMA/2014/944). 403 ESMA also engages directly with the retail investor constituency, primarily through investor warnings on live risks which have covered, eg, online investments, CfDs, and recently bitcoin/initial coin offerings (see, eg, Joint ESA Warning on Virtual Currencies, 12 February 2018 and ESMA Alerts Investors to the High Risks of ICOs, 13 November 2017 (ESMA50-157-829)). Given the difficulties in reaching retail investors, these warnings are best regarded as a channel through ESMA signals its concern to the wider market and to NCAs. 404 See, eg, the first report of 2017, which covered retail investor returns and sentiment: ESMA, Report on Trends, Risks and Vulnerabilities, No 1 (2017). 405 For a review, see ibid, 37–43. 406 Commission, Request to the ESAs to report on the Cost and Past Performance of the Main Categories of Retail Investment, Insurance, and Pension Products, 13 October 2017. ESMA has emphasised the importance of its developing data collection role in bringing transparency to the retail markets and in supporting investor protection (ESMA Chair Maijoor, Speech, n 208) – a role which has generated some industry anxiety: C Flood, ‘Unforgiving Light on Fees Alarms Asset Managers’, Financial Times Fund Management Supplement (27 November 2017)). 407 ESMA seems sensitive to the risks posed by its burgeoning retail market activities. ESMA Chair Maijoor has underlined, eg, that ESMA consciously took a ‘cautious approach’ to its closet indexing review, relying heavily on NCAs that were closest to domestic markets: Speech, n 208.

236 ESMA and Supervisory Convergence retail market competences. Board of Supervisors discussions from the outset evidenced persistent NCA concern regarding any ESMA encroachment into NCA retail market autonomy.408 The 2017 ESA Proposal should not disturb the current delicate but sustainable balance between ESMA action and NCA autonomy. Earlier, the 2017 ESA Consultation had laid bare the different interests consumer protection generates. While there was consumer stakeholder support for a stronger ESMA consumer protection mandate and concern as to a perceived lack of ESMA action, public authorities/NCAs and the industry did not support any extension of the ESAs’/ESMA’s powers in this area, although there was some support for the ESAs taking a more proactive role in financial literacy and in relation to financial innovation. The Commission, while supportive of strengthening the ESAs’ role in consumer protection, was careful to note that consumer protection was a shared competence between the EU and its Member States.409 The 2017 ESA Proposal reflects this cautious approach. If adopted it would add ‘consumer protection’ to ESMA’s Article 8 ‘investor protection’ mandate; while a largely semantic reform, it underlines the importance of the consumer interest.410 The Proposal also suggests a strengthening of ESMA’s Article 9 mandate; if adopted, ESMA would be required to engage in thematic reviews of market conduct, and to build a common understanding of market practices and develop retail risk indicators for the timely identification of potential causes of consumer and investor harm. The Proposal further suggests a useful governance reform, which reflects the reality that not all NCAs have consumer protection mandates: authorities responsible for consumer protection would be represented on ESMA’s Financial Innovation Standing Committee, and the Board of Supervisors’ composition rules would be required to allow an NCA, where it did not have responsibility for the enforcement of consumer protection rules, to invite a (non-voting) representative of the relevant national consumer protection authority.411

iii. Financial Innovation Finally, ESMA has a specific mandate in relation to financial innovation, which, under ESMA Regulation, Article 9, requires it to monitor new and existing activities, empowers it to adopt related guidelines and recommendations, and charges it with establishing a committee on financial innovation to support coordination. An innovation mandate is a useful one for a nascent authority such as ESMA, allowing it to claim some ownership over the management of policy on emerging products and practices and to steer developing supervisory responses. ESMA initially responded to the opportunities represented by its innovation mandate by establishing a Standing Committee on Financial Innovation. However, financial innovation only became prominent within ESMA’s activities in 2017, when it was identified as a specific priority of ESMA’s supervisory convergence 408 ESMA’s earliest BoS meetings saw discussion of the need for flexibility and to respect the proportionality and subsidiarity principles in relation to any Art 9 activities; extensive discussion of the approach ESMA should take to Art 9; and some nervousness as to the appropriateness of ESMA’s first investor warning: BoS, Minutes, 25 May 2011 (ESMA/2011/BS/142), 20 September 2011 (ESMA/2011/BS/209), and 8 November 2011 (ESMA/2011/BS/233). 409 2017 ESA Consultation, n 12, 8. 410 2017 ESA Proposal, n 13, ESMA Regulation, Art 8(1)(f). 411 ibid, Art 45.

Supervisory Convergence in Practice 237 agenda. Since then, it has become embedded within ESMA’s supervisory convergence planning.412 The 2017 ESA Proposal suggests that financial innovation be given greater prominence by the ESAs, reflecting the current EU policy preoccupation with it.413 The related proposed reforms include that ESMA’s mandate to assess market developments be extended to cover trends in innovative financial services; that ESMA be subject to an overriding obligation to take account of technological innovation and innovative and sustainable business models; and that, in a nod to the ‘sandbox’ and other supervisory innovations being incubated at NCA level, ESMA be required to promote supervisory convergence in relation to market entry by operators or products relying on technological or other innovation.414 A specific financial innovation mandate is something of a double-edged sword as regards ESMA’s effectiveness as a supervisory convergence actor. Convergence measures can promote NCA learning and experience sharing, identify and highlight emerging risks, and limit arbitrage risks. But they might at the same time stifle experimentation and inject groupthink risks. Thus far, ESMA has adopted a careful approach,415 placing its financial innovation convergence activities within a principles-based analytical framework and being mainly concerned to promote learning and analysis; its Fintech work, for example, is primarily directed to monitoring and analysis,416 and to signalling the current boundaries of the regulated space.417 The 2017 ESA Proposal, if adopted, should not disturb this balanced approach, although it may create unhelpful incentives for ESMA to adopt measures that may stifle experimentation.

iv. Brexit As discussed further in chapter 6, the UK withdrawal from the EU is likely to lead to an expansion of ESMA’s powers over ‘third country actors’ and over the equivalencebased access arrangements for such actors. These arrangements are also likely to govern the access of UK-based firms (as third country actors) to the EU financial market after the UK’s withdrawal, given current indications that a bespoke access arrangement for UK financial services is unlikely,418 and ESMA’s role in the equivalence process can 412 2018 SC Work Programme, n 11, 10 and 29, committing ESMA to a series of analytical and coordination initiatives, including on RegTech, Distributed Ledger Technology, and Fintech licensing. 413 The reforms, which are designed to promote the ESAs as ‘innovation hubs’, are linked to the Commission’s different Fintech policies and to the wider EU Digital Market Strategy: 2017 ESA Proposal, n 13, Explanatory Memorandum, 5–6. 414 2017 ESA Proposal, n 13, ESMA Regulation, Art 8(1)(f); Art 8(1a); and Art 31. 415 ESMA directs its financial innovation activities to the support of investor protection, financial stability, and orderly markets, but seeks to bring a balanced approach which is protective but also supportive: P Armstrong (ESMA), Speech on ‘Financial technology: applications within the securities sector’, 18 January 2017. 416 ESMA has to date primarily focused on crowdfunding and Distributed Ledger Technology, in relation to which it has, eg, established a Crowdfunding Supervisory Forum and Distributed Ledger Technology Task Force; engaged in a range of coordination-based activities on crowdfunding, including a review of national approaches (ESMA, Response to the Commission Consultation Paper on Fintech (ESMA50-158-457) (2017)); and reported on the implications of Distributed Ledger Technology for securities markets (ESMA501121423017-285) (2017)). 417 eg its 2017 opinion to the industry on the need to meet regulatory requirements (where applicable) for initial coin offerings: ESMA, Statement, 13 November 2017 (ESMA50-157-828). 418 European Council, (Art 50) Guidelines on the Framework for the future EU–UK Relationship, 23 March 2018; and European Parliament, Resolution on the Framework for the Future EU–UK Relationship, 14 March

238 ESMA and Supervisory Convergence be expected to strengthen as a result. Brexit has also, however, exposed the extent of ESMA’s ability to wield technocratic influence through its supervisory convergence powers, as well as its appetite and ability for acting in a purposeful and entrepreneurial manner. Following the June 2016 UK referendum, ESMA repeatedly called for a strengthening of its powers over third country actors;419 adjusted and toughened its approach to its current third country powers;420 and examined the risks to the EU financial market from a ‘cliff edge’ ‘hard Brexit’ as well as levels of market preparedness.421 Most controversially, it sought to prevent the emergence of ‘race to the bottom’ supervisory arbitrage risks from Brexit-related supervisory competition for UK firms relocating to the EU-27,422 adopting the robust guidelines contained in the series of high-profile Article 29 ‘relocation’ opinions it adopted over Summer 2017.423 These opinions are notable on a number of grounds. They take an assertive stance on relocation to the EU-27, underlining – to some market consternation – that delegation and similar techniques cannot be used to evade local NCA supervisory control.424 They are practical and operational, addressing, for example, what is expected of firms in relation to management and governance when relocating.425 They evidence the ability of the

2018 (P8_TA(PROV)(2018)0069). Commissioner Barnier repeatedly stressed across Spring 2018 that a bespoke financial services deal would not be available (eg, Speech, 26 April 2018). This position did not change as the UK government moved to finalise its negotiating position over Summer 2018, including by indicating that ‘new arrangements’ that preserve the mutual benefits of integrated markets and protect financial stability, outside the EU’s passporting arrangements, would be sought for financial services: HM Government, The Future Relationship Between the United Kingdom and the European Union, Cm 9593, July 2018. 419 See, eg, 2017 ESMA ESA Consultation Response, n 17; 2017 ESMA CMU Mid-Term Review Response, n 17; and speeches by ESMA Chair Maijoor (including Speech to ALDE Seminar, European Parliament, 8 February 2017, identifying the risks to the EU from the current approach to third country actors, calling for ESMA to be empowered to supervise third country actors, and highlighting ESMA as a defence against destructive supervisory competition). 420 Notably ESMA’s adoption of a more intrusive approach to its assessment of the quality of third country supervision, which forms part of the review ESMA undertakes prior to its ‘endorsement’ of credit ratings from third country rating agencies: ESMA, Guidelines on the Application of the Endorsement Regime (ESMA33-9159) (2017). 421 On ESMA’s market monitoring agenda over 2017, see ESMA Chair Maijoor, Speech on ‘ESMA View Point – Priorities for 2018’, 16 November 2017; ESMA Chair Maijoor, Opening Statement, ECON Committee, 2 October 2017 (ESMA22-105-239); and BoS, Minutes, 6 July 2017 (ESMA22-106-311). ESMA continued to monitor ‘cliff-edge’ risks into 2018 (Bos, Minutes, 31 January 2018 (ESMA22-106-900)). ESMA also coordinated with its sister ESAs through the ESA Joint Committee. In April 2018 the Joint Committee warned of the continuing risk of ‘cliff-edge’ Brexit effects and risks relating to contract continuity and access to market infrastructure, and reiterated the need for relocation planning to be in accordance with the different sets of ESA guidelines: ESA Joint Committee, Risks and Vulnerabilities in the EU Financial System, April 2018 (JC 2018 07) 10–12. 422 Which were identified at ESMA’s first BoS Meeting after the UK referendum: 12 July 2016 (ESMA/2016/ BS/201). 423 ESMA, Opinion. General Principles to Support Supervisory Convergence in the Context of the UK Withdrawing from the European Union (ESMA42-110-433) (2017). ESMA also adopted detailed opinions on investment firms, asset managers, and secondary markets (ESMA35-43-762, ESMA35-45-344, and ESMA 70-154-270, all 13 July 2017), which set out in a granular manner how relocation authorisations should be approached by EU-27 NCAs. The EBA and EIOPA also adopted relocation opinions. 424 P Stafford, ‘EU Regulator Rejects “Letterbox” Relocations after Brexit’, Financial Times (13 July 2017). 425 The opinions have been characterised as a ‘manual for access’: E Wymeersch, Brexit and the Provision of Financial Services into the EU and into the UK, European Banking Institute, Working Paper Series 2017–19 (2017), available at http://ssrn.com/abstract=3119510.

Supervisory Convergence in Practice 239 Board of Supervisors to achieve consensus in an area where competitive interests are strong, and also to commit to monitoring NCA compliance and any ‘back-sliding’.426 They further appear to have been instrumental in braking the supervisory arbitrage that was reported as emerging in the initial months after the UK referendum.427 Subsequently, ESMA’s 2018 Work Programme committed ESMA to assisting NCAs in preparing for the UK’s departure, including by supporting NCA information exchange and sharing of best practice on live relocation issues (through a newly constituted Supervisory Coordination Network), but also, and more coercively, to monitoring compliance with the 2017 relocation opinions.428 The supervisory treatment by NCAs of Brexit-related relocation is of appropriate concern for ESMA given the risks to the single market from supervisory arbitrage. But it is also a highly sensitive issue for NCAs,429 with wider political ramifications.430 That ESMA took the initiative and could deliver Board of Supervisors consensus,431 notwithstanding the competitive territory at stake, reveals much as to its ability to act in a purposeful and entrepreneurial manner and to exert technocratic influence in the most sensitive of contexts. A similar implication can be drawn from Board of Supervisors discussions in late 2017 on the need for a common ESMA approach to the treatment of ‘reverse solicitation’ as a means for supporting access by UK-regulated actors to the EU after Brexit.432 From an effectiveness perspective, ESMA’s concern to ensure NCA preparedness for Brexit-related risks and to deter supervisory arbitrage that could

426 The April 2018 Joint Committee Report noted the ESAs’ commitment to monitoring NCA compliance: n 421, 11. 427 In Spring 2018, the Irish regulator noted that the ESAs’ opinions on Brexit-related relocation (as well as similar SSM guidelines) had meant that ‘much of the heat is now gone out of the regulatory arbitrage issue’: E Sibley, Deputy Governor Central Bank of Ireland, Speech on ‘Brexit: where to next?’, 12 April 2018. 428 2018 SC Work Programme, n 11, 10. The Supervisory Coordination Network’s remit includes coordination in relation to live relocation issues as well as firms’ contingency planning. 429 Evident in the highlighting by ESMA Chair Maijoor across Summer/Autumn 2017 and Spring 2018 of the basis of the relocation opinions in pre-existing EU financial market legislation; that they did not undermine the freedom of establishment; and that they did not prevent the delegation of functions (eg ESMA Chair Maijoor, Speech on ‘CMU, Brexit and ESA Review – What’s Next?’, 20 March 2018; Speech on ‘ESMA View Point – Priorities for 2018’, 16 November 2017; and Speech on ‘Looking to the Future’, 7 June 2017). Chair Maijoor also emphasised NCAs’ agreement on the need to manage Brexit-related competition risks and the importance of NCA cooperation: eg, Speech on ‘The State of European Financial Markets’, 17 October 2017. 430 Clear from the contestation (particularly between France and Luxembourg) which followed the Commission’s suggestion in the 2017 ESA Proposal to strengthen ESMA’s control over NCAs’ decisions to permit delegation by EU firms back to third countries (ie a post-Brexit UK) (see ch 5). eg, A Mooney and P Smith, ‘London’s Fund Management Sector Warns on Impact of Post-EU Split Rules’, Financial Times (12 January 2018). 431 Although some BoS anxiety can be implied from BoS minutes, which note the need to respect the ability of firms to relocate under EU law, the benefits of outsourcing as a business model, NCA autonomy in relation to authorisation decisions, and the location of the opinions in pre-existing EU law and the need to avoid creating new obligations: BoS, Minutes, 5 July 2017 (ESMA 22-106-311) and 23–24 May 2017 (ESMA22-106-271). 432 BoS, Minutes, 27 September 2017 (ESMA22-106-432); the board adopted a related Q&A in December 2017 (Minutes, 14 December 2017 (ESMA22-106-785)). ‘Reverse solicitation’, which has been raised as a post-Brexit access tool, relates to access to the EU market where the service in question is not initiated by the regulated actor but requested by a client. EU rules do not apply in this case, and access is governed by the national rules applied by the relevant NCA. See N Moloney, Brexit, the EU and its Investment Banker: Rethinking ‘Equivalence’ for the EU Capital Markets, LSE Legal Studies Working Paper No 5/2017, available at http://ssrn.com/abstract=2929229.

240 ESMA and Supervisory Convergence rejudice the single market is hard to challenge. But there are legitimation challenges, p as ESMA’s actions here bring it close to the political sphere and to the making of public interest choices as to how Brexit-related market reorganisation should proceed. They accordingly highlight the need for secure legitimation mechanisms, including the legitimation (if in a limited form) provided by the Board of Supervisors: here again, the 2017 ESA Proposal is troublesome, as noted in chapter 2.

V. Conclusion The scale of ESMA’s supervisory convergence activities mapped in this chapter exposes the extent to which ESMA, through a purposeful and often ambitious and expansionist deployment of its powers, and by acting variously as facilitator, coordinator, coach, and policeman, can now exert technocratic influence on how NCAs supervise regulated actors. Whatever the fate of the 2017 ESA Proposal, ESMA’s role in the Europeanisation of local NCA supervision is now securely established within EU financial market governance. ESMA’s approach to supervisory convergence has, up to the 2017/2018 reform waypoint, been based on a productive ESMA/NCA partnership/mutual support model, reinforced by more hierarchical, top-down oversight action in places. This can be regarded as effective, particularly given the technically-informed, responsive, and agile quality of ESMA action, and ESMA’s engagement with NCA needs and their local settings – features which have resonances with experimentalist governance, a mode of governance with some attractions for ESMA’s EU-level setting. So far, the delicate balance ESMA is required to maintain between coordination and coercion is being maintained. Similarly, the challenges for legitimation are, for the most part, being met, albeit legitimation is coming under increasing pressure. There are, however, indications that flexibility and responsiveness are being leached out of ESMA’s supervisory convergence operating model. If ESMA becomes too remote from NCAs, and if supervisory convergence action becomes less a response to NCA needs and more a function of bureaucratic expansion, effectiveness challenges are likely, while legitimation risks will increase. Nonetheless, there is much that augurs well, notably ESMA’s strengthening role as a data-hub, which promises much for data-informed and agile ESMA action. The 2017 ESA Proposal represents, by and large, an incremental strengthening of ESMA’s supervisory convergence powers and should not, if adopted, materially disrupt the broadly effective operating approach ESMA has developed, nor generate material new legitimacy risks. But there are troubling elements. The proposed reforms to peer review would remove the Board of Supervisors from the process and so risk peer review becoming more fractious and antagonistic, and also weaken legitimation, while the superficially benign Strategic Supervisory Plan proposal could lead to supervisory convergence becoming supervisory fiat. Greater pressure could accordingly be placed on ESMA’s legitimation arrangements, as well as on its ability to operate effectively.

5 ESMA and Direct Supervision/ Market Intervention I. Assessing ESMA and the Direct Supervision/ Market Intervention Setting This chapter examines ESMA’s direct, binding supervision and market intervention powers (hereinafter ‘supervision powers’). Alongside the soft regulatory governance and supervisory convergence powers that dominate in ESMA’s tool-kit is a small, scattergun set of hard powers of vertical/hierarchical quality. ESMA exercises binding powers as the exclusive supervisor of EU rating agencies and trade repositories. It is empowered to take binding intervention action in the EU financial market in relation to short selling, the prohibition/restriction of products/services, and the commodity derivatives markets.1 Finally, it can exercise binding powers in the case of NCA breach of EU law, where it engages in a binding mediation between NCAs, or in emergency conditions.2 ESMA is at present a youthful supervisor. But the extent to which it is already shaping the behaviour of regulated actors and NCA practices calls for the nature of its influence to be unpacked,3 and for any effectiveness or legitimation challenges to be identified – particularly as all the indications since the 2017/2018 reform waypoint are that ESMA is likely to acquire additional hard powers in the short to medium term. The extent to which ESMA should become a more overtly vertical actor with additional binding supervisory powers is the current ‘big ticket’ question for EU financial market governance. ESMA’s suite of direct supervision powers has been expanding incrementally since 2011, but 2017/2018 marked a major waypoint. The 2017 E uropean Supervisory Authorities Proposal (ESA Proposal) and the 2017 Central Clearing Counterparties Supervision Proposal (CCP Supervision Proposal) set out a series of

1 Under the Short Selling Regulation (Regulation (EU) No 236/2012 [2012] OJ L86/1) and the Markets in Financial Instruments Directive II (MiFID II)/Markets in Financial Instruments Regulation (MiFIR) (Directive 2014/65/EU [2014] OJ L173/349 and Regulation (EU) No 600/2014 [2014] OJ L173/84), respectively. 2 Under the ESMA Regulation (Regulation (EU) No 1095/2010 [2010] OJ L331/84). 3 As it has been conferred with hard, binding powers, ESMA’s ‘regulatory capacity’ is stronger here than it is in relation to regulatory governance and supervisory convergence. Further, the experience, credibility, and data resources it has acquired more generally, as well as the relatively secure legitimation framework that has developed, serve to strengthen ESMA’s regulatory capacity as regards supervision and its related ability to exert influence.

242 Direct Supervision/Market Intervention additional supervisory empowerments for ESMA,4 and this trend continued into 2018, with the Commission’s March 2018 suggestion that ESMA be the direct supervisor of its proposed regime for crowdfunding service providers – a revealing indication that the Commission regards ESMA as a vehicle for delivering supervision in emerging areas of EU regulatory/supervisory concern.5 Indications are also emerging of some ESMA confidence in its new MiFIR product intervention powers, notwithstanding their controversial nature. ESMA signalled in late December 2017 that it might deploy these powers for the first time to prohibit/restrict the marketing, distribution, or sale to retail clients of complex binary options and contracts for differences (CfDs),6 a statement of intent that prompted a drop in the share price of several potentially affected trading platforms.7 Despite intense industry opposition, once its new product intervention powers had become available to ESMA with the January 2018 application of MiFIR, ESMA’s Board of Supervisors agreed on related product intervention measures in March 2018 – a landmark decision, which marked ESMA’s first ever exercise of direct intervention power and an important staging post for ESMA.8 Despite the currently high salience of ESMA-based supervision, whether and how supervisory governance for the EU financial market should be centralised and supervisory risk mutualised are not new questions. Supervisory centralisation was debated long before regulatory governance for the EU financial market took its first major step forward under the 1999 Financial Services Action Plan (FSAP9);10 formed part of the FSAP-era debate;11 was raised in the context of the Lamfalussy reforms to institutional financial market governance;12 was raised again as the EU fought to stabilise its financial market over 2008–12 in the context of the establishment of the European System of Financial Supervision (ESFS); and has come and gone periodically since the financial crisis, often in connection with the Banking Union reforms, which have normalised the notion of centralised supervision.13 Most recently, Capital Markets Union (CMU) has given fresh impetus to the debate, with financial market supervisory reform being linked

4 Respectively, COM (2017) 536 and COM (2017) 331. 5 COM (2018) 113. 6 ESMA, Statement on Preparatory Work in relation to CFDs and Binary Options offered to Retail Clients, 15 December 2017 (ESMA71-99-910). 7 S Costa, E Robinson, and D Griffin, ‘IG, Plus 500 Plunge as EU Watchdog Signals Derivatives Crackdown’, Bloomberg, 18 December 2017. 8 ESMA, Additional Information on the Agreed Product Intervention Measures relating to Contracts for Differences and Binary Options, 27 March 2018 (ESMA35-43-1000); the formal Decisions followed in May 2018 (ESMA Decision (EU) 2018/795 and ESMA Decision (EU) 2018/796). The ESMA action followed an outbreak of mis-selling from Cyprus-based firms. See section VI of this chapter. 9 COM (1999) 232. 10 See E Wymeersch, ‘From Harmonisation to Centralisation to Integration in European Securities Markets’ (1981) 3 Journal of Comparative Corporate Law and Securities Regulation 1. 11 eg R Karmel, ‘The Case for a European Securities Commission’ (1999) 38 Columbia Journal of Transnational Law 9. 12 eg E Pan, ‘Harmonization of US-EU Securities Regulation: the case for a single European Securities Regulator’ (2003) 34 Law and Policy in International Business 499. 13 The European Central Bank (ECB) has emerged as a prominent supporter of centralised EU financial market supervision as a means for supporting Banking Union (Speech by ECB Vice President Vítor Constâncio, on ‘Synergies between Banking Union and Capital Markets Union’, 19 May 2017; and ECB, Financial Integration in Europe (2016) 97, noting its preference for a ‘single European capital markets supervisor’).

Assessing ESMA and the Direct Supervision/Market Intervention Setting 243 to the support of market integration,14 as has Brexit, with ESMA frequently identified as an institutional vehicle for managing any related fragmentation or stability risks.15 The debate on the merits/design of centralised EU financial market supervision is a rich and multifaceted one, canvassing political economy, functional, legal, and many other perspectives. It is also speculative, as the future design of supervisory governance for the EU financial market will reflect the interplay of the wide range of interdependent forces that shape institutional financial market governance reform in the EU, as outlined in section III of this chapter. The focus of this analysis, however, is not on the wider setting of institutional EU financial market governance and how it might develop, but on probing ESMA as a technocratic actor. This chapter inquires into the nature of ESMA’s role as a direct supervisor, unpacks the features of ESMA’s current (and proposed) direct supervision powers and how they have developed, considers how ESMA is exercising these powers and the extent of the technocratic influence it has acquired, and examines any effectiveness and legitimacy challenges that may be emerging. ESMA’s direct supervision role is currently limited.16 Nonetheless, its direct supervision powers are material to this book’s interrogation of ESMA’s influence and of its effectiveness and legitimacy, given the potential they afford ESMA to exert influence over EU financial market governance by direct supervisory action and by shaping how NCAs carry out supervision. This interrogation requires, however, that the distinctiveness of the direct supervision setting be identified. First, ESMA’s operating environment here is highly constrained. ESMA’s binding supervision powers are dependent on express legislative grant, limited, and, reflecting the material contestation on supervisory centralisation, specified in detail by the co-legislators – there is no equivalent to ESMA’s catch-all supervisory convergence power under ESMA Regulation, Article 29. ESMA action is also curbed by the legal constraints that apply to agency action, including the Meroni ruling,17 which can be associated with the extensive conditionality and proceduralisation that frames ESMA’s binding powers. Additional points of distinction relate to effectiveness and legitimation. This chapter relates effectiveness to whether ESMA is deploying its supervisory powers (whether over market participants or NCAs) to ensure compliance with the EU’s single rule-book, in a technically informed, responsive, and agile manner. The evidence is relatively limited, however, particularly as regards ESMA’s market intervention and NCA-directed powers, and so ESMA’s effectiveness is uncertain. The direct supervision setting also poses distinct challenges for legitimation. The stylised split between political choice (reserved to representative bodies) and technical decision-making (which can be delegated to non-majoritarian actors) comes under stress in financial market supervisory settings generally, as supervision requires material operational discretion, has third party effects, can generate fiscal consequences, and can, through signalling effects, have policy c onsequences. In the ESMA supervision 14 K Lannoo, Spotify’s US Listing Highlights Europe’s Failings, ECMI Commentary No 51, April 2018 (highlighting the risks to the EU capital market from its lack of a single listing authority); and F Demarigny and K Lannoo, Navigating the Minefield of the ESA Review, ECMI Commentary No 49, February 2018. 15 eg D Schoenmaker and N Véron, ‘Brexit Should Drive Integration of EU Capital Markets’, Bruegel Blog Post (24 February 2017). 16 It currently accounts for 28% of ESMA’s budget, as against 57% for supervisory convergence (including risk assessment): ESMA, 2018 Work Programme (ESMA20-95-619) (2017) 7. 17 Case 9-56 Meroni v High Authority (ECLI:EU:C:1958:7). See further ch 2.

244 Direct Supervision/Market Intervention context, legitimation challenges are all the greater given the ongoing p olitical contestation on its role in supervision and the related need to control bureaucratic adventurism. Finally, discussion of ESMA’s direct supervision role must necessarily be somewhat speculative given the highly dynamic nature of the direct supervision setting, and engage with the prospect of additional ESMA empowerments. New supervisory empowerments for ESMA are typically freighted with political, institutional, legal, and market consequence,18 and, as something of a bellwether on the nature of ESMA’s evolving technocratic influence within EU financial market governance, require consideration. Within this distinct setting, this chapter interrogates ESMA’s direct supervision role. ESMA’s supervisory powers are limited, and it has been less purposeful (in that it does not appear to habitually seek opportunities to reinforce its mandate and technocratic position) and expansionist here than elsewhere. The chapter nonetheless identifies an incremental strengthening of ESMA’s influence on EU financial market governance, as well as material potential for this influence to strengthen further – through legislative grant, certainly, but also through ESMA’s increasing technical competence and credibility, which should increase its regulatory capacity and related ability to exert influence. Like other chapters, this chapter takes an optimistic view of this trajectory. ESMA’s approach to the direct supervision of regulated actors displays the technically expert, responsive, and agile qualities that can be associated with effectiveness in this area, and there are grounds for optimism as regards its more rarely deployed market intervention/NCA powers – although ESMA’s reticence in acting holds some effectiveness risks. Further, the incremental conferral of ESMA’s direct supervision powers has allowed for political and institutional learning and experimentation, and for ESMA, as a new supervisor in a complex setting, to develop its supervisory approach in a sustainable manner informed by experience – making it more likely that any effectiveness risks are containable. As regards legitimacy, looked at in the round, the matrix of input, procedural, and output legitimation mechanisms that apply appear to be structuring ESMA’s discretion, providing adequate accountability, and containing bureaucratic creep. Nonetheless, there are pressure points, and the 2017/2018 reform waypoint may place further stress on ESMA’s legitimation arrangements unless governance reforms are made. This chapter first characterises (section II) and contextualises (section III) ESMA’s supervisory role; then it examines ESMA’s powers, its current and potential ability to exert technocratic influence, and the implications for effectiveness and legitimation risks (sections IV–VI). The chapter concludes with a consideration of the implications of the 2017/2018 reform waypoint (sections VII–X).

18 As is reflected in the recent legal/political economy literature. See E Avgouleas and G Ferrarini, ‘A Single Listing Authority and Securities Regulator for CMU and the Future of ESMA: Costs, Benefits and Legal Impediments’ in D Busch, E Avgouleas, and G Ferrarini (eds), Capital Markets Union in Europe (Oxford University Press, Oxford, 2018) 55; J Payne, ‘Institutional Design for the EU Economic and Monetary Union: Financial Supervision and Financial Stability’ in F Amtenbrink and C Hermann (eds), Oxford Handbook on the EU Law of Economic and Monetary Union (Oxford University Press, Oxford, forthcoming 2018); N Moloney, ‘Institutional Governance and Capital Markets Union: Incrementalism or a ‘Big Bang’ (2016) 13 European Company and Financial Law Review 376; and L Quaglia, ‘Financial Regulation and Supervision in the European Union after the Crisis’ (2013) 16 Journal of Economic Policy Reform 17.

Examining ESMA’s Role as a Direct Supervisor 245

II. Examining ESMA’s Role as a Direct Supervisor A. Capturing ESMA Direct Supervision Role i. ESMA as a Hybrid Supervisory Actor Chapter 4 identified ESMA’s distinctiveness from domestic and international financial market regulatory actors as regards its supervisory convergence functions. That distinctiveness can also be identified as regards ESMA’s direct supervision role. Direct supervision over financial markets is located with domestic supervisors; the International Standard Setting Bodies (ISSBs) of international financial governance do not exercise binding supervisory powers – they are soft-law bodies concerned with horizontal/peer regulator supervisory coordination. ESMA sits somewhere between the two. Direct financial market supervision in the EU largely remains with NCAs, which apply the EU’s single rule-book, must have the supervisory powers set out in the rule-book, and are subject to coordination and cooperation requirements. ESMA has, however, been conferred with direct supervisory powers akin to those of NCAs – but over only two sets of regulated actors of small population and pan-EU reach: rating agencies and trade repositories. ESMA has also been conferred with an additional set of b inding powers, which are distinct from those exercised by NCAs domestically and which are concerned with directing NCAs and with supporting supervisory convergence, including by means of market intervention in specified and acute circumstances. These powers have some faint resonances with the coordination powers of the ISSBs, given their horizontal, NCA-learning orientation, but they also have a vertical, hierarchical quality not associated with international financial governance. ESMA’s jumbled t ool-kit of traditional domestic and new EU-level supervisory tools makes characterising its supervision role a slippery business. But one feature is clear: ESMA’s ability to wield binding supervisory power marks it out as distinctive among EU agencies, which are primarily concerned with coordination.19

ii. ESMA’s Powers (1): Regulated Actors The extent to which ESMA can engage in direct supervisory is controlled by the constituting co-legislators. The first grant of direct supervision powers to ESMA came after the 2010 adoption of the ESMA Regulation, when the 2011 credit rating agency regime conferred on ESMA exclusive direct supervisory powers over rating agencies.20 A second cohort of regulated actors came within ESMA’s jurisdiction in 2012, when the 2012 European Market Infrastructure Regulation (EMIR) conferred on ESMA supervisory powers over the ‘trade repositories’ responsible for collecting and holding 19 As has been noted in the agency literature (eg E Chiti, ‘Is EU Administrative Law Failing in some of its Crucial Tasks?’ (2016) 22 European Law Journal 576). 20 The EU’s rating agency regime is split across four legislative measures, one of which (the 2011 Credit Rating Agency Regulation (EU) No 513/2011 [2011] OJ L145/30) confers supervisory power on ESMA. This discussion refers to the Commission’s informal consolidation of the texts in the Consolidated Credit Rating Agency Regulation (CCRAR) (ELI: http://data.europa.eu/eli/reg/2009/1060/2015-06-21).

246 Direct Supervision/Market Intervention data on derivatives market transactions.21 In both cases, ESMA is exclusively responsible for authorisation/registration, supervision, and enforcement. Its powers are highly specified and proceduralised, but are otherwise like the supervisory powers deployed by NCAs domestically. ESMA can also exercise a limited suite of supervisory powers over ‘third country’ (non-EU) actors, as discussed in chapter 6. The 2017 ESA Proposal and CCP Supervision Proposal reforms suggest an extension of ESMA’s direct supervisory powers to certain investment funds, prospectuses, administrators of ‘critical benchmarks’, and data-reporting services providers, as well as of ESMA’s powers over CCPs, while in 2018 the Commission proposed direct empowerments for ESMA over crowdfunding service providers.

iii. ESMA’s Powers (2): Directing NCAs A second suite of powers allows ESMA to investigate, direct, or override NCAs, and is designed to bolster ESMA’s supervisory convergence powers. These powers are set out in the ESMA Regulation and reflect the crisis-era concern to embed the single rule-book, enhance NCAs’ performance, and strengthen supervisory coordination. Article 17 empowers ESMA to undertake a breach of EU law investigation of an NCA, recommend remedial NCA action, and impose a decision on financial market participants where the NCA does not comply. Article 18 applies in emergency conditions and empowers ESMA to direct an NCA to take identified action, and to impose a decision on financial market participants where the NCA does not comply. Article 19 empowers ESMA to engage in a binding mediation between two NCAs and impose a mediation decision on those NCAs, and to direct financial market participants where the NCAs do not comply. The 2017 ESA Proposal suggests reforms of a finessing and nuancing character to make it easier for ESMA to use these powers.

iv. ESMA’s Powers (3): Exceptional Conditions There is a ‘mixed’ dimension to ESMA’s Articles 17–19 NCA-oriented powers, in that ESMA is empowered in certain circumstances to impose binding decisions on financial market participants as well as on NCAs. This mixed quality is more pronounced with ESMA’s final suite of supervisory powers, which empower ESMA to intervene temporarily in financial markets where threshold conditions are met, typically relating to acute market conditions but also, suggesting a mixed NCA/financial market participant orientation, to failure by NCAs to act or inadequate NCA action. These intervention powers can be dated to the establishment of ESMA; they derive from Article 9(5) of the ESMA Regulation, which empowers ESMA to temporarily prohibit or restrict certain financial activities that threaten the orderly functioning and integrity of financial markets, or the stability of the whole or part of the EU financial system, in accordance with the conditions set out in the relevant EU legislative measures that confer such powers

21 Regulation

(EU) No 648/2012 [2012] OJ L201/1.

Examining ESMA’s Role as a Direct Supervisor 247 (these powers are also available, if so required, in the case of an emergency situation in accordance with the regime that governs ESMA emergency action under Article 18). The first of these ‘mixed’ intervention powers were granted under the 2012 Short Selling Regulation and allow ESMA to restrict or prohibit short selling, or to require market participants to make certain disclosures, when a series of conditions relating to financial stability and/or investor protection and to a lack of adequate NCA action are met.22 These powers were added to in 2014 by MiFIR, which confers on ESMA the power to prohibit or restrict the marketing, distribution, or sale of financial instruments, or a type of financial activity, subject to similar conditionality as the short-selling powers.23 MiFIR also confers on ESMA powers of a similar hue over commodity derivative markets: ESMA may impose reporting requirements, require the reduction or elimination of a commodity derivative position, or limit the ability of a person to enter into a commodity derivative contract, again subject to similar conditionality.24 These three sets of intervention powers address different market sectors but have a common design: they map parallel (and novel for most NCAs) powers given to NCAs; they are subject to similar threshold requirements relating to the seriousness of the threat in question and the absence of adequate NCA action; and they are heavily proceduralised and subject to detailed conditionality.

B. Dynamism and Reform Dynamism and reform here are primarily (although not entirely, given ESMA’s c apacity to shape its supervisory powers) functions of the legislative process. By contrast with the supervisory convergence sphere, where ESMA has been able to take the initiative, ESMA’s direct supervisory powers are controlled by the co-legislators, who have been cautious (if persistent) in empowering ESMA: ESMA’s supervisory powers can be regarded as a ‘work in progress, slowly’. The 2017/2018 reform waypoint represents the largest shake-up of ESMA’s supervisory mandate since 2011, but it can still, as discussed later in this chapter, be associated with the cautious incrementalism that has characterised the legislative evolution of ESMA’s supervisory mandate. ESMA’s founding Regulation conferred on it its NCA-oriented powers relating to breach of EU law, binding mediation, and emergency conditions (which have yet to be used). It also contained the Article 9(5) enabling clause for powers to be conferred on ESMA that would allow it to intervene in acute market conditions. Subsequent conferrals of power on ESMA have followed in an incremental manner, reflecting the political interests that dominate in this area. As discussed in section III of this c hapter, while these interests have generally been supportive of conferring power on ESMA where prevailing conditions seem to support EU-level intervention, they have also been directed to preventing risk mutualisation/burden-sharing, and to retaining the fiscal

22 Set 23 Set 24 Set

out in Short Selling Regulation, Art 28, supplemented by administrative rules. out in MiFIR, Art 40, supplemented by administrative rules. out in MiFIR, Art 45, supplemented by administrative rules.

248 Direct Supervision/Market Intervention risks of s upervision at national level. The first, post-establishment conferral of supervisory powers on ESMA – over rating agencies (2011) – can be related to widespread support for rating agency reform over the crisis era and to the attractions of centralised supervision given the cross-border organisation of rating agencies, but also to the limited fiscal risk their centralised supervision poses. Similarly, the subsequent (2012) conferral of powers on ESMA over trade repositories can be related to the crisis-era support for reforming derivatives markets, including by requiring contracting parties to report transactions to trade repositories, and to the operational logic of conferring supervisory powers on ESMA over these new actors of pan-EU reach – but also to the limited fiscal risk the ESMA-based supervision of trade repositories (in effect, databanks) poses. ESMA’s (2012) short-selling powers, which have yet to be used, have similar features. They reflect the febrile market conditions that obtained over 2010–12 in the EU sovereign debt market, and political concern (in some quarters) to dampen the perceived excesses of rampant market forces and speculation – but they are limited given concerns as to fiscal risk. While ESMA’s short-selling powers certainly potentially pose fiscal risks to the Member States (as ESMA intervention could disrupt market liquidity), extensive conditionality frames any ESMA action, and ESMA’s ability to intervene in the sensitive sovereign debt market is very limited. The most recent set of powers conferred under MiFIR (2014), which came into force in early 2018, follow this pattern. They address two areas that, while not particularly tainted by the crisisera upheavals, had by then become associated with persistent failures and political concern, and a focus for reform – the retail investment markets (mis-selling) and the commodity derivatives markets (speculation) – but carry limited fiscal risks for Member States. This incremental evolution reflects the 2013–14 ESA Review, which saw little support for a major reconfiguration of ESMA’s supervisory powers.25 Cautious incrementalism is not only a feature of the legislative process since 2011; it can also be associated with ESMA’s approach to its powers. Over this period, ESMA developed supervisory practices and procedures, and built a supervisory capacity, but cautiously, as discussed in sections IV–VI of this chapter. As is the case with its supervisory convergence role, it is not easy to pigeon-hole ESMA into a discrete characterisation, whether, for example, as NCA-like market supervisor, EU-agency-like system/network overseer, or ISSB-like coordinating actor. But despite this elusive hybridity and the related cautious incrementalism and limited competence that can be associated with ESMA’s role, direct supervision by ESMA is not a paper tiger and can be linked to ESMA’s widening and intensifying influence on EU financial market governance. The nature of ESMA’s supervisory influence and of the related risks that may be emerging has been shaped by the distinct context within which ESMA’s direct supervisory powers have developed and are applied, discussed in the following section.

25 Commission, Report on the Operation of the European Supervisory Authorities and the European System of Financial Supervision (COM (2014) 509) and related Staff Working Document (SWD (2014) 261), and Review of the New European System of Financial Supervision. Part 1: The Work of the European Supervisory Authorities, Study by Mazars for the European Parliament (IP/A/ECON/ST/2012-23) (‘Mazars Report’).

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 249

III. Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy A. Financial Markets and Administrative Supervisory Governance: Context and Challenges Direct supervision is core business for domestic financial market regulators, although there are uncertainties as to how supervision can be best executed and legitimated, as discussed in chapter 4. The location of financial market supervision within a domestic administrative agency is not, however, usually contested. Supervision is a classic form of administrative action, which benefits from the technical expertise and independence associated with non-majoritarian agencies. While rule-making authority can be split across financial market regulators and government, operational supervision is traditionally regarded as the province of the financial market regulator.26 To the extent contestation arises on the location of financial market supervision, it is usually directed to the jurisdictional coverage and related institutional design of the relevant regulator.27 For example, while unitary/integrated financial regulators (charged with overseeing the entire population of regulated actors and all financial sectors) were common prior to the financial crisis,28 many financial regulators internationally now take the form of specialised ‘twin-peak’ regulators, with functions split into separate conduct/consumer and prudential regulators (financial market supervision can thus be split across different regulators), although the optimal institutional design remains unclear.29 In the EU setting, however, the location of financial market supervision is highly contested, and this contestation, discussed in the following section, has shaped ESMA’s operating environment and its ability to exert influence.

B. The EU Context i. Intergovernmental Preferences Arrangements for supporting financial market supervisory coordination at the EU level have, in one form or another, long been familiar to EU financial market governance, and enjoy political and institutional support, as discussed in chapter 4. The centralisation of direct financial market supervision is different in that it is associated with contestation, and this distinctiveness shapes ESMA’s operating environment.

26 For a UK assessment, see HM Treasury, Review of Enforcement Decision-making at the Financial Services Regulators. Final Report, December 2014. 27 For a review of institutional design choices, see E Ferran, ‘Institutional Design: The Choices for National Systems’ in N Moloney, E Ferran, and J Payne (eds), The Oxford Handbook of Financial Regulation (Oxford University Press, 2015) 97. 28 See J de Luna-Martinez and T Rose, International Survey of Integrated Financial Sector Supervision, World Bank Policy Research Working Paper No 3096 (2016). 29 For a review of the ‘twin peaks’ model, see A Goodwin, T Howse, and I Ramsay, ‘A Jurisdictional Comparison of the Twin Peaks Model of Financial Regulation’ (2017) 18 Journal of Banking Regulation 103.

250 Direct Supervision/Market Intervention Member States’ preferences can be pronounced here, and their resistance to the centralisation of financial market supervision can be strong. This is not unexpected. The movement of supervision from domestic NCAs to the EU level/ESMA represents a significant incursion into Member States’ autonomy, which exposes Member State markets (and the domestic political process) to the risks of supervisory error and failure – which cannot be discounted given how difficult it is to supervise in an optimal manner, as also discussed in chapter 4. Centralisation can impose fiscal costs on Member States, particularly in a rescue/resolution context, as well as limit Member States’ ability to wield economic levers; EU-level supervisory action could, for example, impact on sovereign borrowing costs or limit liquidity to the prejudice of the funding capacity of a State and its economy. Member States nonetheless have different preferences regarding the extent of any centralisation and the management of these risks, which have been influenced by their different economic and financial system models.30 These differences shaped the Banking Union reforms,31 but they have also shaped ESMA’s modest direct supervision tool-kit and the cautious and incremental manner in which it has evolved.32 Political commitment to greater supervisory coordination through ESMA (and the other ESAs) was strong over the crisis-era ESMA/ESA negotiations, reflecting the weaknesses in pan-EU supervisory governance exposed by the financial crisis33 and political tolerance for a common defence against stability risks.34 But supervisory convergence was the preferred supervisory governance response, and the caution as regards the centralisation of direct financial market supervision, which has come to define the development of ESMA’s direct supervisory powers, was evident from the outset. Over the negotiations, the European Council underlined that any ESMA/ESA supervisory decisions should not carry fiscal consequences for the Member States,35 while the ECOFIN Council called for extensive specification of any ESMA/ESA direct 30 In broad terms, these different preferences, which derive from different varieties of capitalism, reflect divergences across national financial systems and can be classified as those of the market-making Member States (who tend to have more market-oriented systems and to be more sceptical of EU-level governance and intervention) and those of the market-shaping Member States (who tend to have more bank-oriented systems and to be more supportive of EU-level governance and intervention). See S James and L Quaglia, ‘Why does the United Kingdom (UK) have inconsistent preferences on financial regulation? The case of banking and capital markets’ (2018) Journal of Public Policy, available at https://doi.org/10.1017/S0143814X17000253; C Burns, J Clifton, and L Quaglia, ‘Explaining Policy Change in the EU: Financial Reform after the Crisis’ (2018) 25 Journal of European Public Policy 728; I Hardie and D Howarth (eds), Market-based Banking and the International Financial Crisis (Oxford University Press, Oxford, 2013); and L Quaglia, ‘The “Old” and “New” Politics of Financial Services Regulation in the EU’ (2012) 17 New Political Economy 15. See also ch 1. 31 See D Howarth and L Quaglia, ‘Internationalized Banking, Alternative Banks, and the Single Supervisory Mechanism’ (2016) 39 West European Politics 438; and A Spendzharova, ‘Banking Union under construction: the impact of foreign ownership and domestic bank internationalization on European Union Member States’ regulatory preferences in banking supervision’ (2014) 21 Review of International Political Economy 949. 32 On the political economy of the development of EU financial market governance generally, see L Quaglia, D Howarth, and M Liebe, ‘The Political Economy of European Capital Markets Union’ (2016) 54(S1) Journal of Capital Market Studies 185. 33 As examined in The High Level Group on Financial Supervision, Report (2009) (‘the de la Rosière Group (DLG) Report’). 34 L Cuocolo and V Miscia, The Gentle Revolution of European Banking Regulation: Models and Perspectives in Supervision, BAAFI Center Research Paper Series No 2014-164, available at http://ssrn.com/ abstract=2539641, suggesting that national political resistance to ‘transfers of sovereignty’ became replaced by a characterisation of direct EU intervention as a form of mutual defence. 35 European Council Conclusions, 18–19 June 2009 (Council Document 11225/92/09) 8.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 251 supervisory powers and for veto powers to protect Member States from fiscal risks.36 The scale of the political sensitivities became clear as the substantive negotiations got underway. ESMA’s NCA-oriented powers under ESMA Regulation, Articles 17–19 generated significant contestation, with a coalition of Member States (chief among them the UK) concerned to prevent any m utualisation of risk or related centralisation of supervision.37 Discussions on any supervision of regulated actors by ESMA were also fraught. The Council, riven by Member State differences, replaced a Commissionproposed widely-drawn enabling clause for the future conferral on ESMA of direct supervisory powers with a narrowly-drawn provision covering the future grant of supervisory power to ESMA over rating agencies only; this provision was subsequently removed during the negotiations and overtaken by the 2011 rating agency reforms. The final set of powers ultimately conferred on ESMA was primarily a creature of the Council’s (and most Member States’) reluctance to move to a direct supervision model and preference for a coordination/convergence model for the organisation of EU financial market supervision. The European Parliament’s more ambitious proposals regarding ESMA’s direct supervisory powers were either rejected or significantly scaled back by the Council throughout the negotiations.38 Political preferences continued to shape the limited nature of ESMA’s direct supervisory powers up to the 2017/2018 reform waypoint. The single rule-book has, since 2011, reinforced NCAs as the primary location of supervision in the EU financial market, as can be seen in the much greater detail since the crisis era in how NCA powers are specified across the single rule-book, which reflects the pivotal role of NCAs as the anchors of pan-EU financial market supervision.39 The UK was a prominent ‘footdragger’ on any further supervisory centralisation through ESMA,40 resisting

36 ECOFIN Council Conclusions, 9 June 2009 (Council Document 10737/09). 37 On the different Member State preferences and how they shaped the negotiations, see Burns et al, n 30; N Moloney, EU Securities and Financial Markets Regulation, 3rd edn (Oxford University Press, Oxford, 2014) 960–64; and A Spendzharova, ‘Is More “Brussels” the Solution? New European Union Member States’ Preferences about the European Financial Architecture’ (2012) 50 Journal of Common Market Studies 315. The main conflict line was between the UK, often supported by Spain and the Czech Republic, and France, often supported by Italy, Portugal, and the Netherlands. Significant discord was reported at the key June 2009 ECOFIN Council meeting on the reforms, which saw the Council divided between a majority of Member States in favour of granting the ESAs some direct intervention powers and a minority of Member States, led by the UK, concerned to limit the impact on fiscal sovereignty: T Barber, ‘EU Impasse over more Powers for Bank Supervisors,’ Financial Times (10 June 2009). The relevant ECOFIN minutes stress that NCAs are to remain responsible for day-to-day supervision, that ESA decisions should not impinge on Member States’ fiscal responsibilities, and that the ESAs’ competences should be ‘specified exhaustively and in precise detail’: ECOFIN Council Conclusions, ibid, 11. 38 See n 67. The Council conceded, however, the European Parliament’s proposal that the Art 18 emergency and Art 19 binding mediation powers include an ESMA power to direct financial market participants, as well as the Parliament’s proposal for an enabling power for ESMA emergency intervention (now Art 9(5)). 39 The MIFID II regime, eg, harmonises NCAs’ supervisory powers to a much greater extent than the precursor MiFID I (MiFID II, Art 69). To take a recent example, the 2017 Securitisation Regulation (Regulation (EU) No 2017/2402 [2017] OJ L347/35) specifies the nature of the supervisory review NCAs must carry out of actors engaged with the development and distribution of ‘simple, transparent and standardised’ (STS) securitisations (Art 30). 40 See D Howarth and L Quaglia, ‘Brexit and the Single European Financial Market’ (2017) 55 Journal of Common Market Studies 149; and N Moloney, ‘Bending to Uniformity: EU Financial Regulation with and without the UK’ (2017) 40 Fordham International Law Journal 1335.

