As well as the customary fireworks displays around the world, the start of 2011 has seen the transformation of what was once the Committee of European Securities Regulators (CESR) into the new (and supposedly improved) European Securities and Markets Authority (ESMA, see the new website here). But, apart from the obvious change in moniker, what does the changeover mean for the reference data industry?
The biggest difference between CESR and ESMA is that the latter is now able to draft technical standards that are legally binding in EU member states, rather than acting in a purely advisory role. Therefore ESMA is able to draft laws rather than just technical advice like CESR. It has the power to fast track procedure in order to ensure the consistent application of EU law, can resolve disputes between national regulators and it has a much more hands on role in monitoring systemic risk and the credit ratings agency sector. Hence it has the ability to bite as well as bark.
According to a recent FAQ on ESMA’s new powers (available to download at the bottom of my comments): “ESMA will also continue to issue guidelines and standards which are not legally binding, however, the key difference here will be that national competent authorities will now need to indicate publicly if they comply within two months, and if they do not comply they will need to explain the reasons for this, and it will also be possible to require financial market participants to report publically whether or not they comply.” The days of national regulators dragging their feet over implementation are (hopefully) a thing of the past.
In recent regulatory missives, such as last month’s MiFID paper on OTC derivatives programme trading or the European Council’s proposals for derivatives repositories, ESMA has also been charged directly with policing the industry’s data management practices.
The European regulatory community is pushing hard for increased legal, process and product standardisation within the OTC derivatives market to make it much more transparent and to this end, ESMA will be ensuring that data standardisation targets for this market are being met. The MiFID technical advice paper states: “In case the targets were not met, appropriate mandatory regulatory intervention should be adopted by ESMA (in conjunction with EEA national regulators) to lead to their achievement by the industry.”
The European Council’s proposals around data repositories for the derivatives markets indicate a similar role for ESMA, as it will be given powers to fine firms that are found to be breaching the requirements of trade reporting by not providing “complete and correct” information to repositories or the regulator. ESMA will also be able to conduct on site inspections and investigations in order to determine where the breaches are occurring. There are therefore plenty of reasons on a practical level for data managers to take notice of ESMA’s new role.
Moreover, ESMA’s role as a systemic risk monitoring body, in conjunction with the European Systemic Risk Board (ESRB) and the other European Supervisory Authorities (ESAs), will likely mean it is engaged in the discussions regarding building the data foundations in order to carry out this task. Jean-Claude Trichet, president of the European Central Bank (ECB), has been championing the notion of a reference data utility for the region to support this function and it will be interesting to see how ESMA engages on this issue for the securities markets overall.
The FAQ indicates: “Under CESR, a number of centralised databases were developed to enable supervisors to share critical information that will facilitate day-to-day supervision. ESMA will continue to develop these further and establish further centralised systems.” Will a data utility feature?
Regardless, ESMA and the other ESAs will be charged with gathering aggregate and firm level data in order to feed it to the ESRB for systemic risk monitoring purposes. These are pretty heavy duty data requirements for the new pan-European supervisory bodies to adhere to and they, in turn, will likely compel a new set of data standards for the industry to make this job much easier. The fact that most recent consultation papers that have been issued by European regulators make at least one reference (if not several) to the adoption of industry-wide data standards indicates as much.