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Monday, July 22, 2024 | Back issues
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EU Sharpens Teeth of Its Securities Regulators

(CN) - Lawmakers did not overempower fledgling securities regulators to fight short-sell and hedge-fund abuses in the wake of the 2008 worldwide financial meltdown, Europe's highest court ruled Wednesday.

Lawmakers created the European Securities and Markets Authority (ESMA) in 2011 in response to the deepening fiscal crisis, and a year later gave ESMA the power to intervene in the short-sell and hedge-fund markets of individual member states. The United Kingdom then sued the European Council, arguing that ESMA's newfound control far exceeded court-established separation-of-powers limits by illegally giving the agency legislative and statutory authority - particularly in situations where the governments of member states declined to act.

In an opinion for the Luxembourg-based Court of Justice last year, adviser Niilo Jaaskinen said the agency's ability to meddle in the affairs of individual governments did not pass constitutional muster. While EU leaders have the power to create super agencies like ESMA in emergency situations, the adviser determined that the agencies' power cannot exceed what is necessary to stabilize the internal market and cannot tinker in the financial markets of individual countries.

But the EU high court rejected its adviser's opinion Wednesday, finding instead that EU law authorizes ESMA to act only when member-state authorities fail to do so - and as necessary to stymie threats to the European financial markets.

"ESMA is required to 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 or part of the financial system in the union or significantly improves the ability of the competent national authorities to monitor the threat in question, 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 creating uncertainty for market participants, which is disproportionate to the benefits of the measure," the decision states.

Because the law expressly outlines ESMA's powers and examination requirements, and because judicial review is available, "those powers do not imply that ESMA is vested with a 'very large measure of discretion' that is incompatible with the EU constitution," the court found.

The U.K. had also failed to show that lawmakers had no authority to imbue the new agency with what should have been a commission duty, as the EU constitution gives regulatory powers to the European Commission.

"The regulations that created ESMA cannot be considered in isolation," the court wrote. "On the contrary, that provision must be perceived as forming part of a series of rules designed to endow the competent national authorities and ESMA with powers of intervention to cope with adverse developments which threaten financial stability within the Union and market confidence. To that end, those authorities must be in a position to impose temporary restrictions on the short-selling of certain stocks, credit default swaps or other transactions in order to prevent an uncontrolled fall in the price of those instruments. Those bodies have a high degree of professional expertise and work closely together in the pursuit of the objective of financial stability within the union."

ESMA's creation facilitates the EU's ongoing goal of ending the fragmented, state-by-state European financial market and replacing it with a single common framework - even if the U.K believes that goal runs afoul of constitutionally protected member-state autonomy.

"The EU legislature considered it appropriate to lay down a common regulatory framework with regard to the requirements and powers relating to short-selling and credit default swaps and to ensure greater coordination and consistency between member states where measures have to be taken in exceptional circumstances," the court wrote. "Therefore, the harmonization of the rules governing such transactions is intended to prevent the creation of obstacles to the proper functioning of the internal market and the continuing application of divergent measures by member states."

In dismissing the U.K.'s case, the justices added: "While competent national authorities will often be best placed to monitor and react immediately to an adverse development, ESMA should also have the power to take measures where short-selling and other related activities threaten the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the Union, where there may be cross-border implications and competent national authorities have not taken sufficient measures to address the threat."

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