ISDA/FIA Response to ESA Consultation

FIA and ISDA (the Associations) welcome the opportunity to provide feedback on the European Commission’s (Commission) published Draft Implementing Regulation on the operations of the European Supervisory Authorities (ESAs) and the proposed supervisory framework. The joint response is particularly focused on the European Securities and Markets Authority (ESMA), given the nature of our memberships.

The Associations support the overall goal of the ESAs review package aimed at: (i) reinforcing coordination of supervision across the EU; (ii) extending direct capital markets supervision by ESMA where appropriate, but only where ESMA has built up the necessary expertise and capacity to take over new supervisory powers; (iii) increasing engagement, enhancing consultation processes and creating a culture of continuous dialogue with market participants; (iv) improving governance and funding of the ESAs; and (v) promoting sustainable finance and fintech.

The current European supervisory set-up for both banking and capital markets has proven to be efficient, maintaining market stability and integrity in times of market stress. The Associations believe that increased supervisory convergence would help to deepen capital markets in Europe, key to a more diversified source of funding for European companies. In addition to increased convergence, there is an opportunity to increase the efficiency and competitiveness of Europe’s capital markets through initiatives to streamline and simplify supervisory processes and remove duplication. The proposed recalibration of supervisory structures should be considered carefully to ensure structural stability, given that relevant EU legislation is still in the process of implementation.

We have the following comments:

Executive Summary

The Associations support the overall goal of the ESAs review package.

  1. The governance structure should provide for independent, objective supervisors accountable to legislators but operationally independent. It is important to recognize the very different nature of capital market supervision (which tends to be varied by product and participant, as well as global in nature) versus bank supervision (which typically involves more similar institutions doing a smaller set of activities that are often more locally oriented) and ensure an appropriately differentiated policy approach at each ESA. Supervisory convergence should be the primary focus of the ESAs;
  2. We welcome the introduction of an independent Executive Board with full-time members replacing the current Management Board, but recommend that further clarification should be provided regarding the role of the full-time members of the Executive Board in the management of the ESAs. We agree that the Board of Supervisors should continue to be the main decision-making body of the ESAs;
  3. We recommend further clarifications as to how the proposed Executive Board would work with the proposed CCP Executive Session on the authorization of CCPs (EMIR Part 2.2);
  4. We recommend that ESMA and national competent authorities (NCAs) take a differentiated approach to supervision with regards to wholesale and retail customers;
  5. Given the need to increase resources of the ESAs, we accept a funding system partly funded by the industry, subject to a dedicated industry consultation and within certain parameters. There is a need for fees and contributions to be commensurate as a reasonable level of fees will ensure that the provisions of financial services remains cost effective and that the competitiveness of the EU market place is not affected. Further clarification is required on the collection mechanism;
  6. Fees should be fairly allocated across the regulated population. It would be inappropriate to carve out specific categories of entities just because they are smaller in size than the largest financial institutions. We recognize that proportionality should be at the heart of the allocation;
  7. We recommend increased engagement between the ESAs and the industry, and support the creation of a more robust consultation culture with increased transparency around policy decisions;
  8. New powers for the ESAs: any consideration to expand ESMA’s direct supervisory powers should respect the subsidiarity principle according to Article 5 of the Treaty of the European Union and would first require in-depth assessment, including corresponding cost/benefit analysis and ideally also preceding consultation of concerned entities. In this context, the value of supervision by national authorities should be recognized, given their strong knowledge of local markets, with their particularities (specific products, client base and tax regimes), best practices and national legal frameworks. National supervisors also have the best understanding of practical operations and business models of supervised entities and have established networks of coordination between regulators;
  9. Regulatory forbearance: we believe that the ESAs should be provided with powers to temporarily suspend the application of certain regulatory requirements in certain circumstances and within a reasonable time frame – effectively relieving firms from enforcement action during that time period;
  10. Amendments to time frames: the implementation of significant regulatory reform has highlighted the importance of providing the ESAs, NCAs and market participants with adequate timelines to deliver financial reform;
  11. ESA involvement in the Level 1 process: we believe it is important to give the ESAs observer status for Level 1 negotiations, at least at the stage of trilogies;
  12. Reform of the Q&A process: we support the proposal that the ESAs should conduct public consultations on guidelines and recommendations, and believe this should extend to Q&As; and
  13. We support ESMA supervision for pan-European crucial IBOR benchmarks (ie, EURIBOR, EONIA, which have already been determined critical by the Commission). National competent authorities should retain the supervisory authority over Benchmarks at national level and retain the ability to determine if their local benchmarks are critical.

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