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European Union Securities Rulemaking


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An Introduction for U.S. Asset Managers

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European Union Securities Rulemaking

  1. 1. European Union Securities Rulemaking An Introduction for U.S. Asset Managers April 2015
  2. 2. THE PROBLEM | It’s Complicated U.S. asset managers are often baffled by securities rulemaking in the European Union. Eurospeak The language describing the E.U.’s rulemaking process is different. The United States and the European Union may use different names for what is essentially the same thing: comment period vs. consultation is one example of this. Or the same term may mean different things in the United States and the European Union. For example, a regulation is a type of legislation in Europe, but an act of the executive branch in the United States. Multilevel U.S. securities rulemaking takes place almost exclusively at the Federal level, with limited state involvement. By contrast, in the European Union, the national governments of E.U. member states are tightly integrated into the rulemaking process. • Their representatives participate in E.U.-level decision making. • Member states may be wholly responsible for implementing E.U. legislation. Comparisons between U.S. and E.U. rulemaking can be very difficult. There’s often no U.S. equivalent for an E.U. entity or process. Changing E.U. securities rulemaking has been changing. • The European Union itself has been changing, with integration among member states gradually increasing over time. This has had a knock-on effect on rulemaking. • The financial crisis led to significant change in securities rulemaking. For example, the European Securities and Markets Authority – known as ESMA and one of the key players in E.U. rulemaking – was established just 4 years ago, in 2011, in the wake of the financial crisis. Yet understanding – and anticipating – the rulemaking process is essential for asset managers looking to gather assets in Europe. 2
  3. 3. OUR AGENDA | Who, How and Why This presentation aims to demystify E.U. securities rulemaking by describing who, how and why. Whenever we refer to Europe in this presentation, we’re talking exclusively about the European Union and its member states. We exclude Norway, Switzerland and other non-member states, which have their own rulemaking regimes. WHO HOW WHY The parties involved in E.U. securities rulemaking The process of E.U. securities rulemaking Key E.U. legislation governing securities and treaties governing E.U. rulemaking 3
  5. 5. THE PLAYERS | A Simplified View The European Council Sets Overall Policy and Priorities European Commission European Parliament Council of the European Union European Securities & Markets Authority (ESMA) Member States Prepares Legislation Debate & Approve Legislation Implement Legislation 5
  6. 6. THE PLAYERS | The European Council The European Council provides high-level leadership, establishing political direction and priorities. It is not directly involved in legislation. The National Governors Association is the closest U.S. equivalent to the European Council. However, the National Governors Association is an informal organization, while the European Council has an official role in E.U. government. Composition The European Council is composed of: • The heads of state or of government of all E.U. member states • The President of the European Council (see “Leadership”) • The President of the European Commission Meetings The European Council meets 4 times a year, usually in Brussels. Leadership The European Council elects a President to serve a 2-1/2 year term. The President chairs meetings. The current President of the European Council is Donald Tusk of Poland. 6
  7. 7. THE PLAYERS | The European Commission The European Commission drafts legislation and proposes the E.U.’s annual budget. It manages funding for policies and programs, enforces laws and represents the European Union internationally. Composition The European Commission has a large permanent staff. It is the E.U.’s civil service. Organization The European Commission is organized in departments, called Directorates General, or DGs. The Directorate General for Financial Stability, Financial Services and Capital Markets Union oversees securities rulemaking. The current leadership of DG FISMA is: • Commissioner Jonathan Hill of the United Kingdom • Director General Jonathan Faull of the United Kingdom Location The European Commission is based in Brussels and Luxembourg. Leadership The current President of the European Commission is Jean-Claude Juncker of Luxembourg. The President of the European Commission has been called the most powerful officeholder in the European Union. The President nominates Commissioners – one from each of the other members states – to serve a concurrent 5-year term. Both the European Council and the European Parliament must approve the slate of Commissioners. The European Council nominates a candidate to serve as President of the European Commission for a 5-year term. The European Parliament must ratify the nomination. 7
