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EU Securities and Financial Markets Regulation, 3rd Edition by Moloney, Niamh (23rd October 2014)

I Introduction

From: EU Securities and Financial Markets Regulation (3rd Edition)

Niamh Moloney

International Organisation of Securities Commissions (IOSCO) — Financial Stability Board (FSB) — European Securities and Markets Authority (ESMA) — Securities and Exchange Commission (SEC) — Eurozone — Monetary union — Sovereign debt

(p. 1) Introduction

I.1  EU Securities and Markets Regulation

This book addresses EU securities and financial markets regulation (hereafter securities and markets regulation). It considers the harmonized rules which govern financial markets in the EU; it is concerned with market-based financial intermediation between suppliers of capital and firms seeking capital, and with the wide range of relationships and related risks which this form of financial intermediation produces.1 It does not, accordingly, address the specific rules which apply to deposit-taking institutions.2 The book examines how the EU regulates the major actors in market-based finance, including issuers of securities, investment firms, investment funds, rating agencies and investment analysts, and market infrastructures, such as trading venues and central clearing counterparties (CCPs). It also examines the process through which the massive EU rulebook has emerged, how supervision in the EU is organized, and the role of the European Securities and Markets Authority (ESMA), established in January 2011 as part of the European System of Financial Supervision (ESFS). This Chapter outlines the main features of EU securities and markets regulation and considers how it has evolved to become the regulatory behemoth which it now is, following the crisis-era reforms.

(p. 2) I.2  Securities and Markets Regulation and the Financial Crisis

Securities and markets regulation and supervision addresses the actors which raise capital on, manage risk through, and seek returns from the financial markets, and the related infrastructures and intermediating actors. It is concerned with issuers of securities, the vast array of actors which provide market-based financial intermediation services (such as brokerage, underwriting, and risk management in the form of the issuance of risk-management and risk-transfer products, including derivatives), and the infrastructures (including trading venues) which support trading and risk management.

Financial markets (and the actors therein) accordingly provide a range of functions, including the support of capital-raising and the reduction of related transaction costs, and the facilitation of risk management (including through derivatives and other risk- management products which support market ‘completion’3).4 The different bundles of regulation which address the different segments of the financial markets (securities and markets regulation) have discrete (if often closely related) objectives, drivers, and components, as discussed in subsequent Chapters. But, overall, securities and markets regulation has primarily been directed to the support of market efficiency, transparency, and integrity, and with related consumer/investor protection.5 The traditional neoclassical economics-based analysis of the rationale for regulatory intervention (in financial or other markets) relates the justification for intervention to correction of market failures (failures in a market’s self-regulatory mechanism which obstruct the efficient allocation of resources by an otherwise perfect market).6 In the securities and markets field, the major market failures which arise relate to asymmetric information and to externalities (or wellbeing-influencing consequences which are visited on a third party by the actions of another),7 such as the instability-generating effects which can be caused when a market participant fails. Two major families of corrective regulation can be identified: conduct regulation, which is associated with client-facing and market-facing conduct; and prudential regulation, which is directed to the stability and soundness of financial market actors and the financial system as a whole and has a particular focus on the management and regulation of risk. (p. 3) Conduct regulation is, very broadly, associated with disclosure and transparency-related tools, while prudential regulation has traditionally been associated with more intrusive tools, in particular capital rules. The nature and intensity of regulation varies according to the actor in question. Non-financial corporate issuers seeking capital on the markets, for example, do not pose stability risks but are subject to an array of disclosure-related requirements designed to support market efficiency. Investment firms, by contrast, are subject to an array of client-facing conduct rules, as well as to firm-directed prudential rules designed to support firm stability.

The rationale for (and style of) regulation in this area is closely related to the long scholarly and policy association made between strong financial markets and economic growth,8 although the evidence is not always clear as to the direction of causality and as to which forms of financial market intermediation are most effective and should be supported through regulation.9 International regulatory policy pre-crisis tended to support complete financial markets by means of, for example, reliance on facilitative ‘new governance’ regulatory techniques.10 Some degree of deregulation11 was generally regarded as beneficial as it was associated with the promotion of strong incentives for market participants, with the completion of markets, and with the intensification of financial market activity (or ‘financialization’12).13 Institutional support came internationally from bodies such as the International Monetary Fund (IMF), which assumed that greater financial market intensity would increase allocative efficiency by increasing liquidity, and would increase financial stability by dispersing risk more effectively.14 The destructive force of poorly regulated and unstable financial markets which the financial crisis exposed has since led to a recalibration of the objectives of securities and markets regulation and of the relationship between regulation and financial markets.

(p. 4) The main causes of the paradigm-shifting global financial crisis15 are well known.16 International macroeconomic policy led to a destabilizing build-up of cheap debt or leverage and a destructive search for yield. Burgeoning financial innovation, particularly in the form of securitization products, facilitated the search for yield by transferring leverage into financial markets which, undermined by an array of regulatory weaknesses, including with respect to the management of pro-cyclical behaviour, proved unable to recycle it efficiently and began to accumulate acute levels of risk which threatened the stability of the financial system. The financial crisis was ultimately a crisis of markets, not institutions:17 financial markets proved unable to recycle credit risk effectively; complex securitized products were priced incorrectly; the mechanisms of market efficiency, including the risk management functions provided by derivatives and the information intermediary functions provided by rating agencies, failed. Multiple channels for risk transmission quickly amplified the scale of the risks to which the financial system as a whole was exposed.18

The crisis also exposed the failure of securities and markets regulators to recognize, monitor, and respond to the market-based, cross-sector,19 and systemic risks to financial stability20 which can arise and threaten the financial system.21 Disclosure and anti-fraud rules, and related supervisory strategies, had long been the stock-in-trade of securities and markets regulation. Heavy reliance on disclosure reflected the prevailing assumption that, as described in the (then) UK Financial Services Authority’s (FSA) Turner Review, ‘financial markets are capable of being both efficient and rational and that a key goal of financial market regulation is to remove the impediments which might produce inefficient and illiquid markets’.22 But disclosure failed. Internationally, mandatory disclosures did not extend to the range of markets and instruments implicated in the crisis.23 Market-driven, contractual/voluntary disclosures, particularly in the securitization market and with respect to complex products, did not support market discipline.24 The assumptions of market efficiency and rationality which drove the reliance on disclosure were already under siege (p. 5) from the empirical findings of behavioural finance and cognate disciplines,25 but the crisis placed further stress on these assumptions.26 Securities and markets regulation also failed to build on lessons from its previous defining crisis. The Enron era underlined the risks which flawed incentives can pose to market efficiency.27 But the array of related reforms internationally (and particularly in the EU and US), which addressed, inter alia, investment analyst and auditor risk, did not sharpen the focus on incentive risks elsewhere in the financial markets. Regulators also had little experience with the major risks related to pro-cyclicality and system interconnectedness. For example, despite securities and markets regulation’s long-standing focus on liquidity, regulators failed to understand how changing risk profiles and systemic risks could lead to a catastrophic drying-up of liquidity, and were unable to ensure that instruments remained tradable.28

Hamstrung by a long tradition of disclosure-based intervention and by allowing discrete sectors to operate outside the regulatory net, securities and markets regulators struggled over the financial crisis to contain the build-up of risk. The first major initiative associated with market regulators was the autumn 2008 series of prohibitions on short selling internationally, which have since been associated with the need to be ‘seen to act’29 and, with hindsight, have been of questionable value in supporting market stability.30 Overall, the traditional suite of tools at the disposal of securities and markets regulators was not designed to address major risks to financial stability; regulators misunderstood risk and the nature of threats to financial stability and did not apply the tools at their disposal to limit undesirable or improperly priced risk-taking.31

In response, and as discussed throughout this book, support of financial stability32 and the management of systemic risk have been injected into securities and markets regulation as governing objectives.33 Much of the reform agenda is designed to ensure that financial institutions internalize the risks and costs of their activities and that financial stability is (p. 6) thereby promoted. Accordingly, prudential regulation has been significantly strengthened.34 In addition, client-facing conduct regulation is increasingly becoming associated with the support of financial stability, as are the rules governing market efficiency, transparency, and integrity, traditionally at the core of securities and markets regulation.35 Oversight of the financial system generally, in the form of ‘macroprudential’ oversight, is also shaping securities and markets regulation.36 The reach of regulation is also being extended through the shadow banking regulatory agenda, which seeks to capture the maturity and liquidity transformation functions traditionally associated with credit institutions (banks) and regulated within the banking perimeter but increasingly being carried out by market intermediaries, particularly different types of funds, and through different forms of intermediation, including securities repurchasing and lending activities.37

More generally, the financial crisis can be associated with a questioning of the social utility of markets, the extent to which they support economic growth,38 and the value of untrammeled innovation.39 The extent to which regulation can or should be used to limit or control levels of financial market development is also being questioned.40 The Organization for Economic Co-operation and Development (OECD), for example, has drawn a distinction between ‘primary instruments’ associated with consumption, saving, and fixed capital formation and used to create wealth (loans and equity and debt securities), and ‘other instruments’ used to hedge risk, arbitrage prices, gamble, and reduce tax and regulatory/agency costs and associated with wealth transfer. It has argued that the market for the former finances productivity and enhances innovation and investment, but the market for the latter could be associated with an increase in systemic risk and with ‘less socially useful’ activities, including regulatory and tax arbitrage and gambling.41 An allied concern to support ‘fundamental investors’, who operate on the basis of the fundamental value of securities rather than on speculative grounds, can also be discerned in the policy (p. 7) debate.42 The nature of financial innovation has also come under scrutiny. The International Organization of Securities Commissions (IOSCO) has identified a changed approach to financial innovation, with regulators now paying greater attention to risks, and called for securities and markets regulators to find the right balance between unrestrained innovation and over-regulation,43 while the Financial Stability Board (FSB) is monitoring financial innovation generally.44 The monitoring of innovation is also appearing in national regulatory mandates; the US Securities and Exchange Commission (SEC), for example, has established a Division for monitoring financial innovation.45 This trend has taken expression in a raft of crisis-era rules broadly directed to the dampening of speculation and ‘excessive’ innovation and financial market intensity, which have been a particular feature of the EU reform programme.

Much of the international reform agenda has been driven by the G20 agenda, as initially agreed in the 2008 Washington Action Plan46 and expanded in subsequent key summits, including the April 2009 London Summit and the September 2009 Pittsburgh Summit.47 Central steering has come from the FSB, established in April 2009 following a G20 decision and the successor to the earlier Financial Stability Forum, which adopts a range of regulatory and supervisory standards broadly directed towards prudential regulation and the support of global financial stability and monitors progress, including through peer review.48 The major international standard-setter for financial markets, IOSCO, has also been reinvigorated by the crisis and has produced an array of standards, notably with respect to the over-the-counter (OTC) derivatives markets, money-market funds, and trading practices.49

The international crisis-era reform agenda is now, very broadly, complete, although major reforms remain underway, notably with respect to the treatment of shadow banking.50 (p. 8) Stability is, slowly, returning to the financial system generally and to financial markets in particular.51 The costs and implications of the massive reform programme are becoming clearer.52 In the EU, while the crisis-era regulatory programme can be regarded as having closed with the 2014 completion of the crisis-era Commission (2010–14) and European Parliament (2009–14) terms (a final suite of reforms was adopted at the Parliament’s last plenary session on 15 April 2014—rapidly dubbed ‘Super Tuesday’), and while the EU financial system is slowly stabilizing, it remains fragile,53 and the costs and implications of the massive regulatory reform programme remain unclear (section 5).

I.3  Securities and Markets Regulation and the EU: Building an Integrated EU Financial Market

I.3.1  The Treaty and the Single Market: the Role of Law

EU securities and markets regulation addresses the preoccupations of securities and markets regulation generally. But it has a distinctive quality. While typically characterized since the crisis in terms of a ‘single rulebook’, EU securities and markets regulation is, at its bedrock, concerned with the construction and regulation of a single financial market. While the crisis has led the EU to become preoccupied with the pathology of the single market and (p. 9) destabilizing cross-border risk transmission, EU securities and markets regulation remains fundamentally concerned with market construction and the related regulation of the integrated market.

EU securities and markets regulation is based on the Treaty objective of constructing an internal (single) market (Article 3(3) TEU).54 The single financial market, the construction of which has generated the rules of EU securities and markets regulation, is part of a wider project to create a single market comprising ‘an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured’ (Article 26 TFEU).

A single financial market—within which, supported by a harmonized legal infrastructure, market actors can access national markets across the EU—has long been assumed to broaden and deepen pools of capital in the EU. It has also long been assumed that integration should drive a reduction in the cost of capital for firms, promote stronger risk management, and lead to stronger growth and employment.55 This governing presumption can be traced back to 1966 and the seminal Segré Report.56 As EU securities and markets regulation has developed, efforts to identify the features of an integrated market and its benefits have become more sophisticated. Empirical support for the first major liberalizing and reform period—the Financial Services Action Plan (FSAP) era of 1999–2004—came from the widely cited 2002 London Economics report for the Commission.57 It reported that integration of financial markets would generate higher risk-adjusted returns for investors through enhanced opportunities for portfolio diversification and more liquid and competitive capital markets, that the corporate sector would benefit from generally easier access to financing capital, and that competition in the intermediation sector would offer companies a wider range of financial products at attractive prices.58 It reported that EU-wide gross domestic product (GDP) would increase by 1.1 per cent, that total business investment would increase by 6 per cent, that private consumption would increase by 0.8 per cent, and that total employment would increase by 0.5 per cent.59 The most pronounced impact was predicted for the primary markets in which issuers raise capital; the headline benefit was a reduction in the cost of equity capital in the order of approximately 40 basis points, and a similar reduction was projected for bond-financing costs.60 The integration of retail financial services markets was projected to bring GDP increases of (p. 10) between 0.5 per cent and 0.7 per cent, lower prices for retail services, and lower interest rates.61 Since then, the depth of integration has been closely monitored by the Commission and the European Central Bank (ECB) (section 5.3.2).

As discussed throughout the course of this book, single market construction is a complex business. Integration depends on a wide range of variables, including taxation, infrastructure—including trading (trading venues) and post-trade (clearing and settlement platforms) structures, investor demand (and the removal of the investor home bias which privileges domestic investments),62 the availability of risk management mechanisms, and strong intermediation through investment firms and other intermediating actors. Many of these variables are not immediately susceptible to regulatory intervention, but this is the main mechanism at the EU’s disposal. The EU has, accordingly, focused on the removal of regulatory barriers and reduction of the costs which flow from diverging regulatory regimes and, thereby, on creating a regulatory environment supportive of cross-border activity.

At the start of the single financial market programme, considerable variations existed across the EU as to how markets were regulated. Even where these rules were not actively obstructionist and designed to protect national markets from competition, the existence of divergence between rules caused problems for the construction of the single market. Regulatory divergences and the duplication of rules can amount to non-tariff barriers, given that the costs they represent for market participants can obstruct access to other Member States’ markets. They can distort competition between market participants and prevent the development of the level playing field on which the single market depends.

The foundation Treaty free movement guarantees, which support the single market generally, go some way to removing regulatory obstacles. The freedom to provide services (Articles 56–62 TFEU) and the freedom to establish (Articles 49–55 TFEU) are the Treaty cornerstones on which the single market is based. They provide the basis for market access by virtue of the prohibition they place on discriminatory and free-movement-restrictive national rules, and have been important in the investment services sphere.63 They are, however, subject to exceptions which allow Member States to retain free-movement-restricting rules in certain circumstances and, in particular, where the public interest justifies such rules.64

(p. 11) Where the single market cannot be achieved by means of the free movement guarantees alone and regulatory barriers remain in place (as is typically the case in the highly regulated financial market sphere, given the strong public interest in retaining national rules), the harmonization process steps in by supporting the adoption of harmonized rules which remove regulatory obstacles to integration by putting common standards in place which replace national measures. As discussed in Chapter X, harmonizing measures must meet the Treaties’ competence (in that the measure falls within a competence to act conferred on the EU), proportionality, and subsidiarity (in that, broadly, the outcome sought is best achieved at EU level) requirements (Article 5 TEU).

The procedures governing the adoption of harmonizing measures are considered in Chapter X. In short outline, harmonizing ‘legislative’ measures in the securities and markets sphere are adopted by the Treaties’ law-making institutions.65 They are enacted under the ‘ordinary legislative procedure’, under which the Commission adopts a proposal, which is then adopted into law by the Council of Ministers (Council)66 and the European Parliament (Article 289 and Article 294 TFEU). Legislative measures are accordingly the outcome of often complex and fractious negotiations between these institutions. Legislative measures stand at the top of the rule hierarchy. In addition, extensive technical administrative rules are adopted by the Commission (Article 290 and Article 291 TFEU), with ESMA engaged to different degrees.

Under Article 288 TFEU, binding EU rules (whether legislative or administrative) can take three forms: regulations, directives, and decisions. Regulations are the most intrusive or intensive of EU measures in that they are self-executing: they apply in the Member States once adopted and do not depend on further action at Member State level. Directives are binding as regards the result to be achieved but leave the choice of form and method of implementation to the Member State. They will contain an implementation date, which varies according to the severity of the changes required to existing rules or the new rules demanded and the degree of market upheaval which might be expected, by which the obligations must be implemented by the Member States. Decisions have specific addressees which may include private parties. Until the crisis era, the directive was the dominant type of measure used in EU securities and markets regulation, due to the flexibility it allowed Member States. Directives have, however, led to the EU regime becoming porous in places, (p. 12) as national regimes can diverge significantly following implementation. The crisis era has seen much greater reliance on regulations.

A vast array of soft law supports the binding EU rulebook, primarily (and somewhat problematically) generated by ESMA. The EU’s institutions are also, however, empowered to adopt non-binding recommendations and opinions, and the Commission, in particular, has frequently deployed these measures in the financial markets sphere.

The Court of Justice also shapes the binding EU rulebook through its interpretation of EU law. Prior to the crisis, it had not played a major role in the development of the regime. Its securities and markets jurisprudence was in the main concerned with interpreting the foundation Treaty free movement guarantees,67 although it had ruled on substantive aspects of the harmonized regime,68 notably the market abuse regime.69 The crisis era, however, has seen the Court take a more central role. As tensions have increased between Member States in relation to the intensification of harmonization, litigation has followed. Challenges to the validity of ESMA’s powers,70 to the validity of the major banking measure (the 2013 Capital Requirements Directive IV),71 and to the validity of the proposed (2013) Financial Transaction Tax being adopted among a group of Member States under the Treaty-based ‘enhanced co-operation’ mechanism72 have been brought to the Court,73 and together represent an unprecedented challenge to the validity of EU intervention in this area.74 While the substantive questions vary in each case, these challenges all required the Court to rule on how the foundation Treaty settlement as to the organization of power at EU level relates to the location of control over securities and markets regulation and supervision, and are likely to have important implications for the future direction of EU securities and markets regulation.

