A. Regulatory Reform: On the Books and In Action

Since the outset of the financial crisis, the EU financial markets regimeFootnote ¹ has been undergoing a period of turbulence which contrasts sharply with the period of relative stability which it briefly enjoyed over 2005–2007 and post-FSAP (Financial Services Action PlanFootnote ²). The FSAP reforms had been adopted. The Committee of European Securities Regulators (CESR) had emerged as an influential actor, driving some degree of supervisory coordination and co-operation and constructing a significant soft law ‘rule-book.’ And the 2007 Lamfalussy Review suggested broad political, institutional and stakeholder satisfaction with the Lamfalussy process. There was little enthusiasm for grand adventures in institutional design, albeit that supervision, an institutionally-driven concern, was presciently if belatedly emerging as a concern of the EU institutions. The Review's main concern, however, was with strengthening the pragmatic, if somewhat haphazard, network-based, ‘supervisory convergence’ model as the means for supervising the integrating EU financial market. With respect to regulation, reflecting the wider international zeitgeist pre-crisis,Footnote ³ ‘Better Regulation’ and the need for a ‘regulatory pause’ were the watchwords of a Commission which, once the massive FSAP regime was safely in place, espoused the benefits of self-regulation and highlighted the risks of intervention without impact assessment, extensive consultation and evidence of market failure.Footnote ⁴ This was most apparent with respect to credit rating agencies,Footnote ⁵ debt market transparency,Footnote ⁶ hedge funds,Footnote ⁷ and clearing and settlement.Footnote ⁸ Institutionally, a relatively sophisticated law-making apparatus, in the form of the Lamfalussy structures, a plethora of advisory bodies and stakeholder bodies (notably FIN-NET which represents the consumer and SME interest), had been established.

As is now well known, the crisis reset the regulatory and supervisory environment.Footnote ⁹ It exposed the fiscal risks to Member States from cross-border risk-transmission, given an inconsistent rule-book, poor supervisory coordination, and a regulatory and supervisory system which was not designed to identify and capture systemic risks. Although an early 2008 Commission Communication suggested that the post-FSAP regulatory regime might weather the storm,Footnote ¹⁰ by March 2009 the Commission, supported by ECOFIN, was calling for ambitious reform of the European financial system.Footnote ¹¹ The seminal De Larosière Group Report, published in February 2009,Footnote ¹² underlined the multiple weaknesses in the EU regulatory and supervisory framework. Rules were inconsistently applied. Administrative supervisory practices and sanctions differed. There was no system for macro-prudential supervision or for early warnings. Competence difficulties and supervisory error arose. Supervisory practices were not challenged. Peer review by the Lamfalussy ‘3L3’ committees, including CESR, was ineffective. There was a lack of frankness and cooperation between supervisors. The 3L3 committees were poorly resourced. It was not possible to make common decisions in a crisis—as the banking crisis made clear, but as also underlined by the difficulties in taking coordinated action with respect to short-selling in the securities markets. The Report laid the foundations for the current decisive move to a single EU rule-book, the new emphasis on supporting supervisory outcomes, and the new institutional structure.

Although much remains to be done,Footnote ¹³ the initial phase of the massive reform agenda has completed. This is despite considerable institutional tensions, including clashes between the European Parliament, which has emerged from the financial crisis as a powerful voice in EU rule-making for financial markets and as a strong advocate of greater centralization of supervision and regulatory intervention,Footnote ¹⁴ and ECOFIN, which has been sceptical of moves to centralize operational powers, and acutely sensitive to any separation of fiscal risk-bearing (at Member State level) from supervisory accountability, consequent on the centralization of supervisory decision-making. The ‘fast-track’ ordinary legislative procedure (article 294 TFEU) has led to measures being adopted speedily, despite the complexities of the issues under discussion—although with some loss of transparency as many sensitive issues have been resolved through the opaque institutional ‘trilogue’ (discussions between the Commission, ECOFIN and European Parliament prior to the European Parliament first reading). Space does not permit discussion of the different institutional, international, political and other drivers of this period.Footnote ¹⁵ But crisis-condition dynamics, a concern to control the emerging international rule-book, a re-characterization of regulatory competition as regulatory arbitrage given the fiscal risks to Member States from cross-border risk transmission, some inevitable degree of institutional opportunism, and an accommodating political climate at Member State level, given the significant costs and complexities of rule-making post-crisis, can all be implicated in the crisis-era reform programme. The EU law-making apparatus was also relatively sophisticated and experienced with law-making after the FSAP period, with CESR was an important agent in placing reforms on the political and institutional agenda.

