EU Markets Cop Set for Power Boost as Brexit, MiFID II Loom

Updated on
  • ESMA would assume oversight of clearinghouses, benchmarks
  • Draft EU Commission proposal on supervision seen by Bloomberg

How MiFID II Is Going to Change Banking

The top European Union markets regulator is in line for an injection of sweeping new powers as the bloc braces for the impact of Brexit and new MiFID II rules on its capital markets.

The Paris-based European Securities and Markets Authority will directly supervise critical market infrastructure including derivatives clearinghouses, data reporting services providers and financial benchmarks, according to a draft bill that the European Commission, the EU’s executive arm, plans to publish this week. It will also coordinate the work of national authorities to sharpen the EU’s supervisory focus.

The push for a single EU capital-markets supervisor began more than two years ago as policy makers sought to diversify funding sources for companies and drive growth. It gained increased urgency as they grappled with Brexit, which will leave London’s financial hub outside the bloc, compounding the challenges posed by non-EU firms seeking access to the single market. ESMA’s central role in policing the EU’s new MiFID II market rules, which kick in on Jan. 3, has also spurred demands to strengthen the regulator.

“Despite the post-crisis measures, there remains significant potential to enhance regulatory and supervisory convergence in the single market,” according to the draft document seen by Bloomberg. “Integrated financial markets require more integrated supervisory arrangements to function effectively, while more centralized supervisory arrangements can, in turn, foster market integration.”

Regulatory Sweeteners

A spokeswoman for the European Commission declined to comment on the document.

Financial regulation in Europe is carried out by three main EU agencies -- ESMA, the the European Banking Authority and the European Insurance and Occupational Pensions Authority -- in collaboration with the European Central Bank, which oversees euro-area lenders, and national authorities that handle much of the day-to-day work.

At present, ESMA’s direct supervision is limited to credit-rating agencies and trade repositories, which collect and maintain records of derivatives. Bloomberg Trade Repository Limited, a subsidiary of Bloomberg LP, the parent of Bloomberg News, is authorized by ESMA to operate a trade repository.

As banks based in the U.K. make plans to relocate some operations and staff to the continent, officials have warned national governments against competing with one another by offering regulatory sweeteners, risking a race to the bottom. A more coordinated approach among member states could address such concerns, according to the commission.

Asset Managers

“The future departure of the EU’s largest financial center means that EU27 supervisory arrangements must be strengthened to ensure that financial markets continue to support the economy on an adequate and sound basis,” the draft bill states.

The plan would hand EU regulators the tools to better police asset managers that “delegate” business from one country to another. Steven Maijoor, the agency’s chairman, has said that the practice poses a risk in the context of Brexit as firms may set up shop in the bloc while delegating chunks of their business back to the U.K.

Maijoor has been ESMA chief since April 2011, and is currently serving his second five-year term.

To make sure that differing national approaches to delegation and outsourcing don’t open the door to regulatory arbitrage, EU supervisors would get the “necessary powers to effectively coordinate” actions by national authorities, according to the proposal.

The supervision of clearinghouses, a major battleground in the Brexit talks, is handed to a newly created body within ESMA called the CCP Executive Session, which will include members from the European Commission and the European Central Bank. The goal, as the commission put it in June, is to “ensure further supervisory convergence.”

‘Critical Benchmarks’

Since financial products using “critical benchmarks” are available across the EU, ESMA should supervise them, the draft states. If a benchmark is crucial in a single country, ESMA could delegate supervision to the national authority.

And data reporting service providers, which help investment firms and trading-venue operators to meet publication and reporting requirements under MiFID II, would also be directly supervised by ESMA. Bloomberg Data Reporting Services Limited, a subsidiary of Bloomberg LP, is authorized by the U.K. Financial Conduct Authority, effective Jan. 3, 2018, to operate an approved publication arrangement.

To fund the new tasks, financial firms will be expected to directly finance their supervisors. ESMA, EIOPA and the EBA are currently funded by national authorities and the general EU budget. Under the new rules they would rely on annual contributions from financial firms that are indirectly supervised, fees from directly supervised companies and a “balancing contribution” from EU coffers.

“In some areas we can go further on the path towards supervisory convergence,” Valdis Dombrovskis, the European commissioner in charge of financial-services policy, said Sept. 14 in Tallinn. “It is easier to operate across the single market when you have a single supervisor looking at your entire operations.”

EU member states as well as the European Parliament will discuss the proposals after they’re officially presented.

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