The EU rulebook is also shaped by international standard-setters, including IOSCO, the Basel Committee on Banking Supervision, and the FSB.75 While the Basel Committee has long shaped bank capital regulation in the EU, since the outbreak of the financial crisis international standard-setters have come to play a central role in shaping the EU rulebook; so too have the related competitive dynamics associated with the regulation of the international (p. 13) market. Subsequent Chapters examine the influence of relevant international standard-setters and of associated international dynamics with respect to discrete elements of the EU rulebook.

I.3.2  Market Finance and Financial Market Integration

The construction of an integrated financial market implies the EU’s engagement, to a significant extent, with market-based finance.76 In very broad terms, in economies based on market finance (or on market-based financial intermediation), banks typically rely heavily on fee-based income sources, trading activities, and non-deposit liabilities; non-bank intermediaries play a significant role in the capital intermediation process; and there is significant reliance on financial products to manage risks (such as securitization products and derivatives). Firms also rely on market-based financing through the issuance of securities. In economies based on bank finance (or on bank-based financial intermediation), banks take deposits and make loans and are the major form of financial intermediation between capital suppliers and providers, relying on net interest income as their main source of income.77 Market finance can accordingly be associated with higher levels of market intensity and of financialization generally.78

Whether or not, and how, bank- or market-finance-based economic systems should be adopted or supported has been the subject of a rich debate which stretches across a range of disciplines, but in particular those of financial economics and political science. It engages discussion of the relative merits of market finance or bank lending, in terms of firm-level and economy-level effects,79 and of how different economic systems develop and evolve80 and the related determinative factors, including social and cultural factors81 and political forces and interest-group dynamics.82

Very broadly, market finance (and particularly equity-based finance) is typically associated with more flexible financing techniques for firms, particularly innovative, growth firms.83 (p. 14) Banks, by contrast, may have conservative lending policies and may stunt innovative growth strategies. As the financial crisis has shown to devastating effect, bank finance is subject to paralyzing credit squeezes which impact the real economy, while the shocking impact of systemic failures is now clear.84 The sharp decrease in bank lending to the real economy has led to intensifying reliance on securities markets for corporate funding.85 The financial crisis has also, however, underlined the stability risks which markets can generate, as well as how intense levels of market intermediation can create destructive levels of risk and lead to a proliferation of risk transmission channels. Nonetheless, market-based intermediation allows funding sources to be diversified86 and, where credit intermediation is carried out through market channels such as money-market funds or other funds, can diversify and stabilize sources of funding.87

Whatever the respective risks and benefits of different intermediation models, the EU’s commitment to market finance and to the related benefits of financial market integration has long been a feature, if often an implicit one, of the harmonization programme—but it became express over the FSAP era, which saw the merits of market finance closely linked to the burgeoning integration agenda. In 2000, for example, the Commission88 asserted that ‘[t]he assessment that market-based financing heralds substantial benefits for European investors and issuers is not overturned by periodic bouts of volatility or occasional market corrections’.89 The Commission’s 2005 White Paper on Financial Services, which marked the end of the FSAP period, saw the Commission assert that ‘financial markets are pivotal for the functioning of modern economies’ and that greater integration was associated with more efficient allocation of resources and long-term economic performance.90 In a similar vein, its subsequent 2007 progress report on the single market in financial services argued that open, competitive, and deep financial markets were key to competitiveness and growth.91

But there has long been an asymmetry between the policy aspiration and reality (although market conditions are changing and continue to change—see section 5.3.1). In the EU, as has been extensively examined, market finance lags bank finance.92 Bank finance has (p. 15) traditionally been associated with the major economies of France and Germany and with continental Europe generally; market finance with the UK and, to differing degrees, the Netherlands and the Nordic Member States.93 The construction of an integrated financial market and the related adoption of market finance accordingly demands some very heavy lifting by the EU. In particular, while the EU has useful tools at its disposal (primarily the harmonization of regulation—see section 3.3), how it deploys these tools, and the effectiveness of these tools, is dictated by the deeply embedded national interests and related institutional structures which shape Member States’ intermediation models and, accordingly, by how Member States interact with the EU’s market finance and related financial market integration agenda.

A sharp light has been thrown on the nature of Member State interests with respect to intermediation models, and the related challenges faced by the EU’s agenda, by the influential Varieties of Capitalism (VoC) literature.94 It relates the type of economic model adopted by States (including their intermediation models) to their distinct institutional structures. Famously, it has classified the dominant economy types as the Liberal Market Economy (LME) and the Co-ordinated Market Economy (CME).95 This broad classification, which probes the underlying political economy of States, has important implications for the EU’s financial market integration project. It describes the CME as being, inter alia, based on ‘patient’ (long-term) capital, typically supplied by banks through loan assets, close relationships between banks and firms (including through cross shareholdings), the monitoring of firms (and capital) by networks including of banks, employees, and clients, strong stakeholder relationships (including between firms and employees/clients and based on cross-shareholdings), and as not dependent on publicly available information. The LME, by contrast, is based on market-based funding, a related focus on share price and current earnings and a more short-term orientation, strong market monitoring—including through aggressive takeover activity—and publicly available information. National legal frameworks for contracting and standard-setting tend to reinforce these patterns of economic co-ordination; the LME is typically associated with more facilitative and the CME with more intrusive regulation. The VoC analysis posits that States derive a comparative advantage from these interlinked institutional infrastructures and related economy types, and can be expected to protect those institutions; both models are durable and can be expected to resist convergence.

From the perspective of EU financial market integration and the promotion of market finance, the VoC analysis exposes the scale of the challenge. While it implies that EU law (harmonization), as an aspect of institutional structure, can shape and drive economic (p. 16) models, it also suggests that Member States can be expected to protect their long-standing institutional models, and their related competitive advantages, in single market-related negotiations.96 In an oversimplification, CME States might be expected to resist moves to a more liberal, market-based system of regulation for the single financial market and to be sceptical of market finance, while LME States might be expected to resist a more intrusive regulatory model for the single financial market and to support market finance.97

The VoC analysis has great explanatory power. But the underlying institutional and related economic models of Member States are only one among the many and complex forces which shape not only Member States’ negotiating interests but also the dynamics of EU financial market integration and engagement with market finance across the EU more generally,98 and which are dissipated and/or concentrated across the EU’s complex policy-formation and rule-making apparatus.99 An array of Member State/intergovernmental, supranational, and industry/private forces have shaped the legal infrastructure supporting financial market integration and the extent to which and how financial markets have integrated and market finance has developed in the EU.100

Intergovernmental analyses, for example, have long located primary influence over the single market with the Member States and, chiming with the VoC analysis, initially characterized financial market integration as a ‘battle of the systems’ in which, particularly in the early stages of the single market project, Member States sought to shape financial integration to their own domestic models and to avoid conferring competitive advantage on other States. In these accounts, the legal infrastructure supporting financial market integration has been shaped by negotiations between the Member States representing the major financial systems in the EU—France and Germany on the one hand (broadly CME), and the UK on the other (broadly LME).101 More recently, intergovernmental interaction has been characterized less in terms of ‘bank versus market finance’ (or ‘CME versus LME’) and, reflecting the array of forces which seem to shape Member States’ interests, more broadly in terms of the ‘market-making’ coalition (led by the UK and typically including (p. 17) the Netherlands and the Nordic Member States, and associated with market-led, more liberal regulation) and the ‘market-shaping’ coalition (led by France and typically including Italy and Spain, and associated with more intrusive regulation).102 This analysis, which sees Germany shifting between coalitions, has been associated in particular with the pivotal FSAP era.103 Supranational accounts, by contrast, locate significant power with the Commission and other supranational institutions; influence has also been located within the networks of agencies and committees which have come to shape the EU rulebook for financial markets.104 Private actors have also become increasingly influential on single market negotiations.105

These forces change over time. While the FSAP era can be associated with the ‘market-making’ coalition of Member States as well as with a dominant Commission106—and, overall, with a ‘permissive consensus’ on the benefits of integration107—the crisis era has seen the ‘market-shaping’ coalition of Member States, and their institutionally shaped economic interests, come to the fore, as a more intrusive approach to regulation and a more sceptical approach to market finance have developed.108 The crisis has also, however, exposed how coalitions can shift between Member States depending on the particular ‘mix’ of interests at stake, as well as the changing positions of the supranational institutions, notably the Commission.109

The embedding of market finance in the EU and the related achievement of financial market integration is not therefore a straightforward outcome to achieve. This is all the more the case as it is not clear that market finance should be aggressively promoted. The range of institutional factors which shape a particular economy’s dominant financing model are so variable and intermeshed, and the path dependencies are so significant, that any attempt to promote a particular model is fraught with danger. Even before the financial crisis underlined the difficulties with both bank and market financing models, it was argued that a combination of both bank- and market-finance techniques was likely to provide the most effective financing model for economic development.110 The law and finance (p. 18) scholarship, which probes the relationship between law and financial market development and which has led to a wide-ranging if inconclusive debate on the extent to which law can drive market development and on which legal systems are most supportive of market development,111 also counsels caution. While it suggests that law may have transformative effects with respect to the development of strong financial markets, the causal relationship between law and strong markets is fiercely contested, with challenges relating to the direction of causation, the institutions which can substitute for laws (such as networks of private capital and trading venues), the particular rules which have transformative effects, and the relative impact of ‘law on the books’ and ‘law in action’ (enforcement).112

But while it is not clear that the harmonization programme has been determinative,113 overall it is clear that market finance has taken root in the EU and that significantly more intense market intermediation and financialization has followed, reflecting shifts in Member States’ institutional structures (and a related nuancing of CME and LME models)114 and, in particular, industry developments (section 5.3.1). On the eve of the financial crisis, market-based financing techniques (including the securitization of loan assets) were widely used by banks in France and Germany, while even the German SME (small and medium-sized enterprises) sector, classically dependent on bank patient capital, was beginning to rely on market-based funding.115 It is also clear that financial market integration has, overall, deepened,116 even if—as discussed in subsequent Chapters—variable patterns of integration obtain across different market segments. Despite the upheavals wrought by the financial crisis, there appears to be significant political and institutional consensus in support of financial market integration and market finance, at least to some degree (section 5.3.2).

But the location and intensity of financial market intervention remains contested, reflecting the deep fault-lines which continue to rumble underneath the relatively stable single market consensus and which reflect persistent differences across the Member States with respect to economic models and in approaches to regulation. While the regulatory programme is now relatively well settled, new occasions for conflict continue to emerge and to shape EU securities and markets regulation—including with respect to the institutional structure for (p. 19) EU securities and markets regulation, discussed in Chapters X and XI, and with respect to the emerging tension between the single market and the euro area (section 5.1).

I.3.3  Harmonization: From Liberalization to Regulation

Financial market integration in the EU is primarily achieved through the harmonization of rules. In principle, harmonization of rules is justified where it is necessary to correct a market failure which extends beyond national boundaries and which cannot be corrected by action by individual States,117 and where doing so increases welfare, taking into account the costs of harmonization.118 Typical market failures include protectionist barriers, the regulatory costs and inefficiencies represented by multiple regimes, and the externalities which are generated by effects with an influence on well-being occurring in one State as a result of an activity which is regulated (or not) in another State (classically systemic risks to financial stability).

In the securities and markets regulation sphere, harmonization is typically regarded as justified where markets interact such that intermediaries, investors, and transactions move between them, leading to the potential for cross-border externalities such as fraud119 and systemic risk,120 as well as for increased transaction costs.

But while harmonization may support cross-border activity, harmonization of standards requires political agreement and can be a slow process, which may result in the adoption of standards which rapidly become obsolete. Harmonization also has the potential to restrict regulatory innovations which are typically incubated at national level, to limit the extent to which markets can tailor their regimes to reflect different market participant and transaction profiles, and to impose excessive costs. Harmonization—like any form of law-making, but with the additional risk of inflexibility—is vulnerable to regulatory capture. It can also, by standardizing rules and thereby shaping market behaviour, heighten systemic risk by incentivizing similar types of behaviours, whether regionally or internationally.121 These risks are exacerbated where standards emerge from bodies with insecure governance and accountability foundations and poor technical capacity.122

Alternatively, the objectives pursued by harmonization can be achieved through regulatory competition between States,123 the merits of which have been fiercely debated in the EU (p. 20) context124 and in the US federal context.125 The regulatory competition model is premised on regulatory arbitrage and on effective discovery of the different features of regulatory regimes. Where regimes differ, the regulatory competition model assumes that consumers will choose products/services which meet their price and quality requirements, but which originate from a State with a regulatory regime that is more efficient and less costly than the domestic regime, over domestic products/services produced under the less efficient domestic regime. Firms may choose to relocate to another regime in response to these signals, while investors may choose to invest their capital in a State in which the regulatory regime reflects, from the investor’s perspective, the optimal balance between risk and reward. In the securities and markets sphere, clients should follow intermediating actors located in the most efficient States, and capital should similarly follow the most efficient regulatory systems. Regulatory competition has the twin advantages of easing the informational asymmetry under which regulators labour and improving the quality of intervention by allowing signals to be transmitted from the marketplace to regulators. It can reduce the risk of regulatory capture and potentially deliver regulation which reflects a more diverse range of interests, allows regulatory innovation and the exercise of choice, and checks the expansionist regulatory tendencies of government.126 Paradoxically, regulatory competition may provide valuable evidence on how harmonization should proceed where clear evidence emerges of market support for particular regulatory choices.127 In the EU context, it also appeals to the concept of subsidiarity by shifting the location of regulation from the EU to the Member States.

Among the problems generated by regulatory competition in the context of securities and markets regulation are the disadvantages of an uncertain regulatory environment and multiple regulatory regimes, particularly given the benefits of standardization with respect to disclosure, the risk of externalities and prejudice to third parties—including, as the financial crisis made graphically clear, financial stability risks—and the risk that protectionist barriers will remain in place. Difficulties also arise concerning the level to which competition drives regulation: the ‘race to the bottom’/‘race to the top’ debate128 queries whether market actors’ choice of regime is driven by a concern to adopt rules which maximize value and lower the cost of capital or, alternatively, is a function of stakeholder interests—namely management’s—and asks how States respond.

(p. 21) Effective regulatory competition depends on a number of factors, including the mobility of market participants and their ability to choose regulatory regimes; the related willingness and ability of investors to discount choices of regulation which increase their risks;129 the extent to which regulators can decipher signals from market participants and are politically inclined to react, given path dependencies; the willingness of States to enter the competition;130 and the absence of market failures which require intervention in the form of harmonized common standards. In addition, it is unlikely that competition is simply a function of regulation or ‘law on the books’; the institutional and market structures, particularly with respect to enforcement and monitoring, which combine to drive market efficiency and investor protection are also likely to play a role in regime choices.131

In the EU, harmonization has long been the integration tool of choice.132 Some element of competition was embedded within the regime during the ‘minimum standards’ period—broadly, the period related to the Commission’s seminal 1985 Internal Market White Paper (1985–late 1990s), see further section 4.1—but this period was followed by the intensive FSAP and crisis eras which, in effect, removed regulatory competition and led to harmonization becoming ever more intensive and interventionist,133 as discussed in section 4.2.2. The debate on the respective merits of regulatory competition and harmonization had, however, considerable traction over the 1980s and 1990s as EU securities and markets regulation developed.134 It can now be regarded as somewhat sterile, given the crisis-era move to a ‘single rulebook’ and the location of regulatory power at EU level. The nature and quality of EU intervention remains contested, however, and has been queried from a range of analytical perspectives, including those of political science135 and regulatory theory.136 Rule-making for financial markets is, in principle, prone to risks and failures, given the scale of the information asymmetries between regulators/legislators and the markets, the speed of innovation, and the complexity which regulation must capture; resource constraints; capture risks; political risks; and the behavioural biases and groupthink risks to which rule-makers are vulnerable.137 The EU’s status as the monopoly supplier of securities and markets regulation makes the production of effective regulation all the more difficult; the EU law-making process is complex and multilayered, and often obstructed by intractable political disputes which reflect long-standing institutional differences across the Member States, while the ability of Member States to innovate, experiment, and correct (p. 22) regulatory errors has been almost entirely removed. As discussed in subsequent Chapters, the new rulebook which has emerged from the crisis era is not without risks. Neither is the fast-evolving and new location for contestation between the Member States and the EU—supervision and enforcement (Chapter XI).

I.4  The Evolution of EU Securities and Markets Regulation

I.4.1  Prior to the FSAP

The early progress of EU securities and markets regulation was less than auspicious and contained few signs of the explosive developments which would follow. The 1966 Segré Report marked the EU’s first significant foray into securities and markets regulation and identified many of the market-integration and regulatory themes which continue to preoccupy the regulatory regime some 50 years later. It highlighted the poor condition of the EU financial market138 and the benefits which could follow from the integration of markets; identified the obstacles to integration, chief among them the imposition by Member States of diverging and duplicative rules on market participants; and proposed remedial measures, notably with respect to the capital-raising process and the harmonization of disclosure standards. Subsequent developments took place on two fronts: the liberalization of capital movements,139 which was an essential precondition for the establishment of a single financial market, and the harmonization of Member State rules. Although the first proposal was presented in 1972 (for an issuer-disclosure regime),140 the first tentative steps were taken in 1977 with the Commission’s Recommendation for a European Code of Conduct Relating to Transactions in Transferable Securities.141 This was followed by the first generation of issuer disclosure directives, adopted between 1979 and 1982, which sought to construct a single securities market in which issuers could raise capital and which relied on detailed rule harmonization.

The second phase can be traced to 1985 and the presentation of the Commission’s Internal Market White Paper, which set out a programme of measures designed to deliver the single market (generally) by 1992142 and underlined the Commission’s intention to accelerate the harmonization process by means of the mutual recognition/minimum-harmonization/home Member State control device. The White Paper accordingly reflected the earlier, ground-breaking judgment from the Court of Justice in Cassis de Dijon,143 in which the (p. 23) Court stated that products legally in circulation in one Member State were to be admitted to other Member States without being required to meet additional regulatory requirements. Member States were, in other words, subject to a ‘mutual recognition’ rule, or required to recognize the regulatory regimes of other Member States. Member States could, however, impose those requirements which could be classified as ‘mandatory requirements’, such as consumer protection rules. Mutual recognition, combined with harmonization of rules at a minimum level and the allocation of primary regulatory control for integrated market activities to the ‘home’ Member State (very broadly the Member State in which the regulated party was resident or registered), then became the touchstone for the second phase of EU securities and markets regulation, following the White Paper’s translation of the Court’s ruling into this device for market integration. Mutual recognition was designed to lever open the single market and access to ‘host’ States, once the regulated actor had complied with the minimum harmonized standards which were imposed by the actor’s home Member State; in theory, costly duplications of regulation were avoided. The minimum-harmonization model allowed a degree of regulatory competition as a home Member State could impose additional rules above the minimum level on actors who chose to register in that Member State. It also accommodated some degree of flexibility and innovation in national regimes, as well as sensitivity towards local market features, but placed a limit on prejudicial regulatory competition.

