Eva Dauberton
News Editor
ESMA Chair speech on building effective, attractive, resilient EU capital markets
Verena Ross,Chair of the European Securities and Markets Authority (ESMA), recently delivered a keynote address at the Association for Financial Markets in Europe (AFME)’s 8th Annual European Compliance and Legal Conference in London. She discussed initiatives to build more effective, attractive, and resilient capital markets in the EU, focusing on the securitisation framework and financial sector operational resilience.
EU capital markets challenges
Ross acknowledged that efforts have been made to improve the regulatory framework for European capital markets, but tangible growth has not yet been seen in the real world. To address this, she referred to the 20 recommendations ESMA has outlined in a position paper issued in May to improve EU capital markets. These recommendations include prioritising investors, particularly retail investors, by supporting their investment journey, implementing market reforms to improve efficiency and reduce fragmentation, evaluating EU-level supervision, and enhancing regulatory efficiency and agility. Ross emphasised that a combination of measures, rather than a single solution, is necessary to create regulatory incentives for market participants to engage on a sound basis. She cited the revival of the EU’s securitisation market and improving the financial sector’s operational resilience as crucial elements in building effective, attractive, and resilient capital markets.
Initiatives aimed at improving the securitisation framework
- Wider regulatory initiatives
Ross mentioned that the European Commission is planning a public consultation on the securitisation framework, with proposals to adjust prudential requirements, establish a dedicated securitisation platform, and review key requirements for securitised assets to enhance their appeal, including transparency and due diligence rules. ESMA, in collaboration with the European Supervisory Authorities (ESAs), will provide input to the European Commission through a Joint Committee report on securitisation. ESMA's contribution will likely focus on proposals to reduce the disclosure burden for sell-side parties and improve data usability for investors and supervisors. She also mentioned the need to ensure consistency in supervisory frameworks to avoid divergent practices across the EU.
- Area of focus for ESMA
She mentioned considerations ESMA is specifically working on, including:
- Providing greater clarity and predictability for market requirements: This involves reviewing factors that have led investors to limit their investments in new securitisations and originators to limit issuances. The jurisdictional scope of the securitisation regulation is one aspect that will be examined, with potential changes to reduce legal uncertainty when parties are located outside the EU.
- Making the EU regulatory framework more proportionate: ESMA is currently preparing draft guidelines intended to introduce proportionality in the application of due diligence rules where the current securitisation regulation allows for it. ESMA plans to publicly consult on these guidelines in the coming weeks to bring clarity to the current framework and facilitate discussions.
- Introducing proportionality within the transparency framework under Article 7 of the Securitisation Regulation: Considering stakeholders‘ feedback suggesting that the current disclosure requirements are overly prescriptive and burdensome, simplifying and harmonising reporting regimes are front and centre to ESMA’s data strategy. She mentioned that ESMA is preparing to publish the feedback statement to the consultation on securitisation disclosure templates under Article 7 of the Securitisation Regulation launched last December. This document will also propose possible amendments to the ESMA technical standards. The clear focus is on introducing proportionality – especially concerning the disclosure requirements for private securitisations (as far as possible within the current legislative framework).
Initiatives around financial sector operational resilience
Ross focused mainly on digital transformation and mentioned the regulatory framework around Information and Communications Technology (ICT) providers and the Digital Operational Resilience Act (DORA). She noted upcoming publications such as ESAs feasibility study about the potential setup of a single EU Hub for major ICT-related events, which should be delivered by mid-January 2025, considerations regarding DORA supervision, and ongoing work on the new oversight responsibilities allocated to ESAs over third-party ICT service providers designated as critical.
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SFC CEO discusses listed companies' corporate governance
During the 14th Biennial Corporate Governance Conference organised by the Hong Kong Chartered Governance Institute, Julia Leung, Chief Executive Officer (CEO) of the Securities and Futures Commission (SFC), highlighted the vital role of good corporate governance in addressing the significant challenges faced by listed companies. Leung emphasised key elements of good corporate governance and referred to the proposals in the Stock Exchange of Hong Kong's consultation on enhancing its Corporate Governance Code (CG Code).