The catalogue of crisis-era legislative measures is substantial (a vast delegated rule-book is also in preparation). An extensive new rating agency regime was adopted in 2009 with the Credit Rating Agency Regulation;Footnote ¹⁶ in December 2010, following political agreement in the trilogue, the European Parliament reached a first and final reading on the important 2010 Credit Rating Agency ProposalFootnote ¹⁷ which contains both substantive revisions, which will subject rating agencies to additional transparency rules, and institutional revisions with respect to the supervisory role of the new European Securities and Markets Authority (ESMA). In November 2010, political agreement on what will become the massive, complex, and contested 2011 Alternative Investment Fund Managers (AIFM) Directive was formalized, with the first and final reading by the European Parliament.Footnote ¹⁸ Key Commission proposals have been presented with respect to the regulation of short-selling and credit default swaps (2010),Footnote ¹⁹ the OTC derivatives markets (2010),Footnote ²⁰ and investor compensation schemes (2010).Footnote ²¹ The FSAP review, scheduled for this period but substantially reconfigured given the financial crisis, is well underway. Major revisions are expected to MiFID,Footnote ²² the Transparency Directive,Footnote ²³ and the Market Abuse Directive (MAD).Footnote ²⁴ In 2010, revisions were adopted to the Prospectus Directive, including significant reforms to the Directive's summary prospectus regime for retail investors.Footnote ²⁵ In the funds sphere, the Madoff scandal led to a 2010 consultation on weaknesses in the UCITS depositary regime.Footnote ²⁶ The extensive UCITS IV reforms to the UCITS regime, which have been in gestation since the 2005 Green Paper on investment funds,Footnote ²⁷ were finally adopted in 2009.Footnote ²⁸ One of the central UCITS IV reforms, the new ‘Key Investor Information’ retail investor document for UCITS investment—a major step forward for EU retail market policy—is now in place and, as the first EU retail market disclosure measure to be subject to systematic testing, is an important staging post in the development of a more sophisticated retail market rule-book.Footnote ²⁹ The important Packaged Retail Investment Products initiative is proceeding, albeit slowly, and promises much in terms of its removal of the current significant arbitrage risks which trouble the EU's distribution and disclosure regime for retail investment products.Footnote ³⁰ Developments in cognate areas include the CRD III reforms to executive pay, which will apply to senior executives in investment firms,Footnote ³¹ as well as the financial reporting reforms which are being led by the International Accounting Standards Board.

While the impact in practice of the ‘crisis-era’ generation of rules remains in the realm of speculation, some themes can be identified concerning their impact on EU rule-making more generally. The nature of the actors the subject of EU financial market law is changing to include actors which are perceived (however unfairly) to pose a risk to market stability, rather than as potential beneficiaries of liberalization; credit rating agencies and alternative investment fund (particularly hedge fund) managers provide the major examples. In neither case was cross-border access the primary concern of the law-makers; indeed, the initial attempts to construct a pan-EU passport for hedge fund managers can be associated with some degree of EU regulatory imperialism and led to an international outcry given the significant regulatory burden which would have been imposed on non-EU alternative investment fund managers. The perimeter of the current regime is widening. The ‘regulated market’ concept, which serves as the perimeter control for much of the current regime with respect to issuer disclosure, equity market transparency, and market abuse prevention, has come under pressure as an increasingly out-dated model for marking the reach of financial regulation. A much wider set of organized markets and bilateral/over-the counter trading venues are likely to become subject to EU financial market regulation post MiFID Review. Reflecting the DLG Report's call for a ‘single rule-book,’ the EU rule-book is also intensifying. Regulations are increasingly being relied on in preference to Directives (the Short Selling and OTC Derivatives Proposals, for example), maximum harmonization is being widely considered (with respect to the Transparency Directive reforms, for example), delegated rules are being used extensively (the 2011 AIFM Directive contains extensive delegation to Commission rule-making), and options and derogations are being restricted (for example, under the Transparency Directive and the MiFID Review). Similarly, principles-based regulation, and market-discipline-based measures, both strongly associated with the pre-crisis era,Footnote ³² are disappearing from the EU regime. The MiFID Review, for example, proposes that MiFID's principles-based regime for equity market transparency move to a rules-based model. Operational harmonization is also a feature of the current agenda: the MiFID Review contains the proposal that a ‘consolidated tape’ of equity market transparency information may be required for the EU market. The ability of Member State to experiment and innovate is being limited, while the systemic risks of EU regulatory error are increasing.