In the securities and markets sphere, the White Paper argued that the ‘liberalisation of financial services, linked to capital movements, will represent a major step towards Community financial integration and the widening of the Internal Market’.144 It broadened the previous focus of the harmonization programme from issuers by including a collective investment schemes regime (to be adopted by 1985, adopted on schedule) and an investment advisers regime (to be adopted by 1989, adopted in 1993). Issuer-facing reforms were also included: a public offer prospectus regime was to be adopted by 1988 (adopted in 1989) and a regime concerning the information to be published on the acquisition of major holdings was to be adopted by 1988 (adopted on schedule).

With the 1985 collective investment regime, the EU gave the regulatory ‘passport’ device, which has since come to shape all of EU securities and markets regulation, its first airing.145 The regime was based on authorization of the collective investment scheme by the home Member State in accordance with the regime’s common standards and the conferral of a regulatory passport on the authorized scheme to operate across the EU (in ‘host’ Member States). It was followed by the second generation of issuer-disclosure directives (adopted between 1986 and 1994) which grafted the mutual-recognition concept on to the first generation of issuer-disclosure measures. In 1989, EU securities and markets regulation turned to the pathology of financial markets with the adoption of an insider-dealing regime designed to protect the integrity of and confidence in the new marketplace.

In 1993, after protracted negotiations, EU securities and markets regulation took a major step forward with the adoption of the cornerstone investment-services regime. In 1997 this was bolstered by the adoption of a directive which required that investor compensation schemes be established in all Member States and set out common rules. By 1997, which can (p. 24) be seen as the approximate end of phase 2, the harmonized structure contained the basic elements of securities and markets regulation such that a common core of basic rules applied in most Member States. A network of national competent authorities (NCAs) had also been established, designed to supervise the harmonized rules and to provide a pan-EU co-operation system, albeit embryonic in form, on which the supervision of the integrated market could be based.

Nonetheless, the regulatory structure supporting the integration process was inadequate. Large areas of regulation were not harmonized. The existing regimes were deficient in a number of respects and did not support mutual recognition effectively. Implementation of directives was inconsistent and often badly delayed. Supervisory co-operation was underdeveloped. All in all, the signs were already there that the regime would be ill equipped to cope with the enormous demands which would be placed on it imminently, notably the arrival of monetary union, the explosion in market and technological innovation, and the upsurge in cross-border activity which followed in the wake of these two developments.

During the first and second phases of EU securities and markets regulation, the preoccupation with integration and the piecemeal development of the regime resulted in a certain bankruptcy concerning the underlying regulatory objectives being pursued by the common standards which underpinned the new market. While EU securities and markets regulation served primarily as a lever to open the marketplace, it also, even at that stage, served as the regulatory basis for many activities on the EU market. But it was not always clear what underlying regulatory objectives were pursued by the harmonized rules. These early reform periods were grounded in pragmatism and shaped by market-access requirements rather than by any particular attachment to the rights and wrongs of market regulation or any particular regulatory philosophy. Even at this early stage, however, the pull exerted by different economic models on Member States’ approaches to harmonization and financial market integration was apparent; the negotiations on the 1993 directive on investment services, in particular, saw sharp distinctions between the UK-led ‘Alliance’ coalition and the France-led ‘Club Med’ coalition with respect to the extent to which trading on stock exchanges should be liberalized (Chapter V).

I.4.2  The FSAP and Post-FSAP Eras

I.4.2.1  The FSAP, Market Finance, and Integration

The FSAP era which followed (1999–2004) was highly regulatory in orientation, but was predominantly concerned with liberalization and the embedding of market finance.

As phase 2 came to an end—and largely independently of the harmonized regime—market finance began to take root, and integration to develop, at a rate that posed significant challenges for the limited EU regulatory regime. The euro removed currency risk, enhanced price transparency within the euro area, and supported changes in investment patterns as investors began to shift to pan-EU rather than Member State-based investment patterns. New technologies (including online delivery methods) began to increase the ease with which cross-border investment services could be offered and to enhance the dissemination of market information and access to trading, bringing greater numbers of investors to their own national markets and, increasingly, to the integrated marketplace. In a related (p. 25) development, changes to trading venues led to greater competition, reduced transaction costs, and increased cross-border trading. Consolidation in the intermediation industry occurred on an intra- and inter-Member State basis. Demographic developments and changes in how State-supported pensions schemes were funded provoked massive growth in the institutional investment segment and higher levels of retail investor activity. Issuers began to turn to the capital markets for their financing needs to a much greater extent than was previously the case.146 In response, EU securities and markets policy began to engage seriously with the embedding of market finance and with the development of appropriate legal infrastructures to support financial market integration.

The initial impetus was intergovernmental and came from the European Council. The 1998 Cardiff European Council requested the Commission to prepare a framework for action for financial services which would ensure that the full benefits of the euro were realized with respect to financial services and that the stability and competitiveness of EU financial markets were ensured. The Commission duly issued a Communication later in 1998 on ‘Financial Services Building a Framework for Action’147 which strongly supported market finance and integration. It found that while some progress had been made, financial services markets remained segmented and cross-border provision of financial services, particularly in the retail sector, remained limited. Five areas were identified for reform in order to ‘equip the EU with financial markets capable of sustaining competitiveness and weathering financial instability’:148 an overhauling of the legislative apparatus in order to ensure more effective responses to regulatory challenges; a market-driven modernization of wholesale markets in order to remove the remaining barriers to cross-border public offers and investment-related activities; completion on an incremental basis of the single market for retail financial products; review and clarification of the mechanisms for supervisory and regulatory co-operation; and creation of the general conditions for a fully integrated financial market, including construction of an integrated infrastructure with respect to payments, stricter application of the Treaty rules on competition and state aid, and progress on tax harmonization.

Later in 1998, the Vienna European Council called for the translation of these objectives into a specific work programme. Construction of the work programme was undertaken by the newly constituted Financial Services Policy Group, composed of representatives of the Council, the ECB, and the Commission, and it was presented by the Commission in its 1999 Financial Services Action Plan (the FSAP).149 The FSAP was a programme of 42 measures which would radically change the shape of EU securities and markets regulation. The FSAP’s proposals recognized that deficiencies in the harmonized regime were blocking greater integration and were designed to plug the major gaps and thereby support liberalization and integration. A second, more regulatory, theme of the FSAP was the need to protect the marketplace against the risks posed by greater integration, to meet the regulatory challenges posed by market developments, and to ensure the protection of retail investors in the integrated marketplace. The main proposals for financial markets were (p. 26) grouped into four categories—wholesale markets, retail markets, prudential rules and supervision, and wider conditions for an optimal single financial market.

The FSAP completed more or less on time, with 39 of the 42 measures adopted by the end of 2004. Its success, simply in terms of the formal completion of the programme, reflects the interplay of a series of factors. In particular, the FSAP period saw the holding together of a complex coalition of interests,150 and was characterized by a strong political,151 market,152 and institutional153 consensus on the benefits of market finance and of financial integration which reflected institutional changes to economic models in some Member States and the coincidence of the FSAP with a period of stock market exuberance (prior to the 2002 dotcom crash). By way of example, the 2000 Lisbon European Council—which took place at the height of wider stock market exuberance and before the bursting of the dotcom bubble, and the conclusions of which were described as bringing about a ‘step change’ in the movement towards greater integration154—provided important support for the FSAP and for the regulatory encouragement of market finance generally.155 It highlighted the need for action on the wholesale markets, given the contribution these markets could make to economic growth, and identified as priority areas the widest possible access to investment capital on an EU basis, elimination of barriers to investment in pension funds, further integration of sovereign bond markets, an enhancement of comparability of companies’ financial statements, and an intensification in co-operation by regulators. Although coalitions shifted as different FSAP measures were negotiated, a broadly pro-market and pro-integration coalition held.

Further impetus for reform came from the Lamfalussy Report of the Committee of Wise Men on the Regulation of European Securities Markets, chaired by Baron Alexandre Lamfalussy and constituted by the Council and which was delivered in February 2001.156 While it proposed the first major institutional reform to EU securities and markets (p. 27) regulation and ultimately paved the way for ESMA (Chapter X), it also reviewed progress on integration more generally and was strongly supportive of market finance. But its findings were a searing indictment of the inadequacy of the harmonized structure, its inability to cope with market developments and support greater integration, and the failure of EU legislative procedures to deliver regulation quickly and effectively. It warned that unless steps were taken to complete the regulatory structure and open the marketplace and to revise the law-making process, ‘economic growth, employment and prosperity will be lower, and competitive advantage will be lost to those outside the European Union. And the opportunity to complement and strengthen the role of the euro and to deepen European integration will be lost’.157

I.4.2.2  Harmonization and the FSAP: Liberalization and Re-regulation

The FSAP led to a new EU rulebook for financial markets. Its main elements were the 2002 Distance Marketing of Financial Services Directive, the 2003 Prospectus Directive, the 2004 Transparency Directive, the 2002 International Accounting Standards Regulation, the 2009 ‘UCITS IV’ reforms to the Undertakings for the Collective Investment of Transferable Securities (UCITS) collective investment regime (which were initiated shortly after the close of the FSAP but are associated with the FSAP period), the 2004 Markets in Financial Instruments Directive I (2004 MiFID I) governing investment services and trading venues, and the 2003 Market Abuse Directive (2003 MAD) on insider dealing and market manipulation.158 Detailed technical administrative rules amplifying these measures were adopted by the Commission, exercising powers delegated from the European Parliament and Council. The FSAP era also led to institutional reform in the form of the establishment of the Committee of European Securities Regulators (CESR), which supported the new ‘Lamfalussy process’ for the adoption of technical administrative rules by the Commission by providing technical advice to the Commission and, through a range of non-binding ‘supervisory convergence’ measures (including ‘soft’ quasi-rule measures), supported co-operation and convergence between NCAs.

With hindsight, it is now clear that the FSAP ‘rulebook’ was incomplete and, reflecting the wider regulatory zeitgeist, left large segments of the market—particularly in the wholesale sector—largely unregulated. But at the time, it represented a significant expansion of the pre-FSAP regime and largely removed the ability of Member States to engage in regulatory competition.

Under the FSAP, harmonization changed in character. It was no longer simply a functional device for removing obstacles and addressing market failures in the form of regulatory costs. It became the device through which centralized regulation was imposed on the EU marketplace (and on domestic and cross-border actors). This change in tone is well illustrated by the Commission’s 2000 Investment Services Directive (ISD) Communication, which laid the foundations for what would become the 2004 MiFID I, in which it argued that the removal of regulatory obstacles to free movement was no longer sufficient (p. 28) and that a regulatory framework was needed to secure the benefits of efficient and stable market-based systems.159 Thus, although the FSAP era generally represented the ascendancy of the (very broadly) liberalization-supporting market-making/LME Member States, it also reflected the regulatory orientation of the market-shaping/CME Member States.160

The FSAP did not, however, entirely remove Member State control over financial market rules. The 2003 Prospectus Directive was not expressed as a maximum-harmonization measure (maximum harmonization is typically associated with the removal of the ability of Member States to impose additional or more stringent rules in the area concerned upon domestic actors). Neither was the 2003 MAD I, which was structured as a minimum-standards measure, as was the 2004 Transparency Directive. Notwithstanding the scale of its regulatory ambitions, the 2004 MiFID I did not formally oust the Member States. The 2002 Distance Marketing of Financial Services Directive provides a rare FSAP example of formal maximum harmonization in that it expressly prevents Member States from adopting additional rules.161 In practice, the raft of technical administrative rules adopted under the major FSAP measures significantly limited Member States’ freedom to operate, particularly given market hostility to the ‘gold-plating’ of rules by Member States (or the adoption of additional requirements for domestic markets). But administrative rules were often based on minimum harmonization and adopted a flexible approach—although maximum harmonization was adopted under the MiFID I administrative regime162 and regulations were regularly deployed at the administrative level. Overall, however, maximum harmonization was not fully embraced across the FSAP despite its detail.163

The appropriate level of harmonization for the financial markets, and by extension the balance of control between the EU and the Member States, generated political debate over the FSAP, however, particularly with respect to whether a directive or regulation should be employed and the degree of Member State flexibility which should be supported. Charges of over-regulation were frequently raised, particularly with respect to the array of technical administrative rules.164 Market support for the FSAP’s more intrusive harmonization was, nonetheless, generally strong; the minimum-harmonization model which, unusually for the FSAP, was expressly adopted by the 2004 Transparency Directive was criticized for allowing divergences to appear and compliance costs to increase.165 There was some circumspection from the consumer sector, with concern expressed that a maximum harmonization (p. 29) approach could threaten national consumer protection regimes.166 But overall, by the end of the FSAP period and immediately prior to the crisis, a commitment had emerged to limit Member State discretion in order to curb the encrustation of national rules through ‘gold-plating’ and to support effective implementation.167 The crisis era would see this translated into the ‘single rulebook’ agenda.

I.4.2.3  The post-FSAP Era and the Legislative Pause

Phase 4 of EU securities and markets regulation, the post-FSAP and pre-crisis phase, can be traced to the Commission’s 2005 White Paper which set out the policy agenda for 2005–10.168

Over this period, and in a significant strategic shift, EU regulatory intervention went into abeyance, reflecting both the Commission’s support for a ‘regulatory pause’169 and the pre-crisis-era zeitgeist internationally. The 2005 White Paper focused on ‘dynamic consolidation’ towards an integrated, open, and efficient financial market; removal of the remaining economically significant barriers; implementation, enforcement, and evaluation of existing legislation and rigorous application of the EU’s 2002 Better Regulation agenda to new initiatives; and enhancement of supervisory co-operation and convergence and a strengthening of European influence in the global marketplace. Ensuring the effectiveness of the FSAP became the Commission’s major priority.

This period also saw the Commission rely more heavily on non-regulatory tools and ‘enrol’ private sector actors in the standard-setting process,170 reflecting the wider pre-crisis movement towards facilitative ‘new governance’ techniques for intervention171 and a ‘decentred’ approach to financial market regulation.172 This was most marked with respect to the reliance on codes of conduct with respect to the credit rating agency and clearing and settlement sectors, but was projected to become a feature of Commission policy more generally.173

(p. 30) I.4.3  The Crisis Era

I.4.3.1  The Financial Crisis and the EU

(a)  The Financial Crisis

In the EU, the financial crisis rapidly became hydra-headed, spawning interconnected banking, market, and fiscal crises174 and—leaving economic stimulus and recovery measures aside175—leading to a series of interconnected reform programmes, of which the massive reforms to EU securities and markets regulation form only one part.176

The catastrophic costs of bank rescue by the Member States, and the destructive feedback loop which emerged between sovereign risk and bank stability, transformed the ‘EU financial crisis’ into a ‘euro-area fiscal crisis’ with far-reaching effects.177 The initial banking crisis and the related bank rescues (from 2008) placed intense pressure on the sovereign debt of several Member States (notably Greece and Ireland). Contagion effects on euro-area sovereign debt generally rapidly intensified (driven by the Greek crisis in particular) from mid-2010, further intensified over 2011, and continued into the first half of 2012, generating an existential threat to the euro.178 The sovereign debt crisis forced the EU into unprecedented support of a number of Member States through financial assistance programmes, and led to historic liquidity support to banks and to the euro from the ECB and euro-area central banks (the Eurosystem).179 Far-reaching changes to the institutional settlement governing Economic and Monetary Union (EMU) also followed: new rules governing budgetary co-ordination and discipline were put in place, along with a new (p. 31) institutional structure to finance rescue/support programmes for euro-area Member States (the European Stability Mechanism).180 The sovereign debt crisis was not brought under some degree of control until the massive intervention by the Eurosystem in euro-area sovereign debt markets (from July 2012)181 and the seismic Banking Union reform (agreed by euro-area Member States in June 2012). The latter, composed of a new euro-area Single Supervisory Mechanism (SSM) and a euro-area Single Resolution Mechanism (SRM)182 (the mutualized euro-area deposit guarantee scheme, often regarded as the third pillar of Banking Union, remains incomplete), and supported by the dense banking rulebook which applies across the single market (as well as by EU state aid rules), is designed to ensure euro-area banks are appropriately regulated and supervised and can be effectively and safely resolved where they fail, and to protect the euro area from the fiscal costs of bank failure.183

Outside the euro area and across the EU generally, the reform of banking regulation has been intense, and has led to the dense banking rulebook (which also supports Banking Union) which includes a new harmonized bank resolution and rescue regime. The securities and markets reforms discussed across this book have similarly led to a far-reaching extension of the perimeter of the regulatory regime and a decisive shift in the location of regulatory control from the Member States to the EU. The regulatory reforms have been underpinned by institutional change in the form of the European System of Financial Supervision (ESFS). The ESFS comprises the NCAs, the three European Supervisory Authorities (ESAs)—ESMA, the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA)—and the macro-prudential oversight body, the European Systemic Risk Board (ESRB).

The EU regulatory reform agenda for the EU financial system generally184 is designed to address the failures which the crisis exposed in financial system regulation internationally, and so follows the related G20 reform agenda. But specific and additional difficulties beset the EU,185 arising from the mismatch between the pan-EU operations of some major (p. 32) banking groups and nationally based supervision and resolution regimes:186 the ‘global in life, national in death’ conundrum.187 At the core of the original EU banking crisis (which would become a fiscal crisis) was a destructive imbalance in the EU’s regulatory and supervisory architecture. The post-FSAP regulatory structure facilitated the cross-border activities of large financial institutions, but it did not adequately address cross-border supervision, co-ordination, crisis resolution, and deposit protection. The early stages of the crisis were characterized by local solutions, including the extension of deposit guarantee schemes, which often paid little heed to pan-EU financial stability consequences.188 The Fortis group, which came to close to collapse in September 2008, became emblematic of EU supervisory and co-ordination failures. It was initially supported through a co-ordinated injection of €11.2 billion by the governments of Luxembourg, the Netherlands, and Belgium on 28 September 2008. The rescue subsequently fell apart as tensions arose concerning burden-sharing, with the Netherlands nationalizing the Dutch element of Fortis and Belgium and Luxembourg selling the remaining elements to BNP Paribas.189 The Dexia group fared better, with the cross-border rescue co-ordinated by Luxembourg, France, and Belgium succeeding. Other major cross-border groups, notably RBS and ING, were the subject of home State rescues.190

The scale of the damage to the stability of the EU financial system has been recorded in detail by the ECB through its regular financial stability reports. In December 2008, for example, the ECB reported on an uncertain financial stability outlook and on the threats to the funding positions of banks and ongoing liquidity contraction in money markets, on the risks associated with hedge funds’ exposures to redemptions, and on the impact of unexpected events on then exceptionally volatile markets of thin liquidity, as well as on the impact of poor macroeconomic conditions.191 By December 2010, the situation ‘was still fraught with risk’, given the new instability in the euro-area sovereign debt market.192 By December 2012, although pressure on the euro had eased, the ECB was concerned about ongoing stress in the euro-area sovereign debt market, the risks of a decrease in bank profitability, and the impaired ability of fragmented markets to support bank funding.193 Although by May 2013 the ECB could report that stress on the euro area had fallen markedly, it remained concerned about bank profitability, funding sources, and the resilience of the euro-area sovereign debt market, and had become concerned as to the ongoing global reassessment of risk premia for assets, as investors began to move from safe (p. 33) havens to riskier assets.194 The 2012 and 2013 ECB reviews also highlighted the risk posed by financial innovation and the shadow banking sector.