  8. 8. THE PLAYERS | The European Parliament The European Parliament is one of the 2 parties that must approve legislation and the E.U. budget. (The other is the Council of the European Union.) Composition Members of the European Parliament, or MEPs, are directly elected by E.U. voters every 5 years. The number of MEPs for each country is determined by the terms of the Treaties governing the European Union and is based on population. The European Parliament currently has over 700 MEPs. Location The European Parliament meets in Strasbourg, France, and in Brussels. The European Parliament’s administrative head office, or General Secretariat, is based in Luxembourg. The services linked to the legislative process and MEP offices are de facto based in Brussels. Leadership The powers of the European Parliament are much more limited than those of the U.S. House of Representatives. The European Parliament doesn’t have authority over foreign policy, defense policy or direct taxation. All of these issues are controlled by the national governments of E.U. member states. Parliament elects a President to serve a 2- 1/2 year term. The current President of the European Parliament is Martin Schulz of Germany. 8
  9. 9. THE PLAYERS | The Council of the European Union The Council of the European Union is one of the 2 parties that must approve legislation and the E.U. budget. (The other is the European Parliament.) The Council also helps coordinate foreign policy and defense policy. Composition The Council of the European Union is composed of ministers from E.U. member states with authority over the topic being discussed. As a result, this body is sometimes called the Council of Ministers. For example, if the Council is discussing economic and financial affairs, the economic minister for each member state will participate, and the meeting will be known as the Economic and Financial Affairs Council, or Ecofin Council. Each council establishes its own meeting schedule. The Ecofin Council generally meets monthly. Location The Council of the European Union meets in Brussels and Luxembourg. Leadership Council meetings are in general chaired by the minister from the country holding the E.U. presidency. The E.U. presidency rotates every 6 months on a pre- determined scheduled. For example, ministers from Latvia will chair meetings for the first half of 2015. The Presidency will be transferred to Luxembourg for the second half of 2015. Exception: The permanent chair of the foreign minister’s council is the E.U.’s High Representative for Foreign Affairs and Security Policy. Voting Beginning in 2014, for a proposal to pass, it must be approved by a qualified majority, meaning ministers representing: • At least half of E.U. member states • At least 65% of the E.U. population 9 Don’t confuse the Council of the European Union with the European Council!
  10. 10. THE PLAYERS | European Securities and Markets Authority Better known as ESMA (ess-ma), the European Securities and Markets Authority is responsible for safeguarding the European financial system. It’s part of the European System of Financial Supervision. Composition ESMA is part of the E.U.’s civil service and has a substantial permanent staff. History ESMA was established in 2011, as part of the response to the financial crisis. It replaced the Committee of European Securities Regulators, or CESR, known as Caesar. Location ESMA is based in Paris. Leadership ESMA is an independent authority. It is overseen by a Board of Supervisors consisting of one representative from each E.U. member state. In addition, representatives from the following entities are invited to meetings as observers: • The European Commission • 3 states in the European Economic Area not in the European Union (Iceland, Liechtenstein and Norway) • Other E.U. supervisory authorities (European Banking Authority, European Insurance and Occupational Pensions Authority, European Systemic Risk Board) The Board of Supervisors appoints the Chair, though Parliament may reject the appointment. The Chair serves on the European Systemic Risk Board. A subset of the Board of Supervisors forms ESMA’s Management Board. ESMA is roughly equivalent to the U.S. SEC, though ESMA doesn’t have the SEC’s enforcement powers. The current Chair of ESMA is Steven Maijoor of the Netherlands. 10
