Ministers call Brussels to heel on regulation
William Hutchings
Portugal, Hungary, Finland and Sweden joined the UK and Germany at the Council of Ministers, the EU’s highest level of political authority, in saying they were “concerned about the manner in which the [financial regulatory] process is being conducted” by the commission, led by Michel Barnier, commissioner for internal market and services.
One asset manager close to Brussels told Financial News: “This is the second time the commission has ignored Esma’s advice – it happened with the Alternative Investment Fund Managers Directive, too. I think the member states have had enough. The commission is trying to make a power grab, saying it can do what it likes regardless of whatever Esma says. That is not how the member states wish to proceed.” The six countries have made their complaint in relation to the Short-Selling Regulation, which pertains to short selling and the use of credit default swaps on sovereign debt.
The Council of Ministers is set this week to confirm or reject a Delegated Act that the commission has drawn up to implement this regulation. Germany and the UK have told the commission they will vote against it.
The countries’ positions are set out in a note written by the general secretariat of the council, dated September 21 and obtained by Financial News. In accordance with this stage of the EU’s process for financial legislation – level two of the Lamfalussy process – the commission wrote its draft after receiving advice from Esma.
Statements from the six dissenting countries included in an annex to the note said: “The commission’s draft Delegated Act for the Short-Selling Regulation departs from Esma’s advice in a number of areas, without explanation. Esma’s advice is compiled through a transparent and thorough consultation process, and provides expert understanding from Europe’s Supervisory Authorities.
“While we recognise the commission is not obliged to follow Esma’s advice, the credibility of the level two process must be ensured. We therefore request that the commission adopts a more open and consultative approach in future, when drawing up level two proposals, in particular explaining the reasons for any such deviations.”
A Member of the European Parliament involved in the European policy reform process said: “The short-sell dossier has been entirely politically driven – there is not a scrap of evidence to support the rules.”
A spokesman for the Commission said: “The Commission has requested and taken into account the technical advice of Esma on the technical issues covered by this Delegated Act.”
The European Commission’s programme for financial services regulation lists 19 reforms at various stages of proposal and implementation. All of these could be affected by the Commission’s response to the six countries’ request.
A requirement that the Commission follow the advice of the Supervisory Authorities, or give a satisfactory reason why it has not, should help the financial services industry, because the Supervisory Authorities issue their advice to the Commission only after extensive consultation with market participants. Germany and the UK also claim in the note that the Commission’s definition of hedging – which the regulation says is a permissible use of short selling and CDS – is too narrowly drawn.
Investors use CDS on a country’s sovereign debt as a general hedge against their investments in that country. If this use of CDS is banned, investors may stop making investments in weaker European economies, such as Greece. Any reduction of inward investments to these countries might, ultimately, have to be made up for by Germany, which for the past year has been under pressure to support the economies of peripheral eurozone states.
Germany and the UK each stated in the annex to the note: “Regarding the content of the Delegated Act, we regret especially that the hedging requirements concerning credit default swaps are very narrow and inflexible. This could, for example, significantly hinder investments in member states with illiquid CDS markets, and the hedging against general economic risks which might occur in a member state.”
Esma said in its advice to the Commission that it “considers that there should not be any restrictions as regards the scope of the assets/liabilities which can be hedged, provided that they meet the conditions of correlation and proportionality”, and “it is better not to produce a very precise quantitative definition as to the extent of the correlation required”.
The Commission’s draft Delegated Act, however, states there must be a correlation of “at least 70% between the price of the assets [invested in] or liabilities and the price of the sovereign debt”.