The scale of the regulatory and supervisory repair required was massive. The agenda-setting February 2009 de Larosière Group (DLG) Report195 exposed the regulatory gaps and weaknesses in the post-FSAP banking and securities and markets regulation regimes, many of which the EU had in common with a number of major regulatory systems worldwide. But it also pointed to poor supervisory co-ordination, co-operation, and information-sharing, and the absence of emergency and crisis resolution mechanisms. The EU’s Economic and Financial Committee (EFC)196 similarly found that the distribution of tasks between home and host banking NCAs was not clear, that host NCAs had limited powers and were often unable to challenge home NCAs, that NCAs were not mandated to consider pan-EU financial stability, and that there were significant inconsistencies in Member States’ intervention and rescue powers.

The subsequent reform agenda for banking and for securities and markets regulation sought to establish a uniform and enhanced ‘single rulebook’ for the single market which would reflect the G20 reforms and close the regulatory gaps which had emerged, enhance supervision and supervisory co-ordination, and identify and mitigate the distinct financial stability risks generated within the single market.

The banking reform programme, however, developed a distinct trajectory. The fiscal implications of cross-border supervisory failure had been clear in the early stages of the crisis as home NCAs and tax-payers carried the costs of bank rescue. But they became acute as euro-area sovereign debt came under pressure and the costs of bank rescue became mutualized across the euro area with the establishment of support programmes for the weakest peripheral economies (Greece, Ireland, and Portugal). The later stages of the banking reform programme, accordingly, focused on management of the fiscal risks of bank failure and ultimately led to the radical Banking Union reform for euro-area banks.

(b)  The Securities and Markets Reform Agenda

The massive crisis-era reform programme has redrawn EU securities and markets regulation. Large segments of the wider EU reform programme focus on the prudential regulation of deposit-taking banks (notably the bank capital, liquidity, and leverage requirements, the resolution and rescue reforms, and, for the euro area, Banking Union), and are designed to address the acute financial stability and fiscal risks which the crisis generated. But the regulatory and supervisory reforms are also designed to address the regulatory gaps which the financial crisis exposed, and in particular the stability risks which markets can generate, and so have reshaped EU securities and markets regulation.197

(p. 34) Subsequent Chapters discuss the forces which have shaped the different elements of the new securities and markets regulation regime.198 Overall, however, the EU’s banking-driven euro-area fiscal crisis can be associated with the emergence of a strong anti-speculation agenda and a related suspicion of market intensity, both of which became defining influences on the securities and markets regulation regime. Institutional differences in economic models across the Member States had long led to variations in the extent to which Member States supported intense financial market activity and market finance. These underlying tensions burst out to dramatic effect as the financial crisis deepened, and became explosive as turmoil gripped the EU’s sovereign debt markets over 2010 to 2012. Hostility to perceived excessive speculation—and suspicion of market intensity and innovation generally—has shaped, in particular, the new rating agency regime, the new regime governing alternative investment fund managers, and the new trading regime.

I.4.3.2  The Major Securities and Markets Regulation Reforms

Two distinct waves of reform to EU securities and markets regulation over the crisis period can be identified.

The first wave of EU financial system reform generally was closely related to the G20 agenda and was concerned with supporting financial stability and ensuring a secure regulatory perimeter; it was also concerned with the distinct risks to the EU market arising from cross-border risk transmission and, as the sovereign debt crisis took hold, the destructive feedback loop between the fiscal implications of banking failure and the resilience of sovereigns. These reforms focused on strengthening EU banking regulation, most notably through the massive 2013 Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR) reforms which implemented the Basel III reforms to bank capital, liquidity, and leverage regulation, and introduced related risk management and governance reforms;199 these reforms also apply to investment firms within the scope of the CRD IV/CRR regime.

During this phase of stability-orientated reform, securities and markets regulation experienced its first set of major reforms. These reforms are exemplified by two perimeter-changing measures which captured market actors not previously subject to EU regulation. The 2011 Alternative Investment Fund Managers Directive (2011 AIFMD)200 has extended the asset management regime, which was previously liberalization-driven and focused on the retail-market-orientated ‘UCITS’ collective investment scheme, to include all non-UCITS fund managers, including private equity, property, and commodity fund managers, although it has become most associated with hedge fund regulation. The 2012 European Market Infrastructure Regulation (2012 EMIR)201 has brought radical change to the OTC derivatives markets, requiring in-scope derivatives to be cleared through CCPs and, in effect, imposing major reform on a previously lightly regulated segment of the (p. 35) financial markets. This reform wave also includes the EU’s new rating agency regime, composed of Credit Rating Agency (CRA) Regulations I (2009),202 II (2011),203 and III (2013)204 and the 2013 CRA Directive,205 and the 2012 Short Selling Regulation, which imposes new restrictions on short selling in a range of financial instruments, including sovereign debt.206

This first phase can also be associated with the initial institutional reforms to EU financial system governance: the 2011 establishment of the ESFS, composed of NCAs, the ESAs (conferred with a range of quasi-regulatory and supervisory tasks), and the ESRB, charged with macro-prudential system oversight. The second set of institutional reforms relate to Banking Union but may have ‘spillover’ effects for securities and markets regulation (Chapter XI section 7).

A second wave of securities- and markets-specific reform has followed, and has led to the reform programme extending beyond financial stability and embracing reforms which can be more closely associated with the traditional securities and markets regulation objectives of market efficiency (in particular the effectiveness of markets in supporting long-term savings and growth),207 transparency, and integrity, and consumer/investor protection. Many of these reforms have their roots in the review obligations which the FSAP imposed on its major measures, but the reviews have been coloured by the financial crisis. For example, the cornerstone of investment firm and trading venue regulation, the 2004 MiFID I, has been radically overhauled by the 2014 Markets in Financial Instruments Directive II (2014 MiFID II) and 2014 Markets in Financial Instruments Regulation (2014 MiFIR) reforms,208 which have the effect of capturing a very wide range of firms, venues, instruments, and trading practices within the regulatory net. The asset management regime has been expanded by discrete regimes for venture capital funds, social entrepreneurship funds, and long-term investment funds, designed to enhance the ability of markets to raise capital.209 The retail investor protection regime is undergoing major reforms which include the adoption of a new, cross-sector measure designed to address the disclosure provided in relation to packaged investment products and to close gaps in the current disclosure regime (the Packaged Retail Investment Products, or PRIPs, reform).210 Long-standing elements of (p. 36) EU securities and markets regulation, including the capital-raising regime,211 the market abuse regime,212 and the UCITS regime213 have also been reformed. An extensive administrative rulebook relating to these legislative measures is under development. The review process is already underway, underlining the state of permanent revolution which EU securities and markets regulation has been in since October 2008. The 2012 Short Selling Regulation, for example, has been reviewed, and the 2013–14 ESFS review is underway.

I.5  EU Securities and Markets Regulation After the Financial Crisis

I.5.1  The Single Market

The single market has long been a governing priority of EU securities and markets regulation. In the wake of the financial crisis, it remains of central importance, although the single market consensus has come under strain.

In the early stages of the crisis, the single market came under threat, with some support for a ‘less Europe’ approach (based on limited passporting and on market access being limited to locally capitalized and regulated subsidiaries).214 As the crisis deepened, Commissioner Barnier highlighted the importance of the single market and warned against protectionism.215 The reform era has ultimately led to a ‘More Europe’ approach, in the form of the new rulebook and related institutional reforms. But a related re-conceptualization of the single market has taken place, with the remarkable FSAP consensus on the benefits of a single, deep, and liquid financial market being replaced by a more sober realization of the fiscal risks of integration.

This recognition of the risks of the single market has been accompanied, nonetheless, by continued policy support for the integration project. From an early stage in the crisis, the Commission identified the single market as a ‘lever for recovery’ and warned against protectionism.216 The Commission’s 2010 European Financial Stability and Integration Report similarly highlighted financial market integration as a ‘major policy objective’ of the EU, and underlined the benefits in terms of cost reduction, instruments which met investor (p. 37) and issuer needs, better risk diversification, and easier access to finance.217 Its 2011 Report, following unprecedented turmoil in euro-area sovereign debt markets, argued that economic and financial integration was not an obstacle to stability and that ‘financial integration delivers huge benefits and has been a key source of economic growth’.218 In 2012, the ECB likewise strongly supported integration and its benefits for households and firms, and called for continued policy support.219 The Council adopted a similar approach, suggesting that the ‘balanced development’ of the EU financial system required regulatory reform but also greater financial integration.220 This institutional support for the single financial market reflects the EU’s wider 2011 ‘Single Market Act’ project,221 which is designed to combat ‘integration fatigue’ post-crisis. But amid the seemingly irrepressible dynamism of the single market movement, there is evidence of a more measured approach. The 2010 European Financial Stability and Integration Report also called for integration to deepen at ‘more sustainable pace’, and related the ‘rapid convergence’ pre-crisis to the credit boom and misperceptions regarding credit risk.222

The financial crisis has accordingly not dealt a fatal blow to the integration project, although integration has become strongly associated with the containment of risk. But while liberalization has taken a back seat to market protection, it remains a feature of the regulatory regime. The new fund vehicles for venture capital, social entrepreneurship, and long-term capital funds, for example, are designed to support market access. The 2012 EMIR, to take another example, seeks to support competition among CCPs in the clearing of derivatives, while the new 2014 MiFID II/MiFIR regime is designed to level the playing field between all types of trading venue.

The financial crisis has, however, exposed new lines of tension with respect to the single market, externally and internally.

First, as discussed throughout this book, there are clear indications of something of a ‘fortress Europe’ agenda in some regulatory spheres.223 Across much of the new rulebook, the EU has sought to impose its regulatory policies internationally by linking third country access to the single market to onerous, mandatory ‘equivalence’ requirements which require, in effect, that third country regulation and supervision reflect EU requirements. As discussed in subsequent Chapters, this development is most marked with respect to new areas for EU intervention, notably the rating agency regime, the 2011 AIFMD, the 2012 EMIR, and the new trading rules which apply to derivatives trading under the 2014 MiFID II/MiFIR. But the equivalence assessment is also extending to more settled areas; the 2014 MiFID II/MiFIR regime, for example, imposes a new equivalence regime on the provision of investment services by third country investment firms in the EU. Although the trade negotiations between the US and the EU on a Transatlantic Trade and Investment (p. 38) Partnership (TTIP), launched in summer 2013, suggest the beginnings of a more liberal approach,224 the equivalence model remains a policy preference. The September 2013 proposal for benchmark regulation, for example, proposes that the use of benchmarks provided by non-EU ‘benchmark administrators’ be subject to an equivalence assessment. Few countries, however, have addressed benchmark regulation; the equivalence mechanism accordingly allows the EU to shape the international response.225 As discussed in subsequent Chapters, the political and market consequences of this approach to international engagement can be significant.226

Second, new tensions have been exposed within the single market. The wider the regulatory perimeter, the greater the risk that EU rules have asymmetric impact across the Member States, given the tendency for financial market segments to concentrate in particular national markets. This is particularly the case with respect to wholesale market regulation, as these markets are concentrated in particular Member States, most notably the UK.227 The construction of the single financial market has long been attended by competing national interests and tensions as to the nature of financial market regulation. Prior to the financial crisis, these tensions were, broadly, contained; the regulatory programme was generally facilitative and regulatory costs could be offset by market access benefits. But the crisis-era programme is significantly more regulatory in orientation and reaches deep into the wholesale markets. It can more easily be associated with prejudicial regulatory costs and with the differential imposition of regulatory burdens, and has accordingly placed pressure on the single market consensus.

The highly contested Financial Transaction Tax (FTT) Proposal provides a useful example (Chapter VI section 5). The cacophony of protest which the Commission’s 2011 FTT Proposal,228 widely regarded as an anti-speculation measure, prompted in some markets, and the prospect of a veto from a number of Member States, led to its being recast in 2013 (p. 39) as a measure for a smaller group of Member States under the Treaties’ Enhanced Co-operation mechanism.229 But the spillover effects of the FTT outside the ‘FTT zone’ and on the single market more generally are potentially considerable and have led to the UK challenging the FTT proposal before the Court of Justice.230 Tensions within the single market can also be identified in the reforms to the regulation of trading venues under the 2014 MiFID II/MiFIR; the UK successfully negotiated a recital statement that no action taken by an NCA or ESMA in the performance of their duties should directly or indirectly discriminate against any Member State or group of Member States as a venue for the provision of investment services and activities in any currency. Similarly, the UK’s 2012 challenge to ESMA’s powers to impose controls on short selling in national markets,231 while based on the Treaty limits imposed on agencies, can be associated with a concern to shield the UK wholesale markets from perceived excessive and costly supervision, and with the likely differential impact of such powers on the UK market given the scale of its wholesale market.

The most serious threat to the single market, however, arises in the cognate banking context, and from the euro-area 19/internal market 28 split associated with Banking Union. The likelihood of the ‘euro-area 19’ acting as a block when it comes to rule-making for the ‘internal market 28’ is real and poses a potentially serious challenge to the single market.232 There are, however, some indications of increasing Commission sensitivity to single market tensions, in the banking sphere at least. Its highly contested 2014 proposal for a bank ring-fencing regime allows Member States the possibility to retain more restrictive national regimes, where applicable, to avoid any costly realignment of national rules.233 Albeit a very different measure and operating in a different context, this facilitative approach stands in contrast to the maximum harmonization approach adopted to own funds/capital requirements, which has generated hostility on the part of some Member States.234

I.5.2  Harmonization and an Ever Expanding Regulatory Perimeter

I.5.2.1  The Location of Control

Over the FSAP era, liberalization-driven regulatory reform in support of cross-border activity saw the location of securities and markets regulation shift to the EU from the Member States. The crisis era has led to the almost complete ascendancy of the EU. This has been driven by a host of factors. The ‘single rulebook’, initially proposed by the 2009 (p. 40) DLG Report, enjoyed early and widespread support from the Member States and the EU institutions. While the EU’s supranational actors would always have been expected to support greater uniformity, from an intergovernmental perspective, the rulebook had the potential to act as a hedge against the fiscal risks of cross-border activity and poor supervision; the rulebook consensus might also be associated with a pragmatic transfer by the Member States of the risks associated with financial market regulation at a time of intense crisis. The extensive G20 reform agenda and the EU’s related concern to shape the international rulebook also strengthened support for more intensive intervention. The extent to which rule-making power has moved to the EU is well illustrated by the Commission’s seizing the initiative when the global interest-rate fixing scandal broke over summer 2012 and producing related proposals for reform.235

As discussed throughout this book, the new rulebook is characterized by detailed legislative measures which, more often than not, take the form of a regulation, rather than a directive, in order to avoid implementation risks.236 This is perhaps best exemplified by the behemoth 2014 MiFID II/MiFIR and 2013 CRD IV/CRR regimes which, together, form the twin pillars of the massive EU regime governing the authorization and prudential and conduct regulation of investment firms and credit institutions. In each case, a directive (albeit of great detail), which accommodates some degree of implementation flexibility, is partnered with a regulation, which applies directly in the Member States and which addresses the matters on which uniformity of application is essential. In addition, extensive delegations to administrative rule-making have been conferred across the new rulebook; a dense administrative rulebook, which dwarfs that constructed over the FSAP era, is under development. The new rulebook is also characterized by extensive reliance on ESMA-produced soft law which is ‘hardened’ through ‘comply or explain’ mechanisms. In many respects, ESMA, which is examined across the book, may come to be the defining influence on the future development of EU securities and markets regulation given the very many channels through which it can exert influence.

I.5.2.2  The Breadth of the Rulebook

The preoccupation with financial stability over the financial crisis, and the recharacterization of the single market in terms of risk, has led to the regulatory function of EU securities and markets regulation trumping the liberalization function. A vast new rulebook has followed. The perimeter of EU securities and markets regulation surrounds a much wider set of market participants. An array of asset managers (under the 2011 AIFMD), proprietary traders and dealers (under the 2014 MiFID II/MiFIR), previously unregulated OTC markets (under MiFID II/MIFIR and the 2012 EMIR), and rating agencies (CRA I-III), for example, are now within the EU rulebook. A much wider range of asset classes and a host of trading venues have also been pulled in: the combined effect of MiFID II/MiFIR, the 2012 Short Selling Regulation, and EMIR, for example, is to impose an entirely new and detailed rulebook for derivatives trading in the EU which, for the most part, had largely (p. 41) been disciplined through market dynamics prior to the crisis. Entities which do not participate in the financial markets professionally but which engage in incidental financial activities are also being pulled into the regulatory net; EMIR and MiFID II/MiFIR, for example, have led to the imposition of rules on non-financial entities which use derivatives as hedging tools for their commercial business. The regulatory agenda in the funds sphere (2009 UCITS Directive/2011 AIFMD) appears unstoppable; the 2014 UCITS V reforms are likely to be followed by a series of reforms addressing issues arising from the shadow banking agenda. The re-emergence of market liberalization as the reform programme began to recede, over 2012–13 in particular, has led to a further suite of actors, notably certain types of fund vehicles, being pulled within the rulebook, albeit on an opt-in basis.

I.5.2.3  Correction and Review

Financial market integration will always be a goal of EU securities and markets regulation, however troublesome the causal relationship between a facilitative EU legal infrastructure and cross-border activity. But, given its ascendancy, the success of EU securities and markets regulation is now largely a function of its ability to meet traditional regulatory goals with respect to the support of financial market stability; market efficiency, transparency, and fairness; and investor protection, both for national markets and in the cross-border context.

The institutions appear relatively sanguine. The ESAs, for example, regard the new regulatory framework as providing a resilient framework for the EU financial sector generally.237 But regulation of this ambition, range, depth, and intensity places great pressure on the EU rule-making process. Of the very many challenges which arise, two can be highlighted.