252 Direct Supervision/Market Intervention the MiFIR conferrals of intervention power41 and challenging the validity of ESMA’s short-selling powers before the Court of Justice of the EU (CJEU).42 But suspicion of supervisory centralisation was not confined to the UK. The Short Selling Regulation negotiations on ESMA’s intervention powers were fraught,43 while the MiFIR negotiations on ESMA’s direct intervention powers also struggled.44 Elsewhere, other proposals to confer direct supervisory powers on ESMA foundered after the initial Commission proposal.45 Similarly, Council negotiations since 2011 on additional ESMA empowerments have tended to intensify the conditions and restrictions attached to any proposed powers.46 In a further reflection of the sensitivities, the different sets of administrative rules that set out the conditions governing ESMA’s direct supervisory powers all take the form of Delegated Acts, in relation to which ESMA acts in an advisory capacity only, and not Binding Technical Standards, which are proposed by ESMA. These administrative measures also impose extensive conditionality and proceduralisation on ESMA’s exercise of its powers. The sensitivities associated with ESMA’s direct supervisory powers can also be seen in the incremental manner in which they have been conferred, and in the extent to which pre-tested templates have been relied on. ESMA’s trade repository powers are based on the procedural and operational template established earlier for the rating agency regime, while ESMA’s MiFIR direct intervention powers are based on the previously conferred short-selling powers, which in turn reflect the design of the foundation powers under Articles 17–19. This cautious incrementalism also exemplifies the marginal policy adjustment associated with politically contested and complex governance design choices in the EU, and with agency evolution, as well as how the status quo bias tends to accompany significant political contestation on EU governance reforms, particularly in relation to EU financial governance.47 The 2017/2018 reform waypoint can be associated with more punctuated change, as discussed in sections VII–X of this chapter, although it remains unclear whether Member States’ preferences have shifted significantly. Prior to the waypoint, Member States were certainly becoming more familiar with ESMA, and there was less uncertainty as to how ESMA would approach direct empowerments. Member States were also being exposed to other examples of supervisory coordination and of what was functionally

41 House of Lords, EU Committee, 2nd Report of Session 2012–2013, MiFID II: getting it right for the City and EU financial services industry (2014), Annex of Correspondence with Ministers, Letter from UK Government to Chairman, 24 October 2012, 8. 42 Case C-270/12 UK v Parliament and Council (ECLI:EU: C: 2014:18). See further ch 2. 43 Whether or not ESMA’s intervention powers should extend to the sovereign debt markets proved highly contentious. The Council ultimately refused to accept the European Parliament’s proposal that ESMA be empowered in this market. Moloney, n 37, 569. 44 Danish Presidency Progress Report on MiFID II/MiFIR, 20 June 2012 (Council Document 11536/12). 45 The proposal for the 2014 Statutory Audit Directive (Directive 2014/56/EU [2014] OJ L158/196) to include a role for ESMA in coordinating national audit authorities foundered, for example, and while initial discussions on the 2016 Benchmark Regulation (Regulation (EU) No 2016/1011 [2016] OJ L171/1) were associated with supervision of benchmarks through ESMA, this reform was not proposed. 46 As was the case with ESMA’s MiFIR product intervention powers, where the Council took a more restrictive approach (which prevailed) to the European Parliament: Council MiFIR General Approach 18 June 2013 (Council Document 11006/13) Arts 21 and 32. 47 eg, A Spendzharova, Becoming a Powerful Regulator: the European Securities and Markets Authority in European financial sector governance, TARN Working Paper 8/2017, available via https://ssrn.com/ abstract=2965429.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 253 and institutionally possible. The establishment of Banking Union’s Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM) must be approached with care as an influence on political preferences relating to ESMA; Banking Union’s construction responded to a distinct set of preferences relating to euro area Member States’ concerns to protect their balance sheets and related capacity to raise sovereign funding from the destructive costs of bank rescue. Nonetheless, Banking Union can be associated with a normalisation of the institutional centralisation of supervision and with ‘proof of concept’.48 Banking Union also provided an institutional template (through the SRM) for how risk-sharing could be attempted. Nonetheless, the CMU agenda, which might have been regarded as an inflection point for reform, particularly given greater experience with ESMA, did not prompt a more accommodating political posture on centralisation. Member States were broadly supportive of greater financial market integration under the CMU agenda, but they identified supervisory convergence as the main supervision lever to be deployed in support of integration.49 The C ouncil’s response to the Commission’s June 2017 CMU Mid-Term Review (which signalled that the Commission would propose the conferral of additional direct supervisory powers on ESMA) was cool, emphasising the importance of supervisory convergence and indicating a preference for retaining the ESAs’ existing mandates.50 And while the Brexit referendum had, immediately prior to the 2017/2018 reform waypoint, created potentially conducive conditions for a reshuffling of Member State preferences, given the potential disruption to the single market and the removal of the UK as a potential veto player, all the indications across 2016–17 were that most Member States regarded supervisory convergence as the means for responding to any Brexit-related instability or fragmentation risks and did not have the appetite for major reforms.51 Similarly, over this period there was little evidence of distinct euro-area preferences emerging in support of additional ESMA powers. Certainly, Banking Union has created the potential for Banking Union/euro area caucusing and interest alignment,52 while the withdrawal of the UK means the removal of an influential advocate for multi-currency integration and a political friction against Banking Union/euro-area spill-over effects.53 The legal constraints on Banking Union/ euro area preferences taking priority over wider single market preferences are few,54

48 Schoenmaker and Véron, n 15. 49 eg ECOFIN Council Conclusions, 10 November 2015 (Council Document 791/15). The Council recognised a need for strengthened supervisory convergence but emphasised that CMU could be progressed based on the ESAs’ existing mandates (para 14). 50 ECOFIN Council Conclusions, 11 July 2017 (Council Document 460/17). 51 ibid. 52 The political economy literature has identified the spill-over effects of Banking Union as including the formation of potential new political and economic preferences: F Schimmelfennig, ‘A Differentiated Leap Forward: Spillover, Path-dependency, and Graded Membership in European Banking Regulation’ (2016) 39 West European Politics 483; F Schimmelfennig, D Leuffen, and B Rittberger, ‘The EU as a System of Differentiated Integration: Interdependence, Politicization, and Differentiation’ (2015) 22 Journal of European Public Policy 764; and Y Mény, ‘Managing the EU Crises: Another Way of Integration by Stealth’ (2014) 37 West European Politics 1336. 53 The UK was a prominent supporter of the integrity of single market governance arrangements, clear in the overtaken 2016 ‘New Settlement’ negotiated by Prime Minister Cameron (Decision of the Heads of State or Government Meeting Within the European Council, Concerning a New Settlement for the United Kingdom with the European Union, European Council Meeting, 18 and 19 February 2016 EUCO 1/16 (Annex 1)). 54 A Dashwood, ‘Living with the Eurozone’ (2016) 53 Common Market Law Review 3.

254 Direct Supervision/Market Intervention particularly as a Banking Union/euro area qualified majority vote (QMV) is now in place in the Council. Different financial market models obtain across the Banking Union/euro area zone, however, and it is not clear that a related distinct political preference on ESMA/financial market supervisory governance is emerging.55 Some euro-area institutional support for financial market governance reform was seen in 2015–16, in the form of a ‘Financial Union’, which would include a centralised fi nancial market supervisor, sit alongside Banking Union, and serve to ‘complete EMU’,56 but there was little evidence of widespread political support. Similarly, the ‘completing Banking Union’ project has struggled. Banking Union/euro-area political support for further risk mutualisation through the ‘missing leg’ of Banking Union, the European Deposit Insurance Scheme, is not consistent, and the ‘fiscal backstop’ required to support funding to Banking Union banks in crisis has been long in gestation.57

ii. Supranational/Institutional Preferences Supranational/institutional preferences have also shaped ESMA’s direct supervisory powers and its related ability to exert influence. Reflecting its preference to reinforce single financial market stability and integration through governance reform, the Commission was sympathetic at the outset to some limited supervisory powers being conferred on ESMA. In the original ESMA Proposal it proposed a wide enabling clause, which would have empowered ESMA to exercise exclusive supervisory powers over entities or economic activities with a Community-wide reach, once such specific powers had been conferred on it by EU legislation.58 The Commission also adopted the 2009 DLG Report’s recommendation that breach of EU law, binding mediation, and emergency powers be conferred on the ESAs/ESMA, but, while sympathetic, it did not take up the Report’s more radical but now prescient proposal for the conferral of direct supervisory powers over post-trade infrastructures (CCPs).59 While supportive of some degree of ESMA empowerment,60 the Commission has, however, been wary of ESMA’s

55 Discussed in N Moloney, ‘EU financial governance after Brexit: the rise of technocracy and the absorption of the UK’s withdrawal’ in K Alexander, C Barnard, E Ferran, A Lang, and N Moloney, Brexit and Financial Services. Law and Policy (Hart Publishing, Oxford, 2018) 61. 56 The Five Presidents’ Report, Completing Europe’s Economic and Monetary Union (2015); and ECB, Financial Integration in Europe (2016) 97. 57 See, eg, ECOFIN Council Conclusions, 5 December 2017 (Council Document 15305/17); and Council, Strengthening of the Banking Union/Risk-reduction Measures: Presidency Progress Report, June 2017 (Council Document 9484/1/17). The May 2018 ECOFIN meeting reached political agreement on the legislative risk reduction measures proposed in support of Banking Union (which include bank capital and resolutionrelated reforms), but work is continuing on the EDIS: ECOFIN Council Conclusions, 25 May 2018 (Council Document 8758/18) and ECOFIN Council Conclusions, 22 June 2018 (Council Document 10203/18). In June 2018, euro area leaders finally agreed in principle that the European Stability Mechanism would provide the fiscal backstop (sitting behind the SRM), but final resolution of this issue is not expected until December 2018: Euro Summit Conclusions, 29 June 2018 (EURO 502/18). 58 Commission, 2009 ESMA Proposal (COM(2009)503) Art 6(3); and Commission, 2009 ESA Proposals Impact Assessment (SEC(2009)1234) 26. This proposal was rejected by the Council. 59 DLG Report, n 33, 53. 60 The Commission noted early on in the context of the limited emergency powers available to ESMA under Art 18 that it would have preferred more extensive powers to be granted: BoS, Minutes, 20 December 2011 (ESMA/2012/BS/4).

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 255 direct supervisory powers, and in particular of their potential to threaten its executive pre-eminence.61 It has frequently called in aid the Meroni ruling to impose conditions on ESMA’s powers.62 This more-or-less sceptical posture has shifted over time. As the crisis-era risk-reduction and market-stabilisation period receded, and the promotion of stronger financial market integration came to the fore with the CMU agenda, the Commission began to regard ESMA as a vehicle for the promotion of financial market integration – albeit primarily as a coordination actor, deploying enhanced supervisory convergence powers to reduce transaction costs and smooth supervisory divergences. The Commission’s major CMU policy interventions also, however, contained indications of a softening posture towards direct supervision. The initial 2015 CMU Green Paper suggested that the ESAs’/ESMA’s powers regarding binding mediation and breach of EU law might require strengthening,63 and by the June 2016 CMU follow-up report the Commission was highlighting the ‘fundamental’ role of the ESAs/ESMA in building a deeper and more integrated single market and signalling further work on the ‘European dimension’ of supervision.64 The 2016 report also linked single financial market supervisory governance to the ‘completing EMU’ project – the Commission referenced the Five Presidents’ call for a ‘Financial Union’ and single European capital market supervisor, and committed to considering, with the Parliament and Council, what further steps might be necessary.65 By the June 2017 CMU Mid-Term Review the Commission’s position had hardened further. It signalled the proposal, ‘where warranted’, of additional direct supervisory powers for ESMA, in order to support a functioning CMU, and, specifically, of direct supervisory powers for ESMA over CCPs.66 The European Parliament, by contrast, was an enthusiastic supporter of conferrals of supervisory power on ESMA from the start, adopting an expansionist approach over the initial ESMA negotiations.67 Since then, it has typically sought to expand ESMA’s powers. It adopted a more expansive approach than did the Council to ESMA’s proposed shortselling powers, for example,68 while ESMA’s MiFIR product intervention powers, which were initially designed by the Commission to have a restrictive scope, were extended by the Parliament to include the ex-ante precautionary powers ultimately conferred on ESMA.69 The Parliament’s support for additional e mpowerments for ESMA was 61 From the beginning it was of the view that supervisory powers should only be granted where there was ‘clear added value’: Commission, Financial Supervision Package – FAQ (MEMO/10/434), 22 September 2010. 62 It initially took a more restrictive approach to that ultimately adopted in relation to ESMA’s rating agency enforcement powers, reserving to itself, on Meroni grounds, the power to impose penalties on rating agencies (this rests with ESMA in the regime as adopted). See further Moloney, n 37, 649–50 and 674–75. 63 Commission, Green Paper. Building a Capital Markets Union (COM (2015) 63) 22. 64 Commission, Capital Markets Union – Accelerating Reform (COM (2016) 601) 7. 65 ibid. 66 Commission, Mid-Term Review of the Capital Markets Union Action Plan (COM (2017) 292) 10–11. 67 It proposed that ESMA supervise those financial market participants not subject to supervision by NCAs; be empowered to temporarily prohibit or restrict certain activities or services when market conditions were severely disrupted; support resolution of cross-border firms through a Resolution Unit; and, most ambitiously, supervise cross-border institutions that might pose systemic risk: European Parliament, Resolution on the ESMA Proposal, 22 September 2010 (P7_TA(2010)0339). All these reforms were rejected by the Council, although the temporary prohibition power survived into the final settlement in the form of Art 9(5). 68 As noted earlier in this section, the Parliament wanted ESMA’s direct intervention powers to apply in the sovereign debt markets, a proposal rejected by the Council. 69 European Parliament, Resolution Adopting a Negotiating Position on MiFID II, 26 October 2012 (P7_TA(2012)0406).

256 Direct Supervision/Market Intervention c onsistent prior to the 2017/2018 reform waypoint, including some (prescient) support for ESMA to supervise two forms of EU fund, the EU Venture Capital and Social Entrepreneurship Funds,70 a power since included by the Commission in the 2017 ESA Proposal. Most recently, the ECB has emerged as a potential driver of ESMA’s ability to exert influence through direct supervision. It has repeatedly supported CMU as a means for strengthening Banking Union, identified more integrated financial market supervision as a key ingredient for CMU, and called for ESMA to play a larger role in capital markets supervision.71 These different political and supranational/institutional preferences have shaped the incremental development of ESMA’s direct supervisory powers, their limited nature, and their extensive proceduralisation and conditionality. They have also accordingly shaped the context in which ESMA’s influence, effectiveness, and legitimacy fall to be assessed, as noted at the end of this section.

iii. Technocratic Preferences: ESMA and NCAs While less determinative, technocratic NCA and ESMA preferences have also shaped the development of ESMA’s supervisory powers and ESMA’s related ability to exert influence. Prior to the 2017/2018 reform waypoint, the approach of the Board of Supervisors to ESMA’s supervisory powers can best be described as cautious. It has generally been careful not to claim additional supervisory powers for ESMA, sensitive to peer NCAs as regards how ESMA’s NCA-oriented powers are used, and concerned to ensure ESMA’s powers are applied in a proceduralised manner that respected the limitations on its powers. This caution reflects the different factors that shape NCA preferences in this area. For example, NCAs can be expected to protect their supervisory autonomy and the related resources, powers, and influence that flow from direct supervision. They are also likely to be reluctant to approve supervisory action against a peer NCA given the potential for unattractive precedents and for prejudice to the consensus-oriented dynamic that currently shapes Board decision-making. On the other hand, supervision is hard to get right and, particularly where NCAs face scale and resource challenges, there may be efficiencies in some supervisory powers being located with ESMA. Conferrals of power on ESMA can also have a productive ‘halo’ effect, strengthening ESMA’s capacity more generally and thereby reinforcing NCAs’ domestic influence. Early Board discussions on direct supervision focused almost exclusively on the (still to be deployed) ESMA Regulation, Article 18 emergency power, reflecting the ongoing 70 EU Parliament Briefing, EU Legislation in Progress, Reviving Risk Capital. The Proposal to Amend EuVECA and EUSEF, 19 January 2017, reporting on MEPs’ calls for direct ESMA supervisory powers over these funds. The ECON Committee’s subsequent report on the proposed legislation was less ambitious, although it called for an expansion of ESMA’s oversight powers over NCAs in this area (ECON Report on EUSEF and EUVECA, 30 March 2017 (A8-012/2017)). 71 See, eg, ECB, Financial Integration in Europe (2018) 42 and 56–57 in support of CMU, arguing that CMU ultimately requires a single capital markets supervisor, and supportive of ESMA reform; and, similarly, ECB, Financial Integration in Europe (2017) 33–34 and Speech by ECB Vice President Vítor Constâncio, 19 May 2017, n 13.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 257 turbulence in financial markets over ESMA’s first two years of operation.72 The febrile market conditions faced by NCAs can be associated with the unusual willingness of the Board to consider whether the boundaries of the Article 18 power might be pushed.73 Since then the Board’s posture has been more circumspect. It has been concerned to establish procedures governing ESMA’s breach of EU law, mediation and emergency powers,74 and its short-selling powers,75 and, as discussed in sections V and VI of this chapter, is wary of exercising these powers. In addition, NCAs have shown some nervousness as regards expansive interpretations of ESMA’s direct supervision powers, disagreeing, for example, on the extent to which ESMA has power (alongside NCAs) to validate CCP risk models under EMIR.76 An NCA concern to oversee ESMA as regards its exercise of direct supervisory powers has also been clear. In the early stages of ESMA’s supervision of rating agencies, for example, NCAs were concerned to ensure that the Board retained strategic oversight over rating agency supervision and was provided with sufficient disclosures on ESMA’s supervisory approach.77 This generally wary posture has shaped the Board’s position on new empowerments for ESMA. While the Board has been alert to the prospect of additional supervisory powers for ESMA,78 and shown willingness and preparedness,79 it has been careful to acknowledge the primacy of the co-legislators, and has typically framed its supervisory agenda in terms of supervisory convergence. As the prospect of new ESMA empowerments edged on to the EU policy radar at the outset of the CMU agenda, the official ESMA position (adopted by the Board) was circumspect. ESMA suggested that while it was ‘uniquely positioned to develop a European supervisory approach that could have strong benefits for pan-European actors’, it was ‘clearly not asking for new areas of supervision’ but ‘stands ready to assume such new tasks’ should they be conferred.80 Its major concern was to achieve refinements to its breach of EU law power (Article 17) so that it could be deployed more easily.81 While political and supranational/institutional preferences have had a direct, constituting effect on ESMA’s supervisory powers and its related ability to exert influence, 72 Art 18-related crisis planning dominated ESMA’s direct supervision agenda over 2011–12: BoS, Minutes, 20 September 2011 (ESMA/2011/BS/209); 20 December 2011 (ESMA/2012/BS/4); 14 February 2012 (ESMA/2012/BS/29); 17 April 2012 (ESMA/2012/BS/66); and 19 June 2012 (ESMA/2012/BS/96) – all discussing scenario planning, information exchange protocols, and ‘analytical frameworks’ and ‘practical arrangements’. 73 The BoS meeting of 20 December 2011 (n 72) discussed the risks to ESMA from unrealistic stakeholder expectations as to the reach of its powers, and whether there was scope for ESMA to push the boundaries of Art 18 (the Commission warned that a strict interpretation was needed). 74 See, eg, BoS, Minutes, 19 June 2012 (ESMA/2012/BS/96). 75 BoS, Minutes, 24 September 2012 (ESMA/BS/125) and 29 January 2013 (ESMA/2013/BS/30). 76 BoS, Minutes, 29 January 2015 (ESMA/2015/BS/32). The majority NCA view that ESMA did have such powers prevailed. 77 eg BoS, Minutes, 20 March 2012 (ESMA/2012/BS/46) and 17 April 2012 (ESMA/2012/BS/66). 78 Board discussions across 2014–15 repeatedly referenced the possibility of additional supervisory mandates, including in relation to CCPs and prospectuses (eg BoS, Minutes, 7 May 2015 (ESMA/2015/ BS/906-7) and 6–7 November 2014 (ESMA/BS/201)). 79 The Board, eg, regularly discussed ESMA’s preparedness for potential additional supervisory tasks under the proposed Audit Directive and Benchmark Regulation as these two proposals developed (eg BoS,Minutes, 14 March 2013 (ESMA/2013/BS/58)); in neither case were powers ultimately granted. 80 ESMA, Response to the Commission Green Paper on Building a Capital Markets Union (ESMA/2015/865) 5. 81 ESMA, Response to the Commission CMU Mid-Term Review (ESMA31-68-147) (2017).

258 Direct Supervision/Market Intervention the cautious posture of NCAs can be associated with how ESMA’s approach to supervision has developed and with its reluctance, at times, to deploy its powers. Caution by NCAs, while potentially obstructive of the co-legislators’ intentions and so troublesome in some respects as regards legitimation, can, however, be productive, in that it can also support legitimation by providing a brake against bureaucratic creep.

C. ESMA in Action: Influence, Effectiveness, and Legitimacy ESMA’s direct supervisory powers sit on the main political/institutional fault-lines that rumble underneath EU financial market governance, and are contested. This distinct context, which has shaped the incremental development of ESMA’s powers and their limited nature, also shapes inquiry into ESMA’s influence and the effectiveness and legitimacy challenges that may arise. Notwithstanding its delicate operating environment and limited powers, ESMA’s ability to exert influence on the behaviour of regulated actors and on NCA practices through its direct supervisory powers is not insignificant, as discussed in sections IV–VI of this chapter. In relation to its direct supervision of regulated actors, ESMA has operated in a purposeful and energetic manner, building new supervisory models, claiming ownership over its supervisory mandate, and seeking to influence how the related legislative frameworks evolve. Its NCA-oriented powers afford ESMA significant potential to exert influence over NCAs, but ESMA has yet to exercise these powers in a meaningful manner, although there are indications of a growing appetite for intervention. As far as its market intervention powers go, here again the potential for influence is significant, although so far the only evidence relates to ESMA’s epochal March 2018 decision to intervene in the CfD/binary option market, discussed in section VI. The notion of effectiveness is slippery in this context given the uncertainties as to what ‘good’ supervision looks like and as to the optimal design of EU financial market supervisory governance. Whether there are effectiveness challenges is best assessed in a modest manner, related to ESMA’s ability to deliver its different supervisory mandates. Effectiveness can be regarded as having similar if slightly different features in the regulated actor and NCA spheres. First, as regards the supervision of regulated actors (including ESMA’s exceptional intervention powers), effectiveness can be regarded as related to ESMA’s capacity to ensure regulated actor compliance with the EU rule-book by deploying its supervisory powers in a manner that, given the challenges supervision poses, is technically expert/data-informed, responsive, and agile and that accommodates learning from experience.82 Further, the EU-level setting imposes distinct Meroni-shaped procedural restrictions, political/institutional sensitivities, and specific supervisory challenges, which ESMA must navigate deftly. There are grounds for optimism, as discussed in sections IV and VI. ESMA has, for example, displayed a capacity to engage in risk-based supervision. While, as discussed in chapter 4, risk-based supervision, which provides the supervisor with an institutionalised and systematic tool for directing supervisory action, is still a ‘work-in-progress’, the capacity risk-based super

82 On

supervisory effectiveness, see ch 4.

Contextualising ESMA’s Role: Influence, Effectiveness, and Legitimacy 259 vision gives to the supervisor to evidence and prioritise risks in a data-informed manner and to act responsively has attractions here – particularly given the distinct challenges posed by ESMA’s operating setting and the novelty of its powers. Further, risk-based supervision is regularly used by NCAs,83 and so its embrace by ESMA suggests a capacity to learn from NCA experience in an attractively experimentalist manner.84 ESMA can also learn from experience through its supervisory convergence activities, notably peer review. There are nonetheless constraints on ESMA’s operational capacity, notably the extensive conditionality and proceduralisation that apply to its powers, which may hinder effectiveness. Second, as regards ESMA’s NCA-oriented supervision powers, while the effective deployment of these tools also demands technical acuity, responsiveness, and agility of ESMA, the need is all the greater here, as these powers represent a material hardening of ESMA’s soft supervisory convergence powers and so require ESMA to manage the risks of ‘learning sliding into surveillance’ and ‘plurality sliding into harmonisation’.85 Similarly, e ffectiveness here requires responsiveness to different NCA contexts, albeit combined with a purposeful commitment to taking action where required. There is little evidence yet on ESMA’s approach to its NCA-oriented powers, although there are indications that the location of decision-making in the Board of Supervisors may hamper ESMA’s effectiveness. More generally, the context in which ESMA’s direct supervision powers have developed is a promising one. The cautious incrementalism that can be associated with the development of ESMA’s powers carries with it the promise of supervisory learning and experimentation by ESMA – but also by the constituting co-legislators.86 Direct supervision has, however, the potential to place ESMA’s legitimation arrangements under strain. Supervisory decisions can involve policy choices given their signalling effects; third party effects can arise; and discretion is difficult to confine as supervision demands operational agility and flexibility. Further, the contested political context of centralised EU financial market supervision makes control of any bureaucratic adventurism by ESMA essential. Legitimation of ESMA’s direct supervisory powers is in some respects reasonably secure, with distinct legitimating devices applying alongside the general legitimation arrangements examined in chapter 2. In terms of input legitimacy, for example, ESMA’s discretion as a direct supervisor is structured by bespoke conditionality developed by the co-legislators. There is also evidence of procedural legitimation: alongside the proceduralisation imposed by the co-legislators, ESMA’s internal procedures, including those embedded within ESMA’s

83 See, eg, IMF, FSAP, Technical Note: Fund Management: Regulation, Supervision and Systemic Risk Monitoring, IMF Country Report (Luxembourg) No 17/257, noting that the Luxembourg NCA uses a riskbased approach to supervision ‘in line with most EU authorities’ (para 91). 84 The ability to learn from experience gained by local units is a classic feature of experimentalist governance: C Sabel and W Singer, ‘Minimalism and Experimentalism in the Administrative State’ (2011) 100 Georgetown Law Journal 53. 85 A Riles, ‘Is New Governance the Ideal Architecture for Global Financial Regulation?’ (2013) 31 Monetary and Economic Studies 65, identifying the dangers of command and control governance in transnational contexts. 86 A laboratory-like quality has been identified by the agency literature as a feature of EU agency development: A Boin, M Busuioc, and M Gronleer, ‘Building European Union Capacity to Manage Transboundary Crises: Network or Lead-agency Model?’ (2014) 8 Regulation & Governance 418.

260 Direct Supervision/Market Intervention proprietary risk-based supervision model, also structure ESMA’s discretion.87 Further, Board of Supervisors contestation can act as a check against mandate creep and inject technical expertise, thereby supporting output legitimation, and also provide a limited form of national/peer accountability. Nonetheless, there are distinct challenges to legitimation here, including that accountability review can struggle given the difficulties in establishing appropriate and granular benchmarks for review.

IV. Direct Supervision in Practice: Rating Agencies and Trade Repositories A. Credit Rating Agencies i. Legal Regime and Operating Framework The conferral of exclusive supervisory power on ESMA over EU credit rating agencies represented a watershed, being the first time supervisory competence over an aspect of financial market governance was located at EU level; ESMA Chief Executive Ross described ESMA’s move into direct supervision as a ‘milestone achievement’.88 The Consolidated Credit Rating Agency Regulation (CCRAR) confers these supervisory powers on ESMA and also provides the detailed proceduralisation of these powers which has since served as the template for ESMA’s supervisory powers over trade repositories. This proceduralisation of ESMA’s powers, which reflects political and institutional preferences and the restraints imposed by the Meroni ruling, imposes operational constraints on ESMA over which it has little or no control, although procedural rules governing supervision would more usually be established by a financial market regulator as part of its internal governance arrangements. There is as a result some rigidity and complexity in ESMA’s operational framework, which has the potential to restrict its effectiveness. Under Article 21 of the CCRAR, ESMA is charged with registering EU rating agencies in accordance with the procedures set out in the CCRAR, and with ensuring that the CCRAR is applied. To that end, a suite of direct supervisory powers, extending from the power to request information to more intrusive supervisory powers, is conferred on ESMA and specified in detail. As regards its power to request information, for example, ESMA may, either by ‘simple request’ or by ‘decision’, require all information necessary to carry out its duties from a range of actors.89 The ‘simple request procedure’ is designed for non-binding requests, while the ‘decision procedure’ is designed for binding requests, failure to comply with which can lead to a penalty.90 General investigation powers are 87 Risk-based supervision has been associated with the strengthening of legitimation, including by strengthening accountability: J Black, ‘Regulatory Styles and Supervisory Strategies’ in Moloney et al (eds), n 27, 217. 88 Speech on ‘ESMA’s Role in Europe and International Regulatory Co-operation’, 12 June 2012. 89 Including from rating agencies, rated entities, related third parties, third parties to whom rating agencies have outsourced operational functions, and persons ‘otherwise closely and substantially related or connected to [rating agencies]’: CCRAR, Art 23b. 90 CCRAR, Art 23b(2) and (3), respectively. The relevant procedural and disclosure requirements that apply in each case are specified.

Direct Supervision in Practice: Rating Agencies and Trade Repositories 261 also conferred under the CCRAR, which empowers ESMA to conduct all necessary investigations of relevant persons and confers on its officials and authorised persons a range of related powers.91 The related CCRAR procedural framework covers the procedure governing such investigations; the requirement for relevant persons to submit to ESMA investigations; the assistance of ESMA by relevant NCAs; and the role of the national courts in reviewing related permissions for ESMA to compel telephone or data traffic records. A power for ESMA to conduct on-site inspections is also provided for, alongside a related procedural framework.92 ESMA may conduct all necessary on-site inspections at the business premises of relevant persons, and a suite of related powers is conferred on ESMA’s officials and authorised persons.93 Specific supervisory powers exist for the supervision of a rating agency’s proprietary methodologies,94 underlining the extent to which ESMA can drill into rating agency operation. The CCRAR also empowers ESMA to delegate specific tasks to an NCA (including information requests, investigations, and on-site inspections), but any such delegation does not affect ESMA’s responsibility to ensure that the CCRAR is applied, and it must not limit ESMA’s ability to conduct and oversee the task delegated to the NCA. Certain supervisory responsibilities, including with respect to registration decisions, must not be delegated by ESMA. In practice, delegation is not widely used by ESMA, which acts as the exclusive supervisor of rating agencies through its Supervision Department. The CCRAR also confers ESMA’s enforcement powers, which must be exercised within the CCRAR procedural framework, based on investigation by an ESMA Independent Investigation Officer95 and the adoption of a final decision on enforcement action by the Board of Supervisors.96 Any such enforcement decision must be taken in accordance with the CCRAR, which sets out in Annex III the specific CCRAR infringements susceptible to enforcement action – no other breaches can ground such action. Although the CCRAR does not provide for criminal sanctions, matters for criminal prosecution are to be referred to the relevant national authorities where there are serious indications of the possible existence of facts liable to constitute criminal offences. The range of administrative non-monetary enforcement measures that can be adopted by ESMA are specified as covering: • the withdrawal of registration;

91 Including to examine records and data, to take or obtain certified copies of materials, to summon persons for explanations, to interview persons, and to request telephone and data traffic records: CCRAR, Art 23c. 92 CCRAR, Art 23d. The procedural framework governs, inter alia, the need for written authorisations, the requirement for relevant persons to submit to ESMA’s inspection (and the related ESMA decision needed before an inspection can be launched), and relations with officials from the Member State in question. 93 Including the power to enter any business premises and exercise investigation powers, and to seal any business premises and books and records for the period of the inspection: CCRAR, Art 23d. 94 CCRAR, Art 22a: the powers relate to ESMA’s obligation to examine rating agency compliance with the requirement to back-test methodologies under CCRAR, Art 8(3). 95 CCRAR, Art 23e covers the threshold to be met before an Independent Investigation Officer is appointed (serious indications of possible existence of facts liable to constitute an infringement); the independence of the Officer; and the investigating powers of the Officer. During the investigation process, the relevant person has the right to be heard and rights to access files: Art 23e(3)–(4). 96 The Board must decide based on the Officer’s findings and (when so requested) having heard the investigated person in question. The Officer is prohibited from taking part in BoS deliberations. The Board acts through a simple majority vote (ESMA Regulation, Art 44).

262 Direct Supervision/Market Intervention • the temporary prohibition of the issuing of ratings throughout the EU and/or the suspension of the use of the rating agency’s ratings for regulatory purposes until the infringement has been brought to an end; • requiring the rating agency to bring the infringement to an end; and • public notices.97 The application by ESMA of the relevant administrative non-monetary measure is subject to procedural requirements, including that ESMA must take into account the nature and seriousness of the infringement in question, having regard to a series of factors.98 A concern to avoid market instability and for the related fiscal implications for Member States is implicit in these procedures: where ESMA decides to suspend the use of a rating for regulatory purposes or to withdraw a rating agency’s registration, the rating can be used for 10 days after the ESMA decision; where another rating is not available, a three-month period applies, and this period may be extended by three months in exceptional circumstances related to the potential for market disruption or financial instability. Any ESMA enforcement decision must be notified to the relevant person and is subject to the right of the person concerned to be heard.99 The administrative monetary penalties regime (for fines and periodic penalties) is specified in greater detail,100 reflecting the significant concern as to Meroni risks over the negotiations on ESMA’s fining powers. ESMA’s power to impose fines arises only where the Board of Supervisors finds that a rating agency has negligently or intentionally101 committed a specific infringement identified in Annex III. A minimum and maximum fine range applies to each of the Annex III infringements, but in no case does the range go higher than €750,000. The CCRAR also sets out how ESMA should decide whether fines ‘should be at the lower, the middle, or the higher’ end of these ranges, specifies when fines should be adjusted by means of mitigating or aggravating factors,102 and places a cap on fines of 20 per cent of the rating agency’s annual turnover in the preceding year.103 Procedural requirements govern the imposition of fines, including with respect to the right to be heard by an ESMA Independent Investigation Officer and the Board of Supervisors, access to documents, limitation periods, and the collection

97 CCRAR, Art 24. 98 These are: the duration and frequency of the infringement; whether the infringement revealed serious or systemic weaknesses in the agency’s management systems or internal controls; whether financial crime was facilitated; and whether the infringement was intentional or negligent: CCRAR, Art 24(2). Mitigating factors are addressed by Annex IV and cover whether the infringement persisted for a short time; whether management took all necessary steps to prevent it; whether the agency brought the infringement to ESMA’s attention (quickly, effectively, and completely); and if the agency voluntarily adopted measures to ensure that a similar infringement could not be committed in the future. 99 CCRAR, Art 25. 100 CCRAR, Art 36a. 101 An intentional infringement is considered to arise where ESMA finds objective factors that demonstrate that the agency or its senior management acted deliberately to commit the infringement: CCRAR, Art 36a(1). 102 Art 36a(2) sets out turnover factors as determining the range point – the higher range should apply where the agency annual turnover is more than €50 million. Art 36a(3) and Annex IV provide co-efficients to be used to adjust penalties to reflect identified aggravating or mitigating factors. 103 But where the rating agency has benefited financially, directly or indirectly, from the infringement, the fine must be at least equal to the financial benefit: CCRAR, Art 36a(4).

Direct Supervision in Practice: Rating Agencies and Trade Repositories 263 of fines.104 In the case of continuing infringements or lack of cooperation, ESMA may impose periodic penalties designed to compel action.105 ESMA is empowered to impose periodic penalties that are effective and proportionate, and which are imposed on daily basis until compliance is achieved, but for no longer than six months.106

ii. Rating Agency Supervision in Action: Technocratic Influence but a Balanced Scorecard? ESMA acquired responsibility for rating agency supervision in July 2011, and now supervises 26 EU-registered rating agencies.107 Initial stakeholder reaction to ESMA’s supervisory approach was positive,108 and ESMA’s role has not been significantly contested since. But the ESMA experience remains important. Rating agency supervision was the first supervisory mandate conferred on ESMA, and provides the most extensive evidence so far on ESMA as a supervisor and on any related effectiveness and legitimacy challenges. ESMA’s experience has also influenced its approach to trade repository supervision: both sets of regulated actors are now supervised within ESMA’s Supervision Department by means of similar internal methodologies. Borrowing the ‘scorecard’ mechanism ESMA uses in its supervision of rating agencies, ESMA’s scorecard appears to be balanced. Its approach to supervision suggests that its technocratic reach as the exclusive supervisor of EU rating agencies is now considerable, but that it is operating in an effective manner. ESMA’s effectiveness as the new EU-level supervisor of rating agencies can be regarded as a function of its ability to ensure compliance with the CCRAR and of its engagement with the different factors associated with high-quality supervision, including the extent to which supervision is technically- and data-informed, responsive, and agile, as well as capable of learning from experience. Effectiveness here can also, given the specificities of the EU setting, be related to ESMA’s ability to mitigate the operational, institutional, and political risks associated with moving supervision to the EU level, and with its being a nascent supervisor. Finally, effectiveness can be regarded as a function of how well ESMA grapples with the distinct challenges posed by EU rating agency supervision. Prior to ESMA’s taking over as direct supervisor, rating agencies in the EU had not been regulated to any material extent, and there were few operational templates for supervision. Further, the industry was and remains asymmetrically organised.

104 Commission Delegated Regulation 946/2012. Official Journal references are provided only for legislative measures in this book. 105 Penalties can be imposed to compel a rating agency to put an end to an infringement, and to compel a person to supply complete information, to submit to an investigation and produce related information, or to submit to an on-site inspection: CCRAR, Art 36b(1). 106 The amount of such a periodic penalty is set at 3% of the rating agency’s average daily turnover in the preceding business year (in the case of natural persons, 2% of average daily income in the preceding calendar year): CCRAR, Art 36b(3). 107 As at the end of 2017: ESMA, ESMA’s Supervision of Credit Rating Agencies, Trade Repositories and Monitoring of Third Country Central Counterparties 2017 Annual Report and 2018 Work Programme (ESMA80-199-153) (2018) 25. 108 Mazars Report, n 25, 97, reporting on the view that ‘ESMA has efficiently established the process and organization to professionally execute’ its responsibilities.

264 Direct Supervision/Market Intervention The EU rating agency market is dominated by the three global rating agencies, which account for some 93 per cent of EU rating business.109 ESMA’s supervisory strategy must grapple with the risks generated by this dominant group, but it must also ensure an appropriately proportionate approach such that smaller agencies can develop – support of a more competitive rating agency market is a priority of EU rating agency policy.110 ESMA must as a result deploy some novel and potentially unwieldy supervisory tools directed to supporting competition, alongside the suite of investigation, surveillance, remediation, and enforcement tools NCAs usually deploy when supervising any regulated actor. For example, the CCRAR requires that pricing must not be discriminatory and must be based on actual costs,111 drawing ESMA into the territory of competition and pricing policy, usually uncharted for fi nancial market regulators. There are grounds for optimism that the reach ESMA now extends over rating agencies is not generating effectiveness risks. From the very beginning, ESMA was clear and purposeful on how it would approach supervision and ensure CCRAR compliance – committing to being an ‘intrusive and proactive regulator’ – and identified its driving priority as the embedding of a new regulatory and supervisory discipline on a sector that had not previously been regulated to any material degree.112 This commitment has since been retained. ESMA subsequently declared its aim to be a credible and effective direct supervisor, aiming at lasting impact and known for its ability to be proactive and responsive – later finessed to include a commitment to ‘stimulate behavioural change’ through supervision.113 ESMA’s rating agency supervisory agenda for 2016–20 adopted a similarly purposeful approach, committing ESMA to intensifying its supervisory activities to be more intrusive where necessary.114 ESMA’s most recent report on its (2017) supervisory activities suggests that in practice ESMA has become a purposeful and interventionist supervisor, concerned to police the CCRAR’s regulatory perimeter in a proactive manner and with an appetite to require ‘significant change’ of agencies where necessary.115 A ‘call to arms’ for intrusive supervision is not unexpected from a new supervisor seeking to establish its credibility in a complex operating environment, and could have led to heavy-handed intervention. Intrusive supervision is, however, delivered through a technically-informed, risk-based model designed to ensure that ESMA’s supervisory activities are targeted to the risks most likely

109 ESMA, Report on CRA Market Share (ESMA33-5-209) (2017). 110 Certain CCRAR provisions are designed to support competition (such as the requirement to rotate agencies for the rating of certain complex securitisations), while the Commission monitors the state of the rating agency industry (see, eg, Commission, Study on the State of the Credit Rating Market. Final Report (MARKT/2014/257/F4/OP) (2016)). 111 CCRAR, annex I, section B, para 3c. 112 ESMA, 2013 Annual Report on Credit Rating Agencies (2014) 4 and 5. 113 ESMA, ESMA’s Supervision of Credit Rating Agencies and Trade Repositories 2014 Annual Report and 2015 Work Plan (ESMA/2015/280) (2015) 26; and ESMA, ESMA’s Supervision of Credit Rating Agencies and Trade Repositories 2015 Annual Report and 2016 Work Plan (ESMA/2016/234) (2016) 26. 114 ESMA, Strategic Orientation 2016–2020 (ESMA/2015/593) 15–16. 115 2017 CRA/TR Annual Report, n 107, 28–29 and 36, reporting on ESMA’s efforts to ensure that the CCRAR regulatory perimeter around regulated rating agency business was not breached by unregistered actors, and emphasising the importance of the imposition and monitoring of agency ‘remediation action plans’ following the supervisory review of rating agencies by ESMA.

Direct Supervision in Practice: Rating Agencies and Trade Repositories 265 to materialise.116 This model has three elements: a standardised approach to identifying the most serious risks at rating agency and industry level, informed by entity-level and industry data – including supervisory reports, intelligence from supervisory activities and stakeholder complaints, and wider market and trend assessments; targeted review of how rating agencies are managing these risks; and the deployment of available and proportionate measures to reduce and manage these risks.117 It is supported by a bespoke risk identification/assessment model, designed to ensure ESMA supervisory action is directed to where it will have most impact, and which should mitigate the risks of heavy-handed intervention. Under this model, ESMA prepares a ‘scorecard’ for each rating agency, which aggregates and scores all known risks.118 The risk assessment for each rating agency scorecard is based on the impact of the rating agency (based on predefined factors and weightings) and on an event-probability-assessment of the likelihood of rating agency regulatory failures and infringements (based on four risk categories – environmental, business model, operational, and governance risk).119 To execute the supervisory action called for by this risk assessment, ESMA deploys an extensive supervisory tool-kit, the diversity of which should also mitigate supervisory risks. The tool-kit includes firm-level tools (such as structured interaction with management, formal letters to management, information requests, risk-mapping undertaken in collaboration with rating agencies to highlight ESMA’s priorities, on-site inspections and interviews, remedial action plans completion of which is monitored by ESMA,120 and, where necessary, enforcement action121), as well as industry-level tools (such as thematic investigations,122 peer comparisons, sector-wide guidelines,123 and targeted Q&As to address compliance difficulties identified in the course of investigations and thematic reviews).124 In practice, ESMA’s execution of its risk-based approach to supervision can be characterised as relying on ongoing monitoring combined with ‘deep dives’ into particular practices or risks at a rating agency or at industry level. Over 2017, for example, ESMA engaged in thematic reviews of how rating agencies were applying its 2016 Guidelines on Review and Validation of Methodologies – a key measure that amplifies the CCRAR’s requirements for rating agencies’ models – and the

116 ESMA, ESMA’s Supervision of Credit Rating Agencies, Trade Repositories and Monitoring of Third Country Central Counterparties 2016 Annual Report and 2017 Work Plan (ESMA80-1467488426-27) (2017) 13. 117 ibid, 13–14. 118 European Court of Auditors, EU Supervision of Credit Rating Agencies – Well Established But Not Yet Fully Effective, No 22 (2015) 23–24. 119 2014 CRA/TR Annual Report, n 113, 12. 120 ESMA regards these remedial action plans as ‘an important supervisory tool’, compliance with which it monitors closely: 2017 ESMA CRA/TR Annual Report, n 107, 29. 121 eg 2016 CRA/TR Annual Report, n 116, 13–14. 122 ESMA has engaged in several industry-wide assessments of particular practices and sectors, including in relation to the rating process, IT infrastructures, smaller rating agencies, the structured finance sector, and sovereign debt ratings. 123 eg ESMA, Guidelines on the Validation and Review of Credit Rating Agencies’ Methodologies (ESMA/2016/1575); and ESMA, Guidelines on Periodic Information to be Submitted to ESMA (ESMA/2015/609). 124 eg, the weaknesses ESMA identified in rating agency compliance with CCRAR rotation requirements led to the adoption of a Q&A to support their consistent application: 2016 ESMA CRA/TR Annual Report, n 116, 30–31.

