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European System of Financial Supervision

European System of Financial Supervision (ESFS)

As a lesson learnt from the financial crisis 2007/2008, the European Union aimed at establishing a more integrated European supervision in order to ensure a true level playing field for all actors at the EU level and to reflect the increasing integration of financial markets within the EU. The introduction of the European System of Financial Supervision (ESFS) in 2010 marks the first time a new supervisory architecture was established at the European level, consisting of three European Supervisory Authorities (ESAs) and a board to monitor systemic risks – the European Systemic Risk Board (ESRB). The ESAs and the ESRB started their operations in January 2011.

Working within a diverse supervisory framework

As an integrated provider of financial services, Deutsche Börse Group comprises the whole range of financial markets infrastructure (FMI) operators, such as central counterparties, central securities depositories, securities settlement systems and a trade repository. It also includes trading venues (regulated markets and multilateral trading facilities) and data reporting services providers.

The Group’s entire value chain is impacted by the ESAs’ work as the Group faces a wide range of different supervisors across the EU – European FMIs operate within a diverse supervisory framework.

Objective

The objectives of the ESFS include developing a common supervisory culture and facilitating a single European financial market in order to ensure consistent and coherent financial supervision in the EU. To this end, the ESFS created a system of micro- and macro-prudential supervision consisting of European and national supervisors. In addition, the supervisors play a role in the field of international cooperation (e.g. ESMA is an observer to the International Organisation of Securities Commission (IOSCO) and works on the topic of equivalence).

Timeline

The regulations establishing the ESRB and the ESAs in 2010 included provisions for the European Commission to regularly review the activities and organisation of the ESAs and the ESRB. A first report was published in 2014; a general review followed in 2017. In connection with this, the European Commission launched a public consultation on the operations of the ESAs in spring 2017 to provide a basis for a legislative initiative.  Consequently, on 20 September 2017, the European Commission proposed legislative amendments to the functioning of ESMA and the other ESAs with the aim of more strongly integrating European supervision to foster the Capital Markets Union and financial integration.

On 21 March 2019, the EU Member States and the European Parliament agreed on the core elements for reforming the tasks, supervisory competences, governance structures and financing of the ESAs and the ESRB. These core elements apply from 1 January 2020, while ESMA’s new direct supervisory competences on critical benchmarks and data provision services will take effect from 1 January 2022. The next regular review of the ESA Regulations is already expected for 2022 as well.

ESFS: the highlighted parts of the value chain are affected 


European Supervisory Authorities

European Securities and Markets Authority (ESMA)

The European Securities and Markets Authority (ESMA), based in Paris, covers securities markets and market participants. It contributes to safeguarding the stability of the EU’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets. This is achieved by assessing risks to investors, markets and financial stability, completing a single rulebook for EU financial markets, promoting supervisory convergence and being responsible for the registration and supervision of credit rating agencies and trade repositories. Following the latest regular review of the ESMA Regulation, which was concluded in 2019, ESMA’s tasks and powers regarding supervisory convergence have been strengthened. In addition, as of January 2022, ESMA will also be responsible for direct supervision of data reporting service providers and critical benchmarks as well as for the recognition of third country benchmarks. Like all ESAs, ESMA is responsible for micro-prudential supervision at EU level.

European Banking Authority (EBA)

The European Banking Authority’s (EBA) scope includes credit institutions, financial conglomerates, investment firms and payment institutions. Like all ESAs, the EBA, which is based in Paris since 2019 is responsible for micro-prudential supervision at EU level. Its various tasks relate to:

  • Ensuring sound, effective and consistent regulation and supervision
  • Contributing to the stability and effectiveness of the financial system
  • Preventing regulatory arbitrage
  • Ensuring an equal level of supervision
  • Promoting consumer protection
  • Strengthening international supervisory coordination
  • Appropriate regulation of supervision of credit institutions

European Insurance and Occupational Pensions Authority (EIOPA)

The European Insurance and Occupational Pensions Authority (EIOPA) is located in Frankfurt/Main. Its core responsibilities include supporting the stability of the financial system, the transparency of markets and financial products as well as protecting policyholders, pension scheme members and beneficiaries. Like all ESAs, the EIOPA is responsible for micro-prudential supervision at EU level.

 

Other ESFS authorities

European Systemic Risk Board (ESRB)

The European Systemic Risk Board (ESRB), based in Frankfurt/Main, is responsible for the macro-prudential oversight of the EU financial system and the prevention and mitigation of systemic risk. The ESRB therefore has a broad remit, covering banks, insurers, asset managers, shadow banks, financial market infrastructures and other financial institutions and markets. It is part of the European Central Bank.

Competent national supervisory authorities

The respective competent national supervisory authorities of the EU Member States are also part of the ESFS. According to the various legislative measures in the financial services field, each Member State designates its own competent authority or authorities. The competent national supervisory authorities, e.g. the German Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin, conduct day-to-day supervision at the national level. They are represented in the ESAs.

 

The European Commission's outlook on the CMU and the supervisory set-up

The European Commission has published its Action Plan to complete the Capital Markets Union (CMU), which includes an outlook on potential policy action in Q4 2021 setting the stage for the next regular ESA review in 2022 to take stock of what has been achieved and where further strengthening supervisory convergence and direct supervisory powers for the ESAs might be required.

Political agreement on a more integrated European supervisory architecture

European Parliament and EU member states reached an agreement on reforming the European system of financial supervision in some areas of EU financial markets, including anti-money laundering.

European Commission: Review of the ESFS

The EU Commission adopted a package of proposals to strengthen the ESFS (European System of Financial Supervision) on 20 September 2017. It aims to improve the mandates, governance and funding of the three ESAs (European Supervisory Authority) and the functioning of the ESRB (European Systemic Risk Board) in order to ensure stronger and more integrated financial supervision across the EU.