EU financial market regulation is also becoming increasingly concerned with supervisory outcomes, or with ‘law in action’, as called for by the DLG Report. December 2010, for example, saw the presentation of an important Commission Communication on the harmonization of sanctions,Footnote ³³ which marks a significant break with the convention that sanctioning is the preserve of the Member States. The harmonization of liability regimes, currently a Member State competence, also seems to be in train; the MiFID Review, for example, raises the possibility of a pan-EU liability regime for investment firms. The MiFID Review also contains an ambitious, if politically incendiary, proposal for the Commission to be empowered to prohibit certain investment products.

B. Rating Agencies

The rating agency example usefully illustrates the crisis-driven shift in the nature and intensity of EU intervention. Recent developments suggest that rating agencies can be regarded as pathfinders in terms of operational harmonization, substantive harmonization, and the centralization of supervision. They also highlight the impact of internationalization on the EU rule-book. Rating agencies have come under close international scrutiny in the wake of the financial crisis, given concern as to their failure to reflect risks in structured finance products, and related concerns as to the competence and conflict of interest risks to which rating agencies are exposed.Footnote ³⁴ The focus on rating agencies reflects long-standing difficulties in controlling conflict of interest risk in the financial markets, and particularly in financial market gatekeepers, which the earlier Enron-era exposed with respect to auditors and investment analysts in particular. International dynamics are also relevant in the form of the early focus by the G20 on this area in the initial stages of the crisis. This reflects in turn the availability of an international template from IOSCO's work (its initial 2004 Code of Conduct was revised in 2008 to reflect the financial crisis and is subject to ongoing implementation reviews; the 2010 restatement of the ISOCO Objectives and Principles of Securities Regulation includes rating agencies for the first time).

Prior to the financial crisis, the EU rating agency regime was based on an innovative self-regulation, deterrence-based model, based on compliance with the IOSCO Code, which was hooked into the EU regime by means of CESR's policing of Code compliance under a voluntary agreement with leading rating agencies.Footnote ³⁵ Additional support was provided by generic rules under MiFID, the Market Abuse Directive and the Capital Requirements Directive. A radical change of approach followed with the 2009 Regulation. While the hardening of the approach on rating agencies can be associated with some degree of institutional opportunism, as well as political pressure from the Council, it also reflects international dynamics over the crisis. The 2009 Regulation forms part of the EU's support of the G20 agenda. But it also underlines the EU concern to influence the international rule-book in that the Commission's winter 2008 proposal preceded the April 2009 G20 commitment at the London Summit to the imposition of a registration and oversight regime on rating agencies.Footnote ³⁶ The 2009 Regulation also attempts to export the EU model through, as noted below, equivalence techniques.

The Regulation requires that rating agencies be registered and supervised. It imposes a rule-based regime, based on organizational/governance (including a requirement for rating agencies to have a Board of Supervisors), operational (including methodology requirements) and disclosure elements (including ongoing public disclosure requirements and that a particular symbol is adopted for structured finance ratings). It applies to ratings issued by rating agencies registered in the EU and publicly disclosed, but is operationalized through the requirement that regulated institutions may only use ratings for regulatory purposes where they are issued by a rating agency established in the EU and registered in accordance with the Regulation.

