The European Securities and Markets Authority and institutional design for the EU financial market: a tale of two competences: part (1) rule-making

The purpose of this article, and its companion article, is to examine the implications of the new European Securities and Markets Authority, established in January 2011. In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any design for institutional reform of EU financial market regulation and supervision would have struggled to deliver an optimum model, given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body's powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision/enforcement, even if there is considerable symbiosis between these different activities. This article considers ESMA's rule-making powers; it is accompanied by a companion piece on ESMA's supervisory powers. It examines the considerable powers which ESMA has been granted in the rule-making sphere and argues that ESMA is likely to lead to significant intensification of the EU rule-book for financial markets. While a uniform rule-book carries risks, there are countervailing benefits. There are also promising signs that ESMA may become an effective rule-maker and may prove an effective mechanism for managing the risks of the intensifying rulebook. But the institutional design model is flawed. Treaty restrictions have led to a troublesome compromise in terms of ESMA's design, particularly with respect to Commission control and ESMA independence. Overall, ESMA's design is under-ambitious with respect to rule-making. By contrast, as the companion piece argues, the extent of ESMA's supervisory powers, real and potential, may have pushed ESMA too high up the spectrum towards EU powers. Local supervision of the EU rule-book represents an important safety valve for the EU financial market, and should not be obstructed by over-centralisation. Once supervision was placed on the reform agenda, however, it was always going to be a challenge to draw the dividing line between ESMA's powers and those of national competent authorities. The line may, however, have been drawn too far on the side of operational centralisation