266 Direct Supervision/Market Intervention CCRAR rules on analyst rotation, and in targeted investigations on the rating process, alongside its ‘day-to-day’ supervision activities.125 ESMA’s supervisory style can also be associated with a productively responsive, proportionate approach to intervention. It is concerned to calibrate its approach for smaller rating agencies126 and does not seek to impose standard operating models on the industry.127 ESMA has also repeatedly underlined that it does not adopt a ‘one size fits all’ approach, but tailors its supervisory actions to the risk at stake.128 A useful example concerns the pivotal Guidelines on Review and Validation of Methodologies. While the guidelines have the potential to be operationally intrusive, they are based on ESMA’s supervisory experience of industry practice, and allow rating agencies some flexibility to depart from ESMA’s ‘expectations’ and explain their reasons.129 Further, in its 2017 thematic review of the guidelines’ application, while ESMA identified weaknesses and divergences in how they were applied, it also acknowledged that methodology validation was an evolving discipline, and that innovative practices and consensus on good practices were still developing.130 There is also an iterative and responsive dimension to ESMA’s supervisory engagement, which includes frequent industry roundtables as well as educational agency-level interactions.131 While this evidence of a purposeful, risk-based, and proportionate/responsive approach to supervision augurs well for effectiveness, so does the consistency that can be associated with ESMA’s approach. ESMA’s supervisory approach is operationalised through a Supervisory Handbook and Manual that supports the internal consistency needed, particularly for a new supervisor. Further, ESMA is displaying an extensive and expanding capacity to collect and interrogate the data on which effective supervision depends. The year 2016 saw the launch of ESMA’s bespoke ‘RADAR’ data system, which manages the collection of a range of supervisory reports from rating agencies and informs supervisory strategy and actions; by 2018 ESMA was reporting on the new tools it had developed to interrogate RADAR and better inform supervision.132 ESMA’s capacity to engage in data-informed supervision is also being strengthened by the reviews of the rating agency sector in which it is required to engage,133 and

125 2017 CRA/TR Annual Report, n 107, 30–31 and 32–35. 126 This concern is repeatedly referenced in its reporting: eg, ibid, 29, reporting on how ESMA communicates with smaller agencies and explains how it applies the CCRAR. 127 ESMA has underlined that its supervisory actions are not intended to harmonise internal control practices and that it accepts that each agency will be organised differently: 2015 ESMA CRA/TR Annual Report, n 113, 16. 128 eg 2017 CRA/TR Annual Report, n 107, 43, noting that it takes into account the ‘urgency, size and complexity and the history of the supervised entity’. 129 The guidelines (n 123) clarify what ESMA ‘typically expects’ as to how the relevant CCRAR requirements for rating agencies’ internal methodologies are to be met, but allow agencies to document their rationale for not using the models ESMA typically expects. The guidelines also emphasise ESMA’s support of expert judgement within firms, the basis of the guidelines in industry good practice, and ESMA’s concern not to interfere with the content of ratings or firms’ ratings philosophies. 130 2017 CRA/TR Annual Report, n 107, 32–33. 131 eg 2015 CA/TR Annual Report, n 113, 16. 132 2017 CRA/TR Annual Report, n 107, 43 and 51. 133 Chief among these its 2015 study for the Commission on the rating agency market: ESMA, Competition Choice and Conflicts of Interest in the Credit Rating Industry (ESMA/2015/1472).

Direct Supervision in Practice: Rating Agencies and Trade Repositories 267 by the legislative reforms that have required ESMA to construct publicly accessible databases.134 ESMA’s approach to supervision also displays an agile quality, evolving over time as ESMA learns from experience. In its first report on supervision, ESMA linked its supervisory activities to learning about the industry,135 and since then it has used its supervisory tools to deepen its industry understanding.136 Similarly, selfevaluation and revision can be associated with ESMA’s approach to supervision.137 Its risk-based model has been repeatedly finessed138 and it has engaged in organisational reform, bringing together its rating agency and trade repository supervisory functions in 2015 to allow for operational synergies and mutual learning.139 ESMA has also refined its supervisory approach, although its commitment to an intrusive approach and to strengthening its role has remained consistent.140 It has, for example, moved from prioritising desk-based oversight of functional compliance by rating agencies to building its supervisory planning around rating agency business models and strategic risks.141 Further, while its initial focus was on addressing structural industry weaknesses as the industry responded to a newly-regulated operating environment, once this ‘groundwork’ was laid ESMA turned to focusing on the quality of ratings and to strengthening its supervisory approach, including through engaging more closely with stakeholders, improving industry reporting, and developing its supervisory tools.142 In addition, as ESMA’s data capacity and understanding of the industry has grown, it has come to focus on the more complex and novel aspects of its supervisory mandate, including the policing of the non-discriminatory pricing obligations placed on rating agencies – its approach to which has been cautious and sensitive to the need for sufficient information to inform supervisory action.143 Most recently, ESMA has focused on Brexit-related contingency planning.144 The extent to which ESMA uses different supervisory tools

134 ESMA hosts the ‘European Ratings Platform’ (ERP), which provides a host of data on ratings, as well as ‘CEREP’, which contains data on rating performance. 135 ESMA noted that being ambitious and setting challenging targets was the right approach to quickly learning about the industry and building a reputation as a proactive and preventive supervisor: 2013 Annual Report, n 112, 24. 136 Its 2015 thematic investigations into the rating process and IT infrastructures were designed to allow ESMA to improve its understanding of the industry: 2015 CRA/TR Annual Report, n 113, 6 and 16. 137 ESMA’s 2016–2020 Strategic Orientation, eg, committed ESMA to continuous evaluation of its supervisory approach: n 114, 16. 138 ESMA’s annual reports on rating agency supervision and its general work programmes repeatedly reference ongoing enhancements of its risk-based supervision model. 139 eg common approaches are being adopted for fee policies and cloud computing: 2016 CRA/TR Annual Report, n 116, 7. 140 ibid, 6 and 13, noting it would further strengthen supervision. 141 ESMA, Work Programme 2017 (ESMA/2016/1419) 24. 142 2016 CRA/TR Annual Report, n 116, 18–19. 143 ESMA, Thematic Report on Fees Charged by Credit Rating Agencies and Trade Repositories (ESMA80196-954) (2018)), setting out the findings and recommendations from an industry thematic review and underlining ESMA’s new capacity to act in this area following improvements in related data-flows. ESMA has indicated, however, that it will consider requiring additional information from rating agencies given the current gaps in its information on fees: 2017 CRA/TR Annual Report, n 107, 45. 144 ESMA Chair Maijoor, Opening Statement, ECON Committee, 2 October 2017 (ESMA22-105-239), reporting on ESMA’s supervisory focus on contingency and disruption planning by CRAs; and 2017 CRA/TR Annual Report, n 107, 44–45, setting out how Brexit would inform ESMA supervisory action over 2018.

268 Direct Supervision/Market Intervention has also developed over time. Industry-wide thematic investigations, which have the advantage of allowing pan-industry benchmarking and identification of systemic risks, are now being used more frequently, as are on-site inspections.145 A similarly nuanced approach can be identified in relation to ESMA’s use of enforcement action. Enforcement is a double-edged sword for ESMA: over-enthusiastic wielding of the enforcement tool could trigger market and related political and institutional hostility, but a timorous approach could lead to charges of ineffectiveness. ESMA appears to have taken a middle way. Four enforcement actions have so far been taken. Three related to failures in the application by rating agencies of the CCRAR rules applicable to sovereign rate debt ratings. In May 2017, ESMA imposed a fine of €1.24 million on Moody’s for publicly disclosing ratings of different supranational entities without having made the required public disclosures on the related methodologies. As ESMA found evidence of negligence, it levied a fine the quantum of which took into account an aggravating factor (in the form of the number of infringements, as well as the period of time over which they took place) as well as a mitigating factor (as measures had been voluntarily taken to ensure no similar future infringements).146 Sovereign debt ratings were also at issue in July 2016, when ESMA imposed a fine of €1.38 million on Fitch for negligent failures to notify a sovereign in advance of its disclosure of a rating downgrade and for related CCRAR breaches concerning disclosure and procedural controls.147 An aggravating factor relating to the length of time over which the infringement persisted and a mitigating factor relating to Fitch’s voluntarily undertaking measures to prevent a future infringement were applied. ESMA’s first enforcement decision in May 2014 also related to sovereign debt and involved the publication of an ESMA ‘public notice’ relating to the erroneous issuance by Standard & Poor’s of an email alert announcing (incorrectly) a downgrade of sovereign debt, which came about because of an entanglement of internal Standard & Poor’s databases that breached the CCRAR. As the infringement was not found to be negligent, the Board of Supervisors could not impose a fine but instead issued a ‘public notice’ as a proportionate supervisory action, which also reflected the voluntary measures undertaken by Standard & Poor’s to bring the infringement to an end.148 ESMA’s only enforcement action outside the sovereign debt sphere to date relates to a series of negligent infringements of CCRAR organisational requirements by DBRS Ratings.149 With four enforcement actions, the charge of unduly limited enforcement action is easy to make out. On the other hand, ESMA is not (and in this regard is like many NCAs) an enforcement-led supervisor; enforcement is only one tool among the

145 In its 2016 report ESMA noted that it would engage in more targeted investigations, increase the number of investigations and inspections, and improve its IT tools: 2016 CRA/TR Annual Report, n 116, 17–18. 146 Decision of the BoS to adopt a supervisory measure and impose fines, 23 May 2017. The failures related to ratings of, inter alia the European Investment Bank, European Stability Mechanism, and European Investment Fund. 147 Decision of the BoS to adopt a supervisory measure and impose fines, 21 July 2016. Fitch failed to allow the Republic of Slovenia the required 12 hours to consider and respond to a sovereign downgrade prior to making it public, and made unauthorised disclosures in relation to the downgrade prior to publication. 148 Decision of the BoS to adopt a supervisory measure taking the form of a public notice, 20 May 2014. 149 Decision of the BoS to adopt a supervisory measure taking the form of a public notice and to impose a fine, 24 June 2015. ESMA imposed a fine of €30,000.

Direct Supervision in Practice: Rating Agencies and Trade Repositories 269 many in its tool-kit. There is also a logic to ESMA’s limited enforcement activities. Enforcement is a resource-intensive tool, and is typically deployed sparingly by regulators as a signalling device and to create deterrent effects.150 Further, frequent enforcement action might, given the novelty of ESMA’s powers, be regarded politically and institutionally as bureaucratic over-reach. The initial concentration of enforcement action on sovereign debt ratings exposed ESMA to the risk of a perceived conflict of interest,151 but the CCRAR procedural controls on enforcement action, along with the sensitivity of the new enforcement process, make it unlikely that any institutional bias was at play. There are certainly weaknesses here. ESMA’s power to impose fines and so create material deterrent effects is limited by the legislative regime, which sets low upper limits on fines, certainly relative to the financial power of the major three rating agencies.152 ESMA appears attuned to the need for enforcement to have dissuasive effects, calling for a strengthening of its fining powers in the form of a turnover-based fines regime and an increase (by a factor of five) of the penalty bands that currently apply.153 It has also called for a closing of current enforcement loopholes by the attaching of specific enforceable infringements to all breaches of the CCRAR, including breaches of the novel ‘fair pricing’ requirements, which are not currently included among the infringements that can ground ESMA enforcement action.154 It has further raised concerns in relation to the procedural restrictions on enforcement, notably the requirement to obtain national judicial authorisation for investigations and inspections in some circumstances, and called for a wider set of administrative sanctions, including the ability to remove persons from management bodies.155 While the Commission has been broadly supportive of reform,156 the cumbersome nature of the legislative reform process underlines the constrained operating environment within which ESMA deploys its supervision powers. That there is room for ESMA to develop as a supervisor of rating agencies is not in doubt. It is still a youthful supervisor, and its approach, models, and procedures are evolving. ESMA’s 2016 Guidelines on Validation and Review of Methodologies, for example, are designed to respond to the 2015 finding by the European Court of Auditors of shortcomings in ESMA’s supervision of methodologies.157 Further, at this

150 See I MacNeil, ‘Enforcement and Sanctioning’ in Moloney at al (eds), n 27, 280. 151 ESMA was called on to be as active in enforcing against infringements of rules on corporate ratings as it was in relation to infringements relating to ratings of the sovereigns that had established ESMA: B Masters, ‘Light-touch regime for rating agencies needs transparency’, Financial Times (3–4 June 2017). Questions were also raised by the European Court of Auditors, which reported that it was not clear why investigations were not carried out into certain high-risk cases: 2015 European Court of Auditors Report, n 118, 7. 152 ESMA has argued that the current penalty limits are inadequate given that the global turnover of the largest rating agencies has been as high as $2.4 bn: ESMA, Letter to the Commission on the EMIR Review and ESMA Sanctioning Powers under EMIR and CRAR, 27 January 2017. 153 2017 Rating Agency Market Report, n 109, 77–78; and 2017 ESMA EMIR Review Letter, n 152. ESMA has suggested that the current upper limit of 20% of turnover should remain, noting the need for proportionality. 154 2017 Rating Agency Market Report, n 109, 77–78 155 2017 ESMA EMIR Review Letter, n 152. 156 COM (2016) 664 (reporting to the European Parliament and Council on aspects of the credit rating agency regime), noting that the current level of sanctions does not seem proportionate to the turnover of large rating agencies and committing to reflecting on reforms (at 18). 157 2015 European Court of Auditors Report, n 118, 7.

270 Direct Supervision/Market Intervention stage it is difficult to assess ESMA’s impact on rating agency compliance, although there appears to be evidence of changed industry behaviour.158 Overall, however, a reasonable case can be made that while ESMA’s technocratic influence is now considerable in this area, it is developing as an effective supervisor, although the rigidity in its procedural operating environment is limiting its freedom of action in relation to enforcement. There are also grounds for optimism as regards legitimacy. ESMA’s operating freedom is confined by the extensive CCRAR rule-book and its administrative rules for rating agencies. The CCRAR also proceduralises ESMA’s supervision and enforcement powers, ESMA’s fee-levying and sanctioning powers are further proceduralised by administrative rules,159 and the reporting requirements for rating agencies are detailed in a series of administrative rules.160 A degree of legitimation is also provided by the reserving of key decisions to the Board of Supervisors, which can check bureaucratic creep and monitor ESMA’s compliance with the CCRAR; while there is little evidence of extensive deliberation, NCAs can challenge and request revisions to ESMA decisions.161 In addition, the ESA Board of Appeal has emerged as a purposeful accountability review forum. In 2014 and 2017 the Board ruled on appeals against ESMA decisions not to register a firm as a rating agency.162 In both cases the Board dismissed the appeal, in so doing allowing ESMA a margin of appreciation163 and reinforcing its authority as a supervisor, ruling that ESMA was not required to correct deficiencies in a registrant’s application procedures or act as an adviser. Nonetheless, the Board established a standard of review for ESMA decision-making164 and subjected ESMA’s decision-making to close review.165 The European Court of Auditors has also emerged as an accountability review forum, engaging in an extensive review of ESMA’s initial experience as a supervisor of

158 ESMA identified its key achievements over the initial 2012–16 period as moving the industry into a regulated space and driving related changes to rating processes and methods; a demonstrable strengthening and redesigning of rating agencies’ internal controls; and a stronger rating agency corporate culture evidenced by better compliance systems: 2016 CRA/TR Annual Report, n 116, 16–17. 159 Commission Delegated Regulation 272/2012 and Commission Delegated Regulation 946/2012. 160 Six Regulatory Technical Standards (RTSs) address the rating agency reporting regime, from registrationrelated reporting requirements, to fee reporting, to the specific reporting requirements for structured finance instruments, to ratings data, and to formats and presentation. 161 As was accepted by the ESA Board of Appeal in rejecting an appellant’s argument that registration decisions were de facto taken by ESMA officers in breach of the legislative scheme, which reserved the registration decision to the Board: Global Private Rating Company “Standard Rating Ltd” v ESMA, Decision 10 January 2014 (BoA 2013–14) paras 86–90. 162 FinancialCraft Analytics Sp. zo.o v ESMA, Decision 3 July 2017 (BoA 2017 01); and Global Private Rating Company ‘Standard Rating Ltd’ v ESMA, Decision 10 January 2014 (BoA 2013–14). Both cases concerned the same firm (re-named) and related to appeals against ESMA refusals to register the firm as a rating agency; the appeals were based on a range of grounds relating to ESMA’s failure to give reasons and to procedural irregularities. 163 In the 2017 Decision the Board noted that in technical matters the decision of ESMA, as a specialist regulator, was entitled to some margin of appreciation: FinancialCraft Analytics, n 162, para 45. 164 Expressed in the 2017 Decision as whether ESMA had correctly applied the law; was entitled to reach a refusal decision; and whether procedural irregularities or unfairness vitiated the decision: ibid, para 45. 165 In the 2014 Decision, eg, the Board examined in detail ESMA’s grounds for refusing registration. Although it found against the appellant overall (finding that the ESMA refusal was, in the whole, fully reasoned), in relation to one registration requirement it found that ESMA was not justified in refusing registration because of the failure in question, and in relation to two others it was not able to come to a decision given limited information.

Direct Supervision in Practice: Rating Agencies and Trade Repositories 271 rating agencies in 2015.166 While this review was broadly supportive, it made a number of recommendations relating to, for example, supervisory procedures and their updating, the documenting of supervisory actions, ESMA’s risk-based supervision model, and the investigation process. The European Parliament is not an active accountability forum here – certainly by comparison with its more engaged approach to ESMA’s regulatory governance powers; there is nonetheless extensive ESMA disclosure to the Parliament, as well as to the Council and Commission, through the different annual reports required of ESMA on rating agency supervision, as well as through specific reports and engagements.167 Accountability is further strengthened by ESMA’s commitment to transparency and to setting objectives and outputs as regards rating agency supervision.168 This was evident in its first report on rating agency supervision, in which ESMA, as a new supervisor, identified questions it was required to ask itself (was it making a difference; what progress was it making against annual work plans and wider objectives; where should it focus its activities; and had rating agency practices and market confidence in rating agencies improved?).169 ESMA has also committed to adopting ‘realistic’ and ‘measurable’ supervisory targets, evaluating its supervisory approach continuously, and conveying ‘clear and honest’ messages on its supervisory measures.170 These appealing questions and commitments could be regarded as astute positioning by a new supervisor but they have been supported by action. ESMA’s annual rating agency supervision reports are rich in detail and are supported by a range of other periodic reports, including ESMA’s general Annual Reports and Work Programmes. ESMA also attempts to identify annual objectives and outputs in its general Work Programmes and in its annual rating-agencyspecific work plans. While these objectives and outputs tend to be generic,171 ESMA has shown an awareness of the difficulties in establishing performance metrics172 and its approach has become more refined over time. A concern for accountability can also be identified in the recurring references to the importance of stakeholder complaints to its supervisory activities.173 There are trade-offs with these legitimation mechanisms, chief among them the operational restrictions posed by the administrative rules that govern ESMA’s 166 See n 118. 167 eg, ESMA, Report to the European Parliament, Council and Commission on Staffing and Resources (2014). ESMA also reports on its supervisory activities in its regular hearings before the European Parliament (ECON Committee). 168 Set out initially in 2013 Annual CRA Report, n 112, 17–18. 169 ibid, 3. 170 Strategic Orientation 2016–2020, n 114, 16. 171 ESMA’s 2018 Work Programme, eg, sets the key objective for rating agency supervision as enhancing the effectiveness and lasting impact of supervisory activities at individual rating agency level, through a risk-based focus on identified supervisory areas, day-to-day supervision, and investigations, as well as registrations and perimeter review; and identifies the main ‘outputs’ as investigations, monitoring, registration, enforcement, and supervisory cooperation: n 16, 23. The 2017 Work Programme took a different approach to a similar objective, identifying ‘outcomes’ as: only registered rating agencies issuing ratings; agencies complying with the spirit of the law as well as its formalities; and a strengthening of ESMA’s reputation through world-leading expertise: at n 141, 24. 172 An early ESMA report noted that there were ‘no obvious metrics’ and that defining and measuring the impact of ESMA’s supervisory activities was a work in progress: 2013 CRA Annual Report, n 112, 5. 173 eg 2017 CRA/TR Annual Report, n 107, 29. ESMA has constructed a template and submission portal for stakeholder complaints.

272 Direct Supervision/Market Intervention e nforcement powers. Nonetheless, there is little evidence, thus far, that the procedural setting has materially weakened ESMA’s effectiveness.

B. Trade Repositories i. Legal Regime and Operating Framework An almost identical operating model applies to ESMA’s supervision of ‘trade repositories’. Under EMIR, ESMA-registered trade repositories (in effect, databanks) are charged with receiving, processing, and providing access to the vast mass of derivatives trade reports that must be made by trading counterparties under the EMIR derivatives reporting regime.174 Over 40 NCAs and central banks access this data through at least one EU trade repository,175 placing trade repositories, and their supervision by ESMA, at the epicentre of the EU’s immense post-crisis data system. ESMA took over the supervision of trade repositories in late 2013, but since then its reach has expanded as EU financial market legislation has widened the role of trade repositories. The 2017 Securitisation Regulation provides for reporting to ‘securitisation repositories’, and when it comes into force in 2019 will extend ESMA’s supervisory reach over the trade repositories who take on this function;176 the 2015 Securities Financing Transaction Regulation (SFTR) has since 2018 required counterparties to securities financing transactions to report required details to SFTR-registered trade repositories;177 while the 2014 MiFIR allows counterparties to fulfil MiFIR transaction reporting requirements by reporting to EMIR-registered trade repositories.178 The EMIR regime governing ESMA’s supervision of trade repositories is closely based on the CCRAR template.179 EMIR charges ESMA with registering trade repositories for the purposes of EMIR’s reporting requirements, and confers on ESMA a suite of supervisory and enforcement powers over registered trade repositories that follow the CCRAR template and empower ESMA to, variously, request information, carry out investigations and on-site inspections, take a range of enforcement actions, and impose financial penalties.180 The operational/procedural devices developed for the CCRAR regime apply, including procedural arrangements governing information requests, investigations, and on-site inspections; enforcement procedures, including investigation by an ESMA Independent Investigation Officer prior to Board of Supervisor

174 EMIR, Art 9 requires that counterparties to derivatives transactions must provide details of any derivative contract they have concluded (and of any modification or termination) to trade repositories. 175 2016 CRA/TR Annual Report, n 116, 56. 176 Regulation (EU) No 2017/2402 [2017] OJ L347/35. 177 The SFTR (Regulation (EU) No 2015/2365 [2015] OJ L337/1) requires that trade repositories be registered with ESMA for the purposes of the Regulation’s reporting requirements, but provides for a truncated registration system where the trade repository is already ESMA-registered under EMIR. ESMA’s EMIR supervisory powers over trade repositories apply to SFTR-registered trade repositories (via SFTR, Art 9). ESMA has reported that several EMIR repositories are expected to register for SFTR functions: 2017 CRA/TR Annual Report, n 107, 8. 178 MiFIR, Art 26. 179 And so is not outlined in substantive detail here. 180 EMIR, Arts 60–74.

Direct Supervision in Practice: Rating Agencies and Trade Repositories 273 decision-making;181 the specification of those EMIR breaches subject to enforcement measures and penalties; criteria governing how fines are set and applied and the related use of aggravating and mitigating factors; and the setting of upper and lower ranges for fines.182 As under the CCRAR regime, additional specification of ESMA’s supervisory powers is contained in administrative rules.183 Here too, accordingly, ESMA supervises within a highly specified and proceduralised operating environment.

ii. Supervision in Action: Technocratic Influence but another Balanced Scorecard? The population of ESMA-registered trade repositories is small, reflecting the structure of the industry. ESMA registered six trade repositories in November 2013, and by the end of 2017 this had increased to only eight.184 Nonetheless, the effectiveness challenges facing ESMA were considerable. ESMA’s supervisory effectiveness here is, as with rating agency supervision, primarily a function of its ability to ensure compliance with the trade repository rule-book through a supervisory approach that is informed by sensitivity to the challenges of supervision, and so is data-informed, responsive and agile, and informed by experience. But effectiveness is also related to ESMA’s ability to navigate the challenges of its EU-level setting and those specific challenges posed by the supervision of EU trade repositories. These were considerable at the outset. EMIR’s insertion of trade repositories into EU financial market governance, along with the related and very extensive reporting requirements it imposed on counterparties to derivatives trades, brought structural change and a tidal wave of reporting and data requirements to the EU market data/reporting industry, as well to the EU financial market generally. ESMA’s initial supervisory efforts were accordingly directed to the major challenge of ensuring that newly-registered trade repositories were ready to manage the massive EMIR data-flows185 and to meet their EMIR regulatory responsibilities in a continuous and effective manner once the EMIR reporting obligations were activated in February 2014.186 ESMA also faced the difficulties generated by an industry that had not previously been regulated to any significant extent, and in which compliance cultures and willingness/readiness to engage with ESMA openly could be weak.187 Further, ESMA was required to supervise a highly dynamic industry: system incidents have been reported repeatedly since 2014 as trade repositories’ systems have

181 ESMA acts through a simple majority vote of the BoS (ESMA Regulation, Art 44). 182 The fines are lower than those that apply to rating agencies, with the upper ranges set at €20,000 and €10,000 for identified infringements. 183 Delegated Acts govern the fees ESMA can impose (Commission Delegated Regulation 1003/2013) and the procedures that apply to the imposition of penalties (Commission Delegated Regulation 667/2014). The many other EMIR administrative rules that apply to trade repositories also govern supervision indirectly, in that they specify, eg, the periodic reports to be made by trade repositories to ESMA and govern the disclosures to be made over the ESMA registration process. 184 2017 CRA/TR Annual Report, n 107, 14. 185 Described by ESMA as ‘new, complex and voluminous’: 2014 CRA/TR Annual Report, n 113, 5. 186 ibid, 4. 187 2016 CRA/TR Annual Report, n 116, 26–27.

274 Direct Supervision/Market Intervention adjusted to the new reporting environment;188 market shocks impact on derivatives trades and so on reporting volumes and related supervisory risks;189 trade reporting volumes are increasing (from an already massive 140 million weekly in mid-2013 to 400 million weekly by end 2017);190 and the nascent industry is experiencing rapid change as trade repositories expand their activities.191 Dynamism is also a feature of the related legislative regime, which has expanded the role of trade repositories and thereby the supervisory challenges. EMIR-registered trade repositories can extend their business models by providing reporting services under the SFTR and for MiFIR-required transaction reports and, from 2019, under the Securitisation Regulation.192 ESMA’s capacity to develop an effective supervisory approach was therefore under scrutiny and stress from the outset. Additional challenges came from the need, less acute under the CCRAR regime, to cooperate with NCAs. ESMA is the exclusive supervisor of trade repositories, but NCAs retain supervisory jurisdiction over the regulated counterparties that report to trade repositories; careful communication and cooperation between NCAs and ESMA was accordingly required. Finally, the highly technical, specialist, and data-driven nature of trade repository a ctivity193 demanded of ESMA a very significant technical capacity to interrogate the vast and complex data-streams in and out of trade repositories. The demands on ESMA’s ability to build an effective supervisory approach that would respond to this challenging operating environment were therefore considerable. Alongside these distinct challenges were those common to ESMA-located direct supervision generally, including a delicate political and institutional environment and the constraints imposed by a restrictive procedural framework. Initial indications suggest an ESMA capacity to develop an approach to trade repository supervision that can cope with strain and develop in a purposeful and intrusive manner,194 but which is also technically informed, responsive, and agile, auguring well for ESMA’s effectiveness. ESMA’s supervisory approach for trade repositories follows the risk-based approach it applies to rating agency supervision.195 Supervision of both sets of actors is carried out within a single Supervision Department and in accordance with a uniform supervisory methodology designed to build synergies and support 188 Over 2017, eg, ESMA reported on high volumes of incorrect reports following a regulatory change. These subsequently receded as trade repositories made the required system ‘fixes’: 2017 CRA/TR Annual Report, n 107, 18. 189 ESMA closely monitored trade repository resilience following the UK Brexit referendum, given the risk of volatility in derivatives markets and related pressure on reporting volumes and on trade repositories’ capacity to cope: ibid, 31. 190 2014 CRA/TR Annual Report, n 113, 36; and 2017 CRA/TR Annual Report, n 107, 14. 191 ESMA has repeatedly reported on industry change and on the risks arising from the expansion of trade repositories’ activities and changes to the structure of competition: eg 2017 CRA/TR Annual Report, n 107, 15 and 21. 192 Market actors are also using trade repositories to fulfil their reporting requirements under the EU’s wholesale energy market regime – the REMIT Regulation (Regulation (EU) No 1227/2011 [2011] OJ L326/1)). 193 ESMA has described trade repositories as ‘technology-based market infrastructures’: 2017 CRA/TR Annual Report, n 107, 23. 194 ESMA’s most recent 2017 report, eg, notes its ongoing efforts to ensure IT ‘fixes’ to trade repository data quality weaknesses and its reprioritisation of its supervisory plans in response to specific data incidences that required ‘immediate attention’: ibid, 16 and 18. 195 ibid, 43. It is based on a host of data sources, including the immense trade repository data-set, periodic reports from trade repositories, incident reporting, complaints, and ESMA’s application of key risk indicators: 2014 CRA/TR Annual Report, n 113, 42.

Direct Supervision in Practice: Rating Agencies and Trade Repositories 275 supervisory learning.196 The same supervisory tool-kit, including communication with senior management, investigations (entity-level and thematic), on-site inspections, and guidelines and other soft-law measures,197 is also used.198 Additionally, ESMA engages in a host of bespoke supervisory actions relating to the direct observation, monitoring, and testing of data quality, and also suggests calibrations to the extensive reporting rules, standards, and templates that govern EMIR reporting to trade repositories.199 Further, ESMA engages with a range of affected stakeholders, which allows it to embed the complaints data essential to responsive assessment of trade repository data quality into its risk assessment model.200 It has also displayed a capacity to build a resilient and flexible ESMA/NCA cooperation network, which supports the development of a holistic approach to data reporting by ESMA-supervised trade repositories and by the NCA-supervised counterparties that provide trade reports.201 The technically-informed and responsive approach associated with ESMA’s risk-based approach to rating agency supervision can also, therefore, be identified here, as can a similar ESMA concern to increase its technical understanding of the industry202 and of relevant risks.203 So too can an agile ESMA capacity to strengthen its supervisory approach as it learns from experience. ESMA has, for example, developed its IT tools, enhanced its supervisory approach,204 strengthened and expanded its investigations and inspections, enhanced the periodic disclosures required from trade repositories, and enhanced the cooperation framework that governs its NCA interactions.205 Further, its approach has evolved along with the trade repository sector. During the start-up phase of EMIR trade repository activity, ESMA was concerned with monitoring trade repository readiness and with detecting and addressing early difficulties, chief amongst them the initial blockages that arose as counterparties sought access to trade repositories and NCAs sought access to trade repository data.206 Since then, ESMA’s major focus has been on

196 2016 CRA/TR Annual Report, n 116, 17–18. 197 Chief among them the pivotal EMIR Q&A (ESMA70-186194180-52), which includes a great number of questions relating to trade repositories and reporting requirements. 198 eg 2014 CRA/TR Annual Report, n 113, 6 and 36–37. 199 The related administrative rules (set out in Commission Delegated Regulation 148/2013 and Commission Implementing Regulation 1274/2012) were revised in 2017 on foot of an ESMA proposal. 200 ESMA’s annual reports on trade repository supervision contain extensive accounts of industry engagements and repeatedly refer to the importance of complaints (for which ESMA has set up a dedicated portal). 201 From the outset, ESMA was concerned to ensure its supervisory actions regarding trade repository data quality were undertaken in cooperation with the NCAs who supervise reporting counterparties: 2014 CRA/ TR Annual Report, n 113, 5. 202 eg 2016 CRA/TR Annual Report, n 116, 26–29. 203 While risks to data quality are consistently at the core of ESMA’s trade repository supervisory activities (eg 2017 CRA/TR Annual Report, n 107, 18–21), over time and in response to risk assessments, ESMA has added additional risks, in relation to the governance, strategic plans, and financial resources of trade repositories as well as data security (eg 2016 CRA/TR Annual Report, n 116, 54–55). More recently, Brexit contingency planning has informed its supervisory approach: ESMA Chair Maijoor, Opening Statement, ECON C ommittee, 2 October 2017 (ESMA22-105-239). 204 2017 ESMA Work Programme, n 141, 25. 205 2016 CRA/TR Annual Report, n 116, 6 and 17–19. 206 ESMA reported on problems across the trade repository sector with the ‘onboarding’ of reporting counterparties to trade repositories and with NCAs seeking data access, and on its related remedial action: 2014 CRA/TR Annual Report, n 113, 33.

276 Direct Supervision/Market Intervention data quality,207 in relation to which it is displaying a significant technical capacity to drive trade repository improvements,208 including through its Data Quality Action Plan;209 NCA coordination;210 the adoption of related guidelines and data validation metrics;211 supervisory action,212 including systems and data testing;213 and the construction of a new ESMA-based data portal, which facilitates NCA access to trade repository data (the TRACE system). ESMA is also using its unique sight across the entire pan-EU derivatives market data-set to identify defects in regulatory reporting requirements and drive remedial action.214 The evidence also suggests a significant ESMA capacity to respond in an agile manner to unforeseen events215 and to develop new supervisory tools.216 Enforcement action has been limited, as can be expected given ESMA’s focus on stabilising the new derivatives market reporting system and on embedding compliance and behavioural change through supervisory action. Only one enforcement action has been taken, relating to a failure by a trade repository to provide NCA access, which derived from systemic system and procedural failures within the trade repository.217 ESMA has identified its supervisory achievements here as including significant changes to trade repository systems and software,218 significant improvements in data quality,219 gradual improvements in trade repository internal controls, and greater integration in the sector of compliance functions.220 Self-reporting must be treated with some care. But there are reasonable grounds for suggesting that while ESMA is now, through its supervision of trade repositories, sitting at the epicentre of a systemically important data ecosystem and can exert material technocratic influence, it is building the capacity to ensure that trade repositories comply with their rule-book, and developing a related supervisory approach which is technically-informed, responsive, 207 Data quality recurs as a major supervisory priority across all ESMA’s annual reports and work plans on trade repositories. 208 While care must be taken with self-evaluation by ESMA, its 2017 Report noted sustained improvements in data quality: 2017 CRA/TR Annual Report, n 107, 18. 209 The Plan was adopted in September 2014 in conjunction with NCAs. 210 The Plan is to be implemented by ESMA and by NCAs to ensure consistent data quality disciplines apply across reporting counterparties and trade repositories. 211 ESMA has adopted templates that set out the technical validation requirements for the data reported to trade repositories: available at https://www.esma.europa.eu/policy-rules/post-trading/trade-reporting. 212 eg, in 2015, ESMA, following a major investigation, found that a large number of trades were not reconciled across the different trade repositories, and engaged in remedial supervisory action: 2015 CRA/TR Annual Report, n 113, 32–33; and 2016 CRA/TR Annual Report, n 116, 23. 213 2015 CRA/TR Annual Report, n 113, 7. 214 ESMA has noted its ‘unique position’, from which it can survey the whole market and identify inconsistencies: 2016 CRA/TR Annual Report, n 116, 55. 215 ESMA has constructed an ‘incidents data-base’ and regularly responds to reported incidents with supervisory action: ibid, 22. 216 ESMA has, eg, developed a ‘book of work’ in which trade repositories report to ESMA in a standardised manner on the scope, time, and progress of ongoing and planned IT projects, which allows ESMA to track how trade repositories are developing and applying the many ‘fixes’ necessary on an ongoing basis to ensure data quality: 2017 CRA/TR Annual Report, n 107, 24–25. 217 Decision by the BoS to adopt a supervisory measure taking the form of a public notice and to impose a fine, 3 March 2017. A fine of €64,000 was imposed on DTCC Derivatives Repository Limited for negligently failing to put in place systems capable of providing NCAs with direct and immediate access to derivatives trading data. 218 2015 CRA/TR Annual Report, n 113, 37. 219 2017 CRA/TR Annual Report, n 107, 18. 220 2016 CRA/TR Annual Report, n 116, 8 and 16–17.

NCA-Oriented Supervision 277 and agile. There are some frictions arising from the dense proceduralisation of ESMA’s trade repository powers, but they have not as yet emerged as material constraints on ESMA, although ESMA has described the enforcement process as ‘very heavy and slow’.221 It has also called for an increase in the range of fines; a loosening of procedural restrictions, including the need to obtain permission from national courts for on-site inspections; and for an expansion of its supervisory tool-kit.222 The Commission has proved amenable to increasing fines but, and reflecting Meroni and related political/institutional sensitivities, has not been convinced of a need to expand ESMA’s supervisory tool-kit or to liberate it from the jurisdiction of national courts.223 From the legitimation perspective, there are few indications of material difficulties. Broadly the same legitimating mechanisms as apply to rating agency supervision apply here, although the Board of Appeal has yet to act as an accountability forum. Reporting is extensive, with a wealth of supervisory information disclosed in ESMA’s Annual Reports and Work Plans. These reports also support accountability by setting objectives and outputs for trade repository supervision – even if these are, so far, generic in nature.224 Overall, ESMA’s approach to trade repository supervision provides a reasonable basis for suggesting that, as with rating agency supervision, it will develop as an effective supervisor and that its legitimation framework is adequate.

V. NCA-Oriented Supervision: Breach of EU Law, Binding Mediation, and Emergency Conditions A. Breach of EU Law (Article 17) and Binding Mediation (Article 19) i. The Legal Regime In what was regarded over the ESA negotiations as a significant ratcheting up of the EU’s oversight of NCAs, Article 17 of the ESMA Regulation empowers ESMA to act either where NCAs do not apply the ESMA Regulation Article 1(2) rule-book, which defines the scope of ESMA’s activities,225 or where NCAs breach this rule-book, in particular by failing to ensure financial market participants comply with the rule-book. ESMA is empowered under Article 17 to undertake investigations, make recommendations to NCAs, and ultimately address binding decisions to market participants.226 Article 17

221 ESMA, EMIR Review Report No 4 (ESMA/2015/1254) 26. 222 ibid, 24–32; and 2017 ESMA EMIR Review Letter, n 152. 223 The Commission’s 2017 proposal to revise EMIR addresses only an increase in penalties and an expansion of the specified infringements against which enforcement action can be taken: COM (2017) 208. 224 ESMA’s 2018 Work Programme simply noted as an objective for trade repository supervision the enhancement of the effectiveness and lasting impact of its supervisory activities, and listed as outputs investigations, monitoring, registration, supervision, and supervisory cooperation: n 16, 23–24. 225 Art 1(2) covers, in effect, EU financial market legislation and its administrative rules. See ch 1. 226 ESMA acts through a simple majority vote of the BoS (ESMA Regulation, Art 44).

278 Direct Supervision/Market Intervention also proceduralises the process. ESMA can investigate alleged NCA breaches on its own initiative, or following a request by an NCA, the European Parliament, Commission, Council, or its Stakeholder Group. An NCA under investigation must provide ESMA with all the information ESMA deems necessary.227 Not later than two months after initiating the investigation, ESMA may issue a ‘recommendation’ to the NCA setting out the remedial action needed to comply with EU law; the NCA must inform ESMA of the steps it has taken (or intends to take) to ensure compliance with EU law within 10 days of its receipt of the recommendation. Where the NCA has not complied with EU law within one month of receipt of this recommendation, the Commission’s enforcement powers are engaged.228 The Commission may, either after notification by ESMA of the NCA failure or on its own initiative, within three months of ESMA’s original recommendation to the NCA in question and at its own discretion, issue a ‘formal opinion’ requiring the NCA to take the necessary remedial action to comply with EU law. Where the Commission issues such a formal opinion it must take into account ESMA’s earlier recommendation. The NCA in question must then inform the Commission and ESMA within 10 days of receipt of the formal opinion of the steps it has taken (or intends to take) to comply. Where an NCA does not comply with this formal opinion (within the time set by the opinion), ESMA’s binding powers engage.229 It is empowered to impose an individual decision addressed to a financial market participant, requiring it to take the necessary action to comply with its obligations under EU law, including the cessation of any practice, but only where timely remedying of non-compliance is necessary to maintain or restore neutral conditions of competition in the market, or to ensure the orderly functioning and integrity of the financial system. Further conditions apply: the relevant EU measure must be within ESMA’s scope of action and be directly applicable, and the ESMA decision must be in conformity with the Commission’s earlier formal opinion. Any such ESMA decision prevails over any previous NCA decision on the same issue. ESMA must report on NCA (and financial market participant) failures to comply in its Annual Report to the Commission, Council, and Parliament. Article 17 accordingly does not empower ESMA to impose a binding decision on an NCA, but it does empower ESMA to impose such decisions on financial market participants, where the required conditions are met. Article 19 is a more intrusive power, as it empowers ESMA to impose binding mediation decisions on NCAs. Where an NCA ‘disagrees’ (not defined) about the procedure or content of an action or inaction of another NCA and in relation to the ESMA-scope rule-book, ESMA, at the request of one or more of the relevant NCAs, may assist those NCAs in reaching an agreement in accordance with the Article 19 mediation procedure; this process can lead to ESMA’s imposing a binding mediation decision. Own-initiative action by ESMA is constrained. ESMA may only mediate on its own initiative where this is provided for in relevant sectoral financial market legislation and where, based on objective criteria, ‘disagreement’ (the nature of which is 227 This refinement was added by Directive 2014/51/EU [2014] OJ L153/1. 228 Treaty on the Functioning of the EU (TFEU), Art 258. 229 At the same time, the Commission can pursue enforcement action under Art 258 TFEU against the NCA in question – ESMA’s Art 17 powers are without prejudice to the Commission’s enforcement powers under Art 258.

NCA-Oriented Supervision 279 not specified) between NCAs can be determined. ESMA’s general empowerment to mediate and the related procedure are set out in Article 19, but the binding mediation procedure is incorporated in many sectoral financial market measures, typically in relation to failures of home NCA supervision, NCA failures to cooperate, and NCA failures to exchange information, as well as in more specific situations where NCAs might struggle to reach agreement where agreement is required under the legislation in question.230 Binding mediation has also been embedded within the procedures governing colleges of supervisors. EMIR provides for binding mediation by ESMA where there is a failure of college decision-making, as does the 2016 Benchmark Regulation.231 The Article 19 procedure that governs binding mediation requires ESMA to set a time limit for conciliation and to act as a mediator throughout this conciliation period.232 Where the NCAs fail to agree during this period, ESMA may take a decision requiring the NCAs to take specific action or to refrain from action in order to settle the matter, with ‘binding effects’ for the NCAs concerned, in order to ensure compliance with EU law – the specific conditionality in relation to competition/market integrity/ market functioning, which governs the binding Article 17 power to direct financial market participants, does not apply. Article 19 decision-making is prepared by an independent panel of the Board of the Supervisors,233 which is to facilitate an impartial settlement and to propose a mediation decision for Board adoption (the Board then acts (usually) under a simple majority (Article 41(2) and (3) and Article 44(1)).234 ESMA can also address a binding decision to a financial market participant – where an NCA does not comply with the ESMA binding mediation decision and thereby fails to ensure that a financial market participant complies with directly applicable rules within ESMA’s scope of action235 – requiring the action necessary so that the participant complies with its EU law obligations, including the cessation of any practice. These ESMA decisions prevail over any previous decisions adopted by the NCAs on the same matter. Again, the specific conditionality in relation to competition/market integrity/market functioning, which governs the Article 17 power to direct financial market participants, does not apply. The sensitivities engaged by ESMA’s Article 19 powers are evident from the Article 38 fiscal check, which allows Member States to overrule ESMA’s Article 19 d ecisions.

230 Including in the case of NCA failure to agree on MiFIR transparency waivers and exemptions; NCA failure to agree on ‘accepted market practices’ under the 2014 Market Abuse Regulation (EU) No 596/2014 [2014] OJ L173/1 (MAR); and objections by NCAs to the exercise of precautionary powers by host NCAs under the Prospectus Regulation: MiFIR, Arts 4, 7, and 9; MAR, Art 13; Prospectus Regulation, Art 37. 231 EMIR, Art 17; and 2016 Benchmark Regulation, Art 34. 232 ESMA must take into account the relevant rules in dispute and the complexity and urgency of the issue when setting the time limit: Art 19(2). 233 Composed of the Chairperson and two BoS members who are not representatives of the NCAs concerned and who have neither any interest in the conflict nor direct links to the NCAs concerned: Art 41(2). 234 The simple majority vote requirement does not apply where the Panel’s decision concerns an NCA acting as a consolidating supervisor (and so responsible for group supervision). Here, a simple majority decision can be overridden by BoS members representing a blocking minority in votes, in accordance with Art 16(4) TEU. 235 Art 19 notes that such ESMA action is without prejudice to the powers of the Commission to take enforcement action under Art 258 TFEU where an NCA fails to ensure that a financial market participant complies with directly applicable EU law.

280 Direct Supervision/Market Intervention rticle 38 requires ESMA to ensure that no mediation decision it takes impinges in A any way on the fiscal responsibilities of Member States, and sets out procedural protections for the Member States. Where a Member State considers that an ESMA binding mediation decision ‘impinges on its fiscal responsibilities’, the decision is suspended on the Member State’s notification (within two weeks of ESMA’s notification of its Article 19 decision to the NCA) of ESMA and of the Commission that the ESMA decision will not be implemented by the NCA; the Member State must ‘clearly and specifically’ explain why and how the Article 19 decision impinges on its fiscal responsibilities. Within one month of this notification, ESMA must inform the Member State whether it maintains its decision, or whether it amends or revokes it. Where the decision is maintained or amended, ESMA must state that fiscal responsibilities are not affected. A Council override procedure activates where ESMA maintains the decision: the Council may, by a simple rather than the more usual qualified majority, and within two months of ESMA’s review of the Article 19 decision, decide whether the ESMA decision is to be maintained, and may terminate it.

ii. Articles 17 and 19 in Action: Limited Technocratic Influence but Effectiveness Strains? At present, ESMA’s approach to Articles 17 and 19, the influence it can exert with these tools, and the nature of any effectiveness and legitimation challenges are matters of speculation, as ESMA has yet to act against an NCA using these powers. In theory, these powers allow ESMA to act in a hierarchically superior manner over NCAs, and so represent a significant ratcheting up of ESMA’s soft supervisory convergence powers. ESMA’s approach to Articles 17 and 19, however, is best characterised by reticence – which can be associated with a range of factors including a lack of appropriate cases, textual ambiguities, litigation risk, astute ESMA positioning, and conflicts of interests relating to the location of Article 17 decision-making within the Board of Supervisors. But while a reticent approach by ESMA has attractions in terms of stable ESMA/NCA relations, and while a muscular and entrepreneurial approach could generate risks to legitimation and effectiveness were ESMA to drill too deeply into NCA autonomy, ESMA’s reticence also has the potential to generate legitimation and effectiveness risks. The legitimation of Article 17 and Article 19 ESMA decisions seems, in principle, to be reasonably secure. The conditions that govern the powers are prescribed in the ESMA Regulation, and exercise of the powers has been further proceduralised through bespoke ESMA rules of procedure (discussed below). The CJEU and the Board of Appeal have jurisdiction over decisions in this area, and are emerging as accountability fora (as will be discussed further). The form of legitimation that can be provided by the Board of Supervisors is also engaged, as NCA contestation can act as a check on any expansionist tendencies or bureaucratic creep, and thereby support output legitimation as well as a degree of national and/or peer/transnational accountability. Board contestation can also, however, subvert the intentions of the co-legislators and so weaken ESMA’s legitimacy in this area. Similarly, effectiveness risks arise here. ESMA’s Article 17 and 19 powers are designed to drive stronger NCA supervisory convergence and cooperation, and to ensure NCA

NCA-Oriented Supervision 281 compliance with and consistent application of the single rule-book. Effectiveness is therefore a function of ESMA’s capacity as a supervisor to identify appropriately, reflecting its mandate, when and how it should act and to take action accordingly. These powers are not, however, straightforward to deploy: ESMA’s ability to wield Articles 17 and 19 depends on the willingness of the Board of Supervisors to proceed against peer NCAs, and is thus vulnerable to conflict of interest risks. a. Article 17 Prior to the 2017/2018 reform waypoint, the full Article 17 procedure had not been deployed by ESMA, generating some concern.236 It is reasonable that ESMA protects its resources, is sensitive to potentially obstructive disruptions to Board of Supervisors dynamics, and protects its discretion to act against an NCA. Nonetheless, the absence of action is marked. The reticence with which ESMA engages with Article 17 is evident from its ‘Decision on Article 17 Rules of Procedure’ (adopted by the Board of Supervisors), which implicitly characterises Article 17 as a discretionary and last-resort tool that sits at the apex of a convergence-based model for supervisory coordination and is to be deployed in unusual circumstances. The Decision237 covers the procedures to be followed by persons requesting Article 17 action by ESMA and those to be followed by ESMA; the process governing Article 17 investigations – which are carried out by the ESMA Chair; and the process that applies when Article 17 recommendations are to be made to an NCA. It also governs the process relating to any Article 17 decisions to be imposed on financial market participants, and sets out the monitoring and publication procedures that govern ESMA action under Article 17. The sensitivity of Article 17 for NCAs is clear from the Decision. It impliedly acknowledges the inherent conflict of interest faced by NCAs in this area, reserving the investigatory process and decisions relating to its opening/closure to the ESMA Chair. The ESMA Vice-Chair (an NCA),238 however, can object to the Chair’s determinations; any such objection requires the Chair to review the relevant determination, and in practice it would likely be difficult for the Chair to proceed with an investigation where there was a clear signal of unhappiness from the NCA Vice-Chair. Ultimate decision-making authority, reflecting Article 17, lies with the Board of Supervisors. Following the investigation, the Chair submits any recommendation for action to the Board, along with the response from the relevant NCA

236 Over the 2013–14 ESA Review, the Commission noted the limited use of Art 17 but did not propose specific remedial action (2013–2014 Commission ESA Review Report, n 25, 6 and 10). The European Parliament, however, suggested that the location of decision-making within the Board was creating an obstruction, and called for the ESAs to have enhanced investigatory powers: European Parliament, Resolution with Recommendations to the Commission on the ESFS Review, 11 March 2014 (P7_TA(PROV)(2014)0202) paras AR-AV and Annex, sections on ‘Supervisory Cooperation and Convergence’ and on ‘Enhanced Powers’. 237 Decision of the BoS, Rules of Procedure on Breach of Union Law Investigations (ESMA/2012/BS/87rev), most recent version 5 July 2017. The three ESAs apply the same Decision and agree on its content. 238 Conflict-of-interest rules govern the replacement of the Vice-Chair where necessary.