A twin track endorsement/certification model applies to ratings issued by non-EU registered agencies, reflecting the different positions taken by the institutions: the Commission sought to limit the access of non-EU registered rating agencies to the EU, while the European Parliament and some ECOFIN members adopted a more facilitative approach.Footnote ³⁷ An EU-registered rating agency may ‘endorse’ a rating issued by a rating agency group member outside the EU, but the rating agency must verify that the conduct of rating agency activities by the non-EU group member fulfils requirements ‘at least as stringent’ as those applicable under the Regulation. A range of other conditions also apply, including that the rating agency is authorized or registered, and subject to supervision, in the third country, that appropriate supervisory co-operation arrangements are in place, and that there is an objective reason for the rating to be elaborated in a third country. ESMA has proposed that the third country regime must be based on law or regulation, given the need for ex ante supervision based on strong legal requirements in the third country.Footnote ³⁸ A certification regime applies to other (non-group) third country rating agencies, which is based on an equivalence model and which requires that the legal and supervisory framework of the third country ensures that the rating agency complies with legally binding requirements which are equivalent to the Regulation, and which are subject to effective supervision and enforcement in the third country. Of particular note, in terms of international dynamics over the crisis, is CESR's May 2010 opinion on the equivalence of the US regime.Footnote ³⁹ While it found that, overall, the regime was broadly equivalent, it reported that a number of differences existed, particularly with respect to methodologies and quality of ratings and disclosure which, CESR suggested, could be resolved by amendment to SEC rules. While the equivalence decision is currently under review, following the subsequent Dodd-Frank Act 2010 reforms to the regulation of rating agencies, it underlines the ambitions of the EU with respect to the international rule-book.

As the emphasis on operational supervision in the certification/endorsement regime implies, the 2009 Regulation reflects the current reform agenda in that it engages closely with outcomes and supervision. The Commission's 2010 Impact Assessment for the 2010 CRA ProposalFootnote ⁴⁰ makes clear that the 2009 Regulation's supervisory model, based on colleges of supervisors, was an interim compromise to ensure the Rating Agency Regulation could be adopted and thereby G20 commitments met, pending the completion of negotiations on what would become ESMA. The Regulation accordingly currently provides for interim supervision through colleges of supervisors, coordinated through CESR. A plethora of detailed CESR guidance on the authorization, supervisory and enforcement process, much of which will now be taken over by ESMA, has followed.Footnote ⁴¹ Of particular significance was CESR's development of ‘CEREP’—the new central repository for rating agency disclosures—which illustrates the increasingly operational nature of EU intervention.

The 2009 Regulation was followed in quick succession by the Commission's June 2010 CRA Proposal (on which political agreement has been reached) which provides for direct registration and ongoing supervision of rating agencies by ESMA and confers on ESMA related powers to impose fees and to take a range of different supervisory and enforcement action. This Proposal might reasonably be identified as one of the most significant proposals ever made in EU securities regulation, providing as it does for direct market supervision by the new Authority in non-crisis situations, and given its potential as a ‘wedge’ issue. It opened the possibility for future grants of direct operational power to ESMA (which, as noted below, has been seized upon) and, most importantly, provides the practical operational template for how this can be organized, including with respect to how ESMA can be conferred with direct operational powers to impose financial penalties.

ESMA's direct supervision of rating agencies will, for example, be based on an institutionally split supervision model. ESMA will have direct supervisory jurisdiction over rating agencies, being empowered to register and supervise agencies, but Member States will retain supervisory jurisdiction over the use of ratings. Reflecting ESMA's limited resources, local supervisors will provide ESMA with an operational capacity under a ‘hub and spokes’ model; cooperation obligations will be imposed on local supervisors, and ESMA will be empowered to delegate operational matters to local supervisors under ESMA's direction. Local supervisors may request (but may not require) ESMA to withdraw or suspend the registration of rating agencies or to suspend ratings. ESMA's direct enforcement and supervisory powers will be extensive, including powers to request all necessary information, start investigations, examine records, undertake hearings, and carry out on-site inspections. ESMA's enforcement powers will include the withdrawal of registration, the suspension of the use of ratings, public censure, and the imposition of financial penalties.

