Regulatory exceptionalism: the EU short selling ban

Is it really the case that the European Securities Market Authority and its reg­u­latory brethren are the market-facing vanguard of Europe’s auto-colonisation through financial stabilisation? 

dollar's flow in black hole

A much remarked upon feature of the Global Financial Crisis (‘GFC’) has been the recourse of governments to permanent states of exception, purportedly justified by the need to protect financial stability.  We have seen everything from prime ministers being helicoptered in (Romano Prodi), to monetarist central banks buying up bonds and even gilts, to the decision to guarantee private banks with public revenues (funded by austerity).  A small but not insignificant event in this exceptionalist march occurred on 22 January 2014 when the European Court of Justice went against the opinion of its Attorney-General and upheld a power to intervene in markets to prevent short selling that had been granted to a relatively new agency in Europe’s financial supervisory architecture (Case C-270/12).

The concern is not so much that the agency in question – the European Securities Market Authority (ESMA) – thought it a very good idea to step into markets to prohibit short-selling when this activity was allowing vulture funds to drive down bank securities without actually owning them (until the price had fallen).1broadly speaking, on day 1 trader T agrees that she will sell shares in e.g. Big Bank plc to U at a price of €100 on day 5.  However on day 1 T does not own the shares.  T effectively gambles that on day 5 the shares will have fallen in price, say to €90, so that on that day she can buy them at that price and sell them to U at the agreed price of €100: a €10 profit.  This practice is particularly self-fulfilling if enough shares are shortsold in this way as market participants will suspect or know that many others believe the price will fall, and will not be jumping in to buy Big Bank shares.  Rather the concern was constitutional: the EU had just set up a number of new bodies (ESMA, EBA, EIOPS, ESRB) as well as creating a Single Supervisory Mechanism at the European Central Bank, and all these agencies were being granted significant discretionary powers by various regulations, all on the basis of FEU Treaty provisions which one might feel were being interpretatively stretched.

This manoeuvre has to be looked at in the round.  The ‘good’ intentions of trying to prevent GFC2 are expressed in abundance in the various regulatory agency founding regulations, but considered in the light of the Treaty on Stability, Coordination and Governance (the TSCG of 2012), which basically raises austerity to a