Brussels, 22/01/2014 (Agence Europe) - Rejecting all of an appeal lodged by the United Kingdom, and partially contradicting conclusions published by Advocate-General Niilo Jääskinen (see EUROPE 10921), in a ruling on case C-270/12 on Wednesday 22 January, the European Court of Justice confirmed that the power of the European Securities and Markets Authority (ESMA) to adopt emergency measures on the financial markets of the member states in order to regulate or prohibit short selling is compatible with EU law.
In 2012, the EU adopted a regulation aimed at harmonising short-selling, against the background of the financial crisis. Short-selling consists of the sale of shares and securities not owned by the vendor at the time of the sale with a view to benefiting from a fall in the price of the shares and securities. In the event of disturbance on the financial markets, the regulation seeks, inter alia, to prevent an uncontrolled fall in the price of financial instruments as a result of the effect of short selling. The regulation was adopted on the basis of Article 114 TFEU, which permits the adoption of harmonisation measures necessary for the establishment and functioning of the internal market. Article 28 of the regulation vests the European Securities and Markets Authority (ESMA) with certain powers of intervention that comply with Article 114. The Court rules that ESMA's power to adopt emergency measures on the financial markets of the member states in order to regulate or prohibit short selling is compatible with EU law and, circumscribed by various conditions and criteria which limit that authority's discretion, the exercise of that power does not undermine the rules governing the delegation of powers laid down by the FEU Treaty. In May 2012, the United Kingdom brought an action before the Court of Justice seeking annulment of Article 28 of the regulation. The United Kingdom contends, inter alia, that ESMA has been given a very large measure of discretion of a political nature which is at odds with EU principles relating to the delegation of powers. The United Kingdom also submits that Article 114 TFEU is not the correct legal basis for the adoption of the rules laid down in Article 28 of the regulation.
In its judgment, the Court rejects these arguments. It finds, firstly, that Article 28 of the regulation does not confer any autonomous power on ESMA that goes beyond the powers granted to that authority when it was created. The Court also points out that the exercise of the powers laid down in that provision is circumscribed by various conditions and criteria which limit ESMA's discretion. Firstly, ESMA can adopt measures under the provision in question only if such measures address a threat to the financial markets or the stability of the EU's financial system and there are cross-border implications. Moreover, all ESMA measures are subject to the condition that no competent national authority has taken measures to address the threat or one or more of those authorities have taken measures which have proven not to address the threat adequately. Secondly, ESMA is required to take into account the extent to which such measures (i) address the threat to the financial markets or the stability of the financial system of the EU or (ii) significantly improve the ability of the competent national authorities to monitor the threat. ESMA must also ensure that such measures do not create a risk of regulatory arbitrage and do not have a detrimental effect on the efficiency of financial markets, including by reducing liquidity in those markets or creating uncertainty for market participants which is disproportionate to the benefits of the measure. Thirdly, the Court finds that Article 28 of the regulation does not undermine the rules governing the delegation of powers laid down by the FEU Treaty. The Court observes that that provision, which vests ESMA with certain decision-making powers in an area which requires specific technical and professional expertise, cannot be considered in isolation. On the contrary, it must be perceived as forming part of a series of rules designed to endow the competent national authorities and ESMA with powers of intervention to cope with adverse developments which threaten financial stability within the EU and market confidence. To that end, those authorities must, inter alia, be in a position to impose temporary restrictions on the short selling of certain stocks and credit default swaps in order to maintain financial stability within the EU. The Court points out that Article 114 TFEU does not provide that the addressees of the measures adopted by the EU legislature on the basis of that provision can only be member states. In that context, the Court states that, by the adoption of Article 28 of the regulation, the EU legislature sought to provide an appropriate mechanism to enable ESMA to adopt, as a last resort and in very specific circumstances, measures applicable throughout the EU, it being understood that those measures may take the form of decisions directed at certain participants in the financial markets.
As all the pleas in law relied on by the United Kingdom were rejected, the Court dismisses the action in its entirety. There have been a raft of reactions to this important ruling. A spokeswoman for EU Internal Market Commissioner Michel Barnier welcomed the fact that the Court of Justice agrees with the EU's co-legislators and therefore rejected the British case, adding that the ruling is important for the proper functioning of rules governing short-selling in the EU and financial services legislation in general. The Commission will study the Court's arguments to assess the full implications. MEPs Philippe Lamberts (Greens, Belgium) and Sylvie Goulard (ALDE, France) welcomed the ruling as confirming ESMA's powers to tackle the excesses of the financial markets in the fact of obstruction from the British government to hold back the regulation of the financial markets.The British government is disappointed, pointing out that the ruling contradicts the advocate-general's views. The UK says that all the powers granted to EU agencies have to comply with the treaties and ensure legal certainty. (FG/transl.fl)