But delicate constitutional and institutional balance questions arise here, given the current prohibition on delegation of discretionary powers from the EU institutions, under the Meroni doctrine,Footnote ⁴² and given the extent to which ESMA pushes at the legal, political, institutional and constitutional constraints which typically apply to EU agencies.Footnote ⁴³ These questions are notably acute and complex with respect to direct supervision, particularly as it is not entirely clear which institution, the Commission or the Member States, is the delegating authority. The Proposal certainly suggests an institutional sensitivity towards the Commission. The Meroni constraint has led to a complex regime which governs ESMA's exercise of enforcement powers and which places, for example, significant controls on when financial penalties may be imposed, and which imposes a series of conditions on when and how information may be requested and investigations commenced.Footnote ⁴⁴

This operational model, however potentially unstable constitutionally, represents a radical shift from the EU's supervisory model which hitherto has been based on the allocation of supervisory jurisdiction between home and host supervisors, minimum harmonization of supervisory powers, and supervisory convergence in practice. Given the constitutional complexities attendant on ESMA's structure and powers, the new rating agency regime may also represent a test case for the constitutional resilience of the new structure. The procedural complexities which attach to ESMA's enforcement powers are considerable and suggest some institutional anxiety as to Meroni compliance. The rating agency regime may, however, have limited precedent value in practice. In particular, the centralization of operational supervision within ESMA poses only limited direct fiscal risks to the Member States given that rating agencies, in themselves, do not represent a material threat to systemic stability requiring a fiscal response. The political risks of centralizing rating agency supervision were accordingly always more limited, as reflected in the political support for centralized supervision from an early stage from ECOFIN and the European Council, and support from the DLG Report. Nonetheless, the 2010 Proposal represents something of a watershed with respect to the supervision of the EU financial market and establishes and operational template.

Supervision aside, the 2010 Proposal also reflects the emerging and more robust approach to ensuring outcomes by seeking to support structural change in the form of stronger competition in the rating agency market. It accordingly requires issuers of structured finance instruments to give access to the information which they have provided to the rating agency for rating purposes to competing rating agencies. The Commission's November 2011 Consultation on rating agency policyFootnote ⁴⁵ follows this ever-intensifying trajectory, raising the possibility, for example, of a pan-EU harmonized liability regime for rating agencies and a pan-EU public rating agency.

C. Institutional Reform

Member State discretion over financial market regulation has long been subject to restriction by an ever-encroaching EU rule-maker. But with the current move to centralize operational supervision Member States are now caught in a two-pronged pincer movement. This pincer movement is best illustrated by the important institutional reforms to EU financial market regulation in the wake of the crisis. The new European System of Financial SupervisionFootnote ⁴⁶ is composed of: local competent authorities; three new European Supervisory Authorities; and the European Systemic Risk Board (ESRB). The ESRB will in many ways anchor the new system, being responsible for macro-prudential oversight and risk warnings, although it will not have direct supervisory or law-making powers. It will exercise soft law powers, notably the power to issue warnings with respect to systemic risk.Footnote ⁴⁷ ESMA, one of the three new European Supervisory Authorities, along with the European Banking Authority and the European Insurance and Occupational Pensions Authority, was established in January 2011.Footnote ⁴⁸

The establishment and likely implications of ESMA have been charted elsewhere.Footnote ⁴⁹ In summary outline, it has legal personality (ESMA Regulation, article 5), enjoys an independence guarantee (article 1), and has a sound (if limitedFootnote ⁵⁰) funding basis (based on obligatory contributions from Member State competent authorities, an EU subsidy, and any fees paid to ESMA (article 62)). It is composed of: a Board of Supervisors (the constituent Member State supervisors, which injects a strong intergovernmental dynamic into the new body as the Board is responsible for ESMA decision-making and operates under a simply majority vote, save with respect to its quasi-rule-making activities when a qualified majority vote applies); a Management Board; a Chairperson; an Executive Director; and a Board of Appeals, reflecting ESMA's power to make decisions with third party effects (article 6). By contrast, and notwithstanding the exponential growth in its influence and range of activities, CESR's founding Commission decision established it simply as ‘an independent advisory group on securities’Footnote ⁵¹ and, for most of its life, CESR employed a troublesome consensus-driven approach to decision-making and rested on an insecure funding basis. ESMA thus represents a significant move beyond the harmonization techniques and unstable convergence structures previously adopted in EU financial market regulation.