282 Direct Supervision/Market Intervention (which must be given the opportunity to respond). The Board can then agree to address a recommendation to the NCA concerned.239 The Decision applies high threshold criteria to requests for ESMA to take Article 17 action. Any person requesting ESMA to take action must set out a ‘clear grievance’ explaining the breach, and inadmissibility criteria apply.240 Where the request is found to be admissible, the Chair may still, on a discretionary basis, close a request for Article 17 action, taking into account the criteria that govern the Chair’s discretion and which allow the Chair significant leeway to decide not to proceed with an investigation.241 The Chair’s ability to compel information from NCAs under investigation is limited; the Chair may request information from the NCA (as provided for by A rticle 17), but does not have the power to compel the provision of information. Despite these procedural restrictions, Article 17 is not treated as a dead letter by the Decision. The procedures cover, for example, requests for Article 17 action from persons other than those having standing to do so (the Council, Commission, and European Parliament, along with other NCAs and the ESMA Stakeholder Group), providing that ESMA may take own-initiative Article 17 action which takes into account such a third party request, and clarifying that those requesting Article 17 action do not have to show a formal interest or that they are principally and directly concerned by the alleged breach. ESMA also facilitates such third party requests for action through a dedicated web portal. The Decision exposes, nonetheless, ESMA’s difficulties in applying Article 17 effectively. While the different threshold criteria allow ESMA to ensure that it does not become swamped with frivolous or minor Article 17 requests that could drain resources or seriously disrupt Board dynamics, a high bar must be cleared before the Chair can take investigation action, and the Chair cannot compel an NCA to provide information for the purposes of an investigation. The review process that legitimates ESMA Article 17 action has displayed a concern to bolster ESMA’s effectiveness, but it also allows ESMA significant procedural leeway by protecting its discretion not to act. ESMA’s claiming of extensive discretion over the Article 17 process was implicitly validated by the ESA Board of Appeal and the CJEU over the course of the European Banking Authority-related (EBA-related) SV Capital litigation. The Board of Appeal first examined an appeal against an EBA determination not to take Article 17 enforcement action (against the Finnish and Estonian NCAs),

239 The BoS also takes the relevant decision where the Chair’s recommendation includes that a decision be imposed on financial market participants. 240 Art 17 Decision, Annex I. 241 Art 17 Decision, Annex II. The ‘negative investigation factors’ (against the taking of investigation action) are: the request is more suitable to be dealt with by another actor (including NCAs or national courts/ complaint schemes); the request is more suitable to be dealt with by other means, such as peer review, mediation, or guidelines; the request appears frivolous or vexatious; or the grievance does not relate to a clear and unconditional obligation imposed on the NCA. The ‘positive investigation factors’ (in favour of investigation action) are: the alleged breach undermines the foundations of the rule of law (eg, systematic infringements/ breaches of human rights or fundamental freedoms); it concerns a repeated or systematic infringement, or a general policy approach by the NCA; and the alleged breach may have a significant, direct impact on ESMA’s objectives.

NCA-Oriented Supervision 283 f ollowing a request by the appellant that EBA take enforcement action related to alleged supervisory failures concerning the branch of a Finnish bank in Estonia.242 This appeal turned on the admissibility of the appellant’s initial request to EBA to take Article 17 action: the Board of Appeal decided that this request to EBA was admissible and returned the case to EBA for decision.243 The Board of Appeal underlined, however, that the Article 17 power was discretionary, that EBA, as a small body, was not in a position to investigate every admissible complaint, and that, following the correct application of its discretion, EBA was empowered not to take action even where the request was formally admissible.244 A further appeal was then made to the Board of Appeal following EBA’s subsequent determination not to proceed with Article 17 action,245 which was also dismissed by the Board. While it found that the EBA determination not to proceed under Article 17 was reviewable by the Board as a reviewable ‘decision’,246 the Board ruled that the EBA ‘decision’ was an own-initiative action (as the appellant did not have standing to request Article 17 action), EBA had not been in error in deciding not to proceed, that the decision to proceed was discretionary, and that EBA had not erred in the application of its discretion and there were no procedural defects.247 The Board also found that EBA’s failure to give the appellant the opportunity to respond to its ‘decision’ not to proceed was not a procedural defect that invalidated the decision.248

242 SV Capital OÜ v EBA, Decision 24 June 2013 (BoA 2013-008). See further ch 2 on the Board of Appeal. 243 EBA had rejected the appellant’s initial request for Art 17 action on the ground that the request was inadmissible as there was no breach of EU law by the NCAs concerned. The Board upheld the admissibility appeal, finding that the relevant EU rules could have imposed supervisory obligations on NCAs. 244 SV Capital OÜ, n 242, paras 30 and 34. 245 EBA found there were insufficient grounds to initiate Art 17 action: EBA Decision C 2013 002. 246 EBA/ESMA/EIOPA Regulations, Art 60 allows any natural or legal person to appeal to the Board of Appeal against a ‘decision’ taken by an ESA (under Arts 17–19 or otherwise in accordance with relevant EU financial law), where that decision is addressed to the person or where the decision, although addressed to another person, is of direct and individual concern to that person. EBA argued against the admissibility of this appeal and the earlier appeal, arguing in each case that the relevant EBA action in relation to Art 17 was own-initiative EBA action, albeit informed by the complaint, and that the outcome of its internal deliberations on whether to take Art 17 action was not a ‘decision’ appealable by a party who draws attention to the potential breach of EU law. The Board of Appeal took an expansive view of Art 60, finding that the EBA Art 17 determination amounted to a ‘decision’ for the purposes of Art 60. Similarly, in its only other case so far on Art 17, the Board of Appeal (in an appeal from an ESMA determination not to proceed with Art 17 action following a complaint made by a company against the Luxembourg NCA for breach of the prospectus regime – ESMA determined that the complaint was better dealt with by another person or body) found that the determination by ESMA not to proceed was a ‘decision’ that could be appealed under Art 60. ESMA had argued that, in line with CJEU jurisprudence, an annulment action (ESMA argued the appeal against its determination not to act was similar to annulment action under Art 263 TFEU) could only be taken against a binding decision. In this case, ESMA had simply notified the appellant of the outcome of an internal deliberation on whether ESMA would exercise its discretionary power under Art 17. The Board of Appeal disagreed that CJEU jurisprudence on admissibility would automatically apply, underlining that the Board fulfilled a function different from that of the CJEU, and found that the ESMA determination not to take action was a ‘decision’ that could be appealed under Art 60 as, inter alia, it related to Art 17 and was ‘in substance’ a decision under Art 17. It dismissed the appeal on other grounds, finding that the appellant could not show standing for the purposes of Art 60: Investor Protection Europe Sprl v ESMA, Decision 10 November 2014 (BoA 2014 005). 247 SV Capital OÜ v EBA, Decision 14 July 2014 (BoA 2014-C-02). 248 Art 39 of the EBA/ESMA/EIOPA Regulations requires the ESAs to give addressees of decisions the opportunity to express their views.

284 Direct Supervision/Market Intervention In the subsequent action before the General Court of the EU for annulment of the EBA and the Board of Appeal decisions (under Article 263 TFEU),249 the Court took a restrictive view of the complainant’s rights and was accommodating of ESA d iscretion. It dismissed the action concerning the EBA Article 17 ‘decision’ as time-barred, but it also ruled that EBA’s refusal to initiate Article 17 action, on foot of a request by a party which did not have procedural rights (the party was not one of the actors competent to request EBA to take action under Article 17), where the action in question was discretionary, was not a ‘decision’ open to annulment action under Article 263 TFEU. The Court further found that the Board of Appeal had not been competent to hear the appeal as it did not have jurisdiction, in effect overruling the Board’s approach to reviewable ‘decisions’.250 The contested EBA ‘decision’ was not an Article 17 ‘decision’ (it did not address Article 17 action to an NCA or financial market participant), and also did not relate to the sectoral financial rules within EBA’s scope of action, and so fell outside the decisions reviewable by the Board under EBA Regulation, Article 60. On appeal, the European Court of Justice agreed with the General Court.251 The EU Courts have accordingly taken some pains to protect internal ESA determinations not to act under Article 17 from Article 263 TFEU annulment action, but also from Board of Appeal review. Prior to the 2017/2018 reform waypoint there were no reports of ESMA Article 17 action and some evidence of Board of Supervisor wariness,252 although the Board had nonetheless engaged in some preliminary Article 17 fact-finding.253 Following the 2015 shift to greater prioritisation of supervisory convergence, ESMA began to show increased appetite for Article 17 action,254 while EBA’s increasingly interventionist approach began to create supportive conditions for ESMA to take action in appropriate circumstances.255 Further, pressure for ESMA to deploy the Article 17 tool intensified with the CMU agenda, which urged wider use of Article 17 as an investigatory and enforcement tool.256 By 2017 and as the ESA Review unfolded, ESMA was b ecoming

249 Case T-660/14 SV Capital OÜ v EBA (ECLI:EU:T:2015:608). 250 See n 246. 251 Case C-577/15 P SV Capital OÜ v EBA (ECLI:EU:C:2016:947). 252 BoS discussions note, eg, NCAs’ concern to confirm the inapplicability of Art 17 to soft Art 16 guidelines (Minutes, 19 March 2014 (ESMA/2014/BS/60) and for extensive fact-finding and legal analysis to be undertaken before any Art 17 action is commenced (Minutes, 19 March 2015 (ESMA/2015/BS/59) and 24/25 June 2015 (ESMA/2015/BS/140)). 253 During 2015 the BoS discussed whether the imposition by an NCA of passporting fees on a fund could amount to a breach of EU law, although the discussions also emphasised the importance of intensive fact-finding: eg, BoS, Minutes, 24/25 June 2015, n 252. 254 ESMA’s 2016–2020 Strategic Orientation noted that ESMA would enhance its Art 17 procedures to support supervisory convergence (n 114, 14), while its 2017 Supervisory Convergence Work Programme linked Art 17 to ESMA’s supervisory convergence activities and noted its ‘readiness’ to pursue Art 17 action if necessary (n 141, 24), as did the 2018 Work Programme (n 16, 9). 255 Towards the end of 2017 EBA reported on its closure of an Art 17 investigation into the Dutch banking NCA (for failure to comply with the EU capital rules applicable to certain own-account traders) following remedial action by the NCA, and noted its intention to monitor the NCA’s follow-up actions: EBA, Press Release, 6 December 2017. EBA took more assertive action later in 2018, adopting a Recommendation under Art 17 to the Maltese Financial Intelligence Analysis Unit on the action necessary to comply with EU anti-money-laundering rules, following an Art 17 investigation that found a series of supervisory shortcomings as regards the application of the relevant EU rules (EBA/REC/2018/02, 11 July 2018). 256 2015 CMU Green Paper, n 63, 22.

NCA-Oriented Supervision 285 more assertive, calling for enhancements to its ability to take Article 17 action.257 Resistance from NCAs remained considerable, however.258 ESMA’s reticence regarding Article 17 can be associated with a host of different factors, including the chilling effect of litigation risk, which is not inconsiderable given the open-ended and ambiguous nature of some of the conditions that apply and the political contestation that attends ESMA’s direct powers; procedural obstructions, including to the gathering of information by ESMA from NCAs; uncertainties relating to execution and enforcement, particularly as regards the power to impose decisions on financial market participants; risks to credibility were an NCA to defy an ESMA decision; and conflicts of interests associated with Board of Supervisor d ecisionmaking. More positively, ESMA’s reticence can also be associated with ESMA’s development of effective supervisory convergence tools and a related lessening of pressure for Article 17 action. Whatever the reason, and a composite one is likely, ESMA’s reticence does not yet represent a major effectiveness challenge. Wilful breaches of EU law by NCAs are unlikely to represent a threat to supervisory quality in the EU, and a more adversarial ESMA/NCA relationship could prejudice ESMA’s mandate. An evolutionary, supervisory convergence-driven approach is likely to be more effective in addressing supervisory difficulties than more radical but disruptive ESMA interventions. Most attention recently has focused on alleged supervisory failures by the Cypriot NCA in relation to the CfD online selling scandal, which broke during 2015. While ESMA was called on to take Article 17 action against the Cypriot NCA, it adopted a convergence-driven approach, which led to the Cypriot NCA, supported by an ESMAcoordinated Joint Group of NCAs, taking more intrusive supervisory action in relation to the scandal, including enforcement action.259 Divergences in supervisory judgements as to how rules apply have the potential to be more troublesome, but these are addressed (if shakily) by Article 19. Nonetheless, the failure so far to deploy Article 17 somewhat undermines the political intentions that shaped the Article 17 power and weakens ESMA’s legitimacy. Further, there are limits to the extent to which supervisory convergence tools such as peer review, even if imaginatively and assertively applied, can prompt NCA remedial action, particularly in relation to longstanding and deep-seated poor supervisory practices. Supervisory convergence tools can also struggle where competitive interests are strong – Article 17 has, accordingly, become freighted in the Brexit context.260

257 ESMA, Response to the 2017 ESA Consultation (ESMA03-173-194) (2017) 5–6. ESMA also underlined its inability to take Art 17 action directly against financial market participants where the EU law in question was not directly applicable (ie was in the form of a directive): 2017 ESMA CMU Mid-Term Review Response, n 81; and ESMA, Statement to European Parliament Petitions Committee, 17 July 2017 (ESMA43-318-752) (noting that this limitation meant it could not take direct action against the Cypriot firms associated with the scandal that erupted on the online sale of CfDs). 258 The French NCA, eg, argued that while supervisory convergence was a major challenge, the fostering of a common culture and practices, and not enforcement, was the better way to achieve it: Response to the 2017 ESA Review, available at https://ec.europa.eu/info/consultations/public-consultation-operations-europeansupervisory-authorities_en. 259 2017 ESMA Parliament Petitions Committee Statement, n 257. 260 Commission, Consultation on the Operations of the European Supervisory Authorities (2017) 6–7, identifying stakeholder support for greater reliance on Art 17 as a means for driving stronger supervisory convergence.

286 Direct Supervision/Market Intervention b. Article 19 ESMA’s approach to Article 19 has evolved in a similarly tentative manner. Given ESMA’s power to direct NCAs, sensitivities are strong here, although NCAs retain a large degree of control over the gateway to binding mediation. In addition, different NCA interpretations and applications of EU law can reflect longstanding regulatory approaches as well as competitive advantages, and may not be easily amenable to binding mediation. Further, it is not always clear when binding mediation is available. The nature of a ‘disagreement’ is unclear, as is whether ESMA can under Article 19 replace an NCA decision taken by means of a legitimate exercise of NCA discretion. Some interpretations of Article 19 have suggested that it applies solely where one NCA is in breach of EU law, and that it only allows an ESA to establish the breach and set out the conditions with which the ESA must comply to remedy the breach; wider discretionary judgement by the ESAs, under this interpretation, would breach the Meroni ruling.261 On the other hand, Article 17 addresses breach, such a limited interpretation would render Article 19 ineffective, and Article 19 can be regarded as being necessary to allow ESMA to break through cases of supervisory deadlock.262 Support for a restrictive interpretation of Article 19, however, comes from the 2014 Single Resolution Mechanism Regulation,263 Article 95 of which amends the EBA Regulation to provide that EBA’s Article 19 powers cannot apply to national resolution authorities where these authorities exercise discretionary powers or make policy choices. Prior to the 2017/2018 reform waypoint, binding mediation had been proceduralised by ESMA,264 but ESMA had engaged in only one mediation case and had not imposed an Article 19 decision.265 The 2013–14 ESA Review reported on stakeholder concern as to the limited use of Article 19, and as to the potentially chilling effects of Article 19’s textual ambiguity and of the Board of Supervisors holding decisionmaking power.266 Nonetheless, the unwieldiness of Article 19 does not, as yet, appear to have caused significant difficulties for ESMA. Article 19 did not feature heavily in the 2017 ESA Review, although it reported on calls for binding mediation to be deployed more widely.267 The need for ESMA to deploy the binding mediation tool effectively is, 261 This interpretation is supported by rec 32 of the ESMA Regulation, which was inserted towards the end of the ESA negotiations to allay the fears of some Member States that the ESAs would be empowered to exercise extensive supervisory discretion and to displace NCA judgement. Recital 32 provides that in cases where the relevant EU law confers discretion on NCAs, decisions taken by ESMA under Art 19 cannot replace the exercise of that discretion in compliance with EU law. 262 EBA Chair Enria accordingly called at an early stage for a clarification of the ESA Regulations to remove textual ambiguities: Speech on ‘The Single Market after Banking Union, 18 November 2013. 263 Regulation (EU) No 806/2014 [2014] OJ L225/1. 264 Decision of the BoS, Rules of Procedure of the Mediation Panel (ESMA41-137-1007) (the rules were originally adopted in 2012 and revised in 2017). The rules cover the conciliation and decision-making phases, non-binding mediation, and related publication and monitoring procedures. They also include conflicts of interest management procedures to ensure that the independent ESMA Mediation Panel, which proposes decisions for BoS adoption, is independent of the NCAs in question. 265 Noted in BoS, Minutes, 28 September 2016 (ESMA/BS/259). Here again, EBA has been something of a path-finder, adopting its first binding mediation decision in April 2018, albeit in the specific context of bank resolution: EBA, Decision of EBA on the Settlement of a Disagreement, 27 April 2018. 266 2013–2014 Commission ESA Review Report SWD, n 25, 13. The Commission committed to examining how greater clarity could be achieved: 2013–2014 Commission ESA Review Report, n 25, 7. 267 Commission, Feedback Statement on the Public Consultation on the Operations of the European Supervisory Authorities (2017) 6.

NCA-Oriented Supervision 287 however, intensifying. Prior to the 2017/2018 reform waypoint the binding mediation tool was being used by the Commission to support new EU supervisory governance initiatives, notably the empowerments proposed for ESMA to engage in binding mediation within the colleges for coordinating CCP recovery and resolution under the 2016 CCP Recovery and Resolution Proposal. In a material change from how binding mediation is currently used within CCP colleges, the Proposal provides that one NCA could call for binding mediation, by contrast with the two-thirds NCA majority required for CCP college mediation under EMIR.268 c. Strengthening Articles 17 and 19 The 2017 ESA Proposal seeks to strengthen Article 17 and Article 19 in two ways: first, procedural refinements are proposed, which would strengthen ESMA’s investigatory powers under Article 17 and clarify when Article 19 can be used; second, and more materially, the reforms propose that decision-making would be moved from the Board of Supervisors to a new bureaucratic Executive Board. The context for and implications of these reforms are considered in section VIII of this chapter.

B. Article 18 – Emergency Conditions Article 18 governs ESMA’s emergency powers. Reflecting the significant contestation on its design, Article 18 operates within a constrained procedural framework. ESMA’s freedom to act is constrained by the need for prior action by an EU institution: ESMA’s powers here are triggered where the Council determines that an ‘emergency situation’ exists, through a decision addressed to ESMA. The trigger factor is accordingly controlled by the Council, although the Council must take this decision in consultation with the European Systemic Risk Board (ESRB) and the Commission and, ‘where appropriate’, the ESAs. Where an emergency has been declared, ESMA’s Article 18 emergency powers are activated, but only where a second condition is met: exceptional circumstances must arise, where coordinated action by national authorities is necessary to respond to adverse developments that may seriously jeopardise the orderly functioning and integrity of financial markets, or the stability of the whole or part of the financial system in the EU. ESMA is not granted the wide-ranging powers the emergency context might suggest. It may adopt individual decisions requiring NCAs to take the necessary action, in accordance with the pre-existing Article 1(2) rule-book, to address ‘any such developments’ by ensuring that NCAs (and financial market participants) comply with the relevant rule-book measures. ESMA may also, where the relevant EU rules are directly applicable to financial market participants, adopt an individual decision addressed to a financial market participant, requiring the necessary action to comply with that participant’s obligations under the rule(s) in question, including the cessation of any practice. The Article 18 power only applies where the NCA in question does not 268 COM (2016) 856, Arts 12, 15, and 18. This lower threshold was supported by ESMA: Statement by ESMA Chair Maijoor on Recovery and Resolution of CCPs to the European Parliament ECON Committee, 22 March 2017, noting that the lower threshold was appropriate in light of the EMIR CCP college experience.

288 Direct Supervision/Market Intervention apply the relevant rule(s), or applies them in a way that appears to be a manifest breach of those rules, and where urgent remedial action appears to be necessary to restore the orderly functioning and integrity of financial markets or the stability of the whole or part of the EU financial system. Any such decision adopted by ESMA prevails over a previous decision adopted by the NCAs on the same issue. A fiscal check applies, like that for Article 19 (albeit with shorter time limits and other calibrations to take into account the acute context in which Article 18 operates). ESMA can also (under Article 9(5)) take temporary services/product intervention action if required in the case of an Article 18 emergency situation and in accordance with the Article 18 conditions on emergency action. The potential use by ESMA of Article 18 featured heavily in early 2011–12 Board of Supervisor discussions over a period when the EU financial market was rocked by the euro area convulsions.269 But its relevance to ESMA’s ability to exert influence has become increasingly doubtful. It is designed to apply in acute conditions, but in the event of a major market crisis intervention will likely be a function of coordinated NCA action, in accordance with the now extensive EU rule-book governing crisis management and which includes rules governing short selling, major disruptions to liquidity, and dislocation in the derivatives markets (under the Short Selling Regulation, MiFID II/MIFIR, and EMIR, respectively).

VI. Exceptional Intervention: Short Selling, Product/Services Intervention, and Intervention in the Commodity Derivatives Market A. Legal Framework i. Short Selling The first exceptional intervention powers to be conferred on ESMA (under the 2012 Short Selling Regulation) were directly related to the financial crisis and the febrile political, institutional, and market conditions then obtaining. The political decision to confer exceptional intervention powers on ESMA was taken during the negotiations on the ESAs’ establishment. At the instigation of the European Parliament, an enabling clause (Article 9(5)) was added to the ESAs’ founding Regulations permitting the ESAs to temporarily prohibit or restrict financial products or services, once the specific power was conferred in relevant sectoral legislation (or in Article 18 emergency conditions). Subsequently (but anticipated by the Article 9(5) negotiations) a specific power for ESMA to intervene temporarily in relation to short selling was conferred under the 2012 Short Selling Regulation. This empowerment, which sits alongside similar powers conferred on NCAs, requires ESMA to take temporary direct action concerning short selling once the relevant threshold conditions (noted below) are met, either by requiring natural or legal persons who have net short positions in relation to a specific financial

269 See

n 72.

Exceptional Intervention 289 instrument or class of financial instrument to notify an NCA or to disclose to the public details of any such positions; or by prohibiting or imposing conditions on the entry by these persons into a short sale or a similar transaction.270 While far-reaching and prevailing over any previous action taken by an NCA, ESMA’s powers are less expansive than those available to NCAs, which include powers to intervene in relation to sovereign debt credit defaults swaps271 (which achieve similar economic effects to short selling for sovereign debt and which are excluded from ESMA’s powers, reflecting political sensitivities arising from the potential impact of such intervention on sovereign borrowing costs). A series of procedural requirements apply under Article 28, including that the ESMA measures can only be valid for three months, following which time they must be renewed (for another three months each time – each renewal is subject to the conditions that apply to the original decision to act) or automatically expire. Advance notification of NCAs is required, as is NCA notification once the ESMA measure is adopted, the ESRB (and other relevant authorities where appropriate) must be consulted, and public disclosure must be made of the measure imposed.272 The obligation on ESMA to intervene is subject to extensive conditionality under Article 28, which is designed to reflect Meroni as well as the political and institutional sensitivities. ESMA ‘shall take a decision’ only if the relevant measure addresses a threat to the orderly functioning and integrity of financial markets, or to the stability of the whole of part of the financial system in the EU, and there are cross-border implications.273 It must also be the case either that no NCA has taken measures to address the threat, or that one or more NCAs have taken measures that do not adequately address the threat. In addition, before taking action ESMA must take into account the extent to which the measure ‘significantly addresses’ the threat to the orderly functioning and integrity of financial markets or to the stability of the whole of part of the financial system in the EU, or ‘significantly improves’ the ability of NCAs to monitor the threat; does not create a risk of regulatory arbitrage; and does not have a detrimental effect on the efficiency of financial markets, including by reducing liquidity in those markets or by creating uncertainty for market participants disproportionate to the benefits of the measure. These conditions are similar to but more demanding than those that apply to NCA action.274 270 2012 Short Selling Regulation, Art 28. As with the parallel NCA powers, the ESMA measures may be limited to particular circumstances or be subject to exceptions, including for market-making activity and primary market activities. 271 2012 Short Selling Regulation, Arts 19, 21, and 23. 272 The disclosure (on ESMA’s website) must specify the relevant measure(s) and include ESMA’s reasons for intervening and the related supporting evidence. 273 Commission Delegated Regulation 918/2012, Art 24(3) specifies the threats that can lead to action as: any threat of serious financial, monetary, or budgetary instability, concerning a Member State or the financial system within a Member State, when this may seriously threaten the orderly functioning and integrity of financial markets or financial stability; the possibility of default by any Member State or by supranational issuers; incidences of serious damage to physical structures or infrastructures that may seriously affect crossborder markets; and serious disruption to payment systems. 274 NCAs’ powers are set out under 2012 Short Selling Regulation, Arts 18–26, and amplified in Commission Delegated Regulation 918/2012. The administrative rules governing the existence of a ‘threat’ that justifies NCA action (Delegated Regulation 918/2012, Art 24(1)), eg, provide NCAs with more extensive grounds for intervention, including solvency difficulties in a financial institution and substantial selling pressure on the institution’s financial instruments. ESMA action, by contrast, is tied to default by Member States and supranational issuers only, and does not cover specific incidences of selling pressure on financial institutions (Art 24(2)).

290 Direct Supervision/Market Intervention ESMA has yet to deploy these powers – a reticence that can be associated with the restrictive requirements, more stable market conditions since 2012, intervention by NCAs in relevant circumstances, and the adoption by ESMA of a series of related opinions on such NCA actions, which have allowed it to influence NCA decision-making.275 ESMA’s reticence can also be associated with some material legal uncertainty. In June 2012, the UK launched a challenge to ESMA’s Article 28 power, chiefly based on the power’s breach of the conditions that apply to any delegations of powers to ESMA. In February 2014, the Court rejected the challenge, finding, inter alia, that ESMA’s executive discretion was appropriately confined in accordance with Meroni, and underlining the importance of the power to the support of financial stability, as well as the technical capacity ESMA brought to EU financial system governance.276 While some degree of legal certainty has been brought to bear, the powers remain sensitive ones and have yet to be activated.

ii. Product Intervention ESMA’s exceptional temporary intervention powers were expanded by the 2014 MiFID II/MiFIR reforms, which confer direct intervention powers on ESMA to temporarily prohibit or restrict the distribution of financial instruments and/or financial activities or practices. These powers were negotiated in much less febrile circumstances than the short selling powers, and can be associated with a more substantive policy evolution – the adoption of a more precautionary and interventionist approach to retail investor protection over the MiFID II/MiFIR negotiations.277 ESMA’s temporary intervention powers sit alongside the similar powers MiFID II/MiFIR confers on NCAs to prohibit or restrict the marketing, distribution, or sale of certain financial instruments (or financial instruments with specified features)278 or structured deposits, or of a type of financial activity or practice, subject to the meeting of a series of threshold conditions (MiFIR, Article 42); unlike ESMA, NCAs can act on a permanent basis.279 ESMA may temporarily prohibit or restrict in the EU the marketing, distribution, or sale of certain financial instruments (or financial instruments with specified features), or of a type of financial activity or practice (Article 40). It may only act if all of the

275 See further ch 4. 276 See n 42. See further ch 2. 277 Discussed further in N Moloney, ‘The Investor Model Underlying the EU’s Investor Protection Regime: Consumers or Investors?’ (2012) 13 European Business Organisation Law Review 169. 278 The instruments within the scope of the power are those covered by the very wide definition of ‘financial instruments’ under MiFID II/MiFIR: MiFID II, Art 4(1)(15). 279 In summary, under MiFIR, Art 42 the NCA must be satisfied ‘on reasonable grounds’ that the financial instrument/structured deposit/activity/practice gives rise to ‘significant’ investor protection concerns, or to a ‘threat’ to the orderly functioning and integrity of markets or to the stability of the whole or part of the financial system within at least one Member State; existing EU regulatory requirements do not sufficiently address the risks and the issue would not be better addressed by improved supervision or enforcement; the action is proportionate (taking into account the risks, the level of sophistication of the investors/market participants concerned, and effect of the measure on them); the NCA has consulted NCAs in Member States that may be significantly affected; and the action does not have a discriminatory effect.

Exceptional Intervention 291 three threshold conditions are met: the proposed action addresses a ‘significant’ investor protection concern, or a ‘threat’ to the orderly functioning and integrity of financial markets or commodity markets or to the stability of the whole or part of the financial system in the EU;280 regulatory requirements under EU law applicable to the financial instrument or activity/practice do not address the threat; and an NCA or NCAs have not taken action to address the threat, or the action taken has not adequately addressed the threat.281 ESMA may act on a precautionary basis (before the financial instrument/ activity/practice is marketed, sold, or distributed) once these conditions are met. ESMA must also ensure that the action does not have a detrimental effect on the efficiency of financial markets or on investors that is disproportionate to the benefits of the action; does not create a risk of regulatory arbitrage; and has been taken following consultation with relevant public authorities in the case of action relating to commodity derivatives. A series of procedural requirements are also specified by MiFIR: ESMA must inform NCAs of any proposed action; publish notification on its website of the decision; and review the action at appropriate intervals and at least every three months282 – if the action is not renewed after that three-month period, it expires. Action by ESMA is hierarchically superior to NCA action: any ESMA measure prevails over any previous action taken by an NCA. In a classic articulation of the Meroni principle, but also reflecting the political and institutional sensitivities, an immensely detailed set of administrative rules governs ESMA’s powers.283 As required by the MiFIR mandate for these rules, they specify the criteria and factors to be taken into account by ESMA in determining whether there is a significant investor protection concern or market functioning/integrity/stability threat, including in relation to: the complexity of the instrument, activity, or practice in question; the type of clients engaged; the size of the potential detrimental consequences; the degree of innovation of the instrument, activity, or practice at issue; and the leverage the relevant instrument, activity, or practice provides.284 These administrative rules are prescriptive, in that the different criteria and factors specified apply cumulatively: ESMA must assess the relevance of all the identified criteria and factors, and take them all into consideration in determining whether the conditions relating to significant investor protection concern and market functioning/stability/integrity threats are met. ESMA may, however, determine the existence of significant investor protection concern or a market functioning/stability/integrity threat as required under MiFIR based on only

280 Although ‘significant’ does not govern the required ‘threat’ to market stability/integrity/functioning before ESMA can act, the administrative rules that govern ESMA action suggest that the existence of such a ‘threat’ would require the existence of ‘greater concern’ than the ‘significant’ concern which is a prerequisite for the investor protection condition: Commission Delegated 2017/567, rec 18. 281 The investor protection/market stability/market integrity/market functioning conditions are crafted in slightly looser terms for NCAs under MiFIR Art 42, as they must be satisfied on reasonable grounds that the instrument or practice/activity gives rise to the conditions or threats, while ESMA action under MiFIR Art 40 is conditional on the proposed action’s addressing the concern or threat. 282 NCAs, by contrast, are not required to review their action at regular intervals, although they must revoke the action if the threshold conditions no longer apply: MiFIR, Art 42(6). 283 These administrative rules are almost identical to those that apply to NCAs, albeit that the governing legislative conditions are looser for NCAs. 284 Commission Delegated Regulation 2017/567, Art 19.

292 Direct Supervision/Market Intervention one of the criteria/factors.285 The criteria and factors are specified in a highly detailed manner and are further atomised into sub-criteria and factors.286 These powers received their first test very shortly after their coming into force and in relation to the pan-EU outbreak of mis-selling of complex CfDs and similar products during 2015–17.287 In June 2017, ESMA gave its first indication that it would exercise its new MiFIR powers to address the mis-selling risks of such products once MiFIR came into force in January 2018.288 ESMA confirmed its appetite for intervention over December 2017 and January 2018, but took a cautious approach, engaging first in a related Call for Evidence on the proposed intervention.289 The Board of Supervisors subsequently decided to adopt its first ever MiFIR Article 40 intervention measures in March 2018. The path-breaking measures (which were closely based on the proposals trailed in the January 2018 Call for Evidence and which were subsequently formally adopted by the Board as regulatory acts (Decisions) of general application in May 2018) imposed a series of temporary restrictions on the marketing in the EU of CfDs to retail investors, and imposed a temporary prohibition on the marketing of binary options to retail investors.290 This first application of the Article 40 power represents a material extension of ESMA’s influence and an important staging-post in its evolution as a supervisor, but augurs well. ESMA’s justification for acting underlines the acuteness and cross-border nature of the risk required before Article 40 action will be taken: for example, ESMA highlighted that very high losses were associated with these products, reporting that 74–89 per cent of retail investor accounts were typically losing money on these investments, and that these highly complex investments had become available and were marketed across several jurisdictions – having previously been marketed only to niche client sectors – and were raising concerns across a ‘large number of NCAs’.291 ESMA’s intervention suggests nonetheless a purposeful commitment to taking action where deemed necessary.292 Further, the two Decisions were based on extensive data

285 Ibid, Art 19(1). Recital 19 reinforces this direction, explaining that the need to assess all the criteria or factors should not prevent the power’s being used by ESMA where only one of the criteria or factors leads to the concern or threat. 286 The Art 19 financial instrument ‘complexity’ criteria, eg, require ESMA to consider the type of underlying or reference asset and its transparency; the degree of transparency of costs and changes; the complexity of the performance calculation, taking into account how the return is constructed; the nature and scale of any risks; the bundling of the instrument, where relevant; and the complexity of any terms of conditions: Art 19(2)(a). 287 Over 2015–17, aggressive online marketing by certain Cypriot investment firms of CfDs to retail investors led to investor losses, a swathe of complaints, and to concerns across affected NCAs and within ESMA. ESMA’s initial reaction took the form of supervisory convergence action (see further ch 4). 288 ESMA, Product Intervention, General Statement, 30 June 2017 (ESMA35-36-885). 289 ESMA, Statement on Preparatory Work in relation to CfDs and Binary Options offered to Retail Clients, 15 December 2017 (ESMA71-99-910); and ESMA, Call for Evidence on Potential Product Intervention Measures (ESMA35-43-904) (2018). 290 ESMA, Additional Information on the Agreed Product Intervention Measures relating to Contracts for Differences and Binary Options, 27 March 2018 (ESMA35-43-1000). The two related Decisions were formally adopted by the Board on 22 May 2018 – ESMA Decision (EU) 2018/795 (the prohibition on binary options) and ESMA Decision (EU) 2018/796 (the restrictions on CfDs) – and were to be applied from 2 July (binary options) and 1 August (CfDs). 291 March 2018 Agreed Product Intervention Measures, n 290, 2. 292 ESMA acted in the face of considerable industry resistance. One of the Europe’s largest online trading platforms, eg, set up a web platform from which customers could protest against the reforms, which generated

Exceptional Intervention 293 assessment;293 reflected a concern for proportionality (as required under MiFIR, Article 40);294 showed responsiveness;295 and were signalled well in advance to the industry, which was also given time to prepare for the restrictions.296 The measures also augur well for ESMA/NCA relations as regards this intrusive and potentially disruptive power. Their apparently smooth and speedy adoption by the Board of Supervisors implies that NCAs see centralised action through ESMA as a useful device where appropriate conditions arise, and not as a threat to their autonomy,297 while ESMA, for its part, indicated its concern to work in tandem with (and not impose measures on) NCAs and to reflect their experience.298

iii. Commodity Derivatives Markets Temporary powers to intervene in the commodity derivatives markets are also conferred on ESMA by MiFIR. These powers relate to the new MiFID II/MiFIR regime for commodity derivatives markets, which is designed to execute the crisis-era G20 commitment to address the excessive commodity price volatility then generating policy concern.299 ESMA’s powers are not specific to commodity derivatives but apply to all derivative positions, although the regime focuses on the risks and features of commodity derivative markets. Where the relevant threshold conditions are met, ESMA must take one or more of the following measures: directly request all relevant information regarding the size or purpose of a position or exposure entered into via a derivative from any person; require any such person to reduce the size of or to eliminate the position or exposure; and, ‘as a last resort’, limit the ability of a person to enter into a commodity

some 14,600 responses: H Murphy, ‘Europe Market Watchdog Hits Retail Trading Platforms with Tough New Rules’, Financial Times (27 March 2018). 293 Clear from the very extensive discussion of the justifications for the measures in the recitals to the two formal Decisions (n 290); the March 2018 Board agreement to take action (March 2018 Agreed Product Intervention Measures, n 290, 5–10); and the earlier January 2018 Call for Evidence (n 289), which referenced, eg, internal ESMA modelling as well as ESMA analysis of investor returns and of data provided by NCAs. 294 ESMA did not, eg, include warrants and ‘turbo-certificates’ in the CfD restrictions despite their similarities to CfD products, although it noted that it would closely monitor such products (March 2018 Agreed Product Intervention Measures, n 290, 4–5), and placed a complete prohibition on binary options only. 295 ESMA warned that it would continue to monitor the sector, and particularly the marketing of CfDs incorporating crypto-currencies, and would adopt further measures where necessary: ibid, 5. 296 The January 2018 Call for Evidence set out in detail a series of potential restrictions on CfD sales (including leverage limits and triggers requiring a firm to close out a retail investor’s position to avoid losses exceeding the original investment) and a full prohibition on binary options. These were subsequently agreed by the Board in March 2018 and formally adopted in May 2018, but did not apply until July and August 2018, respectively. ESMA also produced an explanatory Q&A (ESMA35-36-1262). 297 The UK Financial Conduct Authority (FCA), one of the pioneers of product intervention powers in the EU, had earlier noted its support for ESMA’s consideration of potential intervention action and signalled that any permanent action it would take in the future would take into account any related temporary measures adopted by ESMA: FCA, Statement on ESMA’s Ongoing Work on Possible Product Intervention Measures, 15 December 2017. 298 In its June 2017 statement on how it might use MiFIR Art 40, ESMA referenced the different measures already taken at national level as a potential basis for action (n 288), while its December 2017 statement (n 289) noted that it would take into account measures adopted or consulted on by NCAs in developing its approach. 299 The new obligations imposed on market participants and the new powers for NCAs are set out in MiFID II, Arts 57–58 and Art 69.

294 Direct Supervision/Market Intervention derivative (this last power applies to commodity derivatives only) (MiFIR, Article 45). These measures all take precedence over any related measure adopted by an NCA. ESMA ‘shall take a decision’ only if the measure addresses a threat to the orderly functioning and integrity of financial markets, including commodities derivatives markets, or to the stability of the whole or part of the financial system in the EU, and if an NCA or NCAs has not taken measures to address the threat, or the measures taken have not sufficiently addressed the threat. ESMA must also ensure that the measures taken meet a set of further conditions.300 Highly detailed administrative rules specify further the conditions that apply to these powers.301 Measures can only be temporary in nature, and ESMA must also notify the relevant NCAs before imposing or renewing302 any measures. ESMA has yet to take action under Article 45.

B. Effectiveness and Legitimacy Strains? ESMA’s three sets of exceptional intervention powers cover different forms of temporary action and serve different purposes: the short-selling powers are primarily addressed to financial stability; the product/activities/practices intervention powers have a strong consumer protection orientation; and the commodity derivative powers are designed to address the pricing and stability risks specific to these markets. They have been shaped by different political/institutional preferences, as well as by different technical, contextspecific requirements. But they are all novel and contestable powers,303 designed to apply temporarily in exceptional circumstances, with potentially far-reaching and unforeseen effects, and with the capacity to strengthen significantly ESMA’s technocratic influence. The path-breaking 2018 exercise of the MiFIR product intervention powers aside, there is little evidence on how ESMA will approach these powers, or of the nature of the influence it will come to exert as a result. Nonetheless, sitting at the frontier of ESMA’s current supervisory powers in terms of their ability to shape markets and create third party effects, and applicable in exceptional circumstances which are by definition rare, volatile, and contingent, they require appropriate legitimation. ESMA’s ability to act effectively also matters, particularly given the novelty of 300 The action must ‘significantly address’ the threat to the orderly functioning and integrity of financial markets, including commodity derivatives markets, or to the stability of the EU financial system (or part thereof), or significantly improve the ability of NCAs to monitor the threat; not create a risk of regulatory arbitrage; and not have the following detrimental effects on the efficiency of financial markets, disproportionate to the benefits of the measure – reduce liquidity in financial markets, restrain the conditions for reducing risks directly related to the commercial activity of a non-financial counterparty, or create uncertainty for market participants. ESMA must also consult with the Agency for the Cooperation of Energy Regulators (ACER) where the action relates to wholesale energy products, and with the public bodies responsible for the oversight, administration, and regulation of physical agricultural markets where the measure relates to agricultural commodity derivatives. 301 Commission Delegated Regulation 2017/567, Art 22. 302 Measures must be reviewed at appropriate intervals and at least every three months. Where a measure is not renewed, it expires automatically. Renewal decisions are subject to the same conditions as apply to the original decision. 303 The administrative rules governing ESMA’s MiFIR Art 40 powers generated significant stakeholder concern that ESMA should treat these powers as a ‘last resort’ and as subsidiary to other EU measures: ESMA, Technical Advice on MiFID II/MiFIR (ESMA/2014/1569) 189.

Exceptional Intervention 295 these powers and their potential impact on the EU financial market, as well as on ESMA/NCA relations. In terms of legitimation, ESMA action here sits within the general legitimation framework examined in chapter 2, including the form of legitimation the location of decision-making within the Board of Supervisors provides (these powers are exercised by NCAs on the Board under a qualified majority vote).304 All three sets of intervention powers, which can only be used on a temporary basis, are also subject to detailed conditionality and proceduralisation. In addition, a number of institutions are emerging as accountability fora: the UK challenged the validity of ESMA’s short-selling powers before the CJEU, while the European Ombudsman has shown an appetite for examining ESMA’s MiFIR product intervention powers, as has the European Parliament’s Petitions Committee.305 Further, distinct environmental frictions support legitimation by putting a brake on ESMA bureaucratic creep: given the untested nature of these powers, and as their use is linked to the management of heightened risks, they pose reputational and credibility risks to ESMA. While legitimation appears reasonably secure, it is harder to assess effectiveness. In this context, effectiveness can be related to ESMA’s ability to deploy these novel powers in a manner that, given the uncertainties and the acute context in which they apply, is data-informed, responsive and agile, and also proportionate; effectiveness also relates to ESMA’s ability to address the specific challenges that flow from the EU setting of these powers, including the intensive conditionality and proceduralisation, and the need to avoid disrupting the ESMA/NCA relationship but to act appropriately where required in the EU interest. There are some threats to effectiveness. The extensive conditions that apply, while legitimating, might be regarded as risking ESMA paralysis – but these conditions are designed to reflect the exceptional nature of the powers and, particularly given ESMA’s privileged access to relevant market data (discussed in chapter 4), are unlikely to obstruct action where action is required. Certainly, the 2018 deployment of the MiFIR Article 40 powers does not seem to have been obstructed by the administrative rules that govern these powers. The nested ESMA/NCA design of the three sets of intervention powers also augurs well for ESMA’s effectiveness. In all three cases, NCAs have equivalent powers at national level, the use of which they must notify to ESMA, and ESMA is empowered to adopt opinions on NCAs’ use of these powers306 – ESMA is well-equipped accordingly to draw on NCA experience and manage NCA concerns. As discussed above, ESMA’s first use of the MiFIR Article 40 power suggests that while ESMA intervention is likely to be exceptional, a data-informed, agile and responsive, and proportionate approach can be expected – but these powers remain at a very early stage.

304 ESMA Regulation, Arts 9(5) and 44. 305 In a ruling related to ESMA’s supervisory convergence actions concerning the CfD mis-selling scandal, the Ombudsman found that a complaint against ESMA was not made out, in part as ESMA had coordinated supervisory action by NCAs, but reserved the right to inquire further into the matter if ESMA did not take appropriate follow-up action: Decision of the European Ombudsman No 485/2016/REC, 7 February 2017. ESMA also appeared before the European Parliament’s Petitions Committee to explain the action it had taken in relation to the scandal: ESMA, Statement, European Parliament Committee on Petitions, 17 July 2017. 306 See further ch 4.

296 Direct Supervision/Market Intervention

VII. The 2017/2018 Reform Waypoint (1): CCP Supervision and the ‘European Supervisory Mechanism’ A. The Reform Waypoint The three recent proposals to reform ESMA’s supervisory powers presented over 2017/2018 form a waypoint in ESMA’s development. But this waypoint must be approached with caution. Together, the proposals – the 2017 CCP Supervision Proposal, the 2017 ESA Proposal, and the 2018 Crowdfunding Proposal307 – suggest that a material strengthening of ESMA’s direct supervision powers may be on the horizon. But they do not suggest that a diversion of ESMA from its current evolutionary trajectory is imminent; they represent incremental if somewhat more punctuated change within a policy framework and preference setting that continues to privilege supervisory convergence – the different reforms fall short of tilting ESMA markedly in the direction of a single financial market supervisor. Certainly, the proposed reforms indicate a markedly greater tolerance, at least in the Commission, for ESMA to exercise direct supervision powers, and they evidence the extent to which ESMA has become embedded in EU financial market governance. But they do not suggest a major resetting of the preferences that have shaped ESMA’s development. In particular, there is little evidence that political wariness regarding the conferral of direct supervisory powers on ESMA is receding significantly, although it is difficult to predict how Brexit might shape political preferences. The reforms also serve different technical needs and objectives, and have emerged from different incubators – CCP policy development (the 2017 CCP Supervision Proposal), ESA reform/the 2013–14 ESA Review (the 2017 ESA Proposal), and the CMU agenda (the 2018 Crowdfunding Proposal). Nonetheless, together they signal a potentially material strengthening of ESMA’s ability to exert influence and so call for analysis, albeit that analysis must inevitably be speculative given the uncertainties attending the reforms.

B. CCP Supervision as a Specialist Waymarker: Contestation and Coordination The first indication of potential change came with the June 2017 CCP Supervision Proposal, which proposes an enhancement of ESMA’s currently coordination-based role in CCP supervision. While the Proposal can be associated with the CMU- and Brexit-related forces that have shaped the reform waypoint, particularly its 2017 ESA Proposal, it is mainly a creature of the distinct policy imperatives and preferences CCP supervision generates for EU financial market governance; it cannot be too readily used to ground predictions as to ESMA’s development generally. Under EMIR, CCPs are supervised by NCAs, albeit that supervision is coordinated through ESMA-overseen colleges of supervisors.308 This NCA-dominated supervisory

307 COM 308 See

(2017) 331, COM (2017) 536, and COM (2018) 113. further ch 4.

