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The main risks relate to the supervision of wholesale activities of financial firms and capital markets. To address these risks, European leaders should reinforce the European Securities and Markets Authority (ESMA) with significant additional resources and an expanded responsibilities.
Market disruption is not the main risk for the EU-27’s single market: Most market participants have enough time to prepare for the worst-case scenario of a lack of agreement on “B-day” in early 2019. Rather, the main risk is the market fragmentation along national lines that would occur with the loss of the London hub. Fragmentation could result in less effective market supervision than is currently achieved by the UK authorities, a higher likelihood of misconduct and systemic disturbances, and a more onerous cost of funding for EU-27 corporates and households.
The obvious solution is to enhance ESMA's responsibilities, especially over those wholesale market segments that are currently concentrated in London and that require uniform, high quality supervision. Recommended expanded responsibilities include the authorization of significant investment intermediaries (e.g., banks and securities firms) under the EU Markets in Financial Instruments Directive and Regulation (MiFID/MiFIR); the registration, supervision, and resolution of CCPs, at least those that serve international clients and have a potentially systemic importance from an EU perspective; and also the supervision of audit firms and the enforcement of International Financial Reporting Standards.
ESMA should be the single EU-27 point of contact for all interaction with third-country (non-EU) authorities. It should represent the EU-27 securities regulatory community in international supervisory colleges wherever relevant, and in international standard-setting bodies such as the International Organization of Securities Commissions and the Financial Stability Board. It should also, importantly, be given oversight authority over non-EU financial infrastructure that is systemically important for the European Union, similar to what already exists in the United States. This would allow flexibility in handling the financial stability challenges linked to the location of derivatives transactions, especially those denominated in euros, without having to force a costly relocation of their clearing in the euro area in the short term.
There is no compelling counterargument against financial market policy integration, especially now that the early achievements of banking union, including a broadly strong and effective European banking supervision led by the ECB, have provided a “proof of concept.”