ESMA is currently conferred, under the ESMA Regulation, with a range of quasi-rule-making and supervisory powers. The quasi-rule-making powers include ESMA's power to propose ‘binding technical standards’ (‘BTSs’), which acquire legal effect as a form of delegated article 290/291 TFEU measure, through subsequent endorsement by the Commission (articles 10–15). BTSs can take the form of regulatory technical standards or ‘RTSs’ (where the measure has a quasi-rule quality, and so represents a delegation from the legislative institutions under article 290 TFEU), or implementing technical standards or ‘ITSs’ (where the measure has a more operational, implementing quality, and so represents a delegation from the Member States under article 291 TFEU). Specific delegations for BTS adoption are set out in relevant legislative measure: the first group of delegations from earlier FSAP measures has been adopted in the form of the Omnibus I Directive 2010.Footnote ⁵² Different forms of institutional oversight by the Council and European Parliament apply to RTS and ITS adoption, reflecting the post-Lisbon Treaty comitology settlement, but the Commission's powers to endorse, and to revise or reject, ESMA's draft BTSs is common to both. So too is its power to propose BTSs where ESMA does not act. Like CESR, ESMA is also empowered to adopt guidance (article 16), although by contrast with the CESR model, a range of techniques apply to harden ESMA's guidance, including the obligation for competent authorities and financial market participants to ‘make every effort’ to comply.

Although local supervisors, backed by cross-border colleges of supervisors, will continue to carry out the heavy-lifting on supervision, ESMA has extensive supervisory powers. They fall into three categories: the controversial powers to impose decisions directly on market participants and competent authorities (i.e., over-rule competent authorities) in three horizontal situations; specific powers with respect to particular legislative measures; and an array of softer coordination and convergence powers.

With respect to the first category, ESMA is empowered to investigate breaches of EU law by a competent authority, make related recommendations to the authority and, exceptionally and subject to an array of conditions (including the delivery of a Commission ‘formal opinion’ given the Commission's Treaty pre-eminence with respect to enforcement), impose decisions on market participants in cases of continuing breach (article 17). In emergency situations, as declared by the Council, ESMA can, subject again to an array of conditions, impose decisions on competent authorities and market participants (article 18). It can also do so in cases where it is empowered or requested to mediate between competent authorities and mediation fails (Article 19). Under both articles 18 and 19, Member States can raise the article 38 fiscal safeguard clause. Reflecting difficult negotiations and concerns as to Member States bearing the fiscal consequences of ESMA decisions, it allows a Member State to notify ESMA and the Commission of its view that an ESMA decision impinges on its fiscal responsibilities, contrary to the article 38 requirement that ESMA ensure that no article 18 or 19 decision impinge in any way on the fiscal responsibilities of Member States. Ultimately, the Council can over-turn the contested ESMA decision.

With respect to the second category of supervisory powers, ESMA is empowered, under article 9, to prohibit certain products or services in an article 18 emergency situation, or where the relevant power to do so has been conferred; the Short Selling Proposal proposes that ESMA be conferred with direct powers to prohibit short-selling in particular circumstances.

With respect to the third, ESMA has a range of supervisory coordination powers, including with respect to participation in and coordination of colleges of supervisors (article 21), the identification and management of systemic risk and the development of resolution structures, in cooperation with the ESRB (articles 22–27), the promotion of a common supervisory culture (article 29), peer review (article 30), supervisory coordination (article 31), market assessment (article 32), and information-gathering (article 25).