The 2017/2018 Reform Waypoint (1) 297 model reflects the distinct complexities and risks engaged by CCP supervision. Although CCPs are highly complex infrastructures, in essence they ‘clear’ derivatives contracts: they stand between counterparties to derivatives contracts, and so compress and manage EU derivatives market risk.309 In so doing, they sit at the epicentre of immense and intricate pan-EU networks of CCP ‘clearing members’ and counterparties to derivatives contracts, who rely on CCPs to clear different classes of derivative transactions. The EMIR ‘clearing obligation’, which requires certain classes of derivatives to be cleared through CCPs, and market practice, which is driving further asset classes into CCP clearing, are leading to vast volumes of derivatives transactions being cleared through CCPs310 – and to the dependence of multiple counterparties and systemically-critical risk management contracts on CCP stability.311 The fiscal risks of CCP supervision are accordingly real and extensive,312 and are reflected in EMIR’s locating CCP supervision with the relevant local NCA, albeit coordinated through supervisory colleges. The recent 2016 CCP Recovery and Resolution Proposal deploys a coordination-based and not risk mutualisation-based model for CCP recovery and resolution, reflecting the challenges in moving to any form of EU/ESMA-level supervisory centralisation/risk mutualisation in this area.313 The location of supervision within NCAs also reflects the demands of CCP supervision: CCPs are highly complex actors requiring specialist, intense, and nimble supervision, which could be difficult to operationalise at EU level – and particularly within ESMA, as the deep embedding of CCPs in the EU financial market’s risk management system would almost inevitably lead ESMA into the direction of making policy choices and into Meroni breaches if it supervised CCPs directly. Further, the institutional complexities associated with any EU-level CCP supervision are considerable. While supervision is located with NCAs and coordinated through ESMA-overseen colleges, the ECB also has a strong interest in CCP supervision given 309 CCPs manage ‘counterparty risk’ in derivative contracts by acting as a seller to every buyer and as a buyer to every seller. In so doing they guarantee the performance of derivatives contracts and reduce the risk to the financial system by containing the risks of default by a party to a contract. They manage ‘the risks inherent in financial markets (eg counterparty risk, liquidity risk and market risk), and therefore improv[e] the overall stability and resilience of financial markets. In the process, they become critical nodes in the financial system, linking multiple financial actors and concentrating significant amounts of their exposure to diverse risk’: Commission, Proposal to Amend EMIR (COM (2017) 208) 5. 310 As at the end of 2017, 17 EU-authorised CCPs and 28 third country, EU-registered CCPs provided clearing services in the EU. The EMIR CCP clearing obligation, which began to apply from December 2015, has led to sharp increases in the volume of CCP-cleared transactions, as well as to an expansion of the cross-border reach of EU CCPs, which traditionally operated in domestic markets. In addition, the higher margin/collateral requirements now imposed by EMIR on non-CCP cleared transactions is creating regulatory incentives for additional CCP clearing: Commission, 2017 CCP Supervision Proposal Impact Assessment (SWD (2017) 246) 16–19. 311 Most ‘Global Systemically Important Banks’ are clearing members of CCPs (one major EU CCP (Eurex) has 24 G-SIBs as clearing members), while CCPs also have direct links to trading venues and to other CCPs (through ‘interoperability arrangements’, which allow clearing members of a CCP access to another CCP): ibid, 9 and 21–23. 312 As an illustration of the scale of the fiscal risks, the ‘stressed exposure level’ of LCH Ltd in Q1 2016 was €2.46 billion: ibid, 27. 313 COM (2016) 856. The Proposal’s lengthy gestation underlines the difficulties. A pathfinder Consultation was issued by the Commission in 2012, but the Proposal was not adopted until late 2016 after the co-legislators’ adoption of the 2014 Bank Recovery and Resolution Directive (Directive 2014/59/EU [2014] OJ L173/190), which provided a coordination-based template for recovery and resolution.

298 Direct Supervision/Market Intervention the risks CCPs pose to financial stability, reflected in its since invalidated 2011 ‘location policy’ for euro-denominated derivatives clearing. This required that such clearing take place in the euro area and be subject to ECB liquidity support, as CCPs ‘are a focal point for credit and liquidity risk’.314 On a challenge by the UK (the major EU centre for the clearing of euro-denominated derivatives) the policy was found to be invalid by the General Court of the EU, which ruled that the ECB did not have the competence to adopt such a policy.315 The litigation underlines, however, the ECB’s interest in protecting euro area stability from any spill-over disruption from CCP instability.316 Since then, the ECB has repeatedly reiterated its concerns as to the potential stability risks posed by the ‘offshoring’ of euro-denominated clearing in the UK post-Brexit317 and has been reported as calling for enhanced powers over third country (in effect UK) CCPs.318 National political sensitivities are considerable here, and not only because of the fiscal risks, as has been sharply exposed by the Brexit-related imbroglio generated by the UK’s dominance in euro-denominated clearing. The main UK CCPs together are the major provider of clearing services in derivatives to the EU-27, with LCH Ltd the market leader in euro-denominated clearing.319 Since the Brexit referendum, the prospect of the ‘offshoring’ of a significant component of the risk management capacity of the EU financial market in the UK has revealed Member States’ interests in claiming UK-based clearing business,320 prompted the development by the UK industry of defensive policy solutions to ensure continued direct UK CCP access to the EU,321 and shaped 314 ECB, Eurosystem Oversight Policy Framework (2011). It required certain CCPs to be legally incorporated in the euro area, and that full managerial and operational control over all their core functions be exercised within the euro area. The Policy derived from Art 22 of the Statute of the European System of Central Banks and the ECB, which empowers the ECB to make regulations ‘to ensure efficient and sound clearing and payment systems’ and was designed to ensure the ECB had sufficient oversight over CCPs clearing eurodenominated securities, given that the malfunctioning of a CCP outside the euro area could have adverse effects on payment systems within the euro area. 315 Case T-496/11, European Central Bank v UK (ECLI:EU:T:2015:133). The Court found that Art 127(2) TFEU on the ECB’s competences empowered the ECB only in relation to the smooth operation of payment systems, while Art 22 of the Statute (on which the ECB had relied) did not contain an explicit competence in relation to the clearing of securities. 316 The Bank of England and the ECB subsequently agreed enhanced arrangements for information exchange and cooperation concerning UK CCPs with significant euro-denominated business. They also agreed to expand the scope of their standing swap lines for the liquidity support of CCPs established in the UK and in the euro area: Bank of England Press Release, 29 March 2015. 317 eg, Statement by ECB President Draghi to the European Parliament’s ECON Committee, 26 February 2018, emphasising the importance of the Commission’s Summer 2017 EMIR reform proposal to require relocation to the EU of third country CCP clearing in certain circumstances, highlighting the risks to the euro area from significant volumes of euro-denominated clearing operating in the UK outside EU requirements and safeguards, and calling for the ECB to be appropriately empowered, particularly for crisis management. 318 A Weber and S Brush, ‘ECB Seeks New Powers to Deal with Clearing Crises outside the EU’, Bloomberg, 18 April 2018. 319 U Batsaikhan, R Kalcik, and D Schoenmaker, Brexit and the European Financial System: Mapping Markets, Players, and Jobs, Bruegel Policy Contribution No 4 (2017) 9–10. The ECB has estimated that UK CCPs clear 90% of the euro-denominated interest rate swaps of euro-area banks and 40% of their eurodenominated credit default swaps: Speech by B Coeuré (ECB Executive Board), ‘European CCPs After Brexit’, 20 June 2017. 320 France’s concern to prevent the ‘offshoring’ of euro-denominated clearing in the UK post-Brexit has been widely reported: eg, C Jones, ‘Top French Central Banker Backs Moving Euro-Clearing to EU post-Brexit’, Financial Times (22 June 2017). 321 See, eg, International Regulatory Strategy Group, A New Basis for Access to EU/UK Financial Services Post Brexit, September 2017; and UK Finance, Supporting Europe’s Economics and Citizens. A Modern Approach to Financial Services in an EU-UK Trade Agreement, September 2017.

The 2017/2018 Reform Waypoint (1) 299 the Commission’s Summer 2017 proposal of a (last resort) mandatory third country CCP relocation mechanism.322 The political sensitivities as to the location of CCP supervision are not confined to Brexit-related competition. Unilateral NCA action regarding the margin (or collateral) that must be ‘posted’ by CCP clearing members to protect the stability of the CCP can generate acute episodes of market volatility, with political implications. In 2011, at the height of the euro area sovereign debt crisis, the major Italian CCP, as required under the interoperability/connection arrangement it had with the French CCP (LCH.Clearnet SA), significantly raised its margin requirement for Italian sovereign debt, making it very costly to clear such debt. This followed earlier action by LCH.Clearnet SA, which in turn was following action taken by its parent, the UK-based LCH.Clearnet, in response to volatility in the Italian sovereign debt market. In consequence, trading in Italian sovereign debt experienced further severe dislocation, which hampered Italy’s ability to raise funding and weakened its banks.323 The deep interdependencies between the operation of CCPs and sovereign debt markets, and the competitive territory at stake given the value of CCP business, mean that the location and organisation of CCP supervision is rarely a technical apolitical affair. Reflecting this potential for contestation regarding the location of supervision, ESMA’s role in CCP supervision has been coordination-based, even if ESMA’s ‘soft’ reach over CCPs has increased over time to the point that ESMA Chair Maijoor could in 2015 characterise ESMA’s different activities as supporting an ‘OTC Derivatives Union’ within which a high level of regulatory and supervisory consistency had been achieved.324 ESMA oversees CCP colleges of supervisors; approves certain aspects of CCPs’ risk models; manages CCP stress tests; has been delegated CCP supervisory power from an NCA; and has been at the vanguard of the EMIR-driven reorganisation of the EU derivatives market, advising the Commission on which classes of instruments must be cleared through CCPs and traded on trading venues.325 This expansion of ESMA’s influence, as well as the incrementalism that defines ESMA’s development, creates however, environmental conditions conducive to an increase in ESMA’s powers, notwithstanding the background contestation. This dynamic could be seen prior to the 2017/2018 reform waypoint in the 2016 CCP Recovery and Resolution Proposal, the Commission’s first post-EMIR proposal to expand ESMA’s powers over CCPs326 (although, as noted in section VIII of this chapter, the Commission has been sympathetic to ESMA’s having stronger powers over CCPs since the 2013–14 ESA Review). The Proposal provides for CCP recovery action by CCP NCAs, and for CCP resolution action by the proposed new ‘national resolution authorities’ (NRAs) for CCPs, coordinated in each case through two colleges: the EMIR CCP colleges; and the Proposal’s new CCP resolution colleges. But it would, if adopted, also 322 The June 2017 CCP Supervision Proposal contains an ESMA-based mechanism for assessing CCPs, which could lead to the mandatory relocation of certain highly systemic third country (in practice, UK) CCPs to the EU (see further ch 6). 323 Bank of Italy, Financial Stability Report No 3 (2012) 38; and IMF, Technical Note on Financial Risk Management and Supervision of CC&G, IMF Country Report 13/351 (2013) 10–11. 324 ESMA Chair Maijoor, Speech on ‘Clearing the way towards an OTC Derivatives Union’, 22 September 2015. 325 See further chs 3 and 4. 326 COM (2016) 856.

300 Direct Supervision/Market Intervention strengthen ESMA. The reforms include that ESMA would be given a new empowerment to assist CCP colleges in reviewing and assessing CCP recovery plans, and to engage in binding mediation where necessary.327 The Proposal also identifies ESMA as a member of the proposed new CCP resolution colleges, and would empower ESMA to assist these colleges in adopting the different joint decisions required regarding CCP resolution.328 Finally, the 2016 Proposal contains governance reforms, which would require ESMA to establish a structurally separate internal Resolution Committee (composed of the new CCP NRAs) to prepare related Board of Supervisor decision-making.329 National central banks, competent ministries, or other public administrative authorities could all be designated as NRAs for CCPs, and so the community of authorities operating within ESMA’s governance and sphere of influence could expand significantly.330 The 2016 Proposal fits fairly neatly within ESMA’s evolutionary trajectory as a coordination-focused measure, which nonetheless has the potential to expand ESMA’s ability to exert influence. The 2017 CCP Supervision Proposal, however, represents more punctuated change and may, if adopted, signal a material expansion of ESMA’s ability to exert influence.

C. The 2017 CCP Supervision Proposal and a New Supervisory Model i. The European Supervisory Mechanism: ESMA as System Supervisor The 2017 CCP Supervision Proposal331 can be strongly associated with the specific CCP-related risks and sensitivities Brexit has generated; its proposed reforms include Brexit-related empowerments for ESMA over third country CCPs, discussed in chapter 6. It also, however, derives from the EMIR Review, which pre-dated the Brexit referendum, and proposes related reforms to the supervision of EU CCPs, based on a new ESMA-located supervision model; these reforms were earlier signalled in the 2017 ESA Review (discussed in section VIII of this chapter), which queried whether ESMA should be conferred with CCP-related supervisory powers. The major reform proposed is the establishment of a new ‘European Supervisory Mechanism’,332 in which NCAs would remain the frontline CCP supervisors but would be required to obtain ESMA consent before taking identified supervisory decisions: in a major change, ESMA could veto NCA supervisory action. The ambition of the reform is captured by the Commission’s claim that the Mechanism would de facto ensure ‘single supervision’ of EU CCPs.333 The overall effect of the Proposal, if adopted, would be to constitute ESMA

327 ibid, Art 12. 328 ibid, Arts 4, 15, and 18. 329 ibid, Art 5. 330 In addition, the NCAs and NRAs of credit institutions are to participate as observers: ibid, Art 5(2). 331 COM (2017) 331. 332 The proposed legal text does not formally refer to the new arrangement as a ‘Mechanism’, but it is so termed by the Commission’s accompanying documents: eg, 2017 CCP Supervision Proposal, ibid, Explanatory Memorandum, 14. 333 2017 CCP Supervision Proposal Impact Assessment, n 310, 58.

The 2017/2018 Reform Waypoint (1) 301 as a hierarchically superior but fiscally neutral ‘network supervisor’, sitting at the centre of the new Mechanism: ESMA could draw on the investigatory and monitoring work carried out by the front-line NCAs and veto/amend NCA decision-making, but would not be responsible for fiscal risks. The Proposal bears the imprints of ESMA’s expanding technocratic influence. Its adoption can be associated with ESMA’s strengthening technical expertise in relation to CCP supervision, its careful signalling of its support for enhanced CCP supervision powers,334 and its capacity to provide the detailed data on which the Commission’s proposed reforms are based – the Proposal is in part designed to address the divergences and inconsistencies in supervisory practices identified in ESMA’s peer reviews of CCP colleges.335 The Proposal’s aims appear modest and to reflect the contested context of CCP supervision. It seeks to render CCP supervision more efficient and effective by streamlining and clarifying roles and responsibilities, preserving the existing NCA-based arrangement that locates fiscal responsibility with Member States, but constructing a ‘European Supervisory Mechanism’, which would improve the coherence of CCP supervisory arrangements while ensuring that supervisory responsibility and fiscal responsibility were aligned adequately.336 The Commission underlined that EMIR’s location of CCP supervision with NCAs reflected a ‘delicate political balance’ and recognised that Member States had fiscal responsibility.337 The proposed ESMA consent requirement would accordingly not apply to those NCA supervisory decisions that were most acute in terms of Member State fiscal risk.338 Nonetheless, the Commission has proposed a potentially material expansion of ESMA’s powers. If adopted, the Proposal would revise EMIR to require that a host of draft NCA decisions would be submitted to ESMA for ESMA’s consent,339 including on: CCP authorisation; extension of CCP authorisation; withdrawal of authorisation; capital requirements; ongoing supervisory review of CCPs and evaluation of their EMIR compliance;340 review of qualifying shareholders; review of risk models; stress testing; and approval of inter-operability arrangements with other CCPs.341 Altogether, these reforms would amount to a prior consent or veto right for ESMA over the major supervisory decisions made by CCP NCAs. A ‘silent assent’ mechanism

334 2017 ESMA ESA Consultation Response, n 257, 3–4, noting the different NCA positions on this issue. 335 The Commission highlighted ESMA’s concern, reported in its first peer review of CCP colleges, that colleges risked becoming information exchange vehicles rather than effective supervisory tools: 2017 CCP Supervision Proposal, n 331, Explanatory Memorandum, 5 and 10–11. 336 ibid, 9–10 and 14. 337 ibid, 41–42. 338 The Impact Assessment highlighted that the Mechanism was designed to align supervisory and fiscal responsibilities, by leaving supervisory action linked to recovery and resolution and which has fiscal risks with NCAs (such as decisions relating to the funding cushions or ‘waterfalls’, which protect CCPs against default): n 310, 57–58. 339 2017 CCP Supervision Proposal, n 331, EMIR, Art 21a. 340 In relation to which ESMA – and not, as currently provided under EMIR, CCPs’ NCAs – would establish the frequency and depth of the review. The supervisory review would also be coordinated with ESMA. 341 The Proposal also provides that the ‘central bank of issue’ of the CCP would approve a smaller number of NCA decisions, largely related to liquidity risk and to payment and settlement arrangements. Where ESMA had an overlapping competence with such a central bank, it would be required to submit the relevant decisions to the central bank, which would hold the veto power: 2017 CCP Supervision Proposal, n 331, EMIR, Art 21b.

302 Direct Supervision/Market Intervention would apply, in that ESMA consent would be deemed to be given unless ESMA proposed amendments or objected within 15 days of the NCA’s submitting the relevant decision to ESMA. But where ESMA proposed amendments, the NCA could only adopt the decision as amended by ESMA, and where ESMA objected, the decision could not be adopted, although the NCA could request the Board of Supervisors to assess the ESMA objection or amendment. In a borrowing from the suite of powers under Articles 17–19, ESMA’s hierarchical position would be further strengthened by a proposed power for ESMA to adopt a decision addressed to a financial market participant, requiring the necessary action to comply with EU law, where an NCA did not comply with ESMA’s objection or amendments, or where an NCA did not take the requested supervisory action within a reasonable time and that failure resulted in the financial market p articipant’s breaching EMIR requirements. Alongside these proposals are several less novel but still material reforms. ESMA would, for example, be given voting rights over the decisions CCP colleges of supervisors take under EMIR, and the Head of the proposed new ESMA ‘CCP Executive Session’, through which ESMA would act within the Mechanism, would chair and manage CCP colleges, replacing the relevant CCP’s NCA.342 In addition, the Proposal would amend the ESMA Regulation to empower ESMA to request information directly from EU-authorised and EU-recognised CCPs (as well as from authorised central securities depositories, regulated markets, multilateral trading facilities, and organised trading facilities), where it had not been provided by NCAs.343 ESMA’s proposed new powers are accompanied by governance reforms designed to ensure they are exercised in a swift and technically expert manner that results in a coherent pan-EU supervisory approach to CCPs.344 The Proposal provides for a new ‘Board of Supervisors in Executive Session’ (CCP Executive Session), which would exercise the new CCP powers and take over the CCP functions already reserved to ESMA under EMIR.345 The CCP Executive Session would be composed of five permanent members (a voting Head and two Directors, a non-voting ECB representative, and a non-voting Commission representative) and a shifting cohort of non-permanent members in the form of a voting representative of the NCA of each CCP and a non-voting representative of the relevant central bank of issue for each CCP, which would sit where necessary and appropriate for the CCPs under their supervision. The Executive Session, which would operate under a simple majority vote (the Head would have a casting vote), would take all decisions relating to CCPs reserved to ESMA, including the proposed new consent/veto powers, but would be required to inform the Board of Supervisors of its decisions.346 The NCA members of the Executive Session would continue to sit as voting members on the Board of Supervisors (which would no longer address CCP-related matters), but the Board’s membership would also be expanded to include, although as non-voting members, the permanent members of the Executive Session.347 342 ibid, Arts 18 and 19. The voting weights within CCP colleges would also be revised by the Proposal to give greater power to the ECB and to limit the number of votes that could be exercised from one Member State. 343 2017 CCP Supervision Proposal, n 331, ESMA Regulation, Art 35(6). 344 2017 CCP Supervision Proposal, n 331, Explanatory Memorandum, 19. 345 2017 CCP Supervision Proposal, n 331, ESMA Regulation, Arts 44a–44c and 48a. See also ch 2. 346 ibid, Art 44b. 347 ibid, Art 40(1).

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ii. A Waymark? The 2017 CCP Supervision Proposal marks a shift in recent policy thinking on ESMA’s role in supervisory governance generally, and on the organisation of CCP supervision specifically, but it should not be overplayed. It has strong resonances with the dominant supervisory convergence model, and so can be regarded as an incremental, if certainly punctuated, evolutionary step: ESMA would not be empowered to act as a direct supervisor of CCPs, although it could steer and Europeanise supervision by means of the proposed consent and veto powers. Further, its future is uncertain, as Member States are unlikely to be sanguine at the prospect of ESMA’s greater control over NCA supervision of CCPs. While the 2017 ESA Review suggests some industry support for greater CCP supervisory centralisation and coordination,348 there is little consensus on how this should be configured, and considerable resistance from some stakeholders to direct ESMA CCP supervision,349 including from NCAs.350 The consultation that followed the Commission’s June 2017 adoption of the CCP Supervision Proposal also suggests some industry uneasiness.351 This wariness can be expected to inform political interests. And while there are indications of European Parliament support, there are also signs of Parliament concern as to the adequacy of the governance controls on ESMA’s proposed new powers.352 Nonetheless, the Proposal provides further evidence of the technocratic influence ESMA is now wielding on EU financial market governance: the deepening of ESMA’s technical expertise in CCP supervision, its incremental but persistent expansion of its ‘soft’ reach over CCP supervision, and the CCP supervision data it has made available to the Commission can all be associated with the Proposal. From an ESMA effectiveness perspective, there are attractions and drawbacks. ESMA has developed significant technical expertise in CCP supervision and has a ‘bird’s-eye’ view of NCAs’ supervisory practices (through its supervisory convergence activities) and of the derivatives market generally (through its supervisory powers over trade repositories). This, and evidence from its supervision of rating agencies and trade repositories, suggests that ESMA would prove purposeful, technically expert, and sensitive to NCA supervisory concerns in wielding the proposed consent/veto powers. But the proposed powers would take ESMA some distance from the attractive experimentalism of the supervisory

348 2017 ESA Consultation Feedback Statement, n 267, reporting on some industry support based on the need to address fragmentation and inefficiency risks, to have supervisory arrangements reflect the crossborder orientation of CCP activities and their capacity to generate pan-EU systemic risks, and to manage Brexit-related risks. 349 2017 CCP Supervision Proposal Impact Assessment, n 310, 92–93. 350 ESMA’s response to the 2017 ESA Consultation ‘acknowledg[ed] the divergent views of Board members with regard to the most suitable approach for supervising CCPs in the EU’ (n 257, 4). 351 While there was some industry support, the European Association of Clearing Houses (EACH), eg, argued that the proposed ESMA CCP Executive Session would ‘unnecessarily increase the complexity of the CCP supervisory architecture and disentangle the decision making from the financial responsibility’, while a major EU CCP (Eurex) argued that the current college model was ‘relatively effective’ and that the Commission’s model (a ‘half way house’) did not clearly allocate roles and responsibilities, could create additional costs and delays, and would not fully address regulatory arbitrage or financial stability risks (Eurex preferred a single supervisory authority were reforms to be made). Responses available at https://ec.europa.eu/info/law/ better-regulation/initiatives/com-2017-331/feedback_en?size=10. 352 Preliminary Draft ECON Rapporteur Report, 31 January 2018 (PE616.847v01-09).

304 Direct Supervision/Market Intervention c onvergence model that frames EU-level CCP supervision at present – the Mechanism would change NCAs from being autonomous local units welded together through iterative and responsive ESMA-led convergence techniques to being operational outposts centrally steered by ESMA. Further, the operational (and reputational) strain on ESMA could be significant, and might lead to prejudice to its other functions. The legitimacy risks are potentially material as there is a troubling asymmetry in the Proposal’s allocation of fiscal risks; it is unlikely that there would not be a leakage of Member State fiscal risk into the decisions over which ESMA would have consent/ veto power. But the Proposal would weaken rather than strengthen ESMA’s legitimation arrangements. Decision-making power would lie with the CCP Executive Session, in which ESMA officials would have voting rights and the ESMA Chair the casting vote; the legitimation opportunities provided by peer NCA input and friction would be limited. While appeals against CCP Executive decision-making could be made to the Board of Supervisors, appeals are by design exceptional. The Proposal’s ‘silent assent’ process signals an intention that ESMA veto and amendment action would be the exception and not the rule. Nonetheless, ESMA’s capacity to steer NCAs on fiscally material matters would remain significant and troublesome.

VIII. The 2017/2018 Reform Waypoint (2): The 2017 ESA Proposal A. From Incremental to More Punctuated Change: The Reform Context A more general strengthening of ESMA’s supervisory powers has been proposed by the reform waypoint’s second major proposal – the September 2017 ESA Proposal353 – but here again, and despite the eye-catching nature of some of the supervisory reforms, incrementalism can be identified and the significance of the reforms should not be overplayed – the Proposal cannot easily be associated with a resetting of the supervisory convergence framework within which ESMA is situated, nor with a reordering of the preferences that have led to the dominance of this policy. The Proposal has been in gestation since the 2013–14 ESA Review, which saw little stakeholder enthusiasm for major change, although it reported on some support for the ESAs’/ESMA’s Article 17 and 19 powers to be strengthened and for the ESAs/ESMA to have stronger access-to-data powers.354 The Commission, however, displayed some appetite for strengthening ESMA’s supervision mandate and identified the enforcement of financial reporting standards and the supervision of ‘highly integrated market infrastructures’ (CCPs) as potential candidates.355 Institutional support for expanded ESMA supervision powers also came from the European Parliament – a traditional supporter

353 COM

(2017) 536. Commission ESA Review Report, n 25, 7 and 13–14. 13.

354 2013–14 355 ibid,

The 2017/2018 Reform Waypoint (2): The 2017 ESA Proposal 305 of ESMA empowerments – which, while primarily concerned with enhancements to Articles 17 and 19,356 called for direct ESA/ESMA supervision of ‘highly integrated pan-European entities or activities’.357 But, as discussed in section III, Council support for additional empowerments was muted. The pivotal Commission-led 2017 ESA Review took place in a changed policy environment, certainly as regards the Commission’s priorities.358 While the notion of supervisory centralisation had become normalised with Banking Union and there was greater experience with ESMA, the Commission had also drawn ESMA into three major policy agendas/priorities that had become prominent since the 2013–14 ESA Review: its CMU agenda had identified ESMA as a vehicle for supporting the completion of CMU;359 it had identified ESMA as a means for protecting the single financial market against any Brexit-related fragmentation or stability risks;360 and it had drawn ESMA into the ‘completing EMU’ project, identifying ESMA reform as a first step towards the single capital markets supervisor regarded in some quarters as necessary to complete EMU.361 The confluence of these three agendas can be associated with a greater Commission tolerance for empowering ESMA. The Commission’s pathfinder March 2017 ESA Consultation argued that the CMU agenda required further work on the ‘European dimension’ of supervision;362 that Brexit called for a thorough reflection on how to improve the supervisory capacities of the EU-27;363 and that the ‘Five Presidents’ 2015 report on ‘completing EMU’ had earlier called for more integrated supervision.364 The Commission focused on two sets of supervisory reforms: ESA-wide reforms to Articles 17 and 19 and to the ESAs’ access-to-data powers; and ESMA-specific supervisory empowerments. As regards the latter, the Commission canvassed views on where ESMA-based supervision would bring clear added value in reducing market fragmentation and supporting risk management. In its sights were direct supervision of: data services providers (given their cross-border reach); certain new pan-EU investment funds (given emerging divergences in how these funds were supervised by NCAs and consequent blockages in the emerging cross-border market); and CCPs (given their acute cross-border systemic significance and the specific risks posed by Brexit). Reflecting the contestation that attends ESMA’s direct supervisory powers, reaction was variable but generally cool.365

356 2014 Parliament ESFS Review Resolution, n 236. 357 ibid, Annex, section on ‘Enhanced Powers.’ 358 The Review was undertaken in part in response to the changed policy environment, but in part as a follow-up to the earlier 2013–14 Review: 2017 ESA Consultation, n 260, 2. 359 2017 CMU Mid-Term Review, n 66, 8. 360 ibid, noting that Brexit strengthened the need for further integration of financial market supervision at EU level. 361 Commission, Reflection Paper on the Deepening of the Economic and Monetary Union (2017) 20–21. 362 2017 ESA Consultation, n 260, 2; and similarly, 2017 ESA Proposal, n 353, Explanatory Memorandum, 2. 363 2017 ESA Consultation, n 260, 1. In its Communication accompanying the 2017 ESA Proposal, the Commission similarly argued that the Brexit decision reinforced the case for more integrated supervision within the EU-27: Commission, Reinforcing Integrated Supervision to Strengthen Capital Markets Union and Financial Integration in a Changing Environment (COM (2017) 542) 4. 364 2017 ESA Consultation, n 260, 2. 365 2017 ESA Consultation Feedback Statement, n 267. The consultation was dominated by industry interests (at 71% of respondents) that can be expected to be suspicious of ESA/ESMA empowerments. The public

306 Direct Supervision/Market Intervention There was widespread opposition to a material increase in the ESAs’ supervisory powers g enerally: many respondents underlined the need to respect subsidiarity and proportionality, to protect NCAs’ discretion in day-to-day supervision, and to avoid ‘onesize-fits-all’ approaches.366 There was only mixed support for Articles17 and 19 reform, although there was some support for facilitating the ESAs in investigating NCAs.367 Respondents were not supportive of enhanced ESA/ESMA access-to-data powers, with the majority of respondents, industry and public authority/NCA alike, objecting.368 As regards the ESMA-specific empowerments, while, as noted in section VII, there was some support for (albeit also resistance to) CCP-related powers for ESMA, the potential data services-providers empowerment received little attention, although it generated some industry support alongside concern that the new MiFID II/MiFIR NCA-based regime for regulating data services providers be given time to bed in. There was little support for the fund supervision proposition, with respondents generally regarding NCAs as better placed to address different national market needs.369 ESMA and NCAs emerged as actors with distinct technocratic preferences, as predicted by the political economy literature on agency development.370 While ESMA had previously been wary of intervening in the supervisory governance debate, it emerged over the 2017 ESA Review as having an entrepreneurial bent, setting out a clear preference for additional empowerments. Noting astutely that the current ESFS-based ‘mixed’ approach, which locates most supervisory activity with NCAs, was ‘desirable’, ESMA proposed criteria for identification of the distinct EU-27 market segments over which it could usefully exercise direct supervision, primarily data services providers and benchmarks.371 Alongside this collective ESMA position, NCAs emerged with distinct positions. These were often inimical to the Commission’s ambitions,372 but were sometimes supportive of additional ESMA empowerments,373 reflecting the different preferences NCAs can display on ESMA supervision. The September 2017 ESA Proposal that followed is cautious, reflecting the contestation in this area. The direct supervision empowerments proposed for ESMA have an authorities, which can also be expected to be wary of ESA/ESMA empowerments, represented 26% of respondents. 366 ibid, 5–6. 367 ibid, 9. 368 ibid, 10. The industry tended to be concerned about cost, while public authorities were concerned that the ESAs were not using their current suite of powers efficiently. 369 ibid, 13–14. 370 See, eg, M Thatcher, ‘The Creation of European Regulatory Agencies and its Limits: A Comparative Analysis of European Delegation’ (2011) 18 Journal of European Public Policy 790. See further ch 1. 371 2017 ESMA ESA Consultation Response, n 257, 3–4. 372 2017 ESA Consultation Feedback Statement, n 267, 14. The publicly-available NCA responses were often cool, and frequently called on ESMA to deploy its existing powers more effectively. The Danish, Estonian, and Swedish NCAs, eg, opposed any new conferrals of power, and the Irish and Dutch NCAs called for additional assessment prior to the identification of any new powers: available at https://ec.europa.eu/ eusurvey/publication/esas-operations-2017?surveylanguage=en. 373 The French NCA, eg, strongly supported the reinforcement of ESMA’s supervisory powers, albeit only in relation to critical benchmark administrators and data services providers, and not in relation to EU funds: AMF, Response to the ESA Consultation (2017) 5. The Austrian, Finnish, and Spanish NCAs supported some grants of power, including over data services providers (Austrian NCA), data services providers and CCPs (Finnish NCA), and data services providers, critical benchmark administrators, and CCPs (Spanish NCA): ibid.

The 2017/2018 Reform Waypoint (2): The 2017 ESA Proposal 307 incremental quality and are limited to a small population of regulated actors/activities with distinct cross-border settings. What is more revealing is what the Proposal implies. The Commission tied the reforms to the ‘Five Presidents’ 2015 call for centralised financial market supervision;374 located the limited proposed empowerments for ESMA within a wider movement ‘towards a single capital markets supervisor;’375 and earlier in 2017, in the context of the ‘completion of EMU’ project, linked the ESMA reform process to the ‘first steps’ to be taken in the direction of a single supervisor as a support to EMU and to the single-market-wide CMU.376 The proposed funding reforms (considered in chapter 2) also signal a Commission appetite for future empowerments; these reforms are linked to the ‘tasks the ESAs will shoulder in the future’.377 While allowance must be made for institutional opportunism and kite-flying, and while the Commission has acknowledged subsidiarity constraints and functional realities,378 its posture on financial market supervisory centralisation seems clear. It is not, however, the case that ESMA has become the Commission’s exclusive vehicle of choice for financial market supervisory centralisation. The September 2017 ESA Proposal was followed by the December 2017 Investment Firm Prudential Supervision Proposal, which, in what would be a material change to the current NCA-based organisation of financial market supervision, proposed that the prudential supervision of certain Banking Union-based systemic investment firms be located within the ECB/SSM,379 in part to address B rexit-related relocation risks.380 The 2017 ESA Proposal sits squarely within accounts of agency development as being shaped by the Commission’s integrationist preferences to support the Europeanisation of administrative governance and to buttress the single market, although the Commission’s willingness to act as policy entrepreneur in the face of cool stakeholder reaction to the 2017 ESA Review, indications of early NCA resistance, and political preferences that have long been suspicious of supervisory centralisation, is striking. But the Commission’s preferences are not determinative here: political contestation may, particularly given the range of proposed reforms, be diverse and significant, and progress may be slow.381 Further, Brexit has unleashed competitive forces that may drive Member States 374 2017 ESA Proposal, n 353, Explanatory Memorandum, 5. 375 2017 Integrated Supervision Communication, n 363, 5. 376 2017 Commission EMU Reflection Paper, n 361, noting that a gradual strengthening of the supervisory framework should lead to a single European capital markets supervisor, and identifying the 2017 ESA Review as the ‘first steps’ (at 20–21). 377 2017 ESA Proposal, n 353, Explanatory Memorandum, 10. 378 ibid, 9. 379 The Proposal defines certain systemic investment firms as ‘credit institutions’, and so brings them within the jurisdiction of the SSM where they are registered in the Banking Union zone: COM (2017) 791. See further ch 6 on the implications for ESMA/ECB relations. 380 Although the Commission’s support of SSM-located investment firm supervision is consistent with its support for Banking Union generally: see R Epstein and M Rhodes, ‘The Political Dynamics behind Europe’s new Banking Union’ (2016) 39 West European Politics 415. 381 Council Working Group review started in October 2017. An initial late 2017 ECOFIN discussion on the Proposal noted ‘a variety of views’ on the level of ambition of the reforms, and that initial work would focus on ‘targeted adjustments’ to address shortcomings: ECOFIN Council Conclusions, 7 November 2017 (Council Document 13932/17). A ‘bumpy decision-making process’ has been predicted: Demarigny and Lannoo, n 14; while ESMA Chair Maijoor has noted Member States’ wariness: Speech on ‘CMU, Brexit and ESA Review – Where to Next?’, 20 March 2018. At the time of writing, the Council had not reached political agreement and discussions were continuing at the Council Working Group level

308 Direct Supervision/Market Intervention to resist any further loss of supervisory autonomy, or, conversely, to seek advantage from EU-level supervision. France has been overt in seeking to establish itself as the major EU financial centre post-Brexit and is a prominent supporter of ESMA governance reform, but other Member States are wary.382 Certainly, NCAs are taking different public positions on the Proposal, suggesting underlying political contestation. The French NCA, for example, is strongly supportive of supervisory centralisation through ESMA,383 while the Irish NCA is more cautious, particularly (reflecting its competitive advantage) as regards the proposed funds and prospectuses empowerments.384 Earlier, the CMU agenda had not prompted political enthusiasm for centralised financial market supervision,385 and while the 2015 Five Presidents’ Report suggested some institutional support for such supervision within the euro area, it is not clear that euro area political support is coalescing around reform.386 Political preferences will be shaped by industry preferences, which, as the 2017 ESA Review indicated, are not strongly supportive of empowering ESMA. European Parliament support, usually reliable for ESMA empowerments, cannot be guaranteed.387 Whether or not the Proposal will be agreed by the co-legislators before the 2019 European Parliament elections close the current legislative window remains to be seen, but it is clear that the EU has a number of priorities beyond ESA reform at present. Like the 2017 CCP Supervision Proposal, therefore, the 2017 ESA Proposal does not – at least yet – suggest that ESMA’s incremental evolutionary trajectory as regards supervision is about to experience major disruption. Nonetheless, it represents a waypoint in ESMA’s evolution, and points to a political, institutional, and market environment that is more becoming more accommodating of some (at least) new powers for ESMA. It accordingly requires analysis (which must inevitably be tentative) as to what it suggests regarding ESMA’s evolving ability to exert influence and for effectiveness and legitimation.388 (ECOFIN Council C onclusions, 25 May 2018 (Council Document 9298/18)), although the July–December 2018 Austrian P residency had earmarked the Proposal as a priority file. 382 The Swedish Parliament has expressed concerns over subsidiarity (E Kramer, European Parliament Briefing, Review of the ESAs. Initial Appraisal of a Commission Impact Assessment, December 2017), while in early 2018 the Proposal was reported to have generated strong resistance from Luxembourg and Ireland, and Germany was reported to have concerns about the implied shift to a more centralised supervisory model: F Maxwell, ‘Brussels Standoff over Markets Regulator’, Politico (30 January 2018). France, however, was reported as being in support as part of its drive to become the major post-Brexit EU financial centre: ibid. 383 Including in relation to EU CCPs and trading venues; ‘products and entities that have a cross-border dimension or a systemic importance for the EU’; certain (but not all) prospectuses, excluding retail-oriented prospectuses; and (in a shift of position) EU-labelled funds (but not their managers): AMF, Review of the European Supervisory Authorities, February 2018. 384 Statement by Central Bank Director of Policy and Risk G Cross Before the Irish Parliament, Committee on Finance, Public Expenditure, and Reform, 28 November 2017, noting that the Irish NCA is the secondlargest approver of prospectuses in the EU. 385 ECOFIN Council Conclusions, 10 November 2015 (Council Document 791/15) and ECOFIN Council Conclusions, 11 July 2017 (Council Document 460/17). 386 Notably, the coordinated March 2018 statement by finance ministers from Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, the Netherlands, and Sweden on EMU, while supportive of CMU, did not mention centralised financial market supervision: http://www.finance.gov.ie/updates/ireland-and-others-papersetting-out-their-shared-views-and-values-to-create-a-stronger-economic-and-monetary-union-emu/. 387 German MEPs have expressed opposition: Maxwell, n 382. 388 On the proposed reforms generally and in light of any future redesign of EU financial market governance, see Avgouleas and Ferrarini, n 18; and Demarigny and Lannoo, n 14.

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B. ESMA’s NCA-Oriented Powers As regards ESMA’s Article 17 and 19 powers, the Commission has proposed largely finessing changes, which should nonetheless, if adopted, make it materially easier for ESMA (and the other ESAs – these reforms apply to all ESAs) to deploy Article 17 and 19 and exert technocratic influence over NCAs. With respect to Article 17, the Commission has proposed the empowerment of ESMA to make an information request to other NCAs and to financial market participants whenever it deems it necessary for the purposes of an Article 17 investigation; the addressee would be required to provide ESMA with clear, accurate, and complete information.389 Article 19 would also be finessed, including by means of greater clarity on when and how ESMA could mediate on its own initiative. The proposed reforms would amplify the meaning of an NCA ‘disagreement’ (on which own-initiative mediation action by ESMA is dependent), linking it to NCA failures to reach an agreement where EU sectoral financial market legislation imposed a time limit for joint decision-making.390 Alongside these largely nuancing reforms are the more significant governance-related reforms, which would move decision-making power for Articles 17 and 19 (and Article 18) to the proposed new bureaucratic Executive Board.391 The proposed reforms to Articles 17 and 19, if adopted, are likely to strengthen ESMA’s ability to use these powers and, in consequence, its ability to exert influence. From an effectiveness perspective, the reforms are largely procedural and clarifying in nature, and can reasonably be associated with benefits, providing greater legal clarity and allowing ESMA to more easily deploy these tools in accordance with its legislative mandate. Of most significance is the proposal to move Article 17/19 decision-making to the proposed new Executive Board. The effectiveness difficulties suggested by ESMA’s reticence regarding Articles 17 and 19 can certainly be at least associated with the conflicts of interests that Board of Supervisors-located decision-making generates. But there are tensions here between effectiveness and legitimation, which require resolution through deft and balanced governance reform. The proposed Executive Board reform may lead to wider use of Article 17 and 19, and thereby strengthen ESMA’s legitimacy as well as its effectiveness. But failure to provide some form of Board of Supervisor oversight over Executive Board decision-making (under the Proposal, the Board of Supervisors would not have an oversight role) would tilt ESMA’s governance in a troublingly bureaucratic direction as regards legitimation. Effectiveness may also be disrupted. Article 17/19 decision-making that does not allow for some degree of NCA engagement/oversight may lead to a more antagonistic, remote, and suspicious relationship between ESMA and NCAs, particularly as the governance reforms do not command wide NCA support.392

389 2017 ESA Proposal, n 353, ESMA Regulation, Art 17. 390 ibid, Art 19. 391 ibid, Art 47(3). See further ch 2. 392 The available NCA responses to the 2017 ESA Review (n 372) suggest little support for the dilution of Board of Supervisor influence. The Danish, Dutch, Estonian, Irish, and Swedish NCAs, eg, did not support such governance reform.

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C. ESMA’s Direct Supervision Powers: A Basket of Reforms i. Information-gathering Powers The proposed new information-gathering power for ESMA,393 if adopted, would represent a material hardening of ESMA’s current soft power under ESMA Regulation, Article 35 to ‘request’ information directly from financial market participants. Where information is not forthcoming from financial market participants after such a request, the reform would empower ESMA to make a more formal ‘simple request’ for the information; this would not generate an obligation to provide the information in question but could lead to sanctions where the information provided was incorrect or misleading. ESMA would also, however, be empowered to request information in a binding manner ‘by decision’, and failure to comply with any such decision could lead to penalty payments, where the production of the required information was incomplete, or to fines, where the information was incorrect or misleading.394 The related procedural arrangements and modalities governing the setting of fines and periodic penalties would follow those developed for the credit rating agency and trade repositories regimes (albeit with different quanta for penalties), and would be amplified in administrative rules. The proposed new Executive Board, and not the Board of Supervisors, would be the ESMA decision-maker.395 This proposed reform, which signals strong Commission support for ESMA,396 would strengthen ESMA’s ability to exert influence, but it is attractive from an effectiveness perspective, as it would enhance ESMA’s capacity to engage in data-informed supervision and allow it to side-step NCAs reluctant to provide information on regulated actors. There is, however, a risk of an overly heavy-handed initial application of the power (if adopted) by ESMA as a means of signalling purpose and commitment, and, given strong NCA opposition to this reform,397 of disruption to ESMA/NCA dynamics, although the evidence from ESMA’s approach to rating agency and trade repository supervision augurs well. From the legitimation perspective, the power would tighten ESMA’s grip over EU financial market governance, allowing ESMA to make decisions in relation to a very large population of financial market actors, making the need for appropriate legitimation pressing. While there is a functional logic to locating this form of operational supervisory decision-making in the proposed Executive Board, there is a need for additional legitimating oversight of this body if legitimation is not to be weakened.

393 2017 ESA Proposal, n 353, ESMA Regulation, Arts 35a–35h. 394 The reform therefore follows the ‘simple request/’decision’ model used for ESMA’s information-gathering powers under the rating agency and trade repository regimes. 395 2017 ESA Proposal, n 353, ESMA Regulation, Art 47(3). 396 The Commission persisted with this reform notwithstanding very strong NCA and industry resistance: 2017 ESA Consultation Feedback Statement, n 267, 10. 397 Most NCAs whose responses to the 2017 ESA Review are publicly available opposed this reform, often citing cost, complexity, and overlap with local regulators’ powers and jurisdiction.

The 2017/2018 Reform Waypoint (2): The 2017 ESA Proposal 311

ii. Supervisory Empowerments The Commission has also proposed a series of reforms to sectoral financial market legislation to confer additional direct supervisory powers on ESMA. The scattergun reforms cover: certain prospectuses for offerings of securities designed for the professional markets under the 2017 Prospectus Regulation;398 funds established under the EU Venture Capital, Social Entrepreneurship, and European Long Term Investment Fund Regulations (the EUVECA, EUSEF and ELTIF funds399); data services providers authorised under the MiFID II/MiFIR regime; and benchmark administrators authorised under the Benchmark Regulation.400 This basket of disparate regulated prospectuses/actors have in common limited fiscal risk, a confined population, and a distinctly cross-border operational setting. In all cases, the Proposal locates supervisory decision-making with the proposed new ESMA Executive Board. The Commission’s declared intention is functional and integrationist: the reforms are designed to move the supervision of certain activities and entities with particular importance for the EU as a whole, or with a significant degree of cross-border business, from NCAs to ESMA, reflecting the specificities of the sector concerned and in accordance with a ‘targeted approach’.401 The prospectus reforms are designed to move to ESMA oversight of certain specialist prospectuses that, according to the Commission, given their cross-border dimension, technical complexity, and risks of supervisory arbitrage, would be most efficiently supervised at EU level.402 The proposed ESMA empowerment relates to the scrutiny and approval of four types of prospectuses associated with the sophisticated, wholesale market segment: those relating to non-equity securities traded on a ‘regulated market’403 to which only sophisticated investors have access; those relating to assetbacked securities; those relating to property, mineral, scientific-research-based, or shipping companies; and third country prospectuses.404 There is some leakage beyond prospectus review responsibilities, in that ESMA would also be empowered to assess compliance by the relevant issuer of securities with advertising rules in the relevant host Member State in which the prospectus was distributed and related advertisements were disseminated (host Member States retain control over advertising under the Prospectus Regulation; the home Member State approves the prospectus). ESMA’s competences would be closely based on the rating agency/trade repository templates, and include powers to: request information and carry out investigations and on-site inspections; delegate certain tasks to NCAs; impose supervisory measures, including fines and public notices; and apply supervisory fees. The procedural framework governing the 398 Regulation (EU) No 2017/1129 [2017] OJ L168/12. 399 Regulations (EU) No 345/2013 [2013] OJ L115/1; 346/2013 [2013] OJ L115/18; and 2015/760 [2015] OJ L123/98. 400 These proposed reforms, which are highly detailed and relate to relevant sectoral financial market legislation, are considered in relation to their major features only. All the reforms, eg, take different approaches to the minimum and maximum fine ranges available to ESMA when exercising its enforcement powers. 401 2017 ESA Proposal, n 353, Explanatory Memorandum, 3 and 13. 402 ibid, 8. 403 A defined term in EU financial market legislation, which relates to the most heavily regulated of the EU’s different classes of regulated trading venue. 404 On the latter powers see further ch 6.

312 Direct Supervision/Market Intervention imposition of supervisory measures and sanctions would also be based on the rating agency and trade repository templates. ESMA would also be given exclusive supervisory powers to register EUVECA, EUSEF, and ELTIF funds, and to ensure that the related Regulations applied on an ongoing basis (these powers currently rest with NCAs). This set of reforms is designed to enhance the efficiency of the administrative processes for these three new EU funds – the related Regulations were adopted over 2013–15 as part of the EU’s post-crisis efforts to support funding – and thereby to support fund-raising for the SME, social, and longterm investment sectors.405 The reforms follow the procedural technology developed for the rating agency/trade repository regimes.406 As is the case with the proposed prospectus reforms, there is a leakage effect here: ESMA’s proposed powers would extend beyond the fund and also attach to the supervision of the EUVECA, EUSEF and ELTIF fund managers (‘alternative investment fund managers’ in EU parlance) regarding their compliance with the related fund Regulations, but also in relation to their compliance with the requirements for alternative investment fund managers under the 2011 Alternative Investment Fund Managers Directive.407 There is therefore potential for some leakage of ESMA’s proposed powers into the territory of NCAs, as NCAs have competence to supervise alternative investment fund managers under the AIFMD. The final set of reforms relates to two discrete financial services providers: data services providers; and benchmark administrators. Revisions are proposed to MiFIR that would make ESMA (not, as at present, NCAs) the exclusive supervisor of ‘data services providers’408 and responsible for their authorisation and compliance with MiFIR, given that their business is inherently EU-wide and as any related regulatory or supervisory difficulties cannot be addressed by Member State action alone.409 The same procedural technology used for the prospectus and fund reforms is deployed again here for ESMA’s competences. Finally, the Commission has proposed the movement of the authorisation and supervision of administrators of ‘critical benchmarks’, and the supervision of ‘supervised contributors’ to critical benchmarks, under the Benchmark Regulation, to ESMA from NCAs. These reforms, if adopted, would abolish the recently-established college of supervisor framework within which benchmarks and their administrators are currently supervised by NCAs. They respond to concerns that the college-based system (which came into force only in 2018) is not adequate to deliver the cross-border, pan-EU oversight required given the importance of critical benchmarks to the stability of the

405 The reforms are designed to address the transaction costs and other inefficiencies generated by divergent NCA administrative practices, supervisory approaches, and applications of discretion under the Regulations, and thereby to facilitate the development and cross-border integration of these relatively new forms of EU fund: 2017 ESA Proposal, n 353, Explanatory Memorandum, 27. 406 ESMA’s proposed supervisory powers include powers to withdraw manager and fund registrations, adopt decisions requiring infringements to be brought to an end, impose fines, issue public notices, and, in the case of the ELTIF only, temporarily prohibit the marketing of an ELTIF (the latter reflecting the ELTIF’s retail orientation). 407 Directive 2011/61/EU [2011] OJ L174/1. 408 Three different forms of ‘data services provider’ are regulated by MiFID II/MiFIR: approved publication arrangements (APAs); consolidated tape providers (CTPs); and approved reporting mechanism (ARMs). This new regulatory regime is designed to support the transmission of the massive new data-set, which MiFID II/ MiFIR requires from investment services firms, trading counterparties, and trading venues. 409 2017 ESA Proposal, n 353, Explanatory Memorandum, 7.