  11. 11. THE PLAYERS | Member States Even though today securities rulemaking is largely driven at the European Union level, the E.U. member states continue to play a critical role. Implementation Member states are responsible for the implementation of directives adopted at the European Union level. These directives must be transposed into national law -- through the adoption of implementing measures -- before they can become effective. Member states may add requirements, in a practice known as gold plating. These additional requirements may be prohibited if maximum harmonization among member states is required; they may also be specifically permitted. Local Regimes Member states may also establish rules for activities that are not covered by E.U. legislation. For example, before the passage of AIFMD, most member states had established local regulations for hedge funds, generally referred to as private placement regimes. Under the principle of subsidiarity, the European Union may take action on an issue only if: • The issue is an area where exclusive authority has been given to the European Union or • The European Union can act more effectively than national governments Directives vs. Regulations The European Union has two types of legislation. Directives bind member states to achieving a particular objective. Member states are responsible for implementation through national law. Regulations are directly binding on member states, without the need for transposition into national law. Because of the concerns about systemic risk, legislation related to securities is increasingly in the form of regulation. 11
  12. 12. THE PROCESS | The 4-Level Framework Securities rulemaking within the European Union takes place in 4 stages. The History of the Jargon This framework is often referred to as the Lamfalussy Process, named after the chair of the Committee of Wise Men that created it. The process was modified after the financial crisis in the Treaty of Lisbon, based on recommendations put forth in the De Larosière Report. This 4-level process is unique to rulemakings affecting the financial services industry. Level 4Level 2Level 1 Legislative Acts Non-Legislative Acts Binding Technical Standards (BTs) Level 3 Comply or Explain Enforcement 12
  13. 13. THE PROCESS | Level 1: Legislative Acts European Union securities rulemaking ordinarily begins with passage of legislation. Proposal All E.U. legislation must be based on a proposal from the European Commission. Members of Parliament may ask the Commission to present a proposal to the Council of the European Union. Only the Commission has the right to initiate legislation. The European Commission often starts the legislative process by issuing a green paper that launches a consultation process (essentially a request for comments). The Commission may hold hearings as part of this process. When the Commission is ready to move forward, it will generally produce a white paper explaining the proposals. ESMA may provide the Commission with technical advice on securities- related issues. Approval Under ordinary legislative procedures, legislation must be approved by both: • A majority of the members of the European Parliament • A qualified majority of the members of the Council of the European Union (representing at least half of E.U. member states and at least 65% of E.U. population) The European Union also has special legislative procedures, though these generally don’t apply to securities rulemakings. These special procedures limit the role of the European Parliament. Coming to Agreement Informal mechanism: Representatives of the European Parliament and of the Council – with the help of the Commission – may meet informally to iron out differences on legislation. These sessions are known as trialogues. Formal mechanism: If agreement still can’t be reached, a Conciliation Committee can be convened. If it is, representatives from the Parliament and the Council – with the assistance of the Commission – have 6 weeks to agree upon the text of the legislation. The agreement reached in the Conciliation Committee needs to be confirmed separately by the Parliament and the Council. 13
  14. 14. THE PROCESS | Level 2: Non-Legislative Acts Legislation adopted by the European Parliament and the Council of the European Union may delegate authority for follow-up to the European Commission. In the case of non-legislative acts, the follow-up work is done directly by the European Commission. There are two types of non-legislative acts: Delegated Acts The European Commission may be given authority to develop Level 2 acts and other non-essential elements of legislation. These are known as delegated acts. The Commission must present the delegated acts that it has developed to the European Parliament and the Council. These delegated acts are deemed effective unless the Parliament or the Council actively objects to them. Implementing Acts The European Commission may be given authority to develop implementing acts that ensure uniform implementation of the legislation throughout the European Union. In this case, the comitology procedures require that the Commission consult with committees composed of representatives from member states before implementing measures are adopted. Support of a majority of committee members is required for significant implementing measures. 14