Political scientists have described institutional change in the European regulatory space as an incremental and experimental process, rather than the implementation of a ‘grand design’.Footnote ⁵³ Each step influences the next one, new stakeholders (such as CESR) are created which influence the next institutional reform and so on. All this leads to a layering or thickening of European intervention. The process is also strongly characterized by pragmatism. CESR, which acquired influence over the financial markets in an exponential manner and which created a new form of governance for EU securities markets, was originally a rather makeshift solution to the difficulties caused by a complex institutional law-making process which was not ‘fit for purpose’ in the financial markets sphere. It drew heavily on the existing comitology structures for delegated law-making. As the FSAP drew to a close, CESR's difficulties in supporting pan-EU supervision, which was not a major priority as compared to EU law-making when CESR was established in 2001, became more apparent. The 2007 ECOFIN Conclusions in support of supervisory convergence, and the related changes to CESR's founding Decision and Charter, might similarly be regarded as a pragmatic attempt to address the challenges of cross-border supervision while avoiding the difficult constitutional and legal issues which would have been raised had CESR been granted direct supervisory or law-making powers.

With ESMA, however, a step change has occurred. But it is still possible to see the institutional reforms in terms of incrementalism, rather than in terms of a ‘grand design,’ with respect to law-making. Meroni restrictions and complex institutional tensions have prevented ESMA from acquiring direct rule-making powers. But aggressive control by the Commission over BTSs, by means of its endorsement powers, is likely to be met with some hostility from the European Parliament, if the February 2011 row relating to the appointment of the first set of Chairpersons for the new Authorities is anything to go by,Footnote ⁵⁴ resistance by ESMA, given the robust statement in its January 2011 FAQ that the Commission's role with respect to BTSs is to ‘check that these draft laws are in the Union interest and are compatible with EU law and then to adopt these draft technical standards with minimal amendments, if at all possible’,Footnote ⁵⁵ and likely consternation from the markets, given the consequent lack of certainty as the emerging BTS rule-book and the location of rule-making influence. Nonetheless, while ESMA may become a de facto rule maker, its formal powers are confined to guidance and to BTS proposals. While BTS delegations may evolve over time, and the first set of Omnibus I Directive delegations certainly give ESMA some discretion over policy-related decisions, the major policy choices remain the preserve of the Commission, Parliament and Council, and the subject of the article 294 TFEU legislative process. The troubled passage of the AIFM Directive is a testament to the on-going and primary importance of the legislative process.

ESMA's supervisory powers, by contrast, do amount to something new as, for the first time an EU body will have operational supervisory powers over competent authorities and market participants. It is also becoming increasingly clear that ESMA is likely to acquire further supervisory power incrementally. In particular, the second category of ESMA's supervisory powers (specific powers related to particular measures) shows signs of expanding rapidly. The decision to grant ESMA powers over rating agencies was made at an early stage of the crisis reform process. Of more significance are the recent decisions to grant ESMA powers under the new generation of measures, notably the proposed AIFM Directive, the Short Selling Proposal, and the OTC Derivatives Proposal. The Short Selling Proposal, for example, suggests that ESMA will be empowered to, inter alia, require natural persons to notify a competent authority, or disclose to the public, details of net short position, and to prohibit or impose conditions on short sales. A range of procedural requirements, including notification obligations, and conditions, including with respect to the severity of the related threat to the stability of the EU market and the failure of local competent authorities to act, will apply. ESMA is also likely to be conferred with a range of softer powers, including the ability to conduct enquiries into short-selling, coordinate onsite inspections in Member States in situations with cross-border effects, and issue ex ante opinions on any proposed prohibition on short-selling by a competent authority. The combination of direct supervisory powers, which are likely to act as a considerable deterrent on competent authorities taking action which does not reflect ESMA's position, and softer practice-shaping powers, may lead to ESMA exercising very considerable influence in practice over supervision in this area. The Short Selling Proposal model is reflected, to different degrees, in the proposed AIFM Directive and the OTC Derivatives Proposal.

EU financial market regulation now has a long history. That history has been punctuated by sharp spikes in the intensification of EU activity, most notably over the Lamfalussy/FSAP-era (1999–2004) and now in response to the financial crisis. Regulatory intervention over the former period was largely a function of market exuberance and liberalization. In the latter period, however, it is a response to the pathology of the internal market with respect to risk transmission. The current phase may turn out to be more revolutionary than reforming, particularly with respect to operational supervision. Certainly, the dynamism and momentum associated with the CESR-era, and the powerful and unexpected effects of market events, cautions against conservative speculation as to ESMA's ability to push against the formal boundaries of its founding Regulation.