And the Direction of Travel Continues: The 2018 Crowdfunding Proposal 313 EU financial system.410 The same procedural technology used for the other proposed empowerments is also applied here. This brief discussion does not seek to query the legal resilience or functional optimality of these proposals, to challenge the claims made as to the benefits of centralised supervision in these sectors,411 or to place them in the context of EU financial market governance and its optimal supervisory arrangements generally. Its concern is with what these proposals signal as to ESMA’s capacity to exert technocratic influence, and with the implications for its effectiveness and legitimacy. The proposed empowerments, while limited, clearly have the potential to embed ESMA more deeply into EU financial market governance and to allow it to extend its influence over the relevant sectors. The reforms could also have potentially powerful signalling effects as to ESMA’s authority and credibility. ESMA’s regulatory capacity and its related ability to exert influence can be expected to strengthen as a result, if they are adopted. And assuming these powers are ultimately conferred in some form or other, and that ESMA exercises these powers in the way in which it has deployed its rating agency and trade repository powers, the legislative process can be expected to support similarly confined, additional empowerments in the future. The proposed empowerments also signal ESMA’s growing ability to influence its supervisory mandate. ESMA was markedly more assertive in calling for additional supervisory powers over the 2017 ESA Review than it has been previously, suggesting that it was uniquely positioned to develop a European approach that could have strong benefits for the supervision of pan-European actors, and identifying critical benchmarks, data services providers, and CCPs as areas in which its supervisory mandate could be expanded.412 From an effectiveness perspective, this expanded supervisory mandate, if adopted, could afford ESMA enhanced opportunities for supervisory learning, refining its approach, and strengthening its credibility, although it could also disrupt ESMA/NCA relations given the potential for ESMA/NCA competence overlap. The proposed empowerments would, however, place additional strain on ESMA’s legitimation framework, particularly as they would lead to material direct supervisory power over regulated actors being placed in the proposed new Executive Board, which would be without (or have only very thin) legitimating oversight.

IX. And the Direction of Travel Continues: The 2018 Crowdfunding Proposal Alongside these high salience, ‘big ticket’ reforms, the Commission appears committed to an incremental empowering of ESMA where transnational considerations appear compelling and fiscal risks low. Its March 2018 Proposal for a new Crowdfunding

410 ibid. 411 The Commission has suggested that this greater integration of supervision should strengthen integration, support the development of financial technologies, and support sustainable economic development: 2017 Integrated Supervision Communication, n 363, 4. 412 2017 ESMA ESA Review Response, n 257, 4.

314 Direct Supervision/Market Intervention egulation, based on the establishment of an ‘opt-in’ authorisation and regulation R regime for cross-border crowdfunding platforms (‘crowdfunding service providers’) and on their access to a related ‘EU label’,413 proposes the conferral on ESMA of exclusive competence to authorise and supervise such EU-labelled platforms.414 The very early stage of the Proposal and the likely small population of potential authorised actors415 limit the salience of this reform, but it indicates the extent to which the Commission has come to rely on ESMA for delivering supervisory reforms.

X. Conclusion ESMA’s binding supervisory/market intervention powers generate considerable political, institutional, market, and media noise – to be expected as they are a bellwether for the future direction of EU financial market supervisory governance. This chapter was not concerned, however, with the optimality or likelihood of any future conferrals of powers on ESMA or with the optimality of particular design models for EU financial market supervision. Its aims were quieter, being directed to interrogating ESMA’s current role in supervision and whether any effectiveness or legitimation risks can be identified. Like other chapters, it comes to an optimistic conclusion, certainly as regards the direct supervision of regulated actors, where ESMA has proved a determined actor, exerting material influence over the population of rating agencies and trade repositories it supervises certainly, but also displaying a technically informed, responsive, and agile approach that sits within a reasonably secure legitimation framework. The limited evidence makes it more difficult to assess ESMA’s use of its other binding powers. Although ESMA’s reticence here, particularly as regards Article 17 and Article 19 action, can be regarded as a threat to effectiveness and to its legitimacy, other indications, particularly in relation to its MiFIR product intervention powers, augur well. Further, the incremental conferral of ESMA’s different supervisory/intervention powers has proved a strength, as it has allowed for political and institutional learning and experimentation, and allowed ESMA to develop its supervisory approach in a sustainable manner informed by experience. This makes it more likely that effectiveness risks are containable and that legitimation arrangements can be tested and adapted. The chapter takes a less optimistic view of the potential enhancements to ESMA’s powers signalled by the 2017/2018 reform waypoint. The chapter does not seek to examine the optimality of these reforms, although weaknesses can easily be identified. Their piecemeal nature suggests an absence of strategic thinking on ESMA’s role in EU financial market governance and on the optimal design of ESMA-located supervision – the network-based ‘Mechanism’ proposed for ESMA CCP supervision is very different from the traditional, direct ESMA supervision model proposed for benchmarks, data

413 COM (2018) 113. 414 The Proposal sets out the conditions under which ESMA would grant authorisation and specifies ESMA’s proposed powers (in accordance with the templates established under the rating agency and trade repository regimes and used in the 2017 ESA Proposal). 415 The Commission has predicted that 25 platforms will seek authorisation in the first year: ibid, 8.

Conclusion 315 services providers, certain funds and prospectuses, and crowdfunding service p roviders. The December 2017 proposal that certain systemic investment firms be supervised by the ECB/SSM may lead to coordination difficulties. The candidates proposed for direct ESMA supervision do not appear to be compelling – whether in light of the only very recent adoption of legislative schemes based on their supervision by NCAs (benchmarks and data services providers), or given the small and scattergun nature of the population of actors proposed for direct supervision (certain funds and prospectuses and crowdfunding platforms). But regarded simply in terms of ESMA’s potential effectiveness and legitimacy as a technocratic supervisor, they are troublesome, particularly in relation to legitimation, as the combination of the new empowerments and the proposed reforms to governance may generate threats to legitimacy.

6 ESMA as a Network Actor I. ESMA as a Network Actor As discussed in previous chapters, ESMA is a hybrid actor and can be characterised in different ways. This chapter examines a final aspect of its hybridity: ESMA as a technocratic network actor. ESMA has two primary technocratic networks: the EU network – comprised of the European System of Financial Supervision (ESFS) and Banking Union; and the international network – comprised of ESMA’s relationships with the actors of international financial market governance and with ‘third country’ (non-EU/EEA) supervisors and regulated actors. This chapter considers how ESMA interacts with these networks, and the implications for its ability to exert influence and for its effectiveness and legitimacy.1 While both networks afford ESMA opportunities to expand its influence, so far there are few threats to effectiveness or legitimacy, although change is on the horizon. The withdrawal of the UK from the EU may change the dynamics of ESMA’s EU network and is likely to strengthen ESMA’s role within its international network.

II. ESMA and the EU Financial Governance Network A. ESMA and the European System of Financial Supervision i. ESMA and the ESRB ESMA’s location within the ESFS2 is emphasised by its constitutive 2010 Regulation, which provides that ESMA forms part of the ESFS composed of the other European Supervisory Authorities (ESAs) (the European Banking Authority (EBA) and the

1 ESMA’s ability to exert influence can be related to its ‘regulatory capacity’ and related ‘resources’. ESMA’s EU and international networks provide it with opportunities to strengthen these resources (including by expanding its access to data, deepening its expertise, and providing it with institutional allies), which in turn can be associated with the extent of its ability to exert technocratic influence over EU financial market governance and internationally. 2 The ESFS is charged with ensuring that the rules applicable to the financial sector are adequately implemented to preserve financial stability, and ensure confidence in the financial system as a whole and sufficient protection for customers of financial services: ESMA Regulation ((EU) No 1095/2010 [2010] OJ L331/84), Art 2(1).

ESMA and the EU Financial Governance Network 317 European Insurance and Occupational Pensions Authority (EIOPA)); the European Systemic Risk Board (ESRB); the ESAs’ coordinating Joint Committee; and relevant NCAs (Article 2). ESMA is required to cooperate regularly and closely with the ESRB and the other ESAs, and all ESFS participants are required to cooperate with trust and full mutual respect, in particular in ensuring the flow of appropriate and reliable information (Article 2(3) and (4)). The ESRB is charged with macro-prudential oversight of the EU financial system and with monitoring systemic risk.3 It is an observer on ESMA’s Board of Supervisors, but it is not as material to ESMA’s operation as the other ESAs, although ESMA and the ESRB cooperate on systemic risk matters, and ESMA draws on ERSB technical support,4 consults with the ESRB on relevant regulatory governance activities,5 and assists the ESRB with risk monitoring.6 The ESRB has brought empirical heft to ESMA’s work,7 however, thereby strengthening ESMA’s ability to exert influence, and also provides ESMA with capacity-strengthening opportunities – the ESRB has, for example, called for ESMA’s powers to be strengthened as regards the monitoring and management of investment fund liquidity risk (which is currently a preoccupation of regulatory policy internationally8).9 The 2017/2018 reform waypoint is unlikely to change what appears to be a productive but not pivotal relationship; while the 2017 ESRB Proposal is designed to strengthen the ESRB, the reforms are mainly concerned with the relationship between the ESRB and the European Central Bank (ECB).10

ii. ESMA and the ESAs By contrast, ESMA’s sister ESAs play a key role in its operating environment. The ESAs are organised on sectoral lines, with EBA covering (broadly) the banking sector and EIOPA covering (broadly) the insurance and occupational pension sector alongside ESMA (the financial market sector). All three ESAs follow the same institutional design under their separate founding Regulations11 and, at least at the outset, exercised 3 Under ESRB Regulation (EU) No 1092/2010 [2010] OJ L331/1. 4 Including in relation to ESMA’s evolving central clearing counterparties (CCP) stress-testing activities, for which the ESRB provides the methodologies and adverse financial scenarios (eg, ESRB, Scenarios for the ESMA EU-wide Central Counterparty Stress Test in 2017, 15 December 2016). 5 Consultation can be mandated by sectoral EU financial market legislation. The 2012 European Market Infrastructure Regulation (EU) No 648/2012 [2012] OJ L201/1 (EMIR), eg, required ESMA to consult the ESRB when it was developing the EMIR risk management rules and considering which classes of derivatives should be subject to the EMIR CCP clearing obligation. The ESRB’s engagement with ESMA can be characterised as supportive but challenging: eg, ESRB, Response on Clearing Obligation for Financial Counterparties with a Limited Volume of Activity (2 September 2016). 6 eg, ESMA, Annual Report on 2016 (2017) 14 and 24. 7 eg, the ESRB provides extensive empirical analysis for the different reports ESMA must submit to the Commission (eg, ESRB, Opinion to ESMA on Securities Financing Transactions and Leverage under Article 29 of the SFTR (2017)). 8 See, eg, FSB, Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (2017). 9 ESRB, Recommendations of 7 December 2017 on Liquidity and Leverage Risks in Investment Funds (ESRB/2017/6). 10 COM (2017) 538. 11 Regulation (EU) No 1093/2010 [2010] OJ L331/12 (EBA); Regulation (EU) No 1094/2010 [2010] OJ L331/48 (EIOPA); and n 2 (ESMA).

318 ESMA as a Network Actor the same suite of powers, albeit in accordance with the specific mandates and tasks conferred on them under sectoral EU financial legislation. This sectoral institutional set-up sits uneasily with the reality that financial activity flows across banking, insurance, and financial market silos.12 It reflects, however, the longstanding persistence of these silos in EU financial legislation, as well as the sectoral templates the earlier Lamfalussy committees provided for the ESAs and the status quo bias associated with EU financial governance reform. The three ESAs have observer status on the others’ Boards of Supervisors and are tied together, somewhat haphazardly, by coordination and cooperation obligations. These obligations are most pronounced in relation to regulatory governance; the ESAs are usually required to consult with each other when developing Binding Technical Standards (BTSs) or adopting soft law with cross-sector implications. EMIR, for example, required ESMA to consult with EBA on the development of CCP stresstesting practices; EBA to consult with ESMA on the development of BTSs for CCP capital requirements; and the three ESAs to develop jointly the BTSs governing risk mitigation by financial counterparties in relation to derivatives not cleared through a CCP.13 Similarly, the Packaged Retail and Insurance-based Investment Products (PRIIPs) ‘Key Information Document’ (KID) disclosure regime, which applies to investment products cross-sectorally, mandated the three ESAs to develop jointly the BTSs governing the content and format of the KID.14 The ESAs are also required to coordinate, exchange information, and notify each other in identified circumstances.15 Institutional support for coordination is provided by the ESA Joint Committee (JC), in which the ESAs are to cooperate regularly and closely and ensure cross-sectoral consistency.16 The JC (chaired on a rotating basis by the three ESA Chairs) must meet at least every two months, is supported by a dedicated secretariat (provided by the ESAs), and is composed of the three ESA Chairs (members), the chairs of any JC subcommittees (members), the three ESA Executive Directors (observers), and the Commission and the ESRB (observers). Financial conglomerates, accounting and auditing, risk assessment, retail investment products, anti-money laundering measures, and ESRB relations are identified by the ESMA Regulation as areas for potential cooperation, but in practice the JC has organised itself into five work-streams covering risk monitoring, consumer protection, financial conglomerates, anti-money laundering, and other activities. The JC is not a decision-making body. It is charged with reaching ‘joint positions’ – under Article 56 of the ESMA Regulation, any related proposals for BTSs/soft law or other action must be adopted by the ESAs’ Boards of Supervisors. But while the JC’s activities are dwarfed by those of the ESAs, it has established a meaningful presence. Its activities so far have primarily been focused on the development of joint BTS proposals where these are mandated by relevant sectoral legislation, but it has also coordinated the adoption of soft law,17 12 eg, V Colaert, ‘European banking, securities and insurance law: Cutting through sectoral lines’ (2015) 52 Common Market Law Review 1579. 13 EMIR, Arts 41, 16, and 11. 14 PRIIPs Regulation (EU) No 1286/2014 [2014] OJ L352/1, Arts 8, 10, and 13. 15 eg EMIR requires ESMA to pass on the results of its CCP stress testing to EBA and EIOPA (art 49). 16 ESMA Regulation, Art 54. The JC provisions are replicated in the three ESA Regulations. 17 Including guidelines and positions on: risk-based approaches to anti-money laundering supervision (2017); the assessment of qualifying shareholdings in the banking, insurance, and securities sectors (2017);

ESMA and the EU Financial Governance Network 319 most notably in relation to consumer protection given the cross-sectoral substitutability of retail financial products.18 Recently, Brexit has emerged as an area for cross-ESA/ JC coordination, as has the EU’s new securitisation regime, which has cross-sectoral implications.19 The JC is also acting as a policy laboratory for the ESAs, developing positions on digitisation generally and fintech.20 The JC additionally provides a platform from which the ESAs can collectively lobby where their interests align, including on the application of EU rules21 and on ESA reform.22 There are limits to cross-ESA coordination in the fragmented ESFS institutional space. The JC’s procedural arrangements are cumbersome, as any initiatives must be agreed by the three Boards of Supervisors and move through their relevant Standing Committees.23 Process difficulties aside, coordination is constrained by the silo-ed structure of the ESAs’ legislative underpinnings, which, for example, stymied them in developing joint guidelines on the cross-selling of financial products. While the ESAs had decided that a cross-sectoral approach would be beneficial, they were unable to pursue it given differences in their respective legislative mandates.24 The potential for coordination is also limited by the ESAs’ distinct settings, which shape their priorities, interests, and incentives and which have the potential to prompt competitive behaviour.25 The ESAs originally deployed broadly the same set of powers under their founding Regulations and, as nascent actors in EU financial governance, had similar concerns to establish their regulatory capacity and extend their influence. As they developed, their powers began to diverge26 and different preoccupations and

assessment of anti-money laundering risks (2017); supervisory practices for reducing mechanistic reliance on credit ratings (2016); and supervisory approaches to financial conglomerates (2014). 18 Including FAQs on the PRIIPs regime (2017); joint guidelines on complaints handling (for EBA and ESMA) (2014); and warnings to regulated actors on self-placement activities and on the distribution of complex contingent convertible securities (2014). The JC also hosts an annual Consumer Day for s takeholders. 19 JC, 2018 Work Programme (JC 2017 53). 20 Innovation is a regular theme of JC annual Work Programmes. Major initiatives include the JC opinion on how NCAs should approach ‘innovative solutions’ developed by firms for the customer due diligence process (2018); analysis of financial institutions’ use of big data (2016); and development work on financial advice automation (‘robo-advice’) (2016). 21 The ESAs, eg, adopted a joint position criticising the extension given by the Commission to insurance companies on the application of a major new financial reporting standard (IFRS 9): ESAs’ Concerns Regarding Enlarging the Temporary Exemption from Applying IFRS 9, 21 June 2017 (ESAs 2017 26). 22 The ESAs present an annual joint statement to the European Parliament’s ECON Committee. They have also adopted coordinated positions (while maintaining individual positions) on the different consultations on review of the ESAs. 23 EBA highlighted the difficulties over the 2017 ESA Review: EBA, Opinion on the Public Consultation on the European Supervisory Authorities (EBA/Op/2017/08). The 2016 ESA failure to adopt a joint position on the contested European Parliament-required Commission revisions to the ESAs’ proposed RTSs on the PRIIPs KID underlines the complexities (the EBA and ESMA Boards could reach a position but the EIOPA Board was not able to do so): see further ch 3. 24 The ESAs subsequently called for reforms to sectoral legislation: ESA Letter to the Commission, 26 January 2016 (ESAs 2016 07). 25 On administrative power struggles within the EU and internationally, see T Bach, F de Francesco, M Maggetti, and E Ruffing, ‘Transnational bureaucratic politics: an institutional rivalry perspective’ (2016) 94 Public Administration 9. 26 ESMA’s direct supervision powers have been expanded to a much greater extent than those of EBA and EIOPA. It is the only ESA, eg, to exercise exclusive supervisory power over EU regulated actors (rating agencies and trade repositories).

320 ESMA as a Network Actor incentives began to emerge. EIOPA faced early resistance to its soft-law powers.27 ESMA, given the scale of its regulatory governance mandate, was the first ESA to joust with the Commission on administrative rule-making.28 EBA, however, provides the most striking example of difference that can potentially lead to coordination difficulties and inter-ESA tension. Part of EBA’s distinctiveness from ESMA and EIOPA relates to the nature of the EU banking rule-book and EBA’s related appetite for regulatory governance reform. The BTS process has proved cumbersome for EBA, as it must frequently adjust the highly granular financial reporting/data validation requirements that apply under the EU’s banking rule-book.29 Over the 2017 ESA Review, EBA called for it to have limited rule adoption powers, which would allow it to adjust financial reporting requirements more easily.30 EBA’s distinctiveness is, however, predominantly a function of its challenging situation within the EU’s complex institutional ecosystem for bank governance in which EBA sits alongside the ECB, which oversees Banking Union’s Single Supervisory Mechanism (SSM) for the supervision of Banking Union’s banks (here, ‘the ECB/SSM’).31 EBA is charged with supporting the single market banking rule-book and with single market supervisory convergence/coordination; its jurisdiction is the single market and its primary function is coordination. By contrast, the ECB/SSM’s jurisdiction is the Banking Union zone (in practice, currently at least, the euro area) and its primary function is executive and operational in nature – the ECB/SSM has oversight of the SSM and of the NCAs that carry out operational supervision within the SSM, and direct supervisory responsibility for currently 118 of the SSM-zone’s most significant banking groups.32 Nonetheless, the potential for the mighty ECB/SSM to encroach into EBA’s single market and convergence/coordination territory cannot be ignored as a material influence on EBA’s operating environment. While the ECB/SSM must, under the SSM’s constitutive Regulation, follow EBA’s supervisory convergence measures, there is a gaping disparity in operational supervisory power between EBA and the ECB/SSM, and a related risk of the ECB/SSM driving EBA’s single market convergence agenda – whether through the SSM NCAs, which sit on the EBA Board of S upervisors,

27 While the ‘Solvency II’ regime, which dominated EIOPA’s initial regulatory governance agenda, required EIOPA to produce some 35 sets of guidelines, it produced a great many more, generating material industry concern: M Imerson, Solvency II: EIOPA’s Guidelines Create Unnecessary Complexity and Cost, Wolters Kluwer Insights, 27 March 2015. 28 See further ch 3. 29 The vast ‘FINREP’ (financial reporting) and ‘COREP’ (capital reporting) required of banks are governed by highly detailed technical rules on data coverage, quality, and validation, which apply through EBA’s ‘Reporting Framework’ (most recent version, 2.8). Reforms to this Framework can often take the form of highly technical changes to data cells, inappropriate for the inter-institutional BTS process. 30 EBA, Opinion on Improving the Decision-Making Framework for Supervisory Reporting Requirements (EBA/Op/2017/03). The Commission did not accept EBA’s proposals, suggesting instead that guidelines be used more extensively for such reporting requirements. 31 See, eg, N Moloney, ‘EU financial governance after Brexit: the rise of technocracy and the absorption of the UK’s Withdrawal’ in K Alexander, C Barnard, E Ferran, and N Moloney, Brexit and Financial Services. Law and Policy (Hart Publishing, Oxford, 2018) 61; E Ferran, ‘The Existential Search of the European Banking Authority’ (2016) 17 European Business Organisation Law Review 285; S Capiello, The Interplay between EBA and the Banking Union, Robert Schuman Centre for Advanced Studies Working Paper (2015), available at http://cadmus.eui.eu/handle/1814/37378; and R Lastra, ‘Banking Union and Single Market: Conflict or Companionship?’ (2013) 36 Fordham International Law Journal 1190. 32 Under ECB/SSM Council Regulation (EU) No 1024/2013 [2013] OJ L287/63.

ESMA and the EU Financial Governance Network 321 or less directly. Similarly, there is potential for regulatory encroachment, albeit that the ECB/SSM is charged under the SSM’s constitutive Regulation with following EBA soft law and can only adopt rules on the organisational and operational modalities of SSM banking supervision.33 EBA’s operating environment is as a result materially more complex than that of the other ESAs, and its related incentives to protect its territory are distinct and strong. The complexity of EBA’s operating environment has increased with Brexit. The range of factors shaping the development of Banking Union and the SSM and their relationship with EBA make prediction perilous; Brexit forms only part of the cocktail of relevant factors.34 But it is not unreasonable to suggest that EBA’s operating environment has become more uncertain, particularly with the removal of the friction the UK has provided against Banking Union-prompted institutional centralisation and euro-area creep. If the gravitational pull of the ECB/SSM becomes stronger over single market bank governance, whether because of Brexit or otherwise, EBA will have strong incentives to emphasise its distinctive single market/coordination role. In particular, it is likely to prioritise those areas of its mandate where there is limited overlap with the ECB/SSM, such as investment firm prudential governance and consumer protection (both of which expressly fall outside the ECB/SSM mandate), but where there may be some overlap with the other ESAs, in particular ESMA. ESMA’s situation within this inter-ESA network has shaped how it has developed. ESMA’s inter-ESA setting has certainly afforded it opportunities to extend its reach over EU financial market governance. Where ESMA’s interests align with those of its sister ESAs, their construction of joint positions deepens ESMA’s ability to impose its preferences and exert influence. There are also productive radiating effects where another ESA takes up a cause that may strengthen ESMA’s position – such as EBA’s recent championing of a power to adopt highly technical ‘supervisory regulations’ directly without going through the BTS process, and of a stronger ESA advisory role in legislative negotiations.35 But the inter-ESA setting also has effectiveness benefits, providing channels for coordination and also regulatory learning, particularly where one ESA has been a pathfinder; ESMA’s developing stress-testing activities, discussed in chapter 4, can be expected to benefit from EBA’s long experience in managing the complex technical and political demands of pan-EU bank stress testing. Inter-ESA relations can in addition provide a degree of legitimation by creating incentives for ESMA to operate in a technically effective and legitimate manner, sensitive to its mandate restrictions, and thereby to strengthen its inter-ESA credibility.36

33 In addition, a ‘double-lock’ voting device has been used to manage potential SSM/ECB-led caucusing on the EBA Board of Supervisors: separate simple majorities within the SSM and non-SSM NCA blocs are required for the purposes of reaching the qualified majority required for certain of the Board of Supervisors’ regulatory governance activities: EBA Regulation, Art 44(1). 34 See, eg, N Moloney, ‘Brexit and financial services: (yet) another re-ordering of institutional governance for the EU financial system’ (2018) 55 Common Market Law Review 175. 35 See n 30. Similarly, EBA’s more assertive use of the Arts 17 and 19 breach of EU law and binding mediation powers (as noted in ch 4, section V) may make it easier for ESMA to deploy these powers. 36 See further ch 2 on inter-ESA accountability.

322 ESMA as a Network Actor The image of the ESAs as a collegiate, epistemic community of nascent regulators, learning from each other’s experiences and acting as legitimating actors through peer credibility dynamics should not, however, be overplayed, as the ESAs also have distinct incentives to strengthen their powers and protect their respective territories. In particular, the incentives the confluence of the SSM/Banking Union and Brexit have created for EBA to mark out its distinctiveness may lead to tensions between ESMA and EBA where their mandates intersect, and to ESMA pushing against its mandate in response to protect its territory. For example, EBA’s recent engagement with conduct risk,37 traditionally the bailiwick of financial market regulators, reflects the recent focus by prudential regulators internationally on the risks poor conduct can pose to financial stability,38 but it can also be associated with EBA’s incentives to claim ownership over all aspects of prudential risk management and to strengthen accordingly its position within the ESFS and in relation to the ECB/SSM. But the management of conduct risk, a key aspect of financial market governance, may take EBA close to ESMA’s territory and provide ESMA with expansionist incentives to protect its sphere of operation. Similarly, EBA is giving closer attention to consumer protection (an area outside the ECB/SSM’s mandate), including through research and guidelines39 and a fast-developing financial literacy agenda,40 which could generate some overlaps with ESMA and related expansionist incentives as regards ESMA’s emerging consumer protection agenda. The potential for tension may be exacerbated if the Commission’s December 2017 Investment Firm Prudential Supervision Proposals for a new investment firm prudential regulation regime are adopted.41 Investment firm prudential regulation sits within EBA’s mandate, and the Commission has identified EBA as the primary ESA for amplifying the proposed new rule-book and for supporting convergence and coordination (albeit in cooperation with ESMA) – but the proposed new prudential regime is also very close to ESMA’s financial markets mandate and may become a contested space.

37 EBA includes conduct risk among the risks banking NCAs must include in their annual supervisory reviews of EU banks (EBA, Guidelines on Common Procedures and Methodologies for the Supervisory Review and Evaluation Process (EBA/GL/2014/13) paras 253–57) and among the risks banks must consider in assessing operational risk (EBA, Final Draft RTS on Specification of Assessment Methodology under which NCAs can Permit Institutions to use Advanced Measurement Approaches for Operational Risk (EBA/ RTS/2015/02) Arts 4, 8, and 28). It also includes mis-selling risk, a conduct risk and also a classic financial market consumer protection risk, among the risks to be covered in bank stress testing (EBA, EU-Wide Stress Test. Methodological Note (2018)). 38 See FSB, Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (2017). 39 See EBA, Consumer Trends Report (2017) and EBA, Guidelines on Product Oversight and Governance Arrangements for Retail Banking Products (EBA/GL/2015/18). 40 EBA, Financial Education Report 2017/2018 (2018) is EBA’s first major effort in the financial literacy area. The report collates and assesses national approaches based on information held in EBA’s ‘repository’ of over 80 NCA financial education initiatives. 41 The proposed new regime for investment firms is set out in a proposed Directive (COM (2017) 791) and Regulation (COM (2017) 790). EBA’s role as the responsible ESA is asserted in the proposed Directive, rec 8 and Art 6. The Commission had earlier relied heavily on EBA’s technical expertise in developing the new regime (eg, EBA, Opinion in Response to the European Commission’s Call for Advice on Investment Firms (EBA/Op/2017/11)).

ESMA and the EU Financial Governance Network 323 The legitimation risks from such expansionist incentives should not, nonetheless, be over-estimated, particularly as the other ESAs can act as a check on ESMA. The imbroglio on the application of the proportionality principle to the remuneration rules that apply to regulated financial actors provides a useful example. In developing guidelines on how the EU’s legislative remuneration requirements should apply to asset management, ESMA initially took the position that the relevant legislative proportionality principle could lead to a complete disapplication of the EU rules in certain circumstances. It subsequently changed its position,42 despite material industry opposition, following the adoption by EBA of a contrary position on the remuneration rules applicable to banks and investment firms, which reflected EBA’s more cautious legal interpretation of the relevant legislative text.43 The 2017 ESA Review may, however, accentuate inter-ESA difference and so deepen legitimation risks. The 2017 ESA Proposal44 embeds more deeply the differences between the ESAs, with ESMA emerging as the most powerful of the three, with potentially new direct supervisory powers and potentially significantly greater resources.45 This ‘first among equals’ status may create troublesome incentives for ESMA to push against the boundaries of its mandates and to be less sensitive than it might otherwise be to the implications of its activities for the other ESAs; a useful constraining friction on ESMA might accordingly be weakened.

B. ESMA and Banking Union The single market-oriented ESFS sits awkwardly alongside the primary Banking Union structures: the SSM and the Single Resolution Mechanism (SRM). The SSM is of most relevance to ESMA’s setting. While certain investment firms come within the scope of the SRM,46 resolution is a distinct function, typically separated from supervisory and regulatory functions, and there are few overlaps in practice with the SRM’s and ESMA’s mandates.47 The SSM is different. While only deposit-taking entities currently come within the SSM’s jurisdiction, and while the SSM is concerned with prudential supervision (and not conduct supervision, the mainstay of financial markets supervision),48 42 ESMA, Guidelines on Sound Remuneration Policies under the UCITS Directive and AIFMD (ESMA/2016/411) 10. 43 EBA’s 2015 guidelines on bank and investment firm remuneration reflected the Commission’s view that the related legislative proportionality requirement could not support a complete disapplication/waiver of the relevant rules (EBA, Guidelines on Sound Remuneration Policies under CRD IV (EBA/GL/2015/22)). EBA recognised, however, that waivers from the rules were appropriate in some circumstances, and called for legal clarification (EBA, Opinion on the Application of Proportionality (EBA/Op/2015/25)), which has since been proposed in the Commission’s 2017 Investment Firm Proposals. 44 COM (2017) 536. 45 Although new powers have also been proposed for EBA and EIOPA, these are primarily concerned with supervisory convergence, and most of the proposed new ESA resources have been allocated to ESMA (156 additional employees as compared to 29 and 35 for EBA and EIOPA, respectively): ibid, Explanatory Memorandum, 17. 46 SRM Regulation (EU) No 806/2014 [2014] OJ L225/1, Art 2 (investment firms covered by the consolidated supervision by the ECB/SSM of the parent undertaking). 47 The Single Resolution Board’s annual reports, however, note cooperation with ESMA (ESRB, Annual Report on 2016 (2017) 30). 48 The SSM covers only euro area ‘credit institutions,’ in effect deposit-taking institutions (2013 ECB/SSM Regulation, Arts 1 and 2(3) (rec 28 notes that national authorities remain responsible for supervisory actions

324 ESMA as a Network Actor the impact of its institutional lynchpin – the ECB/SSM, the most powerful actor in EU financial governance – on ESMA’s operations cannot be overlooked. In particular, the establishment of the SSM has given ESMA incentives to establish itself as the notional EU-level financial market counterweight to the ECB/SSM, even if the ECB/SSM is a materially more powerful institution, with an operational mandate, binding powers, and the hierarchical authority that flows from the ECB’s status as a Treaty institution. There are, for example, grey zones where the ECB/SSM’s executive prudential/banking competences and ESMA’s coordinating conduct/financial market competences may intersect, and which may generate incentives for ESMA to protect its territory against potential ECB/SSM encroachment. These include the treatment of conduct risk, a core concern of ESMA’s financial market mandate but which can generate prudential risks to bank stability. The SSM is empowered only in relation to prudential supervision (reflecting its Treaty competence under Article 126(7) TFEU, which covers prudential matters only), but the borderline between traditional conduct supervision and prudential supervision is not always clearly marked, particularly as regards the supervision of multi-function banks and systemic investment firms, as is clear from EBA’s recent engagement with conduct risk. ESMA’s incentives to protect its financial market mandate territory are likely to become all the sharper, as the 2017/2018 reform waypoint suggests that the EU institutional financial market governance space may become more crowded. The 2017 Investment Firm Proposals propose that large, systemically significant investment firms come within the scope of the SSM49 and that EBA, and not ESMA, be empowered as the ESA responsible for the single-market amplification and application of the proposed new rule-book. Thus far, ESMA’s ECB/SSM interactions suggest some concern to protect its territory; ESMA was, for example, robust in refusing the ECB two seats (as ECB and as ECB/SSM) on the CCP colleges of supervisors that ESMA oversees.50 There is little evidence, however, that the ECB/SSM and ESMA relationship is disruptive. ESMA and the ECB have successfully negotiated a Memorandum of Understanding on institutional cooperation, which should strengthen ESMA’s ability to engage cooperatively with the ECB/SSM.51 Similarly, while ESMA has been quick to engage with the ECB/ SSM where the former’s banking supervision activities raise market disclosure issues (ESMA has underlined, for example, that ECB/SSM supervisory measures may require market disclosure), related ESMA and ECB/SSM relations seem to have been directed

in relation to markets in financial instruments)), and is mandated to engage in prudential supervision-related activities (Art 4(1)). 49 The Commission has proposed that an investment firm conducting MiFID II/MiFIR (Markets in Financial Instruments Directive II 2014/65/EU [2014] OJ L173/349 and Markets in Financial Instruments Regulation (EU) No 600/2014 [2014] OJ L173/84) own-account dealing or underwriting/placing activities be reclassified as a ‘credit institution’ (and so could potentially come within the SSM) either where it has assets in excess of €30 billion; or where its total assets in combination with group investment firms that carry out such activities are in excess of €30 billion; or where the firm is so designated by its consolidating supervisor to ensure financial stability: COM (2017) 790, 2013 Capital Requirements Regulation, Art 4(1). 50 ESMA/2015/838. The ECB subsequently called on the Commission to revise EMIR to reflect its position: ECB, Response to the Commission Consultation on EMIR, 2 September 2015. The 2017 CCP Supervision Proposal readjusts the composition and voting arrangements for colleges and enhances the ECB’s role (COM (2017) 331). 51 ESMA, Press Release (8 February 2016).

ESMA and the EU Financial Governance Network 325 to mutual learning and support.52 Further, the ECB/SSM is supportive of additional direct supervisory powers for ESMA as a means for strengthening Capital Markets Union (CMU) and thereby Banking Union.53 ESMA’s recent purposeful embrace of the financial stability agenda54 might be regarded as defensive action against an encroaching ECB/SSM, but it also represents natural territory for a financial markets regulator seeking to position itself within the currently live policy debate on financial market stability risk. Nonetheless, the potential for institutional friction is real, with three flashpoints likely in the short term: Brexit; CCP supervision; and the prudential supervision of investment firms. Thus far, there is little sign of divergence, in their respective spheres of competence, in how ESMA and the ECB/SSM are approaching Brexit,55 but the potential for friction, and for ESMA to develop related incentives to expand its Brexit activities, cannot be entirely discounted given the salience of Brexit management. In relation to CCPs, the 2017 CCP Supervision Proposal proposes an enhancement of ESMA’s supervisory powers over EU CCPs, but at the same time also proposes a greater role for the EU’s ‘central banks of issue’ and that ESMA obtain the consent of the ECB or other relevant central banks of issue prior to taking identified supervisory actions.56 For its part, the ECB is seeking additional supervisory powers over CCPs, given their relevance to financial stability and the smooth transmission of monetary policy,57 and its support for any enhancement of ESMA’s role over CCPs has been guarded; it has called on the institutions to carefully assess the Proposal’s ESMA-related reforms.58 The CCP territory is accordingly likely to be contested, and may generate incentives for ESMA to protect its current and emerging CCP mandate as a result. Finally, investment firm regulation and supervision are likely to become a flashpoint, given the Commission’s proposal in its 2017 Investment Firm Supervision Proposals that the scope of the SSM be expanded to include large, systemically significant investment firms.59 If this proposed reform is adopted (and it is likely to be contested given the implications for 52 ESMA provided guidance on how the EU’s mandatory financial market disclosure requirements apply as regards supervisory actions – to the market (Q&A on the Common Operation of the Market Abuse Directive (ESMA/2016/419)) and also to the ECB/SSM (BoS, Minutes, 28 September 2016 (ESMA/2016/BS/259)). 53 eg, Speech by ECB Vice President Vítor Constâncio on ‘Synergies between Banking Union and Capital Markets Union’, 19 May 2017. 54 See further ch 4. 55 The ECB/SSM has adopted guidance on bank relocation to the euro area and is monitoring bank preparedness regarding Brexit (eg, ECB Banking Supervision, Brexit: an ECB supervision perspective, November 2017). As outlined in ch 4, ESMA has adopted a series of opinions and measures similar to those of the ECB/ SSM, in that they are designed to ensure that any relocation leads to a meaningful embedding of the firm in question within the new EU home jurisdiction, particularly as regards governance and risk management. 56 COM (2017) 331. See further ch 5. 57 The ECB proposed in 2017 that its mandate be revised to allow it to regulate ‘clearing systems for financial instruments’ for monetary purposes: ECB Recommendation 2017/18 (Official Journal references are provided only for legislative measures in this book). This initiative can be in part related to the proposed injection of central banks of issue into the CCP supervision framework by the 2017 CCP Supervision Proposal, but can also be read as a declaration of intent, as the ECB has long been concerned to exercise some degree of oversight over CCPs on financial stability grounds, as evidenced by its ill-fated ‘euro area location policy’ for CCPs clearing euro-related instruments (see further ch 5). Since the adoption of the 2017 CCP Supervision Proposal by the Commission, the ECB has been signalling its desire for additional CCP powers (eg, Statement by ECB President Draghi to the European Parliament’s ECON Committee, 26 February 2018). 58 ECB, Opinion on the Commission 2017 CCP Recovery and Resolution Proposal (2017). 59 See n 49.

326 ESMA as a Network Actor national supervisory autonomy and Brexit-related competition), ESMA can be expected to police its perimeter ever more vigilantly. In the medium to long term, the ECB/SSM will likely come to represent either an existential opportunity or a threat to ESMA. A confluence of factors, including Brexit, shifts in political postures, and growing familiarity with the SSM and with ESMA may lead to a wider reconfiguration of EU financial governance in the future. ESMA might, for example, be transformed into a direct, financial market supervisor with wideranging and binding powers, providing the conduct counterpart to the ECB/SSM under a new ‘twin peaks’ model for EU financial governance. But a range of other scenarios is possible, from an incremental strengthening of the status quo to the absorption of (some of) ESMA’s powers within a reorganised ECB/SSM. One way or the other, the long shadow the ECB/SSM casts over the future of EU financial governance can reasonably be assumed to create incentives for ESMA to protect its mandates and to signal its importance to EU financial market governance, and to ensure it is strongly positioned for any reforms that may emerge. In terms of effectiveness, it seems reasonable to suggest that, assuming no major upheaval to current institutional arrangements, a cooperative and mutually productive SSM/ESMA relationship will continue to develop, and that ESMA’s effectiveness will be enhanced by the related potential for regulatory learning, coordination, and mutual support. The occasional skirmishes that seem to arise may simply evidence the inevitable tensions generated as institutions – even where there is a great disparity in power – learn to play a new institutional game. Further, ESMA’s incentives to protect its mandate territory from the ECB/SSM may focus its attention on its core mandate and hone its technical expertise, with productive consequences for its effectiveness. From a legitimation perspective, however, there may be troubling effects, as the ECB/SSM at the same time provides ESMA with incentives to adopt an expansionist approach to its mandate.

III. ESMA and the International Financial Market Governance Network A. The EU, ESMA, and International Financial Market Governance ESMA’s technocratic network also includes the actors of international financial market governance. International financial governance is usually characterised as the system that develops standards for the global financial system, supports market access, and facilitates coordination, primarily through the measures adopted by the international standard-setting bodies (ISSBs).60 The main ISSBs in the financial markets sphere

60 See E Avgouleas, Governance of Global Financial Markets. The Law, the Economics, the Politics (Cambridge University Press, Cambridge, 2012).

ESMA and the International Financial Market Governance Network 327 are the Financial Stability Board (FSB), the International Organisation of Securities Commissions (IOSCO), and the International Financial Reporting Standards (IFRS) Foundation, which, since the financial crisis, have come to play a determinative role in shaping standards and cooperation arrangements for the international financial market.61 The management of the EU’s international financial relations with the ISSBs is split between the Commission (as the EU’s supranational, executive body) and the ECB (depending on the issue at hand); and the Member States (usually through NCAs or central banks, although at times finance ministries). In the FSB, the Commission and the ECB are currently members of the decision-making plenary session, along with the UK, France, Germany, Italy, the Netherlands, and Spain (represented by their finance ministries, central banks, and/or other regulators). In IOSCO, the Commission has associate member (non-voting) status, while the EU’s NCAs are ordinary voting members and eight NCAs are currently members of the decision-making IOSCO Board (Ireland, Belgium, France, Germany, Italy, the Netherlands, the UK, and Spain).62 The Commission sits (with voting rights) on the oversight body of the IFRS Foundation (the IFRS Foundation Monitoring Board) together with a number of major non-EU regulators and IOSCO. Institutional actors aside, international financial market governance also includes the different market access and cooperation/coordination arrangements adopted by states on a multi- and bilateral basis to manage the mosaic of relationships between ‘home’ states, where regulated actors are registered and supervised, and the ‘host’ states where they seek to provide financial services,63 of which the EU’s ‘third country’ regime, discussed in section III.C of this chapter, is an example. ESMA’s mandate extends to international financial market governance,64 in relation to which it has recently emerged as a nascent but purposeful and increasingly important actor, although the Commission remains the dominant EU-level actor in the EU’s international financial market relations. The Commission is typically the EU vote-holder on the ISSBs, and usually manages bilateral negotiations, particularly those of high political salience; it was, for example, the main EU actor in the fractious negotiations on EU/US CCP market access65 and in the resolution of the 2017 EU/US fracas on the difficulties MiFID II’s investment research rules generated for US asset managers.66 Nonetheless,

61 See L Quaglia, The European Union and Global Financial Regulation (Oxford University Press, Oxford, 2014). 62 On IOSCO’s governance, see P-H Conac, The European Union’s role in international economic fora. Paper 6: The IOSCO Study for the European Parliament (2015). 63 These mechanisms include the multiplicity of ‘mutual recognition’, ‘substitute compliance’, ‘equivalence’, and other techniques used to manage access. See, eg, H Jackson, ‘Substituted compliance: the emergence, challenges, and evolution of a new regulatory paradigm’ (2015) 1 Journal of Financial Regulation 169; and P-H Verdier, ‘Mutual Recognition in International Finance’ (2011) 52 Harvard International Law Journal 56. 64 ESMA Regulation, Art 33 empowers ESMA to develop contacts and enter into administrative arrangements with supervisory authorities, international organisations, and the administrations of third countries. More specific ESMA powers relating to international coordination and information exchange are contained in sectoral EU financial market legislation. 65 The negotiations were led by the Commission and not ESMA, although ESMA had earlier provided technical advice to the Commission as regards the required ‘equivalence’ of the US regime governing CCPs. 66 The MiFID II requirement for asset managers to ‘unbundle’ the cost of investment research provided by their brokers generated a serious fracas over Autumn 2017, as concerns grew that US brokers providing research to EU firms would have been required to change their US regulatory status and become ‘investment advisers’ in order to comply with MiFID II. After intense lobbying, the US SEC adopted temporary

328 ESMA as a Network Actor ESMA’s technocratic influence in this area is expanding and can be expected to deepen, as the confluence of Brexit and the 2017/2018 reform waypoint is likely to lead to a material strengthening of ESMA’s role in international financial market governance.

B. ESMA and the International Standard Setters i. A Productive Channel for Influence International financial market governance is pivoting from being previously mainly preoccupied with the development of standards (in relation to which national political interests have traditionally been paramount) to adopting a more operational posture and addressing matters relating to supervisory coordination and data management (in relation to which the interests and expertise of financial market regulators are becoming increasingly paramount).67 IOSCO, for example, is focusing closely on the practical management of conduct risk and developing a related ‘tool-kit’,68 facilitating peer review by the FSB of compliance with international standards,69 supporting stress testing,70 and examining the operational details of market access arrangements.71 To take another example, the ISSBs are coordinating efforts to understand, manage, and interrogate the vast financial market data-set now emerging following the implementation of the new crisis-era reporting requirements.72 The increasingly operational quality to the ISSBs’ activities makes ISSB engagement a potentially productive setting for ESMA, as it provides ESMA with a sphere of operation that is relatively uncontroversial and fits well with ESMA’s soft coordination-oriented powers; ISSB engagement also provides ESMA with fruitful opportunities for expert, technocratic input and credibility-building, for the construction of potentially productive international technocratic alliances, and for the related strengthening of ESMA’s position through soft international power.73 International financial market governance is not, however, an entirely accommodating

‘no action’ relief, which allowed US brokers to comply with MiFID II in a manner consistent with US securities regulation and which did not require a change in regulatory status (SEC, ‘SEC Announces Measures to Facilitate Cross-Border Implementation of the European Union’s MiFID II’s Research Provisions’, Press Release, 26 October 2017). At the same time, the Commission issued an FAQ on its interpretation of how the MiFID II rules applied to third country brokers (Commission, FAQ – MiFID II: Interaction with Third Country Brokers). While ESMA noted its engagement in related ‘positive discussions’ with the US SEC (ESMA Chair Maijoor, Speech on ‘ESMA View Point – Priorities for 2018’, 16 November 2017), the EU’s engagement appears to have been Commission-led. 67 E Helleiner and S Pagliari, ‘The end of an era in international financial regulation? A post-crisis research agenda’ (2011) 65 International Organization 169. See further N Moloney, ‘International financial governance, the EU, and Brexit: the agencification of EU financial governance and the implications’ (2016) 17 European Business Organisation Law Review 451, on which parts of this section are based. 68 IOSCO, Task Force Report on Wholesale Market Conduct (2017). 69 IOSCO, Implementation Report: G20/FSB Recommendations related to Securities Markets (2017). 70 IOSCO, Framework for Supervisory Stress Testing of CCPs (2017). 71 IOSCO, Task Force on Cross-Border Regulation. Final Report (2015). 72 Particularly in relation to the massive data-set that is emerging on the OTC derivatives markets (eg, FSB, Review of OTC derivatives market reform: effectiveness and broader effects of the reforms (2017)). 73 On EU agency soft power internationally, see S Lavenex, ‘The external face of differentiated integration: third country participation in EU sectoral bodies’ (2015) 22 Journal of European Public Policy 836. The importance of such soft power to the development of international regulatory networks has been extensively

ESMA and the International Financial Market Governance Network 329 environment for ESMA. The persistence of structural differences across national economies and financial systems in the EU and of related divergences in national regulatory preferences, limits the extent to which ESMA can operate as a representative of a collective EU preference. So too do the competences of the Commission (and the ECB) with respect to the ISSBs. But it is nonetheless becoming clear that ESMA is committed to strengthening its presence internationally through the ISSBs, and that the currently operational bent of international financial market governance is an accommodating one for ESMA.74

ii. Effectiveness and Legitimacy ESMA’s effectiveness in relation to international financial market governance can be cast in terms of its ability to strengthen the EU’s capacity to impose EU preferences as international financial market governance becomes more operational. The international and comparative political economy literature on how the EU engages with international financial relations75 suggests that ESMA’s effectiveness could be a key determinant of the extent to which the EU can impose its preferences. International financial governance has traditionally been examined as a function of the preferences of the ‘great powers’ in finance – the US76 and, increasingly, the EU.77 But the EU’s ability to act as a ‘great power’ is constrained given the deep-seated institutional structures that shape different national economies and financial systems in the EU, and which also shape (and limit) the extent to which the EU can ‘up-load’ a collective preference internationally, ‘down-load’ international standards, and ‘cross-load’ preferences to third countries.78 There are, however, different mechanisms that support preference construction and diffusion in this sphere, such as the national technocratic agencies which can shape and then diffuse domestic preferences internationally by supporting the ‘regulatory capacity’ of states in international financial governance – or states’ ability to achieve desired outcomes internationally through the adoption, monitoring, and enforcing of rules.79 The EU’s ‘regulatory capacity’ has accordingly been identified as of central importance

documented following Slaughter’s pioneering analysis (A-M Slaughter, A New World Order (Princeton University Press, Princeton, NJ, 2004)). 74 ESMA’s Annual Reports and Work Programmes regularly reference the importance of its international activities and its active participation in the activities of the major ISSBs for financial markets. See, eg, ESMA, 2018 Work Programme (ESMA20-95-619) (2017) 18 and 20, reporting on ESMA’s agenda for IOSCO and IFRS Foundation collaboration. 75 See, eg, A Dür, ‘Fortress Europe or open door Europe? The external impact of the EU’s single market in financial services’ (2011) 18 Journal of European Public Policy 619; and E Posner and N Véron, ‘The EU and financial regulation: power without purpose’ (2010) 17 Journal of European Public Policy 400. 76 See D Drezner, All Politics is Global. Explaining International Regulatory Regimes (Princeton University Press, Princeton, NJ, 2007). 77 D Mügge, ‘Europe’s regulatory role in post-crisis global finance’ (2014) 21 Journal of European Public Policy 316. 78 On ‘up-loading’, ‘cross-loading’, and ‘down-loading’, see Quaglia, n 61. 79 A Newman and E Posner, ‘Putting the EU in its place: policy strategies and the global regulatory context’ (2015) 22 Journal of European Public Policy 1316 and D Bach and A Newman, ‘The European regulatory state and global public policy: micro-institutions, macro-influence’ (2007) 14 Journal of European Public Policy 827. As outlined in ch 1, regulatory capacity also relates to the ability of regulators to achieve their aims.