  15. 15. THE PROCESS | Level 2: Binding Technical Standards (BTS) Alternatively, the European Commission may be given authority to adopt technical standards that have been prepared by ESMA (or any other European supervisory authority). Technical Standards Binding technical standards are different from delegated acts and implementing acts because they “should be technical, shall not imply strategic decisions or policy choices and their content shall be delimited by the legislative acts on which they are based.” There are two types: Regulatory technical standards: Details of rules broadly outlined in legislation Implementing technical standards: Forms, filing procedures, etc. Procedure 1. ESMA engages in a public consultation procedure on the technical standards 2. ESMA prepares a draft of the technical standards and submits it the European Commission 3. The Commission may adopt or reject the standards in whole or in part. However, the Commission may not change the standards without ESMA’s agreement. 15
  16. 16. THE PROCESS | Level 3: Comply or Explain ESMA (and the other European supervisory authorities) have general responsibilities for ensuring the consistent, efficient and effective supervisory practices and application of securities-related legislation. Advice ESMA may advise the Commission on the preparation of Level 2 non-legislative acts. ESMA consults with the users and providers of financial services, as appropriate. Comply or Explain ESMA will develop guidelines for the consistent implementation of securities-related legislation throughout the European Union. In developing these guidelines, ESMA must use cost-benefit analysis. Member states must make every effort to comply with these guidelines – or must explain if they do not intend to comply. Financial market participants may be required to report publicly whether they do comply. 16
  17. 17. THE PROCESS | Level 4: Enforcement Both the European Commission and ESMA are, at their respective levels, responsible for ensuring that directives are correctly transposed into national law and that E.U. legal requirements are applied. There are 2 remedies available should that not be the case: Court of Justice The European Commission can refer a case of failure to fulfill an obligation against a member state to the Court of Justice of the European Union. The Court interprets E.U. law to ensure that it is applied uniformly in all member states. European Court of Justice actions normally take years. Fast Track Procedure At the request of a national competent authority, a stakeholder group, or the European Parliament, Council, or Commission – or on its own initiative -- ESMA can launch an enquiry into the issue. ESMA will make a recommendation to the member state within 2 months. Only under well-defined conditions is ESMA empowered to take actions with regard to a specific financial institution. Not the SEC’s Kind of Enforcement Enforcement actions in the European Union are normally against member states, not against individuals or companies. Enforcement with respect to specific parties remains largely with member states. However, E.U. legislation has begun to stipulate that member states impose penalties for certain violations. 17
  18. 18. THE PLAYBOOK |Securities-Related Legislation Approved Legislation Major Goal 1985 UCITS I (Undertaking for Collective Investment in Transferable Securities) Establish regime for cross-border sales of mutual funds for retail investors 2000 CRD I (Capital Requirements Directive) Primarily focused on banking, but with implications for asset managers owned by banks 2002 UCITS III Expand investment capabilities of retail funds. Decrease barriers to cross-border sales. 2004 MiFID 1 (Markets in Financial Instruments Directive) Establish framework for regulation of securities trading and sales of securities to retail investors 2009 UCITS IV Increase efficiency of asset manager operations across borders 2009-2013 CRD II-IV Respond to issues raised by the financial crisis 2011 AIFMD (Alternative Investment Fund Managers Directive Create framework for regulation of cross-border sales of private investment funds to E.U. investors 2012 EMIR (European Market Infrastructure Regulation) “The Dodd-Frank of Europe.” Requires central trading and clearing of derivatives. 2014 UCITS V New requirements for custodians and remuneration policy. Requires member states to impose sanctions on certain violations. 2014 MiFID 2 Respond to issues raised by high frequency trading. Reduce conflicts of interest in retail sales by banning commissions in some instances. 2
  19. 19. THE PLAYBOOK |Securities-Related Legislation Signed Treaty Major Goal 1951 Treaty of Paris Establish the European Coal and Steel Community 1957 Treaties of Rome Establish the European Economic Community 1967 Merger Treaty (Brussels Treaty) Create a single Commission and Council 1986 Single European Act Prepare for the single market 1992 Treaty of Maastricht (also known as the Treaty on European Union) Create the European Union 1997 Treaty of Amsterdam Prepare for entry of new member countries 2001 Treat of Nice Adapt to significant expansion number of member states 2007 Treaty of Lisbon Make the EU more democratic and efficient The European Union was formed through a series of treaties. 18
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