Careful calibration is required given the differential impact which rules of this range and intensity can have on market actors, based on their size, complexity, and business model. Second, unintended consequences, which can include a reduction in market efficiency where regulatory costs prejudice risk management and thereby liquidity, can be significant. There is considerable uncertainty as to the cumulative impact of the reform programme generally on the availability, for example, of the high-quality collateral (or assets) now required to secure a range of different transactions.238

Review is required. As discussed throughout this book, the complex process through which EU securities and markets regulation emerges makes the already difficult process of rule-making for financial markets all the more challenging.239 It remains to be seen whether the new rulebook will have prejudicial effects, although some indications augur well.240 But it (p. 42) seems clear that an effective capacity to correct and calibrate is critical. The extensive review clauses241 to which all crisis-era measures are subject (and which were initially used over the FSAP period) provide a means for releasing political tensions during the negotiating process. But they also hold the promise of useful ex-post review. The Commission has committed to reviewing the new regime,242 while in 2013 the European Parliament pressed for such review to commence.243 ESMA has significantly enhanced the EU’s technical capacity at the administrative rule-making level, and has demonstrated its ability to corral complex market data, engage with market stakeholders, liaise with international standard-setters, and adopt complex rules. ESMA has also opened a safety valve in that it has shown itself capable of providing temporary ‘soft law’ mitigations where confusion and the risk of prejudice to market efficiency arise. But correction at the legislative level is likely to remain necessary, given the scale of the crisis-era rulebook—whether or not the law-making process can cope with large-scale refinements and recalibrations remains to be seen.

I.5.3  Market Finance and Market Integration

I.5.3.1  Market Finance

Since the start of the FSAP era, market finance has become embedded within the EU and a related intensification of market-based intermediation and of financial market activity generally has occurred, although the extent to which this is related to the regulatory programme is contested. In 2002, as the FSAP began to unfold, more sophisticated products had developed, securitization activity had increased, the corporate sector was embracing market finance to a greater extent,244 and the household sector had become more engaged with the financial markets.245 Nonetheless, bank-based financing remained dominant, with bank lending the chief source of external finance in the EU in 2004.246

Subsequently—and as discussed in later Chapters—the asset management sector enjoyed strong growth, trading volumes increased, issuers relied more heavily on market-based (p. 43) funding and, overall, intermediation increased and markets became more complete, with an ever-increasing array of risk management products being used to diversify risk;247 in particular, banks were securitizing their loan portfolios. In 2007, immediately prior to the crisis, the ECB’s 2007 Report on Financial Integration reported on a significant increase in market finance opportunities and on the continued development of corporate bond and equity markets.248 EU stock market capitalization as a proportion of GDP rose over 2004–7,249 narrowing the still significant gap with the US.250

The crisis era provides vivid evidence of the extent to which market intensity has deepened and market-based intermediation has developed. The extensive monitoring since the early days of the crisis of financial stability in the EU251 paints a clear picture of the extent to which market-based intermediation has become embedded, and, accordingly, of the extent to which financial markets have come to threaten the stability of the wider EU financial system. The ECB’s six-monthly Financial Stability Reviews, for example, have, since 2008, highlighted the ongoing fragility of the EU financial market and the risks it poses to overall system stability arising from, for example, sovereign debt markets, shadow banking, financial innovation, and volatility in particular market segments, notably the money-market segment. ESMA’s first (February 2013) report on ‘Trends, Risks, and Vulnerabilities’ similarly underlined the scale of market finance and of related intermediation in the EU.252 It examined risks to the financial system from markets (including liquidity, contagion, market, and credit risks) and assessed activity in and risks from securities markets (including equity, sovereign bond, corporate bond, money market, and structured retail product markets); commodities markets; derivatives markets; wholesale market investor activity (including by traditional funds, alternative investment funds, exchange-traded funds, and money-market funds); retail investor activity; and market infrastructures, including trading venues and CCPs. Its refined second report (September 2013) extended the examination to include covered bond and securitization markets, and additionally addressed securities lending, short selling, and the risks posed by financial benchmarks.253 The Joint Committee of the ESAs has highlighted, for example, risks arising from increased reliance on and demand for high-quality collateral (increasingly mandated by measures such as the 2012 EMIR but also increasingly being sought by market actors following a loss of trust in credit ratings) and increased interconnections between markets and institutions as collateral is used and re-used, the need for strong risk disclosures by financial institutions, (p. 44) and the risks posed by misconduct with respect to financial benchmarks.254 Similarly, the ESRB has warned of risks from CCPs, sovereign debt exposures, money-market funds, and intra-financial sector interconnectedness arising from securities lending and repurchase activities and the shadow banking sector.255

In terms of firm funding sources, while EU firms remain dependent on bank finance, the crisis-era contraction in bank lending, investors’ search-for-yield efforts, and the low cost of issuing longer-term high-yield bonds can all be associated with the emerging evidence of a stronger EU corporate bond market,256 which has led the Commission to suggest increased firm reliance (in the financial sector at least) on market-based funding.257

The development of market finance and the related impact of the financial crisis has had two effects on EU securities and markets regulation. First, a strong anti-speculation agenda has emerged in some Member States, as has a related concern to dampen levels of intermediation and innovation. Similarly, the Commission has supported something of a ‘regulatory rethink’—including with respect to intense financial innovation—and called for a financial sector that supports job creation and sustainable growth,258 and identified a positive relationship between financial innovation and overall welfare as an indicator of progress on the reform agenda,259 while the European Parliament has frequently shown itself to be sceptical of intense financial markets, and particularly of derivatives and related financial innovation.260 The ECB has also repeatedly highlighted the risks of financial innovation and called for strong monitoring,261 as has the ESRB.262 While this zeitgeist has shaped regulation in a number of ways, as discussed across the book, it has also led to institutional change: all the ESAs were charged with establishing ‘financial innovation committees’ which would support a co-ordinated approach to ‘new and innovative activities’ and advise the EU legislators accordingly.263

Second, and while the crisis-era anti-speculation agenda and the ascendancy of a more market-sceptical style of EU regulation might suggest otherwise, policy support for market-based funding of firms remains strong, reflecting the contraction in bank funding and the persistent dominance of bank funding over market funding (some 70 per cent of EU funding is bank-based as compared to 20 per cent in the US). As the crisis reform agenda began to reach its closing stages, the Commission launched a major policy initiative (p. 45) designed to strengthen financial markets as a source of long-term funding and to stabilize and diversify sources of funding. The 2013 Long-Term Financing Green Paper264 queried whether the EU’s long-standing and heavy dependence on bank-based intermediation for long-term funding would give way to reliance on more diversified market funding sources (including institutional investors and alternative financial markets), and proposed a range of reforms to support market-based funding.265 The tentative moves towards supporting alternative market-based funding mechanisms (such as crowdfunding platforms) can also be associated with this agenda, as can the more longstanding but recently refreshed agenda to support market-based SME funding (Chapter II).

I.5.3.2  Financial Market Integration

Financial market integration has also deepened, as discussed in subsequent Chapters. As the FSAP drew to a close, the Commission began to grapple with the complexities of quantifying financial market integration,266 albeit somewhat belatedly,267 and has since produced a series of annual reports on integration.268 They focus in particular on cross-border capital flows, convergence in asset pricing,269 and the provision of financial services through branches and subsidiaries. Since 2005, the ECB has also produced an annual report on integration in the euro area.270

The Commission’s first (2004) Financial Integration Monitor reported that while integration was progressing, it varied across market sectors, with the unsecured money market and the market for consumer loans representing the strongest and weakest ends of the spectrum; liquidity was pooling for common tradable assets, bond yields were converging, and equity returns were becoming increasingly sensitive to EU rather than local shocks.271 Although a home bias persisted, a significant proportion of trading occurred cross-border, with non-residents representing 20 per cent of shares traded in almost all European exchanges.272 Financial institutions were increasingly becoming organized on an EU basis, while professional investment horizons were becoming increasingly EU in nature.273 The 2007 report (p. 46) also reported good progress in integration in the wholesale sector, and noted that financial services providers, large clients, and institutional investors were operating on a pan-European scale. It reported on increasing correlation in equity market returns, continuing convergence in bond yields, and a (limited) weakening of the home bias.274 But while EU bond markets had deepened, equity market liquidity remained fragmented.275 Similarly, a 2011 review related to the MiFID I Review reported that between 2006 and 2009, between 30 per cent and 70 per cent of equity investments (managed by institutional investors in major financial centres) were allocated to domestic securities.276

The financial crisis led to a material retrenchment and a reappearance of the home bias,277 with a significant contraction in cross-border activity (in terms of reduced cross-border capital flows and a greater dispersion in asset prices)278 and a retreat to domestic markets, as reported by the Commission for 2008, 2009, and 2010.279 The Commission’s 2010 review, however, also suggested that the main cross-border channels for integration remained in place (including cross-border subsidiaries and branches and cross-border membership of trading platforms) and predicted a more sustainable pace of integration. But in 2011, with the euro-area sovereign debt crisis intensifying, the Commission reported that the financial integration process had been halted or reversed in some segments;280 it highlighted, however, that financial firms had largely preserved their cross-border presence and that the integration of market infrastructures was progressing.281 By the fifth year of the financial crisis (2012), the Commission’s review focused mainly on financial stability, but reported on continuing market fragmentation.282 ECB euro-area assessments have been similar. The ECB’s 2011 financial integration report, for example, noted the initial domestic retrenchment over 2007–8 but also an underlying trend towards integration, despite the financial crisis, and suggested that while bond and money-market integration, in (p. 47) particular, were experiencing difficulties, the crisis should not endanger the long-term trend to integrate.283 The 2012 report noted a ‘marked deterioration’ in financial integration284 but reported that the bond markets had suffered most damage, with the impact on equity markets more limited.285

Integration remains fragile, although some signs of improvement are emerging. In 2013, the ECB reported on continuing fragmentation in the bond and money markets286 and on outflows from certain euro-area securities, but in 2014 it saw some signs of improvement.287 Recent Commission assessments have been similar.288

The retrenchment over the financial crisis underscores the array of non-legal factors which drive cross-border integration. But the commitment to financial market integration remains very strong, albeit now typically articulated in terms of financial stability support, rather than liberalization.


1  Financial intermediation relates to the process whereby surplus funds are transferred from suppliers (savers) to those in deficit (borrowers).

2  This book does not address the regulation of bank-based finance (deposit-based and loan-based financial intermediation). It does not, accordingly, address the regulation of deposit-taking and lending and the raft of capital, liquidity, and leverage rules which apply to deposit-taking institutions only, or how the financial crisis has changed the structural regulation of multifunction deposit-taking institutions, including with respect to structural ring-fencing and recovery and resolution requirements.

EU rules targeted solely at deposit-taking institutions (credit institutions, as defined under the EU regime) include, eg, the structural/ring-fencing reforms proposed by the Commission in February 2014 (Ch VI sect 1.1), the institutional reforms which support the Single Supervisory Mechanism and Single Resolution Mechanism for euro-area banks (sect 4.3.1), and the raft of rules which govern the own funds, liquidity, and leverage levels which must be maintained by credit institutions, particularly in respect of credit risk. The book does address the market-based activities of credit institutions and of their banking groups which fall within securities and markets regulation. EU securities and markets regulation applies on a functional basis, applying to credit institutions where they engage in market intermediation activities.

As noted in the Preface, the book does not cover areas associated with EU securities and markets regulation more generally, such as rules relating to financial crime (such as anti money-laundering rules) and the fiscal and monetary rules which govern the euro area.

3  A theoretically complete market is one in which individuals can hedge against all contingencies: Spencer, P, The Structure and Regulation of Financial Markets (2000) 2–3. A complete market is strongly associated with the availability of risk management products such as derivatives. On the benefits (and risks) of collateralized debt obligations (CDOs), eg in ‘completing’ fixed income securities markets by providing investment opportunities which would not otherwise be available, see Partnoy, F and Skeel, D, ‘The Promise and Perils of Credit Derivatives’ (2007) 75 U of Cincinnati LR 1019.

4  Levine, R, ‘Financial Development and Economic Growth: Views and Agenda’ (1997) 35 J of Econ Lit 35 688.

5  See, eg, Black, B, ‘The Legal and Institutional Preconditions for Strong Securities Markets’ (2001) 48 UCLA LR 781, and, from a policy perspective, International Organization of Securities Commissions (IOSCO), Mitigating Systemic Risk. A Role for Securities Regulators (2011) (2011 IOSCO Systemic Risk Report).

6  See, eg, Ogus, A, Regulation, Legal Form and Economic Theory (1994). Market failures are generally characterized in terms of resulting in risks not being correctly priced in the marketplace.

7  An externality (and a justification for regulation) arises ‘when the well-being of one economic agent (consumer or firm) is directly affected by the actions of another’: Kay, J and Vickers, J, ‘Regulatory Reform: An Appraisal’ in Majone, G (ed), Deregulation or Re-regulation. Regulatory Reform in Europe and the United States (1990) 221, 226.

8  See, eg, Khan, M and Senhadji, A, Financial Development and Economic Growth: An Overview, International Monetary Fund (IMF) WP No 00/209 (2000); Levine, R and Zervos, S, ‘Stock Markets, Banks and Economic Growth’ (1998) 88 Am Econ Rev 537; Levine, n 4; Demirgüc-Kunt, A and Maksimovic, V, ‘Law, Finance and Firm Growth’ (1998) 53 J Fin 2107; and King, R and Levine, R, ‘Finance and Growth: Schumpeter Might be Right’ (1993) 108 Q J Econ 717. For a review of the major studies see Arner, D, Financial Stability, Economic Growth and the Role of Law (2007), ch 1.

9  The IMF has argued that evidence from the crisis era suggests that some forms of financial intermediation and particular ‘mixes’ of intermediation models are likely to be more closely related to positive economic outcomes than others: IMF, Global Financial Stability Report, October 2012, ch 4 (Changing Global Financial Structures: Can they Improve Economic Outcomes) 1.

10  Ch X sect 1.2.

11  The pre-crisis regulatory era was not a deregulatory era. But the governing assumption was that in weighing the costs and benefits of intervention and of market discipline, the latter would prove more effective: Langevoort, D, ‘Global Securities Regulation after the Financial Crisis’ (2011) 13 JIEL 799.

12  Financialization is typically associated with more complete financial markets and a growth in finance. See generally Deakin, S, ‘The Rise of Finance: What Is It, What Is Driving It, What Might Stop It?’ (2008) 30 Comparative Labour Law & Policy J 67. Financialization has been linked to political support for, and belief in, the superior efficiency of allocation through competitive markets rather than through governmental intervention, financial deregulation, financial innovation, and ‘financial markets becom[ing] the pace-setters of all markets’: Dole, R, Stock Market Capitalism: Welfare Capitalism. Japan and Germany versus the Anglo-Saxons (2000) 3–5.

13  UK Financial Services Authority (FSA) Chairman Adair Turner, Speech on ‘How Should the Crisis Affect our Views About Financial Intermediation?’, 7 March 2011.

14  IMF, Global Financial Stability Report, April 2006, ch 1, highlighting the importance of markets in dispersing credit risks away from banks and in increasing the ‘shock-absorbing’ capacity of the financial system, although noting the related risks.

15  Described as ‘likely to be viewed as a pivotal event in the financial and economic history of the twentieth and twenty-first centuries’: HM Treasury, Single Market: Financial Services and the Free Movement of Capital, Call for Evidence (2013) (2013 HM Treasury Call for Evidence) 21.

16  For a review of the massive literature see Lo, A, ‘Reading about the Financial Crisis: A 21 Book Review’ (2012) 50 J of Econ Lit 151. The major policy assessments in the EU include FSA, The Turner Review. A Regulatory Response to the Global Banking Crisis (2009) (the 2009 Turner Review) and accompanying FSA Discussion Paper No 09/2, and The High Level Group on Financial Supervision in the EU, Report (2009) (the 2009 de Larosière or DLG Report).

17  FSA Chairman Turner, Speech on ‘Reforming Finance: Are We Being Radical Enough?’, 1 February 2011.

18  2009 Turner Review, n 16, 11–49.

19  eg Whitehead, C, ‘Reframing Financial Regulation’ (2010) 90 Boston University LR 1 and Kroszner, R, ‘Making Markets More Robust’ in Kroszner, R and Shiller, R (eds), Reforming US Financial Markets. Reflections Before and Beyond Dodd-Frank (2011) 51.

20  eg 2011 IOSCO Systemic Risk Report, n 5, noting the traditional focus of securities and markets regulators on market efficiency, fairness, and transparency, and their reliance on disclosure-based and conduct-based techniques.

21  eg Anand, A, ‘Is Systemic Risk Relevant to Securities Regulation’ (2010) 60 University of Toronto LJ 941.

22  n 16, 39.

23  eg Fisch, J, ‘Top Cop or Regulatory Flop—the SEC at 75’ (2009) 96 Va LR 785.

24  Generally, Jackson, H, ‘Loan-level Disclosure in Securitization Transactions: A Problem with Three Dimensions’ (2010) Harvard Public Law WP No 10–40, available at <http://ssrn.com/abstract=1649657> and Schwarcz, S, ‘Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown’ (2008) 93 Minnesota LR 373.

25  See further Ch II sect 2.1.

26  Avgouleas, E, ‘The Global Financial Crisis, Behavioural Finance and Financial Regulation in Search of a New Orthodoxy’ (2009) 9 JCLS 23.

27  Coffee, J, ‘Understanding Enron: It’s the Gatekeepers, Stupid’ (2002) 57 The Business Lawyer 1403.

28  McCoy, P, Pavlov, A, and Wachter, S, ‘System Risk through Securitization: The Result of Deregulation and Regulatory Failure’ (2009) 41 Connecticut LR 1327.

29  Enriques, L, ‘Regulators’ Response to the Current Crisis and the Upcoming Reregulation of Financial Markets: One Reluctant Regulator’s View’ (2009) 30 UPaJIEL 1147.

30  See further Ch VI sect 3.

31  2011 IOSCO Systemic Risk Report, n 5. ESMA (European Securities and Markets Authority) Chairman Maijoor similarly noted that pre-crisis, securities and markets regulators were focused on transparency and investor protection and that stability was not a ‘topical topic’: Keynote Address, International Capital Markets Association Conference, 26 May 2011.

32  The European Central Bank (ECB) has described financial stability as follows: ‘Financial stability can be defined as a condition in which the financial system—which comprises financial intermediaries, markets and market infrastructures—is capable of withstanding shocks and the unravelling of financial imbalances. This mitigates the likelihood of disruptions in the financial intermediation process that are severe enough to significantly impair the allocation of savings to profitable investment opportunities’: ECB, Financial Stability Review, May 2013, 5.

33  Well illustrated by IOSCO’s new annual Securities Markets Risk Outlook (first issued for 2013–14), which is designed to identify new potential systemic risks. Similarly, ESMA has begun to develop indicators for systemic risk in securities markets, a process which it has found to be challenging: IMF, Financial Sector Assessment Program, European Union. European Securities and Markets Authority. Technical Note. March 2013 (2013 IMF ESMA Report) 19.

