Europe pitches centralised markets watchdog to avert decline

The EU’s executive arm has unveiled a plan to transfer greater supervisory and enforcement powers to its markets regulator, setting up a battle about how much power national supervisors should cede power to Brussels.

Under the proposal announced Thursday, the Paris-based European Securities & Markets Authority will gain new powers over significant clearing houses, central securities depositories and trading venues.

Crypto firms, for which the EU introduced a national supervision regime less than a year ago, will also fall under its remit, as will pan-European market operators, a new category of trading firms who want to use a single authorization to operate across the EU. Bloomberg first reported details of the proposal last month.

The centralization of supervision powers for vast swathes of the EU’s markets — one of the most fundamental structural reforms since financial crisis spawned the creation of the European Central Bank’s supervisory arm — must still be agreed upon by the European Union’s parliament and council of member states, some of whom staunchly oppose the plans.

The commission argues that national supervisory approaches increase the cost of business and hinder the free movement of capital, and that changes are crucial to encourage European savers to put some of their €10 trillion ($12 trillion) of deposits to more productive use. Market fragmentation means there are more than 300 trading venues and 25 authorized central securities depositories while EU stock exchanges amount to 73% of gross domestic product, compared to 270% in the US.

“The cost of inaction compounds quietly and, over time, this turns into decline,” EU Financial Services Commissioner Maria Luis Albuquerque told reporters in Brussels. “Such decline is already starting, so there’s no time to waste.”

Central to the proposal is beefed-up powers and resources for 15-year-old ESMA, including a board of five independent members with a maximum five year mandate. The preparatory costs will be covered by the EU budget, while trading venues, CDS and crypto-assets services providers will pay a fee toward ongoing expenses the commission said. It added that the amount national supervisors pay to ESMA currently will fall from 60% to 50% of the agency’s budget, while the EU budget will up its contribution to 50% from 40% at present.

The commission’s efforts to streamline market functioning across Europe also include amendments to legislation, including limiting the ability of member states to impose additional requirements on issuers of securities and simplifying passporting processes to improve the provision of cross-border central securities depositories services. It also wants to better integrate distributed ledger technology into the rulebook.

The package involves 18 pieces of legislation but Albuquerque called for them to be adopted simultaneously.

“There is not one single of these measures that will deliver the outcome we need, it is all of them combined, so splitting would actually make us lose sight of the end result that we are looking for,” she said.

Negotiations on the package will begin in earnest in January, when Cyprus assumes the rotating presidency of the European Council.

The European Commission, the EU’s executive arm which is spearheading the proposal, is pushing for swift resolution of the file, viewing it as a key plank of its long-stalled savings and investment union plan.

France, which hosts ESMA, is one of the biggest supporters of the new supervisory proposal. But some member states like Ireland, Belgium and Luxembourg are skeptical, while other countries have problems with specific aspects of the package, particularly the proposals on crypto.

Some market participants have also expressed concern about the package’s potential unintended consequences.

“Adding new regulatory layers could ultimately hinder, rather than support, effective market functioning,” said Adam Farkas, chief executive officer of lobby group the Association for Financial Markets in Europe, who also lamented the “missed opportunity” to simplifying Europe’s fragmented post-trade infrastructure.