330 ESMA as a Network Actor to its degree of influence on international financial governance.80 ESMA represents a significant enhancement of the EU’s regulatory capacity as regards the financial market regulatory process, and so provides a new technocratic channel though which the EU can engage with international financial market governance. ESMA’s effectiveness in this area can accordingly be linked to the extent to which it provides a productive technocratic channel through which EU preferences, particularly as regards technical, operational matters, can be exerted. The EU/IFRS Foundation relationship is a key one for the EU81 and so a testing ground for ESMA’s effectiveness. International Financial Reporting Standards (IFRS) adopted by the IFRS Foundation are the mandatory EU financial reporting standard for the consolidated accounts of EU firms listed on ‘first tier’ trading venues (or ‘regulated markets’) and so a main plank of EU financial market regulation. Much of EU/IFRS Foundation engagement takes place through the Commission, which holds voting rights on the IFRS Foundation’s oversight Monitoring Board. An EU committee (the Accounting Regulatory Committee – ARC) and a technical advisory group (the European Financial Reporting Advisory Group – EFRAG), both of which advise the Commission on its adoption for the EU of IFRS through the IFRS ‘endorsement’ process, play supporting roles. ESMA, however, has emerged as a significant actor in EU/IFRS Foundation relations. With a financial reporting mandate,82 well equipped to navigate a fragmented EU institutional environment with multiple national and EU-level components,83 and committed to enhancing IFRS convergence,84 ESMA, while not a formal EU representative actor within the IFRS Foundation, has moved to claim ownership over technical IFRS Foundation engagement, and looks set to strengthen EU influence in so doing. ESMA has, for example, engaged actively with the IFRS Foundation on the development of IFRS, providing extensive technical input,85 and on IFRS Foundation governance.86 It has also constructed an oversight role for itself over the application of IFRS in the EU,87 thereby strengthening its ability to engage productively with the IFRS Foundation. Nonetheless, ESMA’s ability to operate

80 See, eg, D Bach and A Newman, ‘The European Union as hardening agent: soft law and the diffusion of global financial regulation’ (2014) 21 Journal of European Public Policy 430. 81 Reflected in the EU’s financial support of the Foundation: Regulation (EU) No 2017/827 [2017] OJ L129/24. 82 ESMA Regulation, Art 29(1)(c). 83 At an early stage of ESMA’s engagement, the IFRS Foundation noted that it was difficult for the EU to present a consistent position given the different national and EU-level bodies engaged with financial reporting/the IFRS Foundation: P Maystadt, Should IFRS standards be more “European”? Mission to reinforce the EU’s contribution to the development of international accounting standards, Report for the Commission (2013). 84 ESMA Chair Maijoor highlighted early on that pan-EU coordination of IFRS was one of ESMA’s primary objectives: Speech on ‘Developments in European Financial Reporting’, 12 November 2012. 85 In 2016, eg, ESMA provided 11 detailed comment letters to the IFRS Foundation. The year 2017 saw it provide nine, including on the Foundation’s general review of the effectiveness of IFRS disclosures (ESMA/ IFRS Foundation Letter, 2 October 2017). 86 ESMA emerged as supportive if critical during the 2015 review of IFRS Foundation governance, noting the improvements made by the Foundation but also calling for stronger Foundation accountability and appropriate representation for financial market regulators: ESMA/IFRS Foundation Letter, 19 November 2015. 87 ESMA’s related ‘European Enforcers Coordination Sessions’ (EECS) are noted in ch 4.

ESMA and the International Financial Market Governance Network 331 effectively here may be obstructed by tensions within the EU financial reporting/IFRS ‘network’. The relationship between ESMA and the ARC/EFRAG bodies involved in the internal EU IFRS endorsement process is not always easy88 and may hinder ESMA in its IFRS Foundation relations, while the potential for prejudicial Commission/ESMA tensions is not insignificant, as the Commission is the EU representative on the IFRS Foundation Monitoring Board and has a long history of leading the EU charge on issues of IFRS controversy. ESMA and IFRS Foundation relations appear, however, to be productive and collaborative, and the internal EU institutional complexities do not appear to be disruptive. ESMA/IFRS Foundation communications over the potentially controversial 2015 Review of Structure and Effectiveness of the IFRS Foundation, for example, appear to have been productive, while ESMA has succeeded in negotiating a Protocol on ESMA and IFRS Foundation cooperation, which clarifies ESMA’s role and the Foundation’s commitment to operational cooperation with ESMA.89 Overall, the EU’s ability to impose its preferences in this area can be expected to strengthen as a result of ESMA’s engagement alongside the Commission’s. ESMA is also developing a strong presence on IOSCO, which has previously been regarded as a weak point as regards the EU’s ability to impose its preferences on international financial market governance, particularly given the longstanding US dominance of IOSCO.90 ESMA, like the Commission, is a non-voting, associate member of IOSCO. But unlike the Commission, ESMA enjoys ‘permanent observer’ status on the IOSCO Board,91 reflecting its distinct supervisory competences.92 ESMA is also a non-voting/ observer member of major IOSCO committees, chief among them IOSCO’s European Regional Committee; Committee on Risk and Research; and Committee on Credit Rating Agencies (reflecting its role as a supervisor of rating agencies and its prominent role in the global colleges of supervisors, which supervise the three major global rating agencies). This embedding of ESMA in IOSCO is not only a consequence of its distinct powers; it can also be explained as reflecting the array of channels through which ESMA has come to build its capacity and credibility among the community of international financial market regulators, and the strengthening ability of the EU to impose preferences accordingly. ESMA has, for example, supported many of the IOSCO standards adopted on foot of the G20 crisis-era reform agenda and used them to develop the EU’s administrative rule-book,93 and as ESMA’s risk assessment capacity has strengthened it has come to assist IOSCO in its monitoring of global financial market risk.94 ESMA is also proving adept in supporting IOSCO,95 and thereby 88 ESMA and the other ESAs have expressed strong opposition to the persistence of private sector involvement on EFRAG, and have refused to sit on EFRAG as voting members, although they sit as observers on EFRAG’s decision-making Board and its advisory Technical Expert Group. 89 IFRS Foundation and ESMA Statement of Protocols for Cooperation on IFRS, updated 13 October 2016. 90 Quaglia, n 61, 105–08. 91 Provided for in Resolution of the Presidents’ Committee on the Composition of the IOSCO Board, Resolution 5/2013 (amended by Resolution 2//2015). 92 Conac, n 62. 93 eg, the extensive organisational, conduct, and prudential EU administrative rules that apply to CCPs and which were developed by ESMA are based in part on the 2012 CPSS-IOSCO Principles for Financial Market Infrastructures. 94 2018 ESMA Work Programme, n 74, 16. 95 ESMA/IOSCO Letter, 23 February 2015, calling on IOSCO to play a prominent role in international coordination.

332 ESMA as a Network Actor strengthening IOSCO’s potential as a platform from which ESMA can extend its (and EU) influence. Further, ESMA is building independent relationships with the financial market regulators that sit on IOSCO, through international cooperation agreements. Under the 2011 AIternative Investment Fund Managers Directive,96 for example, ESMA centrally negotiated cooperation arrangements between NCAs and 50 third country regulators (more than 1,000 bilateral agreements were adopted), based on a Board of Supervisors-agreed ESMA template. As well as deepening ESMA’s relationship with third country regulators, this significant operational success sent a clear signal internationally as to ESMA’s ability to act on behalf of EU NCAs in international negotiations, and as to the willingness of NCAs to confer a mandate on ESMA to negotiate on their behalf. ESMA has also established a technical presence on the FSB,97 and is active in the more informal bodies that support international financial market regulatory coordination. Chief among these are the OTC Derivatives Regulators Group and Forum (ODRG and ODRF), through which ESMA works with other major regulators to address gaps and inconsistencies in the implementation of the G20 OTC derivatives market reform agenda. ESMA also seeks to influence standard-setting for financial market infrastructures, including for CCPs, through the Committee on Payments and Markets Infrastructure (CPMI-IOSCO). From an effectiveness perspective, current indications as to ESMA’s ability to enhance the EU’s capacity to impose EU preferences on the ISSBs, at least in relation to operational/technical matters, augur well. There may also be benefits from a legitimation perspective, as international engagement and ESMA’s related incentives to signal its credibility may sharpen its attention to the quality of its outputs and to ensuring mandate compliance. This is not to discount the legitimation risks of ESMA’s role here, particularly as the ISSBs have long been associated with legitimacy challenges.98 Any standards adopted by the ISSBs are, however, usually adopted in the EU through the legislative and administrative rule-making process, while ESMA’s current engagement appears to be mainly directed towards more operational matters, which carry lighter legitimation risks.

C. ESMA, Third Country Actors, and Equivalence i. The Third Country/Equivalence Regime and ESMA’s Role It is in relation to the arrangements that govern access by third country (non-EU/EEA) actors to the EU financial market that ESMA’s technocratic influence has been most pronounced.99 The future shape of the EU’s third country regime is currently highly

96 Directive 2011/61/EU [2011] OJ L174/1. 97 Including through the FSB’s ‘Legal Entity Identifier’ Workstream. 98 From the extensive literature see, eg, M Barr, ‘Who’s in Charge of Global Finance’ (2014) 45 Georgetown Journal of International Law 971; and M Barr and G Miller, ‘Global administrative law: the view from Basel’ (2006) 17 European Journal of International Law 15. 99 ESMA is also shaping how third country actors interact with EU financial market governance by means of the opinions it has provided on whether exemptions may be available from the application of EU rules (eg, its

ESMA and the International Financial Market Governance Network 333 unpredictable, with the 2017 ESA Proposal and the EU/UK withdrawal negotiations injecting material uncertainty as well as high political salience into the third country regime. But however the regime develops, it seems clear that ESMA will emerge with a strengthened role and greater ability to exert influence. The EU, in common with all major financial markets internationally, controls access by non-domestic (third country) actors to its financial market. The rules that govern such access are scattered across sectoral EU financial market legislation, but usually require an ‘equivalence’ determination as to the extent of the alignment between the EU’s and the third country’s rules and financial market governance arrangements.100 In very broad terms, where a third country regime is deemed ‘equivalent’ to the relevant sectoral EU regime, a third country regulated actor can access the EU financial market on the basis of those third country rules, although registration/recognition and/ or supervisory coordination and monitoring arrangements may apply. ESMA’s engagement with this third country regime is primarily through two channels: it is usually required to provide the Commission with equivalence assessments;101 and it can be required to register or authorise third country actors. The third country regime, reflecting the multiple and shifting interests which have shaped it,102 is partial, complex, and lacking in coherence, and ESMA’s role varies with the sectoral financial market legislation in question.103 There are, however, some similarities across the three major third country/equivalence regimes that are of the most operational significance to the EU financial market and to ESMA’s role: those contained in the 2014 MiFID II/MiFIR; 2012 EMIR; and the Consolidated Credit Rating Agency Regime. The 2014 MiFID II/MiFIR contains an equivalence-based third country regime that (since January 2018) permits the provision of third country investment services to

opinion on the application of MiIFD II/MiFIR transparency requirements to certain trades on third country trading venues: ESMA, Opinion. Determining Third Country Trading Venues for the Purposes of Transparency under MiFID II/MiFIR (ESMA70-154-165) (2017)). 100 For an assessment, see N Moloney, The EU and its Investment Banker: Rethinking Equivalence for the EU Capital Market, LSE Law, Society, and Economy Working Paper Series, WP No 5/2017 (2017), available at http://ssrn.com/abstract=2929229. The EU’s third country rules also have an internal dimension (ie the enhanced capital requirements that apply to EU banks’ third country loan assets which do not originate in an ‘equivalent’ third country, and the rules which require that certain trades are carried out on ‘equivalent’ third country venues). 101 The Commission is typically conferred under sectoral EU financial market legislation with the power to initiate the equivalence process and to adopt an equivalence decision, usually in the form of an Implementing Act adopted under the ‘examination procedure’ for administrative rule-making (derived from TFEU Art 291). ESMA engages with this procedure at the technical advice stage; the Commission usually, although not always, mandates ESMA to provide technical advice on the relevant third country regime. 102 See, eg, L Quaglia, ‘The Politics of “Third Country Equivalence” in Post-Crisis Financial Services Regulation in The European Union’ (2015) 38 Western European Politics 167. 103 Brexit has generated an extensive scholarly and policy literature on the EU’s different third country regimes. See, eg: K Alexander, ‘The UK’s third country status following Brexit: post-Brexit models, third country equivalence and Switzerland’ in K Alexander, C Barnard, E Ferran, A Lang, and N Moloney, Brexit and Financial Services. Law and Policy (Hart Publishing, Oxford, 2018) 115; J Armour, ‘Brexit and Financial Services’ (2017) 33 (Supp 1) Oxford Journal of Economic Policy S54; Moloney, n 100; and E Ferran, ‘The UK as a Third Country in EU Financial Services Regulation’ (2017) 3 Journal of Financial Regulation 40. For an industry perspective, see International Regulatory Strategy Group, The EU’s Third Country Regimes and Alternatives to Passporting (2017); and, for an EU policy perspective, see European Parliament Briefing, A Duvillet-Margerit, M Magnus, B Mesnard, and A Xirou, ‘Third Country Equivalence in EU Banking Legislation’, 9 December 2016.

334 ESMA as a Network Actor EU wholesale market participants, without a requirement for an EU presence and on a cross-border services basis, once an equivalence determination is in place (in relation to which ESMA advises the Commission); and also subject to the regulated actor’s being ‘registered’ with ESMA (registration requires that an equivalence decision is in place; the firm is authorised in its home jurisdiction and subject to effective supervision and enforcement there; and related supervisory coordination arrangements with the third country supervisor have been established) (MiFIR Article 46). ESMA is not empowered to supervise these registered third country firms, but it can withdraw a registration decision.104 The EMIR regime105 contains a number of third country access-related provisions but at its core is the third country access regime for third country CCPs, which engages ESMA in a number of ways. ESMA may ‘recognise’ a third country CCP (which can then provide services in the EU) when a series of conditions are met (EMIR, Article 25(2)).106 Central to the recognition regime is the requirement for a Commission equivalence determination, in relation to which ESMA advises the Commission. The CCP in question must also be authorised in the relevant third country and, in ESMA’s judgement, subject to effective supervision and enforcement, ensuring full compliance with the third country’s prudential requirements.107 Appropriate cooperation arrangements must also have been established between ESMA and the relevant third country supervisor. As under the MiFIR third country regime, ESMA is not empowered to supervise ‘recognised’ CCPs, but engages in ongoing review and monitoring of the recognition conditions. ESMA has recently claimed a form of supervisory oversight, in that in practice it monitors third country CCPs for stability and other risks they may pose to the EU financial market, in accordance with its general ESMA Regulation mandate to support financial stability.108 ESMA recognised a first group of 11 CCPs in 2016 (following the prior Commission equivalence decisions on which ESMA provided advice), and has continued to recognise CCPs as equivalence decisions are made.109 A similar regime applies to third country trade repositories under EMIR. A trade repository established in a third country may provide services to entities established in the EU after it has been ‘recognised’ by ESMA (EMIR, Article 77(1)). 104 The conditions governing withdrawal of registration (MiFIR, Art 49) relate to ESMA’s having ‘wellfounded reasons based on documented evidence’ that the firm, in relation to its EU activities, is acting in a manner clearly prejudicial to the interests of investors or the orderly functioning of markets, or that the firm has seriously infringed provisions applicable to it in the third country and based on which the equivalence decision was made. 105 Regulation (EU) No 648/2012 [2012] OJ 201/1. 106 To facilitate applications by third country CCPs, ESMA has adopted Practical Guidance for the Recognition of Third Country CCPs by ESMA (March 2013). 107 Anti-money laundering and terrorism financing requirements also apply. Commission Delegated Regulation 153/2013 sets out the detailed information requirements that the third country CCP must fulfil and that support the ESMA assessment. 108 ESMA, ESMA’s Supervision of Credit Rating Agencies, Trade Repositories and Monitoring of Third Country Central Counterparties 2016 Annual Report and 2017 Work Programme (ESMA60-1467488426-27) (2017) 60–65. 109 ESMA recognised 10 additional third country CCPs in 2017 and continues to assess applications: ESMA, ESMA’s Supervision of Credit Rating Agencies, Trade Repositories and Monitoring of Third Country Central Counterparties 2017 Annual Report and 2018 Work Programme (ESMA80-199-153) (2018) 27.

ESMA and the International Financial Market Governance Network 335 ESMA recognition is conditional on the trade repository’s submitting all the necessary information to ESMA, including at least that information necessary to verify that the trade repository is authorised and subject to effective supervision in a third country which has been recognised by the Commission as being equivalent in accordance with EMIR, and appropriate cooperation arrangements being in place (Articles 77(2) and 75(3)). As yet, no third country trade repository has applied for ESMA recognition. ESMA is also pivotal to the two-pronged third country regime that applies to rating agencies under the Consolidated Credit Rating Agency Regulation (CCRAR).110 Under the CCRAR ‘endorsement regime’, where a third country rating agency forms part of a group that includes an EU rating agency, its ratings can be used for regulatory purposes in the EU where the rating is ‘endorsed’ by the EU rating agency (CCRAR, Article 4). A series of conditions, which are policed by ESMA (and which include an equivalence-like ‘as stringent as the CCRAR’ assessment by ESMA of the relevant third country rules), apply to the endorsement process. These conditions in effect allow ESMA to supervise the third country rating agency by assessing how the ‘endorsing EU rating agency’ complies with its endorsement obligations.111 Under the CCRAR ‘equivalence/certification regime’, a third country rating agency that is not associated with an EU rating agency may issue ratings which can be used for regulatory purpose in the EU, but here the rating agency must be ‘certified’ by ESMA (CCRAR, Article 5). For such certification, the third country rating agency must be authorised or registered and subject to supervision in the third country; the Commission (advised by ESMA) must have adopted an equivalence decision relating to the legal and supervisory framework of the third country; and cooperation arrangements between ESMA and the third country authority must be in place (Article 5(1)). A certified rating agency is supervised by ESMA to ensure it complies with the conditions of its certification. ESMA also cooperates closely with relevant third country supervisors to monitor the endorsement and certification regimes, including through participation in international colleges of supervisors.112 A host of other sectoral financial market measures contain different types of third country/equivalence arrangements that rely on ESMA to varying degrees. For example, the 2017 Prospectus Regulation permits the use of third country prospectuses to meet EU disclosure requirements for EU public offers/listings once the Commission deems the third country regime equivalent and ESMA has entered into a related cooperation agreement with the relevant third country supervisor;113 the 2016 Benchmark

110 The EU’s rating agency regime is split across four legislative measures. This discussion refers to the Commission’s informal consolidation of the texts in the CCRAR (ELI: http://data.europa.eu/eli/ reg/2009/1060/2015-06-21). 111 ESMA has emphasised its supervisory and enforcement jurisdiction over ‘endorsing’ EU rating agencies: ESMA, Final Report. Technical Advice on CRA Regulatory Equivalence – CRA 3 Update (ESMA33-9-207) (2017) 7–8; and 2017 ESMA CRA/TR Annual Report, n 109, 27. ESMA guidelines amplify the nature of this oversight. 112 ESMA, ESMA’s Supervision of Credit Rating Agencies and Trade Repositories, 2015 Annual Report and 2016 Work Plan (2015) 12. 113 Regulation (EU) No 2017/1129 [2017] OJ L168/12, Arts 29–30.

336 ESMA as a Network Actor egulation contains an equivalence/access regime for third country benchmark adminR istrators which is based on their recognition by NCAs, but which also engages ESMA in the related Commission equivalence assessment process and requires ESMA to enter into cooperation arrangements;114 and the 2014 Central Securities Depositories Regulation deploys an ESMA ‘recognition’ mechanism for third country depositories similar to that which applies under EMIR.115 Recently, the 2017 Securitisation Regulation failed to include a third country access regime, reflecting political tensions regarding the precedent it could potentially have established for post-Brexit UK access.116

ii. The Third Country Regime in Practice: ESMA’s Influence In practice, the Commission controls the equivalence process.117 In its Brexit-sensitive February 2017 Report on Equivalence118 it asserted its institutional pre-eminence, highlighting that the equivalence decision is unilateral and discretionary and can be changed or withdrawn as necessary ‘at any moment’.119 It is also clear that while the Commission usually calls on ESMA’s technical expertise, in areas of acute political salience the Commission retains the equivalence process ‘in house’. It managed for example, the highly sensitive and market-critical 2017 US equivalence determination relating to the MiFIR ‘derivatives trading obligation’ (which requires that certain classes of derivative must be traded on an EU trading venue or on a trading venue operating in an equivalent regulatory regime). The Commission’s finding that certain trading venues supervised by the US Commodities and Futures Trading Commission (CFTC) were subject to an equivalent regime followed negotiations with the CFTC and the adoption by the Commission and the CFTC of a ‘general approach’ to govern the application of the respective EU and US derivatives trading obligations to EU and US trading venues.120 ESMA was not directly involved in this process, although it had earlier acknowledged market concern as to the potential disruption that failure to adopt an equivalence decision could wreak.121 Nonetheless, ESMA has emerged as pivotal player in the equivalence process, and its ability to exert influence is strengthening apace. ESMA is charged under its founding Regulation with assisting the Commission on equivalence decisions,122 and in practice it is almost always called on by the Commission for technical support and

114 Regulation (EU) No 2016/1011 [2016] OJ L171/1, Arts 30–33. 115 Regulation (EU) No 909/2014 [2014] OJ L257/1, Art 25. 116 Regulation (EU) No 2017/2402 [2017] OJ L347/35. The new regime for ‘simple, transparent, and standardised’ (STS) securitisations does not include third country arrangements (although the Commission must by 2022 provide a report on whether to propose a third country regime), an unusual omission, which is at least in part related to uncertainty as to how to deal with the UK as a future major third country in this area (J Brunsden, ‘Plans to Boost Securitisation Market Stalls over Brexit,’ Financial Times (6 February 2017)). 117 Commission decision-making on equivalence is overseen by a comitology committee that includes Member State representatives, but it is difficult to override the Commission. See further Moloney, n 100. 118 Commission, EU Equivalence Decisions in Financial Services Policy: An Assessment (SWD (2017) 102). 119 ibid, 9. 120 Commission Implementing Decision 2017/2238. 121 ESMA, Final Report. Draft Regulatory Technical Standard on the Trading Obligation for Derivatives under MiFIR (ESMA70-156-227) (2017). 122 ESMA Regulation, Art 33.

ESMA and the International Financial Market Governance Network 337 so shapes the Commission’s final decisions. In relation to the CCRAR rating agency certification process, for example, ESMA advised the Commission on the equivalence of the regimes in the US, Canada, Australia, Argentina, Brazil, Mexico, Hong Kong, and Singapore through a series of detailed technical reports,123 and the related Commission equivalence decisions followed ESMA’s approach. Under the EMIR CCP equivalence process, ESMA provided the Commission with extensive technical reports, which were also influential on Commission decision-making, on the equivalence of several jurisdictions. The first set of ESMA CCP equivalence reports in Autumn 2013 covered Australia, Japan, India, Singapore, the Republic of Korea, Switzerland and the US. In only two cases (Australia and Switzerland) did ESMA find the regimes to be equivalent, and these positive findings were accepted by the Commission. In all other cases, ESMA made a finding of conditional equivalence, advising the Commission that it could consider the relevant regime to be equivalent where CCPs ensured their internal rules and procedures reflected certain provisions of EMIR. The Commission reflected ESMA’s overall approach in its subsequent equivalence decisions, finding in all cases (bar the US regime) that the regimes were equivalent, although it diverged from ESMA in that it did not specify in its decisions that CCPs make the related internal adjustments called for by ESMA.124 It did, however, do so in its US equivalence determination125 (which followed complex EU/US negotiations).126 The extent of the Commission’s reliance on ESMA’s technical assessments has accordingly placed ESMA in a position to shape how EU financial market governance applies internationally. To take a recent example, ESMA’s updated 2017 equivalence advice to the Commission on the rating agency regime (which re-examined earlier equivalence assessments in light of subsequent reforms made to the CCRAR) saw ESMA find that four of the nine systems assessed were not equivalent, and invite the Commission to explore the willingness of these jurisdictions to make reforms aligning their regimes with the EU regime.127 The equivalence advice process also affords ESMA significant opportunities to strengthen its credibility, and thereby its regulatory capacity and ability to exert influence, given the technical competence, careful international financial market diplomacy, and deft institutional politicking these assessments require.128 Similarly, the equivalence process 123 ESMA/2012/259 and ESMA/2013/262. 124 eg, ESMA’s report on the South Korean regime advised the Commission that the regime could be considered equivalent in respect of CCPs that made the identified adjustments to internal policies and procedures (ESMA/2013/1371), but the Commission’s subsequent positive equivalence decision did not specify these adjustments, although it noted the lower risks attached to clearing activity in the small Korean market (Commission Decision 2015/2038). 125 Which specified the adjustments required to CCPs’ internal policies and procedure (Commission Decision 2016/377). 126 The CCP equivalence discussions with the US were difficult and were completed only after high-level EU/US political engagement, following which the Commission decided in March 2016 that US regulation of CCPs was equivalent for the purpose of EU market access: Commission, Press Release IP/16/807, 15 March 2016 and Commission/US CFTC, Common Approach for Transatlantic CCPs, 10 February 2016. While the technical experts reached a positive conclusion on equivalence fairly speedily, the political process slowed down the negotiations very considerably: House of Lords, EU Committee, 9th Report of Session 2016–2017, Brexit: Financial Services (2016), para 49. 127 N 111, 10. 128 ESMA’s advice on the equivalence of the Australian CCP regime, eg, was detailed, technical, reviewed supervision as well as regulation, and involved engagement with the relevant Australian regulators (ESMA/2013/BS/1159).

338 ESMA as a Network Actor requirement for third countries to enter into cooperation agreements with the EU has given ESMA a platform from which it can build regulatory relationships internationally and deepen its intelligence on international financial market governance.129 ESMA also acts as a gatekeeper to the EU financial market in those limited cases where some type of registration, certification, or recognition power over third country actors has been conferred on it. These gatekeeper powers fall far short of direct supervisory/oversight powers, but still provide ESMA with a means for exerting technocratic influence. Thus far, gatekeeper functions have been conferred only in relation to the ‘registration’ of firms under MiFIR (on which there is as yet no evidence), the ‘certification’ of rating agencies under the CCRAR, and the ‘recognition’ of third country CCPs and trade repositories under EMIR. Of these, there is most experience with CCP recognition.130 The initial 2016–17 experience with CCP recognition, limited though it is, points to an early ESMA determination to maximise its ability to exercise some form of oversight over third country CCPs, despite the limitations of the recognition process.131 ESMA is required to monitor ongoing compliance by recognised third country CCPs with their recognition conditions, including any related conditions on the underlying equivalence finding,132 but it is not empowered to supervise them directly.133 Nonetheless, from the outset ESMA claimed a financial stability mandate to monitor CCPs’ recognition conditions against the potential risks third country CCPs posed to the EU financial market, and has also developed bespoke data collection channels and risk indicators for monitoring related potential risks to the EU market.134 ESMA’s purposeful approach can be read as a declaration of intent as to its ambitions concerning the supervision of third country CCPs. It has used its third country CCP experience to call for more extensive powers over third country CCPs and also over other actors135 – to some effect as the very limited oversight ESMA/the EU can exercise 129 ESMA’s first set of recognition decisions (relating to 11 third country CCPs over 2016) was accompanied by ESMA’s conclusion of 11 Memoranda of Understanding with 15 different CCP supervisors: ESMA, Annual Report on 2016 (2017) 61. For a recent example, see MoU Related to ESMA’s Monitoring of the Ongoing Compliance with Recognition Conditions by CCPs Established in New Zealand between ESMA, the Reserve Bank of New Zealand and the New Zealand Financial Markets Authority, February 2017. 130 ESMA appears, however, to maintain close contact with third country supervisors under the rating agency third country regime. Its report on supervision in 2017 notes its active participation in the global supervisory colleges for the three largest rating agencies internationally and an intensification of international cooperation as regards rating agency supervision, and also reports on ESMA’s bilateral interactions with third country supervisors: 2017 CRA/TR Annual Report, n 109, 30. 131 ESMA must recognise a third country CCP where it meets the four EMIR recognition conditions (a Commission equivalence decision is in place; the CCP is authorised and subject to effective third country supervision and enforcement; ESMA/third country supervisor cooperation arrangements are in place; and EMIR’s requirements on compliance with anti-money laundering and terrorism financing arrangements are met), none of which requires that the risk the CCP potentially poses to EU financial stability is assessed. 132 The Commission’s related US equivalence determination, eg, requires that ESMA monitors US CCPs to ensure that their internal systems support their compliance with identified EU rules: ESMA, Annual Report on 2016 (2017) 61. 133 The international sensitivities regarding CCP supervision are clear from the ESMA/New Zealand MoU on ESMA’s monitoring of CCP recognition conditions (n 129). It affirms that ESMA does not have direct supervision or enforcement powers over CCPs established in New Zealand, and that ESMA relies on the supervision and enforcement capabilities of the local New Zealand authorities (Art 2). 134 ESMA, Annual Report on 2016 (2017) 61–62; and 2017 ESMA CRA/TR Annual Report, n 109, 54–55. 135 eg ESMA, Response to the Public Consultation on the Operations of the European Supervisory Authorities (ESMA03-173-194) (2017) 3.

ESMA and the International Financial Market Governance Network 339 over third country CCPs has emerged as a major policy concern,136 as discussed in section III.C.iv of this chapter.

iii. Effectiveness and Legitimacy There is little evidence yet on how ESMA deploys its limited gatekeeping powers under the third country regime, although the emerging evidence on CCP recognition augurs well, suggesting an ESMA concern to ensure that financial stability risks are monitored, even if its recognition powers do not allow it to supervise third country CCPs directly. There is significantly more evidence on ESMA’s role in the equivalence assessment process. Here, the extent of ESMA’s influence – even allowing for the Commission’s pre-eminence – places it close to politically sensitive financial market access determinations, usually associated with state power,137 and so brings into focus its effectiveness and legitimacy. ESMA’s effectiveness in this area can be related to its ability to provide the Commission with expertly-informed, practical assessments, which are responsive to the different features of markets and financial governance internationally, including by incorporating assessments of whether equivalent outcomes are achieved,138 but which rigorously deploy the conditions the legislative process has applied to EU financial market access. In some respects, a timorous and accommodating approach to the equivalence assessment might have been expected, as ESMA has strong incentives to build effective relationships with regulators internationally and not to antagonise major global market operators; in others, the political sensitivity of the equivalence process and the Commission’s pre-eminence might have led ESMA to adopt a rigid, box-ticking approach. The evidence suggests, however, that ESMA has embraced its equivalence mandates with some confidence, generally deploying a technically expert, flexible and responsive but also forensic approach, which has provided the Commission with a secure evidence base on which to make equivalence decisions. The first major test of ESMA’s approach to equivalence came with the CCRAR rating agency regime. Here ESMA adopted a pragmatic ‘objectives-based approach’, under which the capabilities of the jurisdiction in question to meet the objectives of the EU’s rating agency regime would be assessed from a holistic perspective.139 ESMA’s assessment of the equivalence of the US regime (which was carried out by ESMA after the US had made changes to its regulatory framework to address equivalence gaps previously identified by the Committee of European Securities Regulators (CESR)), for example, found that the few remaining uncertainties were not capable of m aterially

136 The Commission has warned of the risks to the EU from there being no direct involvement of EU supervisory bodies in the day-to-day supervision of third country CCPs, and of the imbalance between the EU’s reliance on third country supervisors and third country regimes’ insistence on direct oversight over third country (including EU) CCPs, particularly as the EU has the highest number of third country CCP access arrangements as compared to other jurisdictions internationally: 2017 CCP Supervision Proposal Impact Assessment (SWD (2017) 148) 42–43 and 45. 137 On the importance of market access decisions, see Helleiner and Pagliari, n 67. 138 In support of a flexible, outcomes-based approach to equivalence as being best placed to achieve optimal outcomes, see Jackson, n 63. 139 ESMA, Technical Advice on CRA Regulatory Equivalence – US, Canada and Australia (ESMA/2012/259).

340 ESMA as a Network Actor detracting from a positive equivalence finding; that ESMA had gained comfort from its discussions with the US regulator (the SEC); that the application in practice by firms of the US requirements would lead to equivalence; and that the equivalence review involved an assessment of the combined effect of the requirements reviewed and not only individual provisions.140 Similarly, while ESMA’s ‘second generation’ 2017 equivalence advice on the CCRAR was forensic and assertive (finding that four of the nine jurisdictions reviewed were not equivalent), its approach was holistic and pragmatic. ESMA found, for example, that certain jurisdictions’ regimes were equivalent to the CCRAR even though these third country rules did not directly map on to the CCRAR – the overall outcome achieved was sufficiently similar.141 The other major body of evidence concerns ESMA’s assessments of the equivalence of third country CCP regimes. Here, in a politically difficult environment,142 ESMA also pursued a technically detailed but outcomes-based and pragmatic approach. From ESMA’s initial Autumn 2013 series of assessments, the Australian assessment143 is indicative, being objectives-based, designed to assess, from a holistic perspective, the capability of the third country regime to meet the objectives of EMIR, and evidence-based, including liaison with the relevant Australian authorities.144 ESMA also highlighted its concern to consider the consequences for the EU market were a third country regime found not to be equivalent and CCP access disrupted. In this initial series of CCP equivalence assessments ESMA also adopted a deft approach to navigating the international political sensitivities, deploying a ‘conditional equivalence’ model for those jurisdictions (the majority) for which it found that, while there were material divergences between the EU and the third country regimes, equivalence could be achieved by the CCP’s taking internal remedial action: ESMA Chair Maijoor highlighted that ESMA was concerned to avoid a ‘zero sum’ approach to equivalence.145 Similarly, while ESMA was ultimately side-lined during the subsequent difficult EU/US negotiations on CCP equivalence,146 it was concerned to support a pragmatic solution and, following the final EU/US agreement, underlined that it ‘would do everything in its power’ to shorten its review period for US CCP recognition in light of the time pressure the lengthy negotiations had created.147

140 ibid. 141 ESMA found, eg, that while the new EU rules on cross-ownership levels between rating agencies were not mapped in the US regime, the applicable US conflict-of-interest rules achieved the same investor protection outcomes sought by the EU: n 111, 81. 142 Despite the extensive international standards that apply to CCPs, significant difficulties have been generated by duplicative and sometimes conflicting regulatory regimes worldwide. The G20 and FSB have called for greater efforts to achieve ‘deference’ by states internationally to each other’s regimes, and related progress is being monitored by the FSB. See P Knaack, ‘Innovation and deadlock in global financial governance: transatlantic coordination failure in OTC derivatives regulation’ (2015) 22 Review of International Political Economy (2015) 1217. 143 ESMA/2013/1159. 144 In relation to the supervision equivalence assessment, eg, ESMA located the assessment within the distinct features of the Australian institutional setting and examined practical supervisory practices, including in relation to data collection. 145 ESMA Chair Maijoor, Speech on ‘International co-ordination of the regulation and supervision of OTC derivatives markets’, 17 October 2013. 146 See n 126. 147 ESMA, ESMA Resumes US CCP Recognition Process Following EU–US Agreement, 10 February 2016.

ESMA and the International Financial Market Governance Network 341 ESMA has also sought to mitigate the market uncertainties equivalence decisions, or the absence thereof, can generate through its supervisory convergence tools. It has used its MiFID II/MiFIR Q&A, for example, to explain how the share-trading obligation (which requires that certain shares must be traded on identified classes of trading venue in the EU or on equivalent third country trading venues) applies in relation to third country venues.148 Overall, the evidence suggests that ESMA has been technically assured, outcomesfocused and pragmatic, but also forensic in assessing equivalence regimes and not afraid to find jurisdictions not equivalent. Perhaps the best indicator of ESMA’s adopting an effective approach is that the Commission has generally, although not always, followed its approach. There are persistent and well-charted difficulties with the equivalence regime, but these tend to be associated with the Commission and not with ESMA.149 ESMA’s burgeoning influence in an area of some (and increasing) political sensitivity raises the prospect of legitimation risks, although there are mitigants. ESMA’s supervisory gatekeeping powers are limited, conferred in legislative measures, and subject to proceduralisation; and as regards the equivalence process, the Commission remains the decision-maker and ESMA is formally an adviser only. Although the Commission usually follows ESMA’s advice, it does not always, and where equivalence becomes politically contested the Commission typically becomes the main EU actor, as has been the case with different EU/US negotiations. Legitimation concerns are not, however, absent, and they will increase if current proposals to expand ESMA’s powers are adopted, as discussed in the following section III.C.iv.

iv. The 2017/2018 Reform Waypoint: The Third Country Regime, Brexit, and ESMA a. Reforming ESMA’s role Before the Brexit upheavals, the EU’s third country regime for financial market access was something of a backwater, but it was ripe for reform – there is a logic to constructing a more standardised equivalence regime in place of the current complex patchwork of rules, and also to building on experience with ESMA as a technocratic vehicle for third country policy. Prior to the 2017/2018 waypoint, the CMU agenda was already bringing a sharper focus to bear on the third country regime and, in combination with the then-upcoming ESA Review, might have been expected to lead to an incremental strengthening of ESMA’s role.150 The confluence of the 2017 ESA Review and Brexit, however, has generated reform impulses that may lead to more punctuated change. On its withdrawal from the EU, the UK will become a ‘third country’, and its market access will, most likely, in large part depend on the application of the third country regime and

148 ESMA, Press Release (13 November 2017). 149 eg in the EMIR context and noting stakeholder concern, Commission, Impact Assessment on the 2017 EMIR Proposal (SWD (2017) 246) 36. 150 eg ECOFIN Council Conclusions on the Commission Action Plan on Building a Capital Markets Union, 10 November 2015 (Council Document 13922/15), calling on the Commission to assess the impact of the different third country regimes on European capital markets and on financial sector competitiveness.

342 ESMA as a Network Actor its equivalence rules. The UK is seeking a bespoke access arrangement151 and thereby to avoid the full application of the EU’s current third country regime, as the access it provides is, to identify only a few UK difficulties, contingent on a unilateral Commission equivalence decision, which can be withdrawn and may be vulnerable to wider political conditions; requires equivalence with EU financial market governance into the future; and covers only a limited number of financial market sectors.152 Current indications suggest that the EU is unlikely to agree and will apply its third country/equivalence rules.153 Assuming no change to the design of the third country/equivalence regime, ESMA will thus play a pivotal role in decision-making on the equivalence of the UK regime in what is likely to be a highly charged environment. Of course, UK financial market actors can use different routes to the EU financial market that avoid the third country regime, whether by setting up subsidiaries, using subsidiaries but repatriating activities back to the UK,154 or using other techniques such as ‘reverse solicitation’.155 151 At the time of writing, the final shape of any EU/UK agreement was not clear. Prime Minister May’s March 2018 ‘Mansion House’ speech called for a bespoke access arrangement based on a ‘collaborative, objective framework that is reciprocal, mutually agreed, and permanent and therefore reliable for business’, and on the EU and UK’s maintaining the same ‘regulatory outcomes’ over time: Speech on ‘Our future economic partnership with the European Union,’ 2 March 2018. In a follow-up speech on 7 March 2018, Chancellor of the Exchequer Hammond called for a bespoke EU/UK arrangement based on achieving ‘fully equivalent regulatory outcomes’ and on ‘mutual recognition and reciprocal regulatory equivalence’. The UK industry had earlier been pressing for such an approach, setting out how it might work in practice (eg UK Finance, Supporting Europe’s Economies and Citizens: A modern approach to financial services in an EU-UK Trade Agreement (2017) and International Regulatory Strategy Group, A New Basis for Access to EU/UK Financial Services Post Brexit (2017)). Similarly, a leading parliamentary report earlier called on the UK Government to either secure substantial changes to the third country/equivalence regime, or (the preferred option) ensure access through a bespoke free trade agreement incorporating mutual recognition mechanisms (House of Lords, EU Committee, 11th Report of Session 2017–2019, Brexit: The Future of Financial Regulation and Supervision (2018)). Subsequently, in its July 2018 White Paper on the future EU/UK relationship, the UK Government indicated that ‘new economic and regulatory arrangements for financial services’ that would provide regulatory flexibility but preserve the mutual benefits of integrated markets and protect financial stability, outside the EU’s passporting arrangements, would be sought: HM Government, The Future Relationship Between the United Kingdom and the European Union, Cm 9593, July 2018, 28–32. The White Paper argued that the EU’s current third country arrangements were not sufficient to deal with the degree of interconnection between the UK and EU-27 financial markets, and called for an access regime based on the regulatory autonomy of both parties and on an ‘expanded’ equivalence regime. 152 The difficulties have been extensively reviewed since the 2016 referendum. See the references at n 103. 153 The March 2018 European Council negotiating guidelines do not expressly reference financial services but underline that any future trade agreement in services must be consistent with the UK’s being a third country and operate on the basis of host state (EU) rules, and that any future framework must safeguard financial stability in the EU and respect its regulatory and supervisory arrangements: European Council (Art 50) Guidelines of 23 March 2018. The European Parliament has expressly referenced financial services, but has declared that the EU’s third country regime must govern financial services access: European Parliament, Resolution of 14 March 2018 on the Framework of the future EU–UK Relationship (P8_TA-PROV(2018)0069). Commission Vice-President Dombrovskis has also emphasised that bespoke access arrangements for financial services will not be acceptable and that the EU’s third country regime will apply: Speech, 24 April 2018. This position was reflected in a number of interventions by the EU’s chief negotiator Michel Barnier over 2017 and 2018, including Speech, 26 April 2018, querying why the third country regime, which he asserted worked well for the US, would not work for the City of London, and emphasising that the third country/equivalence regime would apply. Reaction to the July 2018 White Paper was, at the time of writing, reported to be cool. 154 As discussed in ch 4, ESMA made clear in a series of Summer 2017 opinions that NCAs are not to authorise subsidiaries where they are shell companies without an appropriate local risk management capacity. 155 Under sectoral EU financial market legislation, services provided in response to a ‘reverse solicitation’ (or when a client requests services from an investment firm) are not usually subject to EU law, although NCAs across the EU can take different approaches to the extent to which they give access to such business.

ESMA and the International Financial Market Governance Network 343 But the equivalence regime will most likely be engaged in some way – notably the MiFID II/MiFIR access rules for the wholesale market investment services in which the City of London is dominant. ESMA can be expected to strengthen its regulatory capacity and ability to exert influence as a result, albeit it will need to navigate choppy political waters. Further, ESMA’s role is likely to be strengthened by legislative reform. The risk management and competitiveness challenges that the ‘offshoring’ of a significant component of the EU financial market in the UK after its withdrawal poses to the EU, as well as the EU’s likely concern to refine the third country regime as its international financial relationships adjust to Brexit effects,156 make review of the third country/ equivalence regime a likely consequence of the UK’s withdrawal from the EU. The political and institutional interests engaged by third country regime reform and ESMA’s future role are unlikely to align completely, making prediction difficult. The European Parliament, usually a supporter of ESMA as a technocratic vehicle for EU financial market governance policy, has shown some interest in revising the equivalence regime,157 including to ‘develop stable and resilient regulatory relationships with those countries which have close financial links with the Union’ (code for the UK). But it is suspicious of the Commission’s role in the equivalence process and in international financial governance,158 and may be wary of any reforms that include a strengthening of the Commission. The Commission can be expected to protect (and seek to strengthen) its institutional pre-eminence over the equivalence process, but it is also likely to see integration advantages in an empowering of ESMA, which could buttress the single market against post-Brexit stability risks. Its early 2017 Equivalence Report,159 which did not address Brexit but the timing and content of which cannot be divorced from Brexit, identified supervision of third country actors as an area needing more attention and suggested that greater coherence be brought to the third country regime. Subsequently, the Commission’s 2017 ESA Review and 2017 CMU Mid-Term Review160 both highlighted the need to reconsider the third country regime in light of Brexit risks. But 2017 also saw the Commission propose reforms to Comitology Regulation 182/2011, which governs equivalence decision-making,161 in order to reduce the number of abstentions on decisions and ensure that the Commission receives stronger p olitical

156 In December 2017 the Commission adopted a restrictive and time-limited (one year) decision on the equivalence of Swiss trading venue rules, pending the establishment of a new EU/Switzerland institutional framework for existing and future agreements relating to Switzerland’s single market relationships (Commission Implementing Decision 2017/2441), which became associated with a Brexit-related concern to send a robust signal to the UK as to the EU’s control of the equivalence process: P Stafford, ‘London Fears it will be the EU’s next Capital Markets Target’, Financial Times (28 June 2018). 157 In April 2018 the European Parliament’s influential ECON Committee adopted a draft report on the third country regime, which asserted that the regime was an integral element of EU financial services regulation but lacked certainty and transparency, and called for the Parliament to have a scrutiny role over the Commission’s equivalence decisions (the Parliament ‘deplor[ed]’ its lack of input into the controversial Swiss equivalence decision): ECON Committee, Draft Report on Relationships between the EU and Third Countries Concerning Financial Services Regulation and Supervision (2017/2253/NI), April 2018. 158 ibid; and ECON Committee, Report on the EU Role in the Framework of International Financial, Monetary and Regulatory Institutions and Bodies (A8-0027/2016), March 2016. 159 See n 118. 160 Commission, Consultation on the Operations of the European Supervisory Authorities (2017) and Commission, Mid-Term Review of the Capital Markets Union Action Plan(COM (2017) 292). 161 COM (2017) 85.