34  IMF, n 9, ch 3 (The Reform Agenda: An Interim Report on Progress towards a Safer Financial System) 2. Examples include the Basel III capital regime which imposes higher capital costs on riskier activities and the new regime governing counterparty margin requirements for transactions in derivatives which are not cleared through central clearing counterparties (CCPs): Basel Committee on Banking Supervision and IOSCO, Margin Requirements for Non-centrally Cleared Derivatives (2013).

35  2011 IOSCO Systemic Risk Report, n 5, 42.

36  In the EU, the European Systemic Risk Board (ESRB) is responsible for the macroprudential oversight of the financial system within the EU, in order to contribute to the prevention or mitigation of systemic risks to the financial stability of the EU that arise from developments within the financial system (defined as all financial institutions, markets, products, and market infrastructures), and taking into account macroeconomic developments, so as to avoid periods of widespread financial distress (ESRB Regulation (EU) No 1092/2010 [2010] OJ L331/1 Art1(1) and Art 2(b)). See further Ch XI sect 6.

37  See Ch III sect 3.14.

38  eg querying, in the wake of the crisis, whether excessive financial development can stymie economic growth: Arcand, JL, Berkes, E, and Panizza, U, Too Much Finance? IMF WP No 12/161 (2012) and, similarly, Cecchetti, C and Kharroubi, E, Reassessing the Impact of Finance on Growth, Bank for International Settlements (BIS) WP No 381 (2012).

39  eg Lerner, J and Tufano, P, The Consequences of Financial Innovation: A Counterfactual Research Agenda, NBER WP 16780 (2011), available at <http://www.nber.org/papers/w16780> and Blair, M, ‘Financial Innovation, Leverage, Bubbles and the Distribution of Income’ (2010–2011) 30 Rev of Banking and Finance Law 225.

40  eg Arup, C, ‘The Global Financial Crisis: Learning from Regulatory and Governance Studies’ (2010) 32 Law & Policy 363.

41  OECD, Bank Competition and Financial Stability (2011) 36–9.

42  IOSCO, Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, Consultation Report (2011) 12.

43  n 5.

44  eg FSB (Financial Stability Board), Progress in the Implementation of the G20 Recommendations for Strengthening Financial Stability (2011) 11–12.

45  Division of Risk, Strategy and Financial Innovation, established in 2009.

46  Washington G20 Summit, November 2008, Declaration of the Summit on Financial Markets and the World Economy, Action Plan to Implement Principles for Reform.

47  London G20 Summit, April 2009, Leaders’ Statement on ‘Strengthening the Financial System’ and Pittsburgh G20 Summit, September 2009, Leaders’ Statement on ‘Strengthening the International Financial Regulatory System’. The Pittsburgh summit, eg, noted the earlier progress on the regulation and oversight of over-the-counter (OTC) derivative markets, securitizations, rating agencies, and hedge funds, and called for further reforms with respect to building high quality capital and mitigating pro-cyclicality; reforming compensation practices; improving the OTC derivatives markets; cross-border crisis management resolution for systemically important institutions; and the adoption of a single set of high-quality global accounting standards.

48  See Arner, D and Taylor, M, The Global Financial Crisis and the Financial Stability Board: Hardening the Soft Law of International Financial Regulation (2009), available at <http://ssrn.com/abstract=1427085>.

49  A burgeoning scholarship addresses international standard-setters and the growth in ‘international financial regulation’ over the crisis era, eg Verdier, PH, ‘The Political Economy of International Financial Regulation’ (2013) 88 Indiana LJ 14–15; Kelly, C and Cho, S, ‘The Promises and Perils of New Global Governance: A Case of the G20’ (2012) 12 CJIL 491; Helleiner, E and Pagliari, S, ‘The End of an Era in International Financial Regulation? A Postcrisis Research Agenda’ (2011) 65 International Organization 169; and Brummer, C, ‘How International Financial Law Works (and How It Doesn’t)’ (2011) 99 Georgetown LJ 257.

50  As noted, the shadow banking system is the non-bank system of credit intermediation which engages in the maturity and liquidity transformation functions of banks, but which often falls outside banking regulation while being functionally equivalent: Ch III sect 3.14.

51  For one of the first positive reports see IMF, Global Financial Stability Report. Old Risks New Challenges, April 2013, xi and 3–5. The October 2013 Report reported that financial stability risks were in transition; while a normalization of global asset allocation was underway, market and liquidity risks were growing and emerging markets posed concerns: IMF, Global Financial Stability Report, Transition Challenges to Stability October 2013, ch 1 (‘Making the Transition to Stability’) and ch 2 (‘Assessing Policies to Revive Credit Markets’).

52  eg Santos, A and Elliott, D, Estimating the Costs of Financial Regulation, IMF Staff WP (2012). The study suggests that the reforms will lead to a ‘modest increase’ in bank lending rates (17 basis points in the EU), and that banks have the ability to adapt to the new regulatory regime without taking action which would harm the wider economy. By contrast, the industry-based Institute of International Finance has predicted a reduction of 3.2 per cent of GDP in the US, the euro area, the UK, Switzerland, and Japan between 2011 and 2015: IIF, The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework (2011).

53  In its October 2013 report, the IMF was broadly positive, noting that the euro area was moving towards a more robust and safer financial sector, but noting the challenges: n 51, ch 1. However, ESMA’s second (September 2013) report on Trends, Risks and Vulnerabilities in EU Securities Markets was more pessimistic than its first report (February 2013) and reported on a deterioration in key risk indicators: ESMA, Report on Trends, Risks, and Vulnerabilities. Report No 2 (2013) (ESMA/2013/1138) (ESMA 2013(2) TRV). Its fourth quarterly Risk Dashboard similarly reported that market risk was increasing and risks generally were still at an elevated level: ESMA, Risk Dashboard, No 4 2013 (ESMA/2013/1454). By March 2014, ESMA was more optimistic, noting an improvement in EU securities market conditions and a stabilization of market risk; but it warned of the ongoing fragility of the EU market, given in particular risk transmission from emerging markets: ESMA, Report on Trends, Risks, and Vulnerabilities. Report No 1 (2014) (ESMA/2014/0188) (ESMA 2014 (1) TRV). Similarly in March 2014, the Joint Committee of the European Supervisory Authorities (ESAs) was cautious, noting that the financial system was stabilizing, but warning of risks related to search-for-yield behaviour and from global market conditions, and that ‘there is still uncertainty regarding the strength of the financial sector in the EU’: ESA Joint Committee, Report on Risks and Vulnerabilities in the EU Financial System (2014) (JC/2014/018) 4. The Commission’s April 2014 assessment of 2013 came to similar conclusions, finding a reduction in financial stress and a normalization of markets, but warning that risks to financial stability remained: Commission, European Financial Stability and Integration Report 2014 (2014) (SWD (2014) 170) (2013 EFSIR).The ECB has similarly been cautious (see sect 5.3.2).

54  References to ‘the Treaty’ are to the two Treaties which govern the EU: the Treaty on European Union (TEU) and the Treaty on the Functioning of the EU (TFEU).

55  The ECB has described the benefits of integration as follows: ‘The importance of fostering financial integration lies partly in the fact that reducing financial barriers between Member States is expected to create productivity gains which will increase the efficiency and competitiveness of the EU’s economy. In addition, financial integration, by opening up new financial opportunities for individuals and businesses (especially small businesses), is, if properly regulated, a potentially powerful tool to attain higher standards of freedom, equity and welfare for society as a whole. In an integrated market, producers and consumers can better tailor their risk and return profiles to their preferences or requirements, and unjustified rents and hidden exploitation opportunities for dominant players are more easily identified and removed. Financial integration promotes cross border contacts between financial institutions, which in turn helps institutions to learn from each other and in this way promotes general welfare.’ ECB, Financial Integration in Europe (2012) 33.

56  Report by a Group of Experts Appointed by the EEC Commission, The Development of a European Capital Market (1966).

57  London Economics, Quantification of the Macro-Economic Impact of Integration of EU Financial Markets. Final Report to the EU Commission (2002) (2002 London Economics Report).

58  2002 London Economics Report (n 57).

59  2002 London Economics Report (n 57).

60  2002 London Economics Report (n 57), iv.

61  ZEW/IEP Report on The Benefits of a Working European Retail Market for Financial Services (2002) for the European Financial Services Roundtable.

62  Investors tend to invest a disproportionately large proportion of their equity portfolios, eg, in geographically proximate stocks. See, eg, Coval, J and Moskowitz, T, ‘Home Bias at Home: Local Equity Preference in Domestic Portfolios’ (1999) 54 J Fin 2045.

63  eg Case C-101/94 Commission v Italy [1996] ECR I-2691, in which the European Court of Justice struck down Italy’s ‘SIM’ law which imposed non-discriminatory but obstructive regulatory requirements on non-Italian EU investment firms.

64  The Court of Justice’s ‘general good’ jurisprudence allows Member States to retain an obstructive rule where the measure is non-discriminatory, proportionate, necessary to meet the objective in question and serves a legitimate public policy goal (the ‘general good’ requirement) (eg Case 205/84 Commission v Germany [1986] ECR 3755). See, eg, Case C-384/93 Alpine Investments v Minister van Financiën [1995] ECR I-1141 in which the Court confirmed the validity of a Dutch prohibition on cold-calling which prevented firms from accessing markets outside the Netherlands but which the Court accepted was necessary to protect the reputation of Dutch financial markets.

65  The Treaty-based institutions of the EU are the Council of Ministers (representing the Member States at ministerial level), the European Council (composed of the heads of government), the European Parliament (representing the citizenry directly), the Commission (the EU’s executive), the ECB, the Court of Auditors, and the Court of Justice (Art 13 TEU). The Treaties also provide for other actors, including advisory committees, two of which are of relevance to securities and markets regulation: the Economic and Financial Committee (EFC) (Art 134 TFEU), which primarily supports the work of the Council, and the European Economic and Social Committee (EESC) (previously ECOSOC) (Art 300 TFEU), which provides opinions on legislative initiatives and represents civil society generally, but which has become less influential on EU securities and markets regulation over time.

66  The Economic and Financial Affairs (ECOFIN) Council configuration is composed of finance ministers and addresses securities and markets regulation. In adopting securities and markets rules it operates under a qualified majority vote (QMV). This can result in Member States being bound against their will. A QMV is 55 per cent of Council members, comprising at least 15 of them, and representing Member States comprising at least 65 per cent of the EU population. A blocking minority for a measure must include at least four Council members, absent which the QMV is deemed to be attained (Art 16 TEU).

67  eg Alpine Investments, n 64, and Case C-101/94 Commission v Italy, n 63. The Commission has also on many occasions taken action against Member States before the Court with respect to their failure to implement elements of EU securities and markets regulation, as it is empowered to do under the Treaty (Art 258 TFEU). For an example see Case C-233/10 Commission v Netherlands [2010] ECR I-170.

68  Including on the pivotal Markets in Financial Instruments Directive (2004 MiFID I) 2004/39/EC [2004] OJ L145/1. See, eg, Case C-604/11 Genil 48 SL, Comercial Hostelera de Grandes Vinos SL v Bankinter SA, Banca Bilbao Vizcaya Argentaria SA, 30 May 2013 (not yet reported).

69  See Ch VIII.

70  Case C-270/12 UK v Council and Parliament, 22 January 2014 (not yet reported).

71  n 199; Case C-507/13 UK v Council and Parliament, pending.

72  Case C-209/13 UK v Council, 30 April 2014 (not yet reported).

73  In all cases, the actions were brought by the UK, reflecting the increasingly asymmetric impact of the crisis-era rulebook on the wholesale markets in particular. At the time of writing, the UK has also challenged the ‘location policy’ of the ECB, which requires that CCPs which clear particular proportions of a market in euro-denominated financial products must be located in the euro area: Cases T-93/13, T-45/12, and T-496/11, United Kingdom v ECB.

74  As discussed in Ch X sect 3.1, challenges by Member States to the validity of EU measures have, up until now, been rare.

75  With respect to respectively (and broadly) securities and markets standards, capital and related rules for banks, and the crisis-era reform programme generally, particularly with respect to financial stability.

76  This account of a complex and subtle debate which engages a range of distinct analyses, including from financial economics, comparative political economy, and political science perspectives, is necessarily brief and in outline only.

77  As recently characterized by the IMF: n 34, 3. Bank and market finance systems are also associated with different forms of firm governance: very broadly, dispersed ownership in the market finance system and block-holder-based, stakeholder governance in the bank finance system.

78  eg Hardie, I and Howarth, D, What Varieties of Financial Capitalism? The Financial Crisis and the Move to ‘Market-Based Banking’ in the UK, Germany, and France, Political Studies Association Paper (2010).

79  See, eg, Goergen, M, ‘What Do We Know About Different Systems of Corporate Governance?’ (2007) 7 JCLS 1 and Black, B and Gilson, R, ‘Venture Capital and the Structure of Capital Markets: Banks or Stock Markets’ (1998) 47 JFE 243. This debate is also associated with the rich scholarship on the evolution of dispersed ownership governance (associated with market finance) and block-holding governance (associated with bank finance). See, eg, Coffee, J, ‘The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control’ (2001) 111 Yale LJ 1 and Cheffins, B, ‘Does Law Matter? The Separation of Ownership and Control in the United Kingdom’ (2001) 30 J Legal Studies 459.

80  The influential Varieties of Capitalism literature will be discussed further on in the Chapter.

81  See, eg, Guiso, L, Sapienza, P, and Zingales, L, ‘The Role of Social Capital in Financial Development’ (2004) 94 Am Econ Rev 526.

82  See, eg, Rajan, R and Zingales, L, ‘The Great Reversals: the Politics of Financial Development in the Twentieth Century’ (2003) 69 JFE 5.

83  Better access to external equity capital and stock markets is associated with higher, long-term rates of R&D development, while credit market development appears to have little impact on R&D: Brown, R, Martinsson, G, and Petersen, B, ‘Law, Stock Markets, and Innovation’ (2013) 68 J Fin 1517.

84  See, eg, Gambetti, L and Musso, L, Loan Supply Shocks and the Business Cycle, ECB WP No 1469 (2012) and Hempell, H and Kok Sørensen, C, The Impact of Supply Constraints on Bank Lending in the Euro Area. Crisis Induced Crunching? ECB WP No 1262 (2010).

85  IOSCO, Securities Markets Risk Outlook 2013–2014 (2013) 10. IOSCO noted that the $2.2 trillion in bank loan funding raised in the EU and Europe in 2012 was around half the amount raised through equity and bond markets.

86  For a recent discussion in the context of loan origination by investment funds see Central Bank of Ireland, Loan Origination by Investment Funds, Discussion Paper (2013).

87  For a crisis-era discussion of the relative merits of bank and market funding see ECB, ‘The External Financing of Household and non-Household Corporations: a Comparison of the Euro Area and the United States’ Monthly Bulletin, April 2009, 69. The IMF has suggested that there is little resounding evidence as to whether the bank- or market-based systems are superior and warned against ‘one-size-fits-all’ solutions: n 9, 10, and 25.

88  The ECB also emerged as a strong supporter of integrated and efficient securities markets over the FSAP era given in particular the role of markets in supporting monetary policy goals: ECB, Review of the Application of the Lamfalussy Framework to EU Securities Markets (2005) 2.

89  Commission, Communication on Upgrading the Investment Services Directive (COM (2000) 729) (2000 ISD Communication).

90  Commission, White Paper on Financial Services Policy 2005–2010 (2005) (COM (2005) 629) (2005 White Paper) 4.

91  Commission, Single Market in Financial Services Progress Report 2007 (2007) (SEC (2007) 263) 3.

92  Recently, eg, 2013 IMF ESMA Report, n 33, 6.

93  An extensive literature documents and critiques this structural feature of Europe’s economy. See, eg, from the foundational FSAP era, Van der Elst, C, ‘The Equity Markets, Ownership Structures and Control: Towards an International Harmonization’ in Hopt, K and Wymeersch, E (eds), Capital Markets and Company Law (2003) 3, Barca, F and Becht, M, The Control of Corporate Europe (2001), Hertig, G, ‘Western Europe’s Corporate Governance Dilemma’ in Baums, H, Hopt, K, and Horn, N (eds), Corporations, Capital Markets and Business in the Law (2000) 265, and Berglöf, E, ‘Reforming Corporate Governance: Redirecting the European Agenda’ (1997) 24 Economic Policy 93.

94  The foundational work is Hall, P and Soskice, D (eds), Varieties of Capitalism. The Institutional Foundations of Comparative Advantage (2001). For a review of the scholarship see Thelen, K, ‘Varieties of Capitalism: Trajectories of Liberalization and the New Politics of Social Solidarity’ (2012) 15 Annual Rev Political Science 137.

95  Hall, D and Soskice, D, ‘Introduction’ in Varieties of Capitalism (n 94), 1.

96  On the single market context generally see Höpner, M and Schäfer, A, Integration Among Unequals: How the Heterogeneity of European Varieties of Capitalism Shapes the Social and Democratic Potential of the EU, MPlfG DP 12/5 (2012), available at <http://ssrn.com/abstract=2149634> and Snell, J, ‘Varieties of Capitalism and the Limits of European Economic Integration’ (2010–2011) 13 Cambridge Yearbook of European Legal Studies 415.

97  For a VoC analysis of EU takeover regulation, eg, see Clift, B, ‘The Second Time as Farce? The EU Takeover Directive, the Clash of Capitalisms, and the Hamstrung Harmonization of European (and French) Corporate Governance’ (2009) 47 JCMS 55.

98  A massive scholarly literature theorizes the nature of EU integration generally and is not referenced here. It can be understood as producing two main explanatory theories: supranational governance, which emphasizes EU-level actors, and liberal intergovernmentalism, which emphasizes the Member States and their preferences.

99  The rule-making process is discussed in Ch X. Across this process, coalitions form and re-form, and influence strengthens and dissipates. See, eg, Quaglia, L, Governing Financial Services in the European Union. Banking, Securities, and Post-trading (2010), noting that while the largest Member States, the Commission, the European Parliament, and some private stakeholders (notably the leading financial trade associations and firms) are more influential than others, this can change depending on the stage of the policy/rule-making process: at 7.

100  See, eg, Mugge, D, Financial Regulation in the EU: A Research Agenda, Centre for European Studies, Harvard University (2012), available at <http://ssrn.com/abstract=2034916> and Quaglia, L, The ‘Old’ and ‘New’ Politics of Financial Services Regulation in the EU, OSE Paper Series No 2/2010 (2010).

101  Classically, Story, J and Walter, I, Political Economy of Financial Integration in Europe (1997).

102  ‘Market-making’ coalitions have been analysed as privileging trust in markets, favouring market liberalization, light-touch and competition-friendly regulation, and strong private sector governance; ‘market-shaping’ coalitions tend to show distrust of markets and favour re-regulation, a prescriptive, rules-based approach to regulation, and strong central steering by public authorities: Quaglia, L, ‘Completing the Single Market in Financial Services: the Politics of Competing Advocacy Coalitions’ (2010) 17 JEPP 1007.