Sound corporate governance features
Leung focused on the following key elements of sound corporate governance:
- Robust internal controls: Leung pointed out that around 170 cases of misconduct were referred to the SFC for investigation between 2020 and June 2024. She used patterns found in these cases to illustrate the deficiencies in internal controls and directors’ failure to fulfil their duties. She stressed the importance of strengthening corporate internal controls to detect and prevent corporate misconduct.
- Diversity: Leung emphasised the importance of fostering diversity to promote balanced and inclusive decision-making on corporate boards.
- Quality of directors: Leung highlighted that well-managed companies are expected to have a formal process for identifying, selecting, and appointing directors with the necessary skills, qualifications, and experience to serve on the board effectively.
Proposed enhancements to the Exchange CG Code
Regarding Exchange consultation on proposed enhancements to its Corporate Governance Code (CG Code) issued in June 2024, Leung shared the initial feedback on a few proposals and touched on others. She also noted that based on feedback, some proposals can potentially disrupt established market practices. Leung specifically addressed the following proposals:
- “Hard cap” on the tenure of independent non-executive directors (INED): Leung shared views on this proposal, including the responses from listed companies and investors through their representative groups. The Hong Kong Chartered Governance Institute (HKCGI) argued that the independence of INEDs should be determined based on their mindset rather than the number of years they have served. On the other hand, investor groups expressed the opinion that the proposal does not go far enough. They believe that a board primarily composed of long-serving INEDs may be prone to entrenchment or groupthink. They also raised concerns about the potential compromise of INEDs’ independence due to close association with management. Leung acknowledged that implementing a hard cap of nine years aligns better with international best practices, but they are considering the HKCGI’s supplementary proposal for additional guidance, market education, and a longer implementation timeline to address these concerns.
- Cap on the number of INED positions held: Leung noted the proposal would impact a limited number of directors. She added that the proposal reflects a general recognition that INEDs should have sufficient capacity to handle board responsibilities and its alignment with measures implemented in other major markets.
- Strengthening the board’s accountability: Currently, the CG Code recommends that the board of directors confirm the effectiveness of risk management and internal control systems in the corporate governance report (CG report). However, in most cases reviewed by the SFC, directors confirmed the soundness of their internal control systems despite deficiencies. Only a few directors admitted that their internal controls were inadequate. To enhance the board’s accountability, the Exchange proposed mandating the disclosure of the board’s review of the company’s risk management and internal control systems’ effectiveness.
- Mandatory training for directors: She discussed the Exchange proposal, which would require all directors to attend mandatory continuous professional training and first-time directors to undergo a minimum induction training period. She noted that a strong and competent board of directors is at the heart of good corporate governance.
- Further enhancements on diversity: Leung also highlighted the Exchange's proposed enhancements on diversity for boards and the workforce.
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CFTC issues controversial order against firm for use of off-channel communication
The Commodity Futures Trading Commission (CFTC) has issued an order against Piper Sandler Hedging Services LLC, an introducing broker, for the use of unapproved methods of communication, which violates CFTC recordkeeping and supervision requirements.
The order mandates Piper Sandler to pay a civil penalty of $2 million and to cease and desist from further violations. Additionally, they are required to undertake specified remedial actions.
Notably, Commissioner Caroline D Pham and Commissioner Summer K Mersingers have both issued dissenting statements, highlighting their concerns about the lack of evidence to establish the violation.
Pham noted, “Once again, the CFTC has no evidence that a violation of CFTC recordkeeping rules for introducing brokers (IBs) actually occurred. And, this case also piggybacks off the SEC’s investigation and swerves out of the CFTC’s lane into the securities markets. “
Mersinger stated, “I fear this particular case sends the message that everything is a business record, even if such a conclusion has no foundation in the Commodity Exchange Act (CEA) or CFTC regulations.”
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