European market regulator seeks to become the EU version of the SEC

The European financial market regulator is seeking expanded powers to oversee major exchanges and other key parts of the bloc’s financial infrastructure, in an effort to become the European version of the U.S. Securities and Exchange Commission (SEC), writes FT.

Verena Ross, chair of the European Securities and Markets Authority (ESMA), stated that ‘there is political will’ within the newly appointed European Commission to centralize the oversight of EU financial markets as part of efforts to revive the weak capital market in the bloc.

– It needs to be assessed in which areas it would make sense to move forward towards centralized EU oversight. We particularly need to consider all systemically important infrastructure entities that operate across borders – Ross told the Financial Times, adding that this would include exchanges, depositary or clearing houses, and settlement systems.

ESMA was established in 2011 with the aim of unifying rules across the EU, but most oversight of financial markets is still conducted by national authorities in the 27 member states of the bloc. Based in Paris, ESMA directly supervises only a few entities, such as credit rating agencies, central depositary houses outside the EU, and benchmark administrators.

The idea of transferring more powers from national authorities to ESMA has gained momentum in recent months, as officials in Brussels seek ways to stimulate activity in capital markets to help finance an estimated 800 billion euros in additional investment needs. Former President of the European Central Bank, Mario Draghi, identified the transformation of ESMA into a version of the SEC last month as a ‘key pillar’ in strengthening European capital markets in an important report on stimulating economic growth in the EU.

– ESMA should evolve from a body that coordinates national regulators into a single common regulator for all securities markets in the EU – Draghi wrote, giving it oversight powers over large multinational issuers, cross-border financial markets, and all central depositary houses.

Some smaller EU countries, such as Luxembourg and Ireland, oppose this idea, fearing it could undermine their successful financial sectors. However, Ross is convinced that this shift would improve the efficiency of European financial markets for investors and issuers.

– An effective regulatory and supervisory framework has a significant impact on the functioning of the single capital market, and we do not have that in Europe. This is one of the areas we need to focus on – Ross said.

In response to criticism from smaller countries, she emphasized that a gradual approach to building ESMA’s powers is better than attempting to turn it overnight into a powerful European version of the SEC.

– It is about practical thinking. We must not forget that EU markets are quite different from American ones in terms of the diversity of legal systems. Therefore, it is important to establish the role of centralized EU oversight where it currently makes the most sense – she said.

The process could begin by granting ESMA greater powers to oversee ‘larger, cross-border players’ such as Euronext and Deutsche Börse, which ‘often do not serve just one country, but really serve investors across the entire EU’, Ross added, emphasizing that smaller markets and companies would continue to be under local supervision.

She added that the EU missed an opportunity with its significant regulatory framework for crypto markets, which comes into effect at the end of the year, but will leave oversight of companies in the hands of national authorities.

Draghi also called for strengthening ESMA’s independence from national authorities by introducing independent members similar to those on the ECB’s supervisory board, which oversees major eurozone banks. However, Ross dismissed this idea, stating that ‘the current governance structure works quite well’. It is important, she added, ‘to ensure that national supervisors are fully involved in the decision-making process as a large part of implementation occurs at the national level’.

Expanded powers over mergers

The European Commission, the supreme EU body for protecting market competition, has committed to the first major overhaul of merger and acquisition rules in several decades, including a review of the conditions under which it can intervene in such transactions. According to sources familiar with the plans, the reforms would significantly expand the Commission’s jurisdiction over mergers involving companies whose majority of revenue comes from outside Europe. One option being considered is to introduce a new threshold for taking over oversight of mergers, which would be based on the value of the transaction rather than existing turnover criteria.

Although the details of the reforms are still under discussion, one of the priorities of the new Commissioner for Competition, Teresa Ribera, will be addressing the threat of so-called ‘killer acquisitions’. The proposed changes come after Brussels took jurisdiction over the acquisition of the biotechnology company Illumina worth 8 billion dollars, which bought the start-up Grail, despite both companies being based in California and having no significant revenue or presence in Europe. Brussels lost the case after the EU’s highest court ruled that it had no legal basis for overseeing the transaction, leaving officials to seek other options.

Companies hope that the revised rules will bring legal certainty, especially in cases where large companies acquire smaller ones but with significant growth potential.

However, some officials are concerned that such reforms could open a ‘Pandora’s box’, allowing EU member states to introduce reforms that are more favorable to their markets, or to shift powers from Brussels to national competition authorities. Other European officials have discussed giving the Commission more powers to intervene in mergers even without prior approval from member states — an option that would likely face opposition from countries like France and Germany.