103  Quaglia, n 99.

104  eg Coen, D and Thatcher, M, ‘Network Governance and Multilevel Delegation: European Networks of Regulatory Agencies’ (2008) 28 J of Public Policy 49.

105  Mugge, D, Widen the Market, Narrow the Competition. Banker Interests in the Making of a European Capital Market (2010).

106  Quaglia, n 99.

107  Mugge, n 100, 2.

108  eg Quaglia, L, ‘The “Old” and “New” Political Economy of Hedge Fund Regulation in the EU’ (2011) 34 West European Politics 665.

109  eg Buckley, J and Howarth, D, ‘Internal Market Gesture Politics? Explaining the EU’s Response to the Financial Crisis’ (2010) JCMS 119. For an extensive analysis of the nuanced and shifting nature of intergovernmental and supranational relations over the crisis era see Ferran, E, ‘Crisis-driven Regulatory Reform: Where in the World is the EU Going?’ in Ferran, E, Moloney, N, Hill, J, and Coffee, C, The Regulatory Aftermath of the Global Financial Crisis (2012) 1.

110  eg Levine, R and Beck, T, New Firm Formation and Industry Growth: Does Having a Market- or Bank-Based System Matter? World Bank Policy Research WP (2000), available at <http://ssrn.com/abstract=630753>.

111  The research was originally spearheaded by the work of financial economists La Porta, Lopez de Silanes, Shleifer, and Vishny (LLSV)—see, eg, La Porta, R, Lopez de Silanes, F, and Shleifer, A, ‘The Economic Consequences of Legal Origins’ (2008) 46 J of Econ Lit 285 and La Porta, R, Lopez de Silanes, F, Shleifer, A, and Vishny, R, ‘Law and Finance’ (1998) 106 JPE 1113.

112  See, eg, Armour, J, Law and Financial Development: What We are Learning from Time-Series Evidence, ECGI Law WP No 148/2010 (2010), available at <http://ssrn.com/abstract=1580120>; Siems, M, What Does Not Work in Comparing Securities Laws: A Critique of La Porta et al’s Methodology, CPC-RPS No 0009 (2008), available at <http://ssrn.com/abstract=608644>; Armour, J and Lele, P, Law, Finance and Politics: The Case of India, ECGI Law WP No 107/2008 (2008), available at <http://ssrn.com/abstractid=1116608>; Milhaupt, C and Pistor, K, Law & Capitalism. What Corporate Crises Reveal about Legal Systems and Economic Development Around the World (2008), Coffee, J, ‘Law and the Market. The Impact of Enforcement’ (2007) 156 UPaLR 229; and Cheffins, n 79.

113  As discussed in subsequent Chapters.

114  eg Buckley and Howarth, n 109.

115  Hardie, I and Howarth, D ‘Die Krise but not La Crise? The Financial Crisis and the Transformation of German and French Banking Systems’ (2009) 47 JCMS 1017.

116  For an overview see Grossman, E and Leblond, P, ‘European Financial Integration: Finally the Great Leap Forward’ (2011) 49 JCMS 413.

117  Ferrarini, G, ‘Securities Regulation and the Rise of Pan-European Securities Markets: An Overview’ in Ferrarini, G, Hopt, K, and Wymeersch, E (eds), Capital Markets in the Age of the Euro: Cross-border Transactions, Listed Companies and Regulation (2002) 249.

118  Enriques, L and Gatti, M, ‘The Uneasy Case for Top-Down Corporate Law Harmonization in the European Union’ (2006) 27 UPaJIEL 939.

119  For an early analysis see Bentson, G, ‘Regulation of Stock Trading: Private Exchanges Versus Government Agencies’ (1997) 83 Va LR 1501.

120  For an early analysis see Davis, E, ‘Problems of Banking Regulation—An EC Perspective’ in Goodhart, C (ed), The Emerging Framework of Financial Regulation (1998) 533.

121  Romano, R, For Diversity in the International Regulation of Financial Institutions: Rethinking the Basel Architecture (2013), Yale Law & Economics Research Paper, available at <http://ssrn.com/abstract=2127749>.

122  Enriques, L, ‘EC Company Law Directives and Regulations: How Trivial Are They?’ (2006) 27 UPaJIEL 1.

123  Regulatory competition has been defined as ‘the alteration of national regulation in response to the actual or expected impact of internationally mobile goods, services or factors of national economic activity’: Sun, J-M and Pelkmans, J, ‘Regulatory Competition in the Single Market’ (1995) 33 JCMS 67, 68.

124  See, eg, Deakin, S, Legal Diversity and Regulatory Competition: Which Model for Europe?, Centre for Business Research, University of Cambridge, WP No 323 (2006).

125  An extensive US literature addresses the dynamics of regulatory competition in corporate law (largely a function of the States and the State of Delaware in particular) and with respect to issuer disclosure (a function of the federal government). For a major contribution see Romano, R, The Genius of American Corporate Law (1993). With respect to securities and markets regulation, see generally Jackson, H, ‘Centralization, Competition and Privatization in Financial Regulation’ (2001) 2 Theoretical Inquiries in Law 649 and, for contrasting perspectives in the issuer-disclosure debate, see Fox, M, ‘Retaining Mandatory Issuer Disclosure: Why Issuer Choice is Not Investor Empowerment’ (1999) 85 Va LR 1335 and Romano, R, ‘Empowering Investors: A Market Approach to Securities Regulation’ (1998) 107 Yale LJ 2359.

126  See Bratton, W, McCahery, J, Picciotto, S, and Scott, C, ‘Introduction: Regulatory Competition and Institutional Evolution’ in Bratton, W, McCahery, J, Picciotto, S, and Scott, C (eds), International Regulatory Competition and Coordination. Perspectives in Economics Regulation in Europe and the United States (1996) and Esty, D and Geradin, G (eds), Regulatory Competition and Economic Integration. Comparative Perspectives (2001).

127  Ferran, E, Building an EU Capital Market (2004) 54.

128  Charny, D, ‘Competition among Jurisdictions in Formulating Corporate Law Rules: An American Perspective on the “Race to the Bottom” in the European Communities’ (1991) 32 Harv LR 423.

129  Scott, H, ‘Internationalisation of Primary Securities Markets’ (2000) 63 Law and Contemporary Problems 71.

130  Enriques, L, ‘EC Company Law and the Fears of a European Delaware’ (2004) 15 EBLR 1259.

131  See, eg, Black, B, ‘The Legal and Institutional Preconditions for Strong Securities Markets’ (2001) 48 UCLA LR 781.

132  On the various harmonization methods which have been used in the construction of the single market generally see the analysis in Slot, P, ‘Harmonisation’ (1996) 21 ELR 378, 382–7.

133  Between 2003 and 2013, eg, there has been (approximately) a tenfold increase in the volume of EU law on financial services generally: 2013 HM Treasury Call for Evidence, n 15, 19.

134  For two early studies see Wymeersch, E, Control of Securities Markets in the European Economic Community, Collection Studies. Competition—Approximation of Legislation Series No 31 (1977), and Buxbaum, R and Hopt, K, Legal Harmonisation and the Business Enterprise (1988).

135  eg, Quaglia, L, Eastwood, R, and Holmes, P, ‘The Financial Turmoil and EU Policy Co-operation in 2008’ (2009) 47 JCMS 63.

136  eg, Black, J, ‘Restructuring Global and EU Financial Regulation: Capacities, Coordination and Learning’ in Ferrarini, G, Hopt, K, and Wymeersch, E (eds), Rethinking Financial Regulation and Supervision in Times of Crisis (2012) 3.

137  For a reform prescription for rule-making processes see OECD, Recommendations of the Council on Regulatory Policy and Governance (2012).

138  ‘[Community] savers generally prefer to hold cash or short term assets and it would be difficult to alter that liquidity preference radically in the short term’ and ‘[i]n several Community countries, the equity markets are suffering from a shortage of available capital and from a rather unsatisfactory pattern of business demand for capital…business firms often find it hard to obtain risk capital and at the same time the investing public does not always find attractive opportunities on the market’: n 56, 17 and 27.

139  See Usher, J, The Law of Money and Financial Services in the European Community (2nd edn, 2000) 7–38 and Barnard, C, The Substantive Law of the EU: the Four Freedoms (3rd edn, 2010) ch 15.

140  [1972] OJ C131/61.

141  Recommendation 77/534/EEC [1977] OJ L212/37 (1977 Code of Conduct).

142  Completing the Internal Market (COM (85) 310) (1985 Internal Market White Paper). The Paper set out an agenda of 279 legislative measures to be brought into force by 1992 and proposed the building blocks of the single market as it currently operates.

143  Case 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) [1979] ECR 649.

144  1985 Internal Market White Paper, n 142, 27.

145  Directive 85/611/EEC [1985] OJ L375/3.

146  Subsequent Chapters discuss these developments with respect to particular market segments.

147  COM (1998) 625 (the 1998 Communication).

148  1998 Communication, 1b.

149  Commission, Communication on Implementing the Framework for Financial Markets Action Plan COM (1999) 232 (FSAP).

150  The Commission reported that the FSAP generated an ‘unprecedented degree of co-operation between the institutions’: Commission, FSAP Evaluation. Part I Process and Implementation (2005) (2005 FSAP Evaluation Report) 5.

151  The UK, while often otherwise a robust critic of the FSAP’s substantive reforms, supported the FSAP integration agenda in principle on the grounds that it was expected to lower the cost of capital and improve the allocation of capital, give firms increased opportunities to access markets, and give retail consumers access to a wider range of products: HM Treasury and FSA, Strengthening the EU Regulatory and Supervisory Framework: A Practical Approach (2007) 9.

152  See, eg, the support for the FSAP from the series of industry reports issued towards the end of the FSAP era: the FSAP Expert Group Reports (by the Securities, Banking, Asset Management, and Insurance Expert Groups, all entitled Financial Services Action Plan. Progress and Prospects) were published in May 2004.

153  See, eg, the support (albeit sometimes qualified) of the European Parliament: European Parliament, Resolution on Financial Services Policy (2005–2010) White Paper, 11 July 2007 (P6_TA(2007)0338) (2007) (Van den Burg II Resolution), based on the Economic and Monetary Affairs Committee (ECON) 2007 Van den Burg Report on Financial Services Policy 2005–2010 (A6-0248/2007). Support also came from the ECB: ECB, Financial Integration in Europe (2007) 4.

154  Report from the Commission, Progress on Financial Services. Second Report (COM (2000) 336) 2.

155  The Lisbon agenda was designed to make the EU ‘the most competitive and dynamic knowledge-based economy in the world, capable of sustained economic growth with more and better jobs and greater social cohesion’: Lisbon Council Conclusions, 23–4 March 2000. The Commission has suggested that the Lisbon agenda was ‘one which the world’s press, public leaders and private individuals all came to know’, and that the linkage between the FSAP and this agenda gave impetus to the FSAP: 2005 FSAP Evaluation Report, n 150, 6.

156  Final Report of the Committee of Wise Men on the Regulation of European Securities Markets (2001) (2001 Lamfalussy Report).

157  2001 Lamfalussy Report, 7, 8.

158  Respectively: Directive 2002/65/EC [2002] OJ L271/16; Directive 2003/71/EC [2003] OJ L345/64; Directive 2004/109/EC [2004] OJ L390/38; Regulation (EU) No 1606/2002 [2002] OJ L243/1; Directive 2009/65/EC [2009] OJ L302/32; Directive 2004/39/EC [2004] OJ L145/1; and Directive 2003/6/EC [2003] OJ L96/16.

159  n 89, 5.

160  One analysis has described the FSAP as favouring the (broadly) continental approach to harmonization as the UK preference was traditionally for minimum harmonization and regulatory diversity: Welch, J, ‘Decomposing MiFID’ (2006) Financial World July/August 46.

161  The Directive’s disclosure requirements are not subject to this requirement: Art 4(2).

162  Commission MiFID I Directive 2006/73/EC [2006] OJ L241/26. The Art 4 ‘goldplating prohibition’ prevented Member States from applying rules additional to the Directive on their domestic markets unless approval had been obtained from the Commission.

163  Tison, M, ‘Financial Market Integration in the Post FSAP Era. In Search of Overall Conceptual Consistency in the Regulatory Framework’ in Ferrarini, G and Wymeersch, E (eds), Investor Protection in Europe—Corporate Law Making, the MiFID and Beyond (2006) 443 and Enriques, L and Gatti, M, ‘Is there a Uniform EU Securities Law After the Financial Services Action Plan?’ (2008) 14 Stanford J of Law, Business and Finance 43.

164  eg Inter-institutional Monitoring Group, Third Interim Report Monitoring the Lamfalussy Process (November 2004) 20 and Inter-institutional Monitoring Group, Final Report Monitoring the Lamfalussy Process (October 2007) 9.

165  See Ch II sect 5.

166  FIN-USE, Financial Services, Consumers and Small Businesses. A User Perspective on the Report on Banking, Asset Management, Securities and Insurance of the Post FSAP Stocktaking Groups (October 2004) 16.

167  Following the 2007 ‘Lamfalussy Review’ (Ch X sects 2.2 and 2.3), the Council undertook to limit the use of national discretion in future legislative measures: 2836th Council Meeting, 4 December 2007, ECOFIN Press Release No 15698/07, 16. The Commission also committed to a greater use of regulations to support more effective implementation: Commission, Review of the Lamfalussy Process. Strengthening Supervisory Convergence (2007) 5.

168  n 90.

169  While a range of factors, not least among them the need for the FSAP reforms to bed in, shaped this period, the withdrawal from regulation is strongly associated with then Internal Market Commissioner McCreevy, who typically favoured market discipline, where possible, and supported a lighter regulatory touch. See, eg, McCreevy, C, Speech on ‘Assessment of the Integration of the Single Market for Financial Services by the Commission’, CESR Conference, Paris, 6 December 2004.

170  On enrolment see Black, J, ‘Enrolling Actors in Regulatory Systems: Examples from UK Financial Services Regulation’ (2003) Public Law 63.

171  See further Ch X sect 1.2.

172  The decentred characterization of regulation emphasizes the complex, fragmented, multi-actor process through which regulation can emerge where the state relinquishes its monopoly on regulatory intervention and as regulation extends beyond formal legal rules. See Black, J, ‘Decentring Regulation: Understanding the Role of Regulation and Self Regulation in a “Post Regulatory World”’ (2001) 54 Current Legal Problems 103.

173  Wymeersch, E, Standardization by Law and Markets, Especially in Financial Services, Financial Law Institute WP No 2008-02 (2008), available at <http://ssrn.com/abstract=1089037>.

174  The ESRB has described the EU financial crisis as involving overlapping and inter-related crises with destructive feedback loops: ESRB, Annual Report (2012) 7.

175  The EU’s economic recovery plan was originally based on some € 200 billion of expenditure, automatic stabilizers (such as social security benefits) to the value of some €200 billion, and sector-specific support, including € 7 billion to the car industry. For an early EU agenda see Commission, A European Economic Recovery Plan (2008) (COM (2008) 800).

176  This short introductory outline can only note the major features of the crisis-era period, and focuses on the securities and markets reform agenda. From the vast literature on this period see for a wide-ranging review Ferran, n 109, and, from an earlier stage of the crisis, the discussions in the (2009) 47 Special Edition of the JCMS.

177  The main transmission channels between sovereign debt risk and bank stability risk were: direct exposures by banks to the home sovereign; the consequential downgrade of bank ratings following a sovereign rating downgrade; a weakening of the implicit funding discount for banks, where the market lost faith in the ability of a sovereign to bailout a bank; and a reduction in the value of sovereign debt as collateral: Commission, Financial Stability and Integration Report 2011 (2012) (SWD (2012) 103) (2011 EFSIR) 12–13.

178  Concerns over the possibility of a Greek default led to pressure on other euro-area sovereign debt and to related pressure on banks holding sovereign debt.

179  Liquidity support for banks included unlimited liquidity provision through fixed-rate tenders, the lengthening of refinancing operations, an extension of eligible collateral, and the provision of liquidity in foreign currencies. The ECB also conducted ‘Outright Monetary Transactions’ in euro-area sovereign debt secondary markets (the OMT programme) where the sovereign was in a financial assistance programme; this controversial programme was launched in August 2012 (following ECB Chairman Draghi’s widely reported defence of the euro—n 181) and replaced the previous Securities Market Programme. The ECB and national central banks also engaged in covered bond purchases. The OMT programme was regarded by some as amounting to an ECB monetary bailout, prohibited by the Treaties (Art 123 TFEU). In February 2014, in a landmark and closely followed ruling, the German Constitutional Court ruled that the OMT programme was likely to breach the Treaties (and the German Constitution), and asked for guidance from the Court of Justice.

180  For an outline of the support from the ECB and euro-area central banks and the reforms to economic governance see 2011 EFSIR, n 177, 47–3, and Commission, Financial Integration and Stability Review 2012 (2013) (SWD (2013) 156) (2012 EFSIR) 12–13 and 40–5.

181  Following the 26 July 2012 announcement by ECB President Draghi that ‘[w]ithin our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’: Speech to Global Investment Conference, London.

182  The SSM is based on Council Regulation (EU) No 1024/2013 [2013] OJ L287/63 and Regulation (EU) No 1022/2013 [2013] OJ L287/5. The SRM is based on Regulation (EU) No 806/2014 [2014] OJ L225/1 and a related Intergovernmental Agreement. In each case, ‘non-participating’ (non-euro-area) States can take part, should they wish to.

183  See further Ch XI sect 7 on Banking Union and the SSM. On the SRM, see in brief outline Ch IV sect 13.

184  For reviews see, eg, Moloney, N, ‘Resetting the Location of Regulatory and Supervisory Control over EU Financial Markets: Lessons from Five Years On’ (2013) 62 ICLQ 955; Howarth, D and Quaglia, L, ‘Banking Union as Holy Grail: Rebuilding the Single Market in Financial Services, Stabilizing Europe’s Banks, and “Completing” Economic and Monetary Union’ (2013) 51 JCMS 103; Moloney, N, ‘EU Financial Market Regulation after the Global Financial Crisis: “More Europe” or More Risks?’ (2010) 47 CMLR 1317; and Mülbert, P and Wilhelm, A, ‘Reforms of EU Banking and Securities Regulation after the Financial Crisis’ (2010) 26 Banking and Finance LR 187.

185  On the early stages of the crisis in the EU and the initial reform agenda see, eg: Begg, I, ‘Regulation and Supervision of Financial Intermediaries in the EU: the Aftermath of the Financial Crisis’ (2009) 47 JCMS 1106; Dabrowski, M, The Global Financial Crisis: Lessons for European Integration, Case Network Studies and Analysis No 384/2009, available at <http://ssrn.com/abstract=1436432>; and Wouters, J and van Kerckhoven, S, The EU’s Internal and External Regulatory Actions after the Outbreak of the 2008 Financial Crisis, Leuven Centre for Global Governance Studies, WP No 69 (2011).