344 ESMA as a Network Actor guidance. This reform can be associated with bolstering the Commission against political risks when making equivalence decisions and with signalling the Commission’s intention to remain pre-eminent in the process. Member States’ preferences on access by third country actors to the EU financial market have historically varied depending on the financial market segment in question, but clashes tend to arise between those Member States open to liberalisation and those inclined to limit market access, whether for competitiveness reasons or because of concerns relating to financial stability.162 Brexit may lead to a collective determination to signal openness and the attractiveness of the EU financial market by means of a new, streamlined equivalence regime and an enhanced role for ESMA as its central hub, particularly if the liquidity, stability, or efficiency of the EU capital market is compromised post-Brexit. Much depends, however, on Member States’ respective competitive advantages in relation to the relocation of business from the UK, and whether these are compromised by any change to the third country regime.163 Any change to the third country regime and to ESMA’s role will reflect these dominant political and institutional preferences, but ESMA’s expanding technocratic influence cannot be entirely discounted. Over 2016–17 ESMA adopted an entrepreneurial posture, calling for a strengthening of its role164 and drawing on its experience with EMIR’s third country CCP regime to argue that the lack of EU-level supervisory control over third country actors exposed the EU to risks; ESMA Chair Maijoor warned that the EU was an ‘island of equivalence’ in a world which demanded supervisory oversight of third country actors.165 ESMA advocacy aside, the institutional vehicle ESMA provides for reform and the technical experience it has acquired in this area are likely to shape how the legislative process might reconfigure the third country regime in the short to medium term. b. ESMA and Third Country CCPs: The Thin Edge of the Wedge? The first substantial indication of a potential Brexit-related enhancement to ESMA’s role in the third country regime came with the Commission’s June 2017 CCP Supervision Proposal, which suggested a material reconfiguration of the treatment of third country CCPs.166 The Commission’s proposal of an EU relocation mechanism (the informally termed ‘kill switch’) for the most systemically significant third country CCPs 162 eg, different levels of exposure to international financial markets have been associated with different perspectives on financial stability: A Spendzharova, ‘Banking union under construction: the impact of foreign ownership and domestic bank internationalization on European Union member-states’ regulatory preferences in banking supervision’ (2014) 21 Review of International Political Economy 949. 163 Member States’ interests in attracting UK business became clear over 2017 and 2018, with asset management, and France’s related efforts to woo business, emerging as a flashpoint: O Walter, ‘Spooked Fund Managers look at Rivals to London’, Financial Times (17 February 2018); and M Arnold and O Walker, ‘BlackRock and Citi plan Paris Expansion in Macron Coup’, Financial Times (8 July 2018). 164 In its response to the Commission’s 2017 ESA Review Consultation, ESMA called for enhanced supervisory powers (n 135, 3) and followed up with a call for direct supervisory powers over third country rating agencies, trade repositories, benchmarks, trading venues, and data services providers (ESMA, Letter to the Commission, 7 July 2017). 165 ESMA Chair Maijoor also queried in this intervention whether ‘sufficient assurance’ was available that the risks of third country infrastructures in the EU were adequately assessed and addressed by the relevant third country regulators: ‘Keynote Speech’, 23 January 2017. 166 COM (2017) 331.

ESMA and the International Financial Market Governance Network 345 has attracted most attention given its global implications,167 and has acute salience for the UK post-Brexit given its implications for the UK CCPs which dominate in eurodenominated clearing.168 But while less incendiary, the proposed empowerments of ESMA represent a potentially material strengthening of its role, and suggest significantly greater Commission tolerance for ESMA’s exercising direct operational power than the Commission has previously been prepared to countenance. The Proposal, which is designed to enhance the EU’s capacity to manage the stability risks posed by third country CCPs and to ensure a level playing-field between EU and third country CCPs,169 suggests that ESMA’s role in the CCP third country regime would be strengthened in a number of ways, depending on the systemic relevance of the third country CCP in question. The Commission has proposed that ESMA would assess, in accordance with conditions to be set out in EMIR and amplified in administrative rules, the systemic importance of any third country CCP seeking recognition (the new regime would only apply to currently-recognised CCPs where changes were made to their recognition status); and that ESMA would exercise new supervisory powers based on this assessment. ESMA’s powers over CCPs determined by it to be non-systemically important (‘Tier 1 CCPs’) would not change materially, although ESMA would be empowered to make information requests of all recognised CCPs and required to assess the resilience of all recognised CCPs in adverse market conditions. ESMA’s powers over any CCPs that it found to be systemically important (‘Tier 2 CCPs’) would be significantly enhanced. These Tier 2 CCPs would be made subject to specified EMIR requirements and so unable to rely on an equivalence determination – unless ESMA found that in complying with the relevant third country regime a CCP showed ‘comparable compliance’ with EMIR.170 The Commission has also proposed that ESMA be given a discrete set of supervisory powers over Tier 2 CCPs,171 including to take investigatory actions and engage in onsite inspections,172 and to take enforcement action (including by requiring a CCP to bring any infringement to an end, issuing public notices, withdrawing recognition, and imposing fines and periodic penalties). Finally, where ESMA’s assessment of systemic relevance found that a CCP was of such substantial systemic importance that the Tier 2 regime would not sufficiently ensure the EU’s (or one or more of its Member States’) financial stability and that the CCP should not be recognised, the Proposal provides that the Commission could then decide that

167 The Proposal’s relocation mechanism has generated significant concern from the US financial market. See, eg, responses to the Commission’s consultation on the Proposal by the International Swaps and Dealers Association (US), ICI Global, and The Vanguard Group, available at https://ec.europa.eu/info/law/betterregulation/initiatives/com-2017-331_en. 168 The relocation proposal has received close attention in the UK (eg House of Lords, EU Committee, 11th Report, n 151, 58–62 and 91–92, recognising the EU’s concerns regarding the ‘offshoring’ of CCP business in the UK but concerned as to the risks to the UK). On the sensitivities raised by the dominance of UK CCPs in the EU financial market, see further ch 5. 169 2017 CCP Supervision Proposal Impact Assessment, n 136, 46. 170 2017 CCP Supervision Proposal, n 166; EMIR, Art 25a. 171 The exercise of these powers by ESMA would be subject in identified circumstances to the consent of the relevant central banks of issue for the instruments cleared by the CCP in question – in practice this would often be the ECB. 172 The Proposal’s procedural framework for investigations and onsite inspections is based on that which applies to ESMA’s powers under the rating agency and trade repository regimes.

346 ESMA as a Network Actor the CCP not be recognised and require it to relocate to the EU to access the EU market (the mandatory relocation mechanism). The Proposal’s future is uncertain given volatile Brexit-related political and institutional interests,173 dynamic EU CCP market conditions,174 and the material industry hostility it has prompted.175 Nonetheless, its very adoption by the Commission marks a waypoint in ESMA’s development. While the proposed third country CCP supervision reforms draw on the operating templates developed for the third country rating agency and trade repository regimes, and while ESMA is not fully empowered as a CCP supervisor (the home/third country supervisor would remain dominant and in practice fiscally responsible), the reforms nonetheless represent a significant empowerment of ESMA given the systemic importance of CCPs, their fiscal implications, and their salience within international financial market governance. Further, the proposed location within ESMA of the pivotal decision relating to the relative systemic importance of a third country CCP underlines the Commission’s growing institutional comfort with ESMA’s technical capacity and with ESMA as a vehicle for policy reform. The Proposal also indicates ESMA’s strengthening capacity to shape the reform agenda, as it draws heavily on ESMA’s well-aired concerns as to the limits of its third country CCP powers.176 From an effectiveness perspective, the Proposal has some functional attractions,177 as it would materially enhance ESMA’s ability to manage risk in the EU financial market and as ESMA has already built significant technical capacity as regards CCP supervision, as discussed in chapter 5. But it would draw ESMA into an area of high salience internationally and politically, and so could come to prejudice ESMA’s other less high-profile but operationally critical functions; the combination of these proposed powers and the proposed powers for ESMA to oversee NCA supervision of EU CCPs (as discussed in chapter 5) could skew if not overwhelm ESMA’s priorities. Legitimation is more troublesome. Acute legitimation risks arise in relation to the threshold determination by ESMA as to the systemic importance of a third country CCP; given the implications of such a decision, it is difficult to regard it as other than

173 The Proposal does not emphasise the Brexit context, although it identifies the significant challenges the future location of a substantial volume of euro clearing in the UK creates for EU financial stability: 2017 CCP Supervision Proposal Impact Assessment, n 136, 11. In practice, the impetus for the Proposal is hard to disassociate from the UK’s dominance in CCP services (see further ch 5). Shortly after its adoption by the Commission, political strains began to emerge, with France and Germany signalling their support for a tougher approach to CCP relocation than that adopted by the Commission: Reuters, Market News, ‘France wants right to Veto Euro Clearing in the UK after Brexit – EU Sources’, 6 September 2017. 174 The EU market is evolving as major actors take pre-emptive action in advance of Brexit. The major German CCP (Deutsche Bӧrse’s Eurex Clearing), eg, in late 2017 offered financial institutions a profit-based incentive to move their clearing business to it: P Stafford, ‘Deutsche Bӧrse makes ground in UK derivatives push’, Financial Times (5 February 2018). 175 The relocation mechanism fracas aside, the proposed empowerment of ESMA over third country CCPs has been greeted with some hostility by the international industry, which is concerned as to potential fragmentation between the proposed EU-level supervision of third country CCPs and NCA-level (but ESMA overseen) supervision of CCPs that choose to migrate fully to the EU: K Lannoo, ‘The EU’s plan to Shift Clearing out of London Risks Disaster’, Financial Times (24 March 2018). 176 ESMA’s difficulties in monitoring the risks to the EU from third country CCPs and in taking remedial supervisory action are repeatedly referenced across the Proposal and its Impact Assessment. 177 Although it also has material drawbacks, including as regards the fragmentation within the EU of CCP supervision across NCAs, ESMA, and, to some extent, the ECB and central banks of issue.

ESMA and the International Financial Market Governance Network 347 a policy choice. The Proposal, however, weakens legitimation as it provides that ESMA would take CCP decisions through the proposed new CCP ‘Executive Session’, and so would dilute the role of the Board of Supervisors and its capacity to provide a form of legitimation through national and peer/transnational accountability channels and also through challenge of ESMA which supports output legitimation. c. The 2017 ESA Proposal Proposal,178

The 2017 ESA reflecting the Commission’s earlier indication in the 2017 ESA Consultation of its intention to address the ESAs’ role in the third country regime, contains two reform proposals designed to strengthen ESMA’s role here: a proposed new ESMA power to review NCA decision-making over the outsourcing/delegation by EU regulated actors of material activities outside the EU; and a strengthening of ESMA’s role in the equivalence process generally. As regards the first, the Commission has proposed a new soft power for ESMA to promote supervisory convergence in relation to NCAs’ supervision of delegation, outsourcing, and risk transfers by EU regulated actors. More controversially, and in a material hardening of ESMA’s soft 2017 Brexit relocation opinions, it has also proposed that ESMA oversee NCA decisions in this area.179 The Commission has proposed that NCAs would be required to notify ESMA where they intended to authorise a financial market participant whose business plan involved the outsourcing, delegation, or risk transfer of a material part of its activities into third countries, while benefiting from the EU passport.180 ESMA would review whether the proposed authorisation complied with EU law and ESMA soft law, and could issue a recommendation to an NCA, including that it review a decision or withdraw an authorisation; an NCA could choose not to follow such a recommendation but would be required to give a public explanation.181 The proposed reform’s fate is highly uncertain, as it has emerged as one of the most contested elements of the ESA Proposal, generating concern that it prejudices NCAs’ autonomy in relation to the authorisation process and so disturbs the pre-eminence of home NCAs as regards authorisation and in the granting of the single market passport under EU financial market legislation.182 Less controversially, a deeper embedding of ESMA in the equivalence process has also been suggested. The Commission has proposed that ESMA monitor ongoing

178 COM (2017) 536. 179 2017 ESA Proposal, n 44, ESMA Regulation, Art 31a(1). 180 ibid, Art 31a(2). The Commission has described this proposed power as an ‘early intervention’ mechanism to address supervisory arbitrage risks: Commission, Reinforcing Integrated Supervision to Strengthen Capital Markets Union and Financial Integration in a Changing Environment (COM (2017) 542) 6. 181 2017 ESA Proposal, n 44, ESMA Regulation, Art 31a(3) and (4). 182 EU industry concern, particularly from the asset management sector, which relies heavily on delegation arrangements, was reported shortly after the adoption of the Proposal (A Mooney and J Thompson, ‘Europe’s National Regulators Clash Over Delegation’, Financial Times (8 October 2017)), while the US industry and regulators have also proved hostile: O Walker, ‘Washington Joins Fray over EU Rules Change’, Financial Times, Fund Management Supplement (5 February 2018). Certain NCAs, particularly those with large asset management sectors, have also expressed concern (eg, G Cross, Central Bank of Ireland, Opening Statement to the Oireachtas Committee on Finance, Public Expenditure and Reform, 28 November 2017). Others, notably the French NCA, are supportive (AMF, Review of the European Supervisory Authorities, February 2018).

348 ESMA as a Network Actor regulatory and supervisory developments, enforcement practices, and relevant market developments in third countries already deemed equivalent in order to verify whether the equivalence criteria were still fulfilled (taking into account the market relevance of the country in question – implying close monitoring of the UK) and report annually to the Commission.183 It has also proposed that ESMA notify the Commission of any third country developments that could impact on EU/Member State financial stability, market integrity, investor protection, or on the functioning of the internal market. ESMA would also be empowered to negotiate practical ‘administrative arrangements’ with third country supervisors covering access to information and coordination of supervisory activities, including onsite inspections. Where a third country authority refused to enter into such cooperation agreements or to cooperate effectively, ESMA would be required to inform the Commission, which would take this into account when reviewing equivalence decisions. ESMA’s grip over NCAs would also be tightened. NCAs would be required to inform ESMA of their intentions to conclude any administrative arrangements with third country authorities, and to provide ESMA with related drafts. Further, ESMA would be empowered to develop model administrative arrangements, which NCAs would be required to make every effort to follow. The Commission has further proposed that ESMA’s suite of direct supervisory powers be expanded to cover third country prospectuses and third country benchmark administrators. These proposed supervisory empowerments are limited in scope but underscore the Commission’s increasing reliance on ESMA as an institutional vehicle for achieving policy aims, and would also give ESMA the potential to strengthen its regulatory capacity and exert influence more generally. A final set of related reforms from 2017 further illustrate the potential Brexit and the third country regime afford ESMA to strengthen its ability to exert influence. The Commission’s 2017 Investment Firm Prudential Supervision Proposals propose refinements to the MiFID II/MiFIR third country regime, which include an obligation for third country investment firms accessing the EU through the MiFIR equivalence portal to provide a series of notifications to ESMA annually, including on the scale and scope of their EU activities and on their investor protection arrangements and risk management policies. The Commission has also proposed a toughening of the MiFIR equivalence test, including by means of a requirement that a finding of equivalence could only be made ‘after a detailed and granular assessment’ and on obligation on ESMA to engage in ongoing monitoring of whether the third country continued to be equivalent.184 The fate of these reforms is unclear. The bulk of the reforms do not materially change ESMA’s powers, but as they toughen the equivalence assessment process they can be expected to generate contestation, particularly as Member States are likely to have different, Brexit-related interests as regards the third country regime. The delegation-related, NCA-oriented reforms, which do materially extend ESMA’s powers, are also likely to be contested given the incursion they make into NCAs’ autonomy over the authorisation process. Nonetheless, the reforms signal a future strengthening of ESMA’s ability 183 2017 ESA Proposal, n 44, ESMA Regulation, Art 33. 184 COM (2017) 791, MiFIR, Art 46. The proposals were reported as a significant toughening of the MiFIR equivalence regime: J Brunsden, ‘Brussels Signals Tough Stance on UK Bank Bonuses after Brexit’, Financial Times (19 December 2017).

Conclusion 349 to exert technocratic influence in a politically charged area. They also underscore the extent to which ESMA can now influence the legislative process: the controversial delegation-related reforms derive from ESMA’s 2017 Brexit/relocation opinions and reflect ESMA’s repeated calls over 2017 for a strengthening of its powers to manage supervisory arbitrage risks.185 But the proposed enhancements of ESMA’s role in the third country regime by the 2017 ESA Proposal bring risks. From the effectiveness perspective, the equivalence-related reforms would draw ESMA more into a process that can be expected to be more politically contested in the future, and so could expose it to political risks which could prejudice its effectiveness more generally. Further, the delegationrelated reforms would tilt ESMA into a more hierarchical position over NCAs and so could inject a disruptively antagonistic dimension into NCA/ESMA relations, which could also prejudice ESMA’s effectiveness more generally. Legitimation risks also arise, particularly as the delegation-related powers are proposed to rest with the new Executive Board and not with the Board of Supervisors.

IV. Conclusion ESMA’s activities as a network actor are of less importance to its position within EU financial market governance than its core regulatory governance, supervisory convergence, and direct supervision activities discussed in earlier chapters. Nonetheless, ESMA’s two major EU and international technocratic networks have, in different ways, provided it with opportunities to extend its influence over EU financial market governance. So far, ESMA’s activities as a network actor can be associated with effectiveness benefits, although there are legitimation risks from the expansionist incentives ESMA’s network activities can generate. ESMA’s two networks are, however, highly dynamic and currently unstable. How the EU network – and particularly Banking Union – and the international network – and particularly how it is shaped by the EU’s third country rules – develop after the UK’s withdrawal from the EU will likely have material implications for ESMA’s future position within EU financial market governance.

185 ESMA Chair Maijoor has also sought to address the concerns the delegation reforms have triggered: Speech on ‘CMU, Brexit and ESA Review – what next?’, 20 March 2018.

POSTSCRIPT This book charts the emergence of ESMA as a technocratic actor of central importance in EU financial market governance and considers whether ESMA’s burgeoning influence generates effectiveness and/or legitimacy challenges. Its conclusion is positive: ESMA has become a technically expert, responsive, and agile actor, often deploying ‘state of the art’ tools; and has resilient and adaptive legitimation arrangements, albeit these arrangements are coming under increasing pressure. The book is concerned with the current institutional settlement within which ESMA operates. It does not inquire into the optimal organisation of EU institutional financial market governance or speculate as to how this might evolve. Its positive assessment of ESMA’s current role and of the trajectory ESMA is following suggests, however, that the incremental change path which has characterised ESMA’s development up to now is likely to be the most productive path forward – particularly as incremental change allows ESMA, NCAs, Member States, and the EU institutions to experiment, and allows ESMA to develop within the European System of Financial Supervision, in a sustainable manner. In this regard, the 2017 ESA Proposal, examined throughout the book, may have some prejudicially disruptive effects, even if it is a less radical measure than often suggested. The fate of the Proposal is uncertain. As this book went to press, there were few signs that the Proposal would be adopted in anything close to its original form. Over the late 2017 Commission consultation on the Proposal, industry reaction to the Proposal’s more controversial reforms was hostile.1 There was widespread opposition to the proposed new industry-based funding model for ESMA, and to the proposed conferral on ESMA of direct supervisory powers over certain prospectuses and funds, oversight powers over delegation and outsourcing, and powers to request information directly from regulated actors and impose sanctions for non-compliance.2 Industry reaction to the reorganisation of ESMA’s governance by means of a new bureaucratic Executive Board was less strident but was generally cool, with some respondents opposed and others raising concerns as to related risks, including politicisation, non-euroarea Member State exclusion, and a weakening of legitimacy and accountability.3

1 Responses to the Commission’s September–December 2017 consultation on the Proposal are available at https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-1546860_en. 2 eg, the responses from AFG (the French asset management industry), the Alternative Investment Management Association, the European Fund and Asset Management Association, Fecif (financial advisers), Financial Services Ireland, the German Banking Industry Committee, and the International Capital Market Association, opposing some or all of these reforms. 3 A combined response from Finance Denmark, the Swedish Bankers Association, the Swedish Securities Dealers Association, and the Danish Securities Dealers Association, eg, raised concerns as to the poten-

Postscript 351 Consumer stakeholders were also critical, suggesting that the opportunity to reform the European Supervisory Authorities in a manner which strengthened consumer protection had been lost.4 Member State reaction was, in many quarters, unenthusiastic.5 Of most significance to the future of the Proposal, initial indications from the European Parliament’s powerful ECON Committee suggested only limited support for a significant empowerment of ESMA. The 10 July 2018 draft report on the Proposal by the two ECON Committee rapporteurs recommended that the ECON Committee reject the proposed conferral on ESMA of direct information-gathering and related sanctioning powers, oversight powers over delegation/outsourcing, and direct supervisory powers over prospectuses, and also reject the proposed industry-based funding model.6 Further, the draft report indicated that the Parliament’s growing concern to exercise oversight over ESMA, particularly as regards regulatory governance, was strengthening: the report recommended that a number of changes be made to ESMA’s accountability arrangements, including that the Parliament have advance sight of draft ESMA guidelines, a new procedure apply to the adoption of ESMA Q&As, and that Parliament (and Member State) representatives sit as non-voting members of the Board of Supervisors when decisions regarding binding technical standard (BTS) proposals were made. And all the while, the window for the legislative process to complete prior to the May 2019 European Parliament elections was closing. The debate which the Proposal has prompted, however, suggests that ESMA’s future is secure, at least for the medium term, and that it is unlikely to be jolted from its current trajectory, which is leading it to intensify its influence over EU financial market governance. The late 2017 consultation on the Proposal suggested strong industry support for ESMA’s regulatory governance and supervisory convergence roles, as well as support for its powers to be extended in some respects, notably by means of a ‘no action’ power (noted in chapter four). Further, the support which emerged from the consultation (and from the July 2018 draft ECON Committee report) for ESMA’s accountability arrangements to be enhanced, particularly as regards soft law,7 augurs well for ESMA’s future if, in consequence, its legitimacy is strengthened. And while the implications of Brexit for the institutional organisation of EU financial market governance remain difficult to predict, all the signs are that there will be demand for ESMA’s technical capacity as regards the management of EU/third country relations: it now appears more likely than not that access by UK regulated actors to the EU financial market will be based on some form of EU-controlled equivalence process in which ESMA can be expected to play a key role.8 Similarly, the current indications that tial politicisation of the proposed new Executive Board and called for greater checks and balances on the proposed Board and for non-euro-area Member State representation. 4 Joint response by BEUC (the European Consumer Organisation), Better Finance, Finance Watch, AGE Platform Europe, European Financial Inclusion Network, and COFACE Families Europe. 5 At the time of writing, there was evidence of material political contestation, particularly as regards the proposed direct supervisory powers (eg, A Carrier, ‘Member States to Continue Discussions over Controversial ESAs Review Proposal,’ Norton Rose Fulbright, Financial services: regulation tomorrow (24 May 2018)), and the Council had not achieved political agreement, although the Austrian Council Presidency (July–December 2018) had included the Proposal among the priority files for its Presidency. 6 Report by ECON Rapporteurs MEPs Burkhard Balz and Pervenche Berès, PE 625.358, 10 July 2018. 7 eg reforms to the ESMA Q&A process were a recurring theme of industry responses. 8 As of end July 2018, the indications were that the UK, in line with the UK Government’s July 2018 White Paper on the future EU/UK relationship (noted in chapter six), was seeking an ‘enhanced equivalence’

352 Postscript the relocation of financial services business from the UK to the EU-27 will intensify9 suggest that ESMA’s influence over post-Brexit EU financial market governance is likely to strengthen, particularly if renewed pressure comes to bear on supervisory convergence as a result and ESMA action is called for. ESMA itself can be expected to continue to act astutely and purposefully and in a manner that incrementally strengthens its position. As the 2017 ESA Proposal wound its way through the legislative process over summer 2018, ESMA was continuing to assert itself over EU financial market governance. July 2018 saw it fine five Scandinavian banks a total of €2.48 million for issuing credit ratings without ESMA authorisation (the banks had argued these were ‘shadow’ ratings for clients and not regulated ratings);10 ESMA’s decision to enforce against the banks despite this practice being standard practice in the Scandinavian market, some ambiguity as to the interpretation of the relevant rules, and sharp disagreement from some of the banks in question,11 suggests a commitment to taking enforcement action, notwithstanding the related sensitivities. ESMA also adopted a detailed peer review report on NCAs’ supervision of certain UCITS investment fund guidelines,12 the assertive tone of which was very much in line with the increasingly robust approach ESMA is taking to peer review. At the same time, ESMA refined its peer review methodology, to, inter alia, make clearer the criteria which govern the choice of peer review topics and to specify how the NCAs subject to on-site inspections in a peer review are chosen.13 The relatively minor nature of the revisions to the peer review methodology suggest that notwithstanding ESMA’s increasingly intrusive approach to peer review, it is retaining NCA support. Speculation on the future shape of the institutional arrangements of EU financial market governance is perilous at present. Brexit, the Capital Markets Union agenda, and the expanding reach of the Banking Union structures and of euro area governance generally, combined with the longstanding but highly dynamic interests and preferences which shape EU financial market governance, all make prediction a slippery business. But it can be predicted relatively safely that, absent disruptive agents and putting the 2017 ESA Proposal to one side, ESMA will continue to evolve in an incremental manner that is productive for EU financial market governance. This book shows that ESMA, as currently configured and operating as a soft law, convergence-oriented actor, is capable of technically-expert, responsive, and agile action in support of the EU financial market and poses few threats to effectiveness or legitimacy. The analysis also suggests

approach and that chief negotiator Barnier was open to discussions on this point: A Barker, ‘Barnier Eases Opposition to May’s Brexit Plan for City of London,’ Financial Times (30 July 2018). 9 Summer 2018 saw reports that the UK was expecting pressure for financial services business to r elocate from the UK to the EU to intensify: M Arnold and G Parker, ‘Hammond sees Dangers of Bank Capital Shift after Brexit,’ Financial Times (6 August 2018). Summer 2018 also saw a slew of relocation reports, including of Deutsche Bank moving almost half its euro clearing activities from London to Frankfurt (O Storberck, ‘Deutsche Bank Shifts Half of Euro Clearing from London to Frankfurt,’ Financial Times (29 July 2018). 10 ESMA Press Release (23 July 2018). 11 As was reported at the time: H Murphy, ‘Five Scandinavian Banks fined €2.5m for Unauthorised Credit Ratings,’ Financial Times (23 July 2018). 12 ESMA, Peer Review on the Guidelines on ETFs and other UCITS Issues (ESMA42-111-4479) (2018). 13 ESMA, Peer Review Methodology (ESMA42-111-4661) (2018).

Postscript 353 that ESMA can be expected to develop in a dynamic and purposeful manner that does not outrun the tolerance of NCAs, Member States, or the EU’s institutions. Beyond this, it is reasonably easy to predict, given the synergies and the relatively low political salience, that ESMA’s role as a data repository, building and managing a vast data-set on which the effectiveness of EU financial market supervision will increasingly depend, will expand. Its convergence-oriented powers can also be expected to strengthen. But whether ESMA will be transformed into the much-discussed yet still to emerge single financial market supervisor – however designed, whether multi-function or conduct/consumer-oriented, and whether sitting alongside/below a strengthened European Central Bank within which the supervision of certain financial market actors will have been subsumed – depends on how a series of unpredictable forces and agents combine. For now, ESMA’s approach and the developmental trajectory it is following suggest that it will continue to be a productive and constructive influence on EU financial market governance.

354

INDEX accountability budgetary/financial 97 governance arrangements 47–8 single rule-book 140–1 soft law rule-book 161 see also under external governance administrative review see under external governance appeal procedures see external governance, Board of Appeal approach of book 3–4, 40 Auditors, European Court of 85 Banking Union 323–6 Brexit issues 325, 326 CCP supervision 325 defensive actions 324–5 ECB/SSM interactions 324–6 passim effectiveness 326 financial market counterweight 324 institutional friction flashpoints 325–6 investment firm supervision 325–6 opportunities/threats 326 SRM/SSM 323–4 see also European System of Financial Supervision (ESFS) base in Paris 1 benchmark colleges 206 binding technical standards see under single rule-book Board of Appeal see under external governance Board of Supervisors active decision-making, encouragement 77–8 categories of new tasks 75 challenges in ESA reviews 67–9 clarification of remit 76 composition 58–9 convening of meetings 60 direct supervision/market intervention 242, 256, 259–62, 268, 270, 272, 280–1, 300, 302, 304, 309–10 effectiveness issues 69–70 external governance 86, 88, 90–1, 95, 98–100, 102

input/output legitimacy 70–1, 77 majority voting 68–9 network actor 317, 320–1, 327, 332, 349 other members/observers 59 in practice 71–2 procedural rules 60 reconfiguration proposals 74–6 reform debates 69–72 regulatory governance 114–15, 120, 132, 137–40, 145, 154, 159–60, 162, 164, 167–8, 351 and role of ESMA 2, 7, 15, 18, 23, 31–2, 37 stakeholder critique 68 strategic/sensitive issues 77 supervisory convergence 170, 173, 177, 185–6, 191, 206, 213, 215, 222, 225–6, 229, 231, 236, 239–40 see also institutional design Brexit issues CCP supervision 298, 299 direct supervision/market intervention 267 ESA Proposal (2017) 307–8 evolution 32–3 NCA-orientated supervision 285 third country actors/equivalence 341–4, 347 see also under supervisory convergence CCP colleges Banking Union 324 coaching supervision 207, 214 European Supervisory Mechanism 299–300, 302 facilitation/coordination 204–6 peer review 226, 228 technocratic influence 129–30, 150, 204 CCP supervision Brexit issues 298, 299 derivatives clearing role 297 European Supervisory Mechanism proposal (2017) aims 300–1 contested context 301 further powers 302 governance reforms 302

356 Index legitimacy issues 304 policy significance 303 prior consent/veto right 301–2 technocratic influence 303–4 international complexities 297–8 location of supervision 299 Member States’ interests 298–9 NCA dominated 296–7 reform proposals (2017–18) 296, 299–300 see also direct supervision/market intervention CESR into ESMA see under evolution CESR role 20–1 Chair 61, 66 coaching manual 209–10 coaching role application workshops 211 banking sector 208, 212 delegation arrangements 211 Europeanisation of supervision 207–9 financial information 212 financial markets 208 financial reporting 212 guidelines 209 institutional support 211–13 legislatively required opinions 214–21 effectiveness/legitimation 221 MAR context 217–18 MiFID II/MiFIR context 218–21 non-compliance, publishing of reasons requirement 214–15 short selling 215–17 meaning 207 NCA practices/role 208–9, 212 NCA reactions short selling opinions 215–17 NCA supervisory planning cycle, proposal 212–13 nudging effect/role 157, 171, 175, 191, 210, 213–21 opinion powers 213–21 legislatively required opinions see legislatively required opinions above own-opinion powers (Art 29) 213–14 peer review see peer review Q&As 210 standard forms/templates 210 supervisory briefings/handbook 210 see also supervisory convergence colleges of supervisors 202–7 benchmark colleges 206 CCP colleges see CCP colleges effectiveness/legitimacy risks 206 facilitation/coordination powers 202 formal constitution 203 home/host, home/home models 203–4 reform proposals (2017–18) 206–7

relevance 203 tasks 204–6 see also supervisory convergence commodity derivatives markets see under exceptional intervention consumer protection in retail markets mandate see under supervisory convergence credit rating agencies accountability review 270–1 effectiveness 263–70 enforcement powers/action 261–2, 268–9 general investigation powers 260–1 intrusive supervision 264–6 legal regime/operating framework 260–3 legitimacy 270–2 monetary penalties regime 262–3 non-delegation 261 operationalisation 266–8 proprietary methodologies, supervisory powers 261 registration procedures 260 risk-based approach 265–6 technocratic influence 263–72 third country actors/equivalence 335 see also direct supervision/market intervention Crowdfunding Proposal (2017) 313–14 current institutional settlement 350 data capacity see under supervisory convergence data repository role 353 databanks see direct supervision/market intervention, trade repositories Delegated Acts see under single rule-book demoicracy concept 52–3 direct supervision/market intervention additional powers (2017/18) proposals 241–2 Brexit issues 267 CCPs see CCP supervision contestation distinctiveness 249, 258 Crowdfunding Proposal (2017) 313–14 databanks see trade repositories directing NCAs, powers over 246 distinct setting 243–4 dynamism and reform 247–8 effectiveness 258–9 ESA see ESA Proposal (2017) EU context 249–58 exceptional conditions, powers over 246–7 exceptional intervention see exceptional intervention financial markets and administrative supervisory governance 249 intergovernmental preferences Banking Union reforms 250, 253–4 centralisation, resistance to 250–1

Index 357 contestation distinctiveness 249, 258 Member State autonomy, incursion into 250–1 NCAs as primary location of supervision 251–2 punctuated change 30–1, 33, 252 key issues/summary 243–4, 314–15 legitimation arrangements 259–60 NCA-orientated supervision see NCA-orientated supervision regulated actors, powers over 245–6 role 244, 245–8 supervisory centralisation debate 242–3 supranational/institutional preferences ECB 256 European Commission 254–5 European Parliament 255–6 technocratic NCA-orientated preferences 256–8 trade repositories see trade repositories vertical/hierarchical powers 241 distinctiveness of institution 2 dynamism 2–3 equivalence see third country actors/ equivalence ESA Proposal (2017) Brexit issues 307–8 context of reform 304–8 Brexit issues 307–8 contestation 305–6, 350–1 direct empowerments 306–7 gestation period 304–5 incrementalism 304, 307, 308 debate on 350–2 direct supervision powers 310–13 and direct supervision/market intervention 241, 246, 256, 287, 296 funding arrangements see under funding arrangements general issues 2, 5, 10, 18, 31–2 and governance 41, 43, 57, 63, 65–6, 72–6, 78, 81, 101 information-gathering powers 310 NCA-orientated powers 309 network role 323, 347, 349 and regulatory governance 104, 134, 162, 168 and supervisory convergence 170, 173, 178, 186–7, 190–2, 198, 200, 202, 204, 207, 210, 212–13, 221–3, 230–1, 236–7, 240 supervisory empowerments 311–13 benchmark administrators 312–13 data service providers 312 effectiveness/legitimacy 313

EUVECA/EUSEF/ELTIF fund registration 312 prospectus review reforms 311–12 range of proposals 311 technocratic influence 313 see also direct supervision/market intervention ESAs see under European System of Financial Supervision (ESFS) ESFS see European System of Financial Supervision (ESFS) ESRB (European Systemic Risk Board) 317 EU financial governance network Banking Union see Banking Union ESFS see European System of Financial Supervision (ESFS) European Court of Auditors 85 European Ombudsman see external governance, Ombudsman European Supervisory Mechanism proposal (2017) see under CCP supervision European System of Financial Supervision (ESFS) 316–23 composition/functions 6–7 ESAs 317–23 coordination/cooperation obligations/ support 318–19 legitimation risks/tensions 322–3 limits to coordination 319–21 observer status 318 sectoral set-up 317–18 ESMA relationship 7–10, 15 ESRB (European Systemic Risk Board) 317 range of organisations 316–17 and single financial market 5–7 see also Banking Union evolution Brexit issues 32–3 CESR into ESMA 21–2, 27 deployment/development of powers 23–4 direct supervision/market intervention 247–8, 252, 285, 290, 292, 296, 300, 303, 308 driving forces for agency development 24–5 European Parliament/ECB interest 28 external governance 95 financial crisis 2007–08 21, 27–8, 31, 33 financial governance change 25–6 incrementalism 19–20, 22, 23 and punctuated change 30–1, 33, 252 informal cooperation 20–1 multiple driving factors 24–6 political preferences 26–7 reform proposals 2017–18 31–2 regulatory governance 113 second-order institutional change 24 sectoral amplification of powers 22–3

358 Index supervisory convergence 182, 187, 206 supranational/institutional preferences 27–8 technocratic preferences 29–30 exceptional intervention commodity derivatives markets 293–4 effectiveness 295 influence of powers 294–5 legal framework 288–94 legitimacy 295 product intervention 290–3 administrative rules 291–2 Decisions 292–3 first test/application 292 powers 290 temporary prohibition/restriction 290–1 short selling 288–90 deployment reticence 290 empowerment 288–9 financial markets/stability effects 289 political/institutional sensitivities 289 procedural requirements 289 see also direct supervision/market intervention Executive Director 61, 62 external governance accountability arrangements 87–8 administrative review 82–5 Board of Appeal 82–4 composition/process 83 jurisdiction 82–3 public record 83–4 third party effects 82 budgetary accountability 96–7 ECON accountability forum 89–90 annual statement to 88–9 European Commission 86–7 accountability to 96 European Court of Auditors 85 European Parliament and Council of the EU accountability to 88–98 objectives of reporting 92–3, 95–6 performance metrics 93–6 budgetary accountability 96–7 financial accountability 97 reporting requirements 88–92 financial accountability 97 institutional oversight 86–7 inter-ESA relations 97 international financial governance 97 judicial review 85–6 Ombudsman 84–5 financial market supervision influence 353 Financial Stability Board (FSB) 327–8, 332

funding arrangements budgetary procedures 98–9 concerns 99–101 ESA Proposal (2017) 101–3 aim of model 101–2 effectiveness/legitimation balance 102–3 industry funding component 102, 103 independence risks 99 reform discussions 100–1 sources of funding 98 sustainability concerns 99–100 see also governance arrangements governance arrangements accountability 47–8 administrative governance 44–6 constitutive legal framework 78–82 delegation chain 50 demoicracy concept 52–3 discretion, constraints on 53–5 dynamism and reform 42–3 effectiveness 55–7 EU agencies 48–9 experimentalist governance 53 external governance see external governance financial market regulation 43–4 funding see funding arrangements hybridity 42, 43 institutional design see institutional design internal enhancements 42–3 legitimation arrangements 46, 56 Meroni principle 53–5, 66–7 multiple notional principals 50–3 benefits and drawbacks 51 non-delegation principle 53–5 and reform proposals 2017–18 31, 41–3, 57, 68–9, 72–8, 99–103 supervisory powers 51 and strict conditionality 53–4 technical effectiveness and legitimation 46–7 technocratic influence 41, 57 IFRS (International Financial Reporting Standards) 327 incrementalism 352 see also under evolution independence see under institutional design institutional design BoS see Board of Supervisors bureaucratic hierarchy/power, moves toward 72–3, 76–7 Chair 61, 66 constitutive and legal framework 78–82 consultation challenges/benefits 63–4

Index 359 requirements and practices 64 stakeholder groups 64–5 Executive Board proposal 74–6 composition 74 relocation of powers 76–7 task categories 75 Executive Director 61, 62 external governance see external governance governance reform proposals 72–8 disruptive/supportive elements 76–8 impact assessment 62–3 independence European Commission’s check on 66 guarantees of 65–6 other challenges 66–7 internal organisation 62–5 legal constraints 81–2 Management Board 61, 69 mandate and powers 78–82 objectives 80–1 organisational model 57–8 reform see governance reform proposals above scope of activities 79 technical expertise, privileging of 58 working methods 62 international financial market governance network characterisation 326 European Commission role 327–8 ISSBs see international standard-setting bodies (ISSBs) third country see third country actors/ equivalence see also network actor International Financial Reporting Standards (IFRS) Foundation 327, 330–1 International Organisation of Securities Commissions (IOSCO) 328, 331–2 international standard-setting bodies (ISSBs) collective preference mechanisms, limitations 329 coordinating role 328 effectiveness 329–32 EU/IFRS Foundation relationship 330–1 influence channels 328–9 international cooperation agreements 332 legitimacy risks 332 main ISSBs 326–7 operational activities 328 regulatory capacity 329–30 scope of concerns 328 structural differences 329 judicial review see under external governance

Lamfalussy process 20, 182 legislative process see under regulatory governance legislatively required opinions see under coaching role Management Board see under institutional design mandate and powers 78–82 NCA-orientated supervision binding mediation (Art 19) 278–80 deployment need, intensification 286–7 limitations to effectiveness 286–7 breach of EU law (Art 17) 277–8 Brexit issues 285 effectiveness 280–1 emergency conditions (Art 18) 287–8 legal regime 277–80 legitimation (Arts 17 and 19) 280 reticence with Art 17 engagement 281–5 Brexit issues 285 conflicts of interest 281 Decision on Rules of Procedure 281–2 discretionary/last-resort tool 281 pressure to deploy 284–5 reasons for reticence 285 review process 282–4 strengthening of Arts 17 and 19 287 technocratic influence (Arts 17 and 19) 280 see also direct supervision/market intervention network actor EU financial governance see EU financial governance network international financial market governance network see international financial market governance network key issues 316, 349 nudging effect/role 157, 171, 175, 191, 210, 213–21 Ombudsman see under external governance opinion powers see under coaching role OTC Derivatives Regulators Group and Forum (ODRG and ODRF) 332 peer review assertiveness 221–2, 227–8 assessment group 225 convergence tool 225 effectiveness challenges 228–30 hierarchical approach 226–7 institutionalisation 223–4 legitimation challenges 230–1 meaning/roles 222–3

360 Index methodology 225–6 NCA role 224–5, 226–8 see also coaching role product intervention see under exceptional intervention regulatory governance assessment of role 104–8 as de facto author of single rule-book 104–5 effectiveness and legitimation 107 market concerns/consequences 105–6 operational importance 105 optimistic conclusion 107–8 points of difference 106–7 testing process’ rigour 106–7 dynamism and reform 109–10 effectiveness 113–14 EU context 112–13 experimentalist governance 115 financial markets and administrative rules agencies’ traditional benefits challenged 111–12 command and control approach 110–11 principles-based regulation model 111 influence 113 institutional setting 112–13 legislative process 165–7 increased purchase over 166–7 informal engagement in 166 participation methods 166–7 legitimation risks 113 new governance approaches 114–15 powers 109 contestation, lack of 113 rule-maker role 108–9 single market rule-book see single rule-book soft law rule-book see soft law rule-book standard-setting function 108–9 regulatory technical standards (RTSs) see under single rule-book retail markets see supervisory convergence, consumer protection in retail markets mandate role see setting and role setting and role benchmark regulation 9 corporate disclosure/financial reporting regulation 9 direct supervision/intervention powers 8–9, 243–4, 249, 258–9, 263, 272–3, 295 direct supervisory powers proposals 19 ESFS relationship 7–10, 15, 316–17, 319, 322–3 EU agency 13–15 EU financial market governence 16–17

financial market regulator 11–13 financial reporting regulation 9 fund management regulation 9 hybridity 4–5, 13 independent agency 11–12 innovation challenges 16–17 international financial governance 15–16, 326, 329–30, 343 investor protection regulation 9, 236, 247, 348 mandate and powers 12–13 market abuse regulation 9 markets and investment firms regulation 9 NCA relationship 15 network actor 15–16 non-majoritarian institution 11 objectives 7–8 policy areas 9–10 post-trading regulation 9 reform proposals 2017–18 18–19 regulatory governance 8 scale of influence 10 supervisory convergence 8 short selling see under exceptional intervention single rule-book accountability functions 140–1 basic trends 116 binding technical standards 120 Delegated Acts 116–20, 122–3, 125–7, 141–3 effectiveness and administrative rule-book agility/revisability 136–8 consultation practices 135–6 data-informed approach 134–5 expert deliberation 138–9 institutional sensitivity 140 key issues 133–4 national contestation 139 EU context 112 legitimation and administrative rule-book 140–5 accountability functions 140–1 draft RTSs, oversight 143–4 technical advice, oversight 141–3 procedural/institutional context 116–26 regulatory technical standards (RTSs) adoption 120–1 AIFMD (2011) 122 attractiveness of procedure 125–6 credit rating agency regime 122 crisis era reform programme 125 EMIR (2012) 122–3 Market Abuse Regulation (2014) 124 MiFID II/MiFIR rules (2014) 123–4 opportunities for ESMA influence/ expansion 122 rise of 121–6

Index 361 technical advice to European Commission crucial/informal role 116 Delegated Acts 116–20, 122–3, 125–7, 141–3 implementing powers/rules 117–18 in practice 118–19 technocratic influence, expansion 34–5, 126–33 draft BTSs, formal revisions/rejections by European Commission 131–2 early legal review procedure 132 MiFID II/MiFIR BTS process 130–1 overrides by European Commission, restraints 126–7 procedural/institutional factors 126–32 RTS process, European Commission concerns 129–30 technical advice, use by European Commission 127–9 transformative rule-book 132–3 see also regulatory governance soft law rule-book accountability arrangements 161 basic forms 145 effectiveness of guidelines, compliance levels 156 EMIR and MiFID II/MiFIR Q&As 148–9 guidelines (Art 16) 145–8 adoption threshold requirements 159–60 de facto binding effect 146–7 difficulties 157–8 effectiveness 155–7 embeddedness 148 functional appeal 155 hardening effects 146 legitimacy 157–62 multi-faceted/adaptive nature of framework 161–2 national/transnational legitimation 160–1 output legitimation 159 perception of risks 157 in practice 147 responsiveness of 156 risks from 156–7 substantial non-compliance 147–8 supervisory binding effect 145–6 transparency enhancement 159 measures (Art 29) 148–9, 162–5 procedural/institutional context 145–9 technocratic influence, expansion 149–55 guidelines (Art 16), quasi-regulatory approach 149–55 measures (Art 29), range and nature 153–5 opinions/public statements 153 Q&As 153–5 see also regulatory governance

speculation on future 352–3 Strategic Supervisory Plan 75, 213, 240 stress test support 200–2 CCPs 201 contestation 200 deployment 201–2 effectiveness 202 investment funds 201n, 202n legitimation challenges 202 see also supervisory convergence supervisors see Board of Supervisors supervisory convergence Brexit issues 237–40 equivalence-based access arrangements 238 legitimation challenges 240 NCA preparedness 239–40 supervisory arbitrage risks 238–9 third country actors 237–8 coaching role see coaching role colleges of supervisors see colleges of supervisors consumer protection in retail markets mandate 233–6 ad hoc interventions 234–5 ESA Proposal (2017) 236 Europeanisation trend 234 retail market concerns 235–6 specific mandate 233–4 context/challenges 179–81 data capacity 192–9 data reporting regimes 195–7 effectiveness measure 199 hosting/repository role 193–4 interrogation of data 197–8 legitimation challenges 199–200 limitations on data capacity 198 mechanisms for gathering data 192 review proposals 198–9 distinct features 171 dynamism and reform 176–9 policy areas 177–8 proceduralism/institutional oversight, absent 176–7 reform proposals (2017) 178–9, 186–7 effectiveness perspective 171–2, 181, 188–90 EU context 181–7 financial/euro area crisis 182–3 institutional/political support 183–4 NCA coordination 181–2 NCA’s role 184–6 Europeanisation of supervisory decision-making 174–5 financial innovation mandate 236–7 financial stability mandate 232–3

362 Index hardening effect 231–2 hierarchical quality 175 influence 187–8 legitimation perspective 172, 179–80, 181, 190–1 meaning 169 models for supervision 180–1 peer review see coaching role, peer review powers 175–6 range of 191–2 prominence, recent 169–70 reform proposals (2017) 178–9, 186–7 retail markets see consumer protection in retail markets mandate above risk assessment 192, 197–8 risk-based models 180–1 self-characterisation 191–2 shaping capacity 171 specific mandates 232–7 Strategic Supervisory Plan 75, 213, 240 stress test see stress test support surveillance possibility 172 system supervisor role 173–5 tasks 175–6 tool-kit 179, 186 supervisory coordination see supervisory convergence supervisory empowerments see under ESA Proposal (2017) technical advice to European Commission see under single rule-book technocratic influence direct supervision/market intervention 243–4, 263–72, 273–7, 280–7, 294, 301, 303, 309, 313 effectiveness 35–8 expansion see under single rule-book; soft law rule-book financial market development 36–7 governance 41, 54–5, 57, 78, 86, 103 innovation 38 legitimation arrangements 38–9

mandate delivery 37–8 nature and extent 33–4 network role 328, 338, 344, 349 regulatory governance 106–7, 110, 113, 116, 126–32, 134, 145, 149–55, 158, 161, 168 setting and role 1–2, 16 single market setting 35–6 supervisory convergence 171–2, 176, 179, 187–8, 192, 206, 228, 232, 238–40 temporary action see exceptional intervention third country actors/equivalence Brexit issues 341–4, 347 credit rating agencies 335 definition/meaning 332 effectiveness 339–41 EMIR regime 334–5 equivalence-based regime 333–4, 336 effectiveness 339–41 European Commission control 336 pivotal player 336–8 EU financial market, gatekeeper role 338–9 EU regime 333 future shape of regime 332–3 legitimation concerns 341 in practice 336–9 reform waypoint 2017–18 341–9 Brexit issues 341–4, 347 ESA Proposal (2017) 347–9 reform of ESMA’s role 341–4 third country CCPs’ treatment 344–7 sectoral financial market measures 335–6 trade repositories 334–5 trade repositories 272–7 effectiveness challenges 273–7 EMIR data-flows 273–4 enforcement action 276–7 legal regime/operating framework NCA jurisdiction 274 risk-based approach 275 technocratic influence/effectiveness 273–6 third country actors/equivalence 334–5 see also direct supervision/market intervention