Europe’s plan to make ESMA the central supervisor of major market infrastructures, and to make CCPs and CSDs interoperate, faces a long runway. National goldplating, budget and data are the sticking points, says ECMI’s Karel Lannoo.
When markets shift, time, budget and data management keep post-trade professionals awake at night. The same is true of Europe’s Market Integration and Supervision Package (MISP) – and the authority charged with enforcing it will need far more resources than it has today.
That is Karel Lannoo’s verdict, halfway through the Council’s changes to the package, as he waited for a delayed flight to Brussels. “If you want to understand the specific changes they made to the original Commission proposal, the only way is to go through the text in full,” says Lannoo, general manager of the European Capital Markets Institute (ECMI).
So far, the reading has confirmed his view that little has changed in how the rules are made. In his latest ECMI Commentary, It’ll be up to the European Parliament to make the SIU work, Lannoo looks at the 2 252 amendments tabled by the European Parliament alongside the Council’s position. The Parliament wants even more single market and interconnectedness. The Council is working to preserve goldplating and national prerogatives, and sets some rules arbitrarily – for example, grouping trading venues by market share and cross-border activity.
Lannoo also argues that the Level 1 text contains detail better left to implementing measures and guidelines, including the criteria for deciding whether a trading platform is pan-European. The Council’s amendments, however, openly call for national flexibility – in other words, goldplating.
Interoperability is central. “Interoperable links are required across the board among infrastructures, from trading venues to CSDs and CCPs, and with T2S, and more transparency, in a single reporting regime and with fee disclosure, to make sure markets work,” Lannoo writes. That, he says, is easier said than done.
Where does MISP stand?
The Parliament’s amendments widen ESMA’s supervisory scope and give it more powers to act against goldplating and to issue no-action letters. The Council, while insisting there will be no goldplating, adds phrases such as ‘taking into account the priorities of the national competent authorities’ throughout the text.
“On several occasions you see it and think: this is the same old story again. The Commission wants to change the approach, and the member states simply say, no, we want to keep all our prerogatives,” says Lannoo.
That is a problem for interoperability. “When you see it combined with all these safeguards for member states, you wonder whether it will work – because we know there has been insistence on interoperability for a very long time. So it’s not as clear-cut as they’re saying.”
Timing for interoperability
So how long will it take for ESMA to assume central supervision, and for interoperability to arrive?
“First of all, the agreement takes time. And one of the other changes the member states are looking for is longer transition periods before ESMA takes over these new functions. All of this means the new rules will take much longer to come into force than expected. First, the Council and the European Parliament have to agree. And if there are long transition periods before ESMA supervises, for example, a CCP or a CSD, it will take quite some time.”
Lannoo expects ESMA to take over supervision of CSDs in two to three years.
ESMA’s Budget
ESMA’s governance is also an issue, Lannoo notes in his commentary, with the Council trying to balance the powers of the Executive Board and the Board of Supervisors. Funding is hard to plan while the scope of ESMA’s tasks remains unclear.
“If ESMA wants 300 more staff, let’s say, it needs a budget for 300 more staff – and that is not yet agreed either,” he says. “You’re basically telling the member states: ESMA will have more functions, so you will have to contribute more for this, and you’ll have to pay for it out of the budget of your national authority. Do you think the member states like that? No.”
The data management challenge
If ESMA is to become Europe’s market supervisor, it has a long way to go – and the data challenge alone is enormous.
“If you centralise more functions, you need more data at the level of ESMA, and the way data is collected today is not necessarily fully harmonised,” says Lannoo. “So the data challenge for ESMA – just to make sure it has a single pool of data to supervise these entities – is enormous.”
ESMA already does this to a degree for CCPs, particularly third-country CCPs. “But that’s only one part. Now it needs to do CSDs as well, and other entities on the trading side too: it will need to supervise significant trading platforms and significant systematic internalisers. Imagine – just supervising one trading platform, the amount of data you have to look at is enormous.”
That task falls to Carlo Comporti, who took over as ESMA chair on 1 November. “He may have a lot of experience, but this is transition management – implementing totally new functions that until now sat at member-state level, not at EU level,” says Lannoo.
Unlike the Single Supervisory Mechanism (SSM), which created new functions for bank supervision, “here, these are existing functions you have to transfer from the member states.”
What next for ESMA and interoperability?
As the title of his commentary suggests, Lannoo sees the European Parliament as the institution that will have to make the Savings and Investments Union (SIU) work. But first, he writes, “the EP needs to make sure that MISP’s scope is consistent and absolutely no arbitrary exceptions are made for PEMOs [pan-European market operators] and large financial infrastructures.”