186  Ferrarini, G and Chiodini, F, Regulating Multinational Banks in Europe. An Assessment of the new Supervisory Framework, ECGI Law WP No 158/2010 (2010), available via <http://ssrn.com/abstract=1596890>.

187  Coined by Bank of England Governor Meryvn King: Turner Review, n 16, 36.

188  Well illustrated by some Member States’ (initially Ireland’s) unilateral extension of their deposit guarantee schemes in autumn 2008.

189  eg Cotterli, S and Gualandri, E, Financial Crisis and Supervision of Cross Border Groups in the EU (2009), available via <http://ssrn.com/abstract=1507750> and Fonteyne, W, et al, Crisis Management and Resolution for a European Banking System, IMF Working Paper WP/10/70 (2010), available via <http://www.imf.org/external/pubs/ft/wp/2010/wp1070.pdf>.

190  Fonteyne, n 189, 13–14.

191  ECB, Financial Stability Review, December 2008.

192  ECB, Financial Stability Review, December 2010.

193  ECB, Financial Stability Review, December 2012.

194  ECB, Financial Stability Review, May 2013. In April 2014, the ECB was similarly cautious, warning that further progress towards financial stability could not be taken for granted: ECB, Financial Integration in Europe (2014) 9.

195  n 16.

196  EFC, High Level Working Group on Cross-Border Financial Supervision Arrangements, Lessons from the Crisis for European Financial Stability Arrangements (2009). On the EFC, see n 65.

197  The new securities and markets regime also, of course, applies to deposit-taking banks in respect of their market-facing activities.

198  The general positions of the Commission, the Council, and the European Parliament over the crisis are discussed in Ch X sect 3.3.

199  The banking rulebook is heavily based on the 2013 Capital Requirements Directive IV (which covers governance, sanctions, capital buffers, supervision, and a reduction in reliance on rating agencies) and the Capital Requirements Regulation (which covers capital, liquidity, leverage, and counterparty credit risk)—respectively, Directive 2013/36 [2013] OJ L176/338 and Regulation (EU) No 575/2013 [2013] OJ L176/1.

200  Directive 2011/61 [2011] OJ L174/1 (2011 AIFMD).

201  Regulation (EU) No 648/2012 [2012] OJ L201/1 (2012 EMIR).

202  Regulation (EU) No 1060/2009 [2009] OJ L302/1 (2009 CRA I).

203  Regulation (EU) No 513/2011 [2011] OJ L145/30 (2011 CRA II).

204  Regulation (EU) No 462/2013 [2013] OJ L146/1 (2013 CRA III).

205  Directive 2013/14/EU [2013] OJ L145/1.

206  Regulation (EU) No 236/2012 [2012] OJ L86/1.

207  Commission, Green Paper. Long-Term Financing of the European Economy (2013) (COM (2013) 150/2) (2013 Long-Term Financing Green Paper).

208  Markets in Financial Instruments Directive II 2014/65/EU [2014] OJ L173/349 (2014 MiFID II) and Markets in Financial Instruments Regulation EU (No) 600/2014 [2014] OJ L173/84 (2014 MiFIR) (see Ch IV n 28 on the implementation timeline). The MiFID regime provides perimeter control for much of EU securities and markets regulation. Accordingly, the 2014 reforms clarify that all references to the precursor MIFID I Directive (n 68) are to be construed as references to the MiFID II/MiFIR regime (and should be read in conjunction with the correlation tables set out in MiFID II). Similarly, all references to terms defined in or to Arts of MiFID I (or the earlier 1993 Investment Services Directive (Directive 93/22/EC [1993] OJ L141/27)) are to be construed as references to the 2014 MiFID II/MiFIR regime: 2014 MiFID II Art 94. As noted in relevant Chapters, the discussion in this book is based on the 2014 MiFID II/MiFIR regime, although reference is made to MiFID I as appropriate.

209  Respectively, Regulation (EU) No 345/2013 [2013] OJ L115/1; Regulation (EU) No 346/2013 [2013] OJ L115/18; and COM (2013) 462.

210  COM (2012) 352. The reforms were agreed in April 2014.

211  The cornerstone 2003 Prospectus Directive has been reformed (Directive 2010/73/EU [2010] OJ L327/1), as has the 2004 Transparency Directive, which governs ongoing disclosure (Directive 2013/50/EU [2013] OJ L294/13) and the related accounting regime (Directive 2013/34/EU [2013] OJ L182/19). These reforms are broadly designed to streamline the relevant regulatory regimes, to bring greater efficiencies to the capital-raising process, and to respond to market innovation.

212  Regulation (EU) No 596/2014 [2014] OJ L173/1 (2014 MAR) and Directive 2014/57/EU OJ [2014] L173/179 (2014 MAD) (on the implementation timeline see Ch VIII nn 3 and 4).

213  COM (2012) 350 (the ‘UCITS V’ reforms, which focus in particular on the UCITS depositary): the reforms were agreed by the Council and European Parliament in February 2014 (Council Document 7411/14, 13 March 2014 (not yet published in the OJ)). A wide-ranging UCITS VI reform agenda has also been presented: Commission, UCITS. Product Rules, Liquidity Management, Depositary, Money Market Funds and Long-term investments (2012).

214  2009 Turner Review, n 16, 101–2.

215  Speech by Commissioner Barnier on ‘Financial Services in Europe—Where Next?’, 31 March 2010.

216  Commission, Driving European Recovery (2009) (COM (2009) 114) 10–11.

217  Commission, European Financial Stability and Integration Report 2010 (2011) (SEC (2011) 489) (2010 EFSIR) 5.

218  2011 EFSIR, n 177, 6 and 13.

219  ECB, Financial Integration in Europe (2012) 31–48.

220  2990th Council Meeting, 19 January 2010, ECOFIN Press Release No 5400/10.

221  Commission, The Single Market Act—Twelve Steps to Boost Growth and Strengthen Confidence (2011) (COM (2011) 206).

222  n 217, 8.

223  On the EU’s engagement with global financial system governance and with third countries see, eg, Mügge, D (ed), Europe and the Governance of Global Finance (2014).

224  The EU’s negotiating position on financial services is set out in Commission, EU-US Transatlantic Trade and Investment Partnership, Co-operation on Financial Services Regulation, 27 January 2014. The EU is concerned to press for consistent rule-making, mitigation of the unintended effects of necessary inconsistency, and regulatory co-operation based on: joint work on implementation of international standards; mutual consultation on new measures that may significantly affect the provision of financial services between the EU and US; joint examination of existing rules to ascertain barriers to trade; and a commitment to assessing whether the other jurisdiction’s rules are equivalent (outcome-based equivalence is a ‘core element’ of the EU proposal) (at 3).

225  COM (2013) 641. See further Ch VIII sect 8.2.3.

226  As is evident from the careful observation by ESMA Chairman Maijoor (ESMA has been very closely engaged with equivalence assessments) that equivalence assessments should move from being designed as binary equivalent/not equivalent assessments and embrace a more nuanced approach which accommodates partial equivalence: Speech on ‘International Co-ordination of the Regulation and Supervision of OTC Derivatives Markets’, 17 October 2013 (ESMA/2013/1485).

227  The crisis-era reform programme, increasing tensions between the euro area and the single market, and the reported isolation of the UK during key negotiations (associated with political tensions linked to, eg, the UK veto of proposed revisions to the Treaties in December 2011 related to euro-area governance) have heightened long-standing concerns in the UK as to the impact of EU regulation on the City (eg Thornhill, J and Jenkins, P, ‘Ties that Bind’, Financial Times, 2 April 2013). In 2012, the UK government launched an extensive assessment of the balance of competences between the EU and UK, including with respect to financial services and markets: the major financial market reviews include HM Government (Department of Business Innovation and Skills), Review of the Balance of Competences between the UK and the EU: the Single Market (2013) and 2013 HM Treasury Call for Evidence, n 15.

228  COM (2011) 594.

229  COM (2013) 71. Art 20 TEU and Arts 326–34 TFEU allow Member States to establish ‘enhanced co-operation’ between themselves within the framework of the EU’s non-exclusive competences and to use the EU’s institutions and competences to do so, as long as the related Treaty conditions are met.

230  n 72. The Court of Justice rejected the challenge, primarily on grounds related to the premature nature of the action as an FTT regime had not, at the time of the UK action, been adopted on foot of the Council authorization to engage in enhanced co-operation. A subsequent substantive challenge may, however, follow if/when an FTT regime is adopted.

231  n 70.

232  And is reflected in the non-discrimination clause which applies to the SSM: Regulation 1024/2013, n 182, Art 1. See further Ch XI sect 7.

233  COM (2014) 43.

234  See Ch IV sect 8.7.

235  Commission Proposals COM (2011) 651 and COM (2011) 654 (both bringing benchmark manipulation within the EU’s market abuse regime) and COM (2013) 641 (proposing a general benchmark regulation regime). See further Ch VIII sect 8.2.3.

236  eg, the 2012 EMIR and the 2012 Short Selling Regulation take the form of regulations. Elsewhere, regulations have been deployed where powers have been conferred on ESMA, given the need for uniformity with respect to ESMA’s powers (notably under the credit rating agency regime).

237  ESA Joint Committee, Report on Risks and Vulnerabilities in the Financial Sector (2013) (JC/2013-010) 7.

238  The cumulative impact of the G20 reform programme on the stock of global high-quality collateral has become a recurring theme of the international policy debate. The Commission has also raised concerns: 2012 EFSIR, n 180, 26.

239  One analysis has identified the following challenges: the introduction of national interest-driven exemptions; ensuring the proportionality of rules; ensuring appropriate economic analysis; ensuring rules facilitate new technologies and innovation; setting the level of harmonization appropriately; choosing the optimum form of intervention (regulation or directive); assessing the appropriateness of EU intervention; and ensuring the rule-making process is robust: 2013 HM Treasury Call for Evidence, n 15, 19.

240  ESMA has reported that the 2012 Short Selling Regulation, despite some febrile speculation as to its potentially prejudicial effects, did not have material adverse effects on market liquidity and price discovery (Ch VI sect 3).

241  Which typically set a date (usually within 2–3 years of the measure coming into force) by which the measure must be reviewed and identify the particular issues which the review must address; these issues usually include contested measures at the time of the original negotiations as well as proposals for future action.

242  It originally promised a ‘fundamental review’ of the crisis-era reforms in 2014, although by the end of 2013 a number of key measures had only just been adopted: Commission, Regulating Financial Services for Sustainable Growth, A Progress Report—February 2011 (2011). An initial survey was published in May 2014 (Commission, A Reformed Financial Sector for Europe (2014) (COM (2014) 279) and accompanying Staff Working Document (SWD (2014) 158)). The Commission argued that financial reform inevitably leads to economic costs for financial intermediaries, noted that a significant element of the costs related to transitional adjustment costs, and highlighted the mitigating strategies which had been adopted, including with respect to phase-in periods, exemptions, and review procedures. Given its timing, the survey was broadly qualitative but the Commission committed to ongoing review of the new regime.

243  European Parliament, Resolution on Financial Services. Lack of Progress in the Council and Commission Delay in the Adoption of Certain Proposals, 13 June 2013 (P7-TA (2010) 0276). It also commissioned an early-stage review of the banking reforms: Directorate General for Internal Policies, Economic and Monetary Affairs Committee, Assessment of the Cumulative Impact of Various Regulatory Initiatives on the European Banking Sector (IP/A/ECON/ST/2010-21) (2011).

244  2002 London Economics Report, n 57, 5.

245  2002 London Economics Report, n 57, 1.

246  At 109.6% of EU GDP for the (then) EU-15: Commission, Financial Integration Monitor (2004) (SEC (2004) 559) (2004 FIM).

247  Firms’ recourse to market-based funding, a key indicator of the strength of the market finance model, is considered in Ch II sect 9.

248  ECB, Financial Integration in Europe (2007) 31.

249  It grew from 71.4% of EU GDP in 2004 to 73.7%, 91.9%, and 91.9% in 2005, 2006, and 2007 respectively. World Bank Data, available at: <http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS?order=wbapi_data_value_2007+wbapi_data_value+wbapi_data_value-last&sort=asc&page=1>.

250  In 2004, US stock market capitalization as a percentage of GDP was 138.4%. By 2007 it was 142.9%: World Bank Data, n 249.

251  The interlinkages between markets and the financial system generally are now regularly monitored by a range of EU actors, including the ECB (through its six-monthly Financial Stability Reviews), the ESAs (including through ESMA’s regular Trends, Risks, and Vulnerabilities Reports (TRVs)), and the ESRB.

252  ESMA, Report on Trends, Risks, and Vulnerabilities. Report No 1 2013 (2013) (ESMA/2013/212) (ESMA 2013(1) TRV).

253  ESMA 2013(2) TRV, n 53. The third report (ESMA 2014(1) TRV) continued to refine the indicators deployed and examined vulnerabilities arising from, inter alia, central securities depositaries.

254  n 237.

255  ESRB, Annual Report (2012) 15.

256  eg ECB, Financial Stability Review, May 2013 (2013) 43. See further Ch II sect 9. The rapid growth in bond funding has been described as moving the EU financial system closer to the UK market-based system: Atkins, R and Stothard, M, ‘A Change of Gear’, Financial Times, 1 July 2013, 9.

257  2011 EFSIR, n 177, 32 and 2013 ESFIR, n 53, 13 and 24–25.

258  EU Internal Market Commissioner Barnier, Speech on ‘Restoring Trust in the Financial Sector’, 26 April 2010.

259  2010 EFSIR, n 217, 51.

260  eg European Parliament, Resolution on Derivatives Markets: Future Policy Actions, 15 June 2010 (P7_TA(2010)0206).

261  eg ECB, Financial Stability Review, May 2013, 10.

262  See further Ch XI sect 6.

263  Early indications suggest the ESAs are taking this mandate seriously. The EBA financial innovation standing committee, eg, produced a report in early 2012 which identified potentially harmful innovations, including collateralized commercial paper and convertible bonds, which were in need of further examination (EBA, Financial Innovation and Consumer Protection (2012)) while ESMA has focused closely on the emerging risks posed by shadow banking, eg, including exchange-traded funds: ESMA 2013(1) TRV (n 252).

264  n 207.

265  The Commission highlighted the need for ‘other intermediaries to complement the role of banks by channeling financing to long-term investments in a more productive way’: 2013 Long-Term Financing Green Paper, n 207, 7–8. The Green Paper was followed by a March 2014 Commission Communication on Long-Term Financing of the European Economy (COM (2014) 168), which set out a policy agenda for promoting the EU capital market and included measures designed to strengthen the corporate bond and equity markets.

266  The Commission’s 2007 European Financial Integration Report characterized an integrated market in general terms as one in which prices for similar products and services converged across geographical borders and where supply and demand could react immediately to cross-border price differences: Commission, European Financial Integration Report 2007 (2007) (SEC (2007) 1690) (2007 EFIR) 8.

267  Following a July 2000 Council request that the Commission propose indicators of progress towards an integrated financial services sector.

268  Which have gone through a number of iterations: Financial Integration Monitors (FIMs), European Financial Integration Reports (EFIRs) and, most recently, European Financial Stability and Integration Reports (EFSIRs).

269  The extent to which asset prices are based on common factors (and related levels of price dispersion or convergence) is a key variable for quantifying levels of integration and is relied on heavily by the Commission.

270  The ECB Financial Integration in Europe reports focus in particular on asset price convergence/divergence and quantitative volume indicators (with respect to cross-border activity) in the bond, money market, and equity segments, and on cross-border banking/loan activity.

271  2004 FIM, n 246, 4.

272  2004 FIM, n 246.

273  2004 FIM, n 246, 9.

274  2007 EFIR, n 266, 8–9.

275  2007 EFIR, n 266, 31–2.

276  Oxera, Monitoring Prices, Costs, and Volumes of Trading and Post-Trading Services. Report for the Commission (2011).

277  The Joint Committee of the ESAs reported in 2013 that the ‘process of EU and Euro area financial integration and cross-border banking has stalled’: ESA Joint Committee, Report on Risks and Vulnerabilities (2013), n 237, 12.

278  Although the ESAs have related this to a realignment of risk assessments (particularly with respect to sovereign debt) and suggested that the wider integrity of the single market and its legal and institutional infrastructure has not been impaired: ESA Joint Committee, Report on Risks and Vulnerabilities (2013), n 237, 14. Sovereign debt spreads in particular have moved to reflect Member-State-specific risk rather than, as before the crisis, market determinations of euro-area risk generally: 2011 EFSIR, n 177, 9.

279  The Commission was relatively sanguine in its review of 2008, noting that while a reversal of integration trends was taking place, it was not likely to be permanent (Commission, European Financial Integration Report 2008 (2009) (SEC (2009) 19) (2008 EFIR)). In its review of 2009, the Commission was generally optimistic, noting an improvement in the main integration indicators, and particularly with respect to pan-EU convergence in the cost of capital (Commission, European Financial Integration Report 2009 (2010) (SEC (2009) 1702) (2009 EFIR)). The Commission’s review of 2010, however, reflected the impact of severe turbulence in the sovereign debt markets and related reverses in the sovereign debt, money, and credit markets, and reported that integration of financial markets was ‘at a stand still’ with respect to cross-border financial flows and convergence in pricing: 2010 EFSIR, n 217, 8.

280  2011 EFSIR, n 177, 6 and 45. The Commission reported that since the crisis and over 2011 cross-border capital flows had fallen sharply. It described the 2011 intensification of the sovereign debt crisis as ‘putting a halt to and in some cases reversing capital flows and financial integration and threatening the foundations of monetary integration’: at 8.

281  2011 EFSIR, n 177.

282  n 180.

283  ECB, Financial Integration in Europe (2011) 7. It reported that equity markets had been less affected by the crisis and that cross-border investment levels remained strong, with almost 40% of equity holdings of euro-area residents issued in other euro-area Member States (22–4).

284  ECB, Financial Integration in Europe (2012) 8.

285  ECB, Financial Integration in Europe (2012) 9 and 25–6.

286  ECB, Financial Integration in Europe (2013) 9–10 and 15–16, noting a home bias and a high level of dispersion in the money markets and varying patterns of bond issuance across the euro-area Member States.

287  The ECB reported that bond market integration was showing signs of ‘slight improvement’, that the level of integration in the sovereign debt market was showing a ‘clear improvement’, and that equity market integration was improving, but that significant financial fragmentation remained: ECB, Financial Integration in Europe (2014) 9.

288  In April 2014 the Commission found that the European economic and financial area was substantially more segmented on national lines as compared to 2007–8, and an increased home bias and weaker pan-EU diversification, but that improvements were emerging (including with respect to the sovereign debt market): 2013 EFSIR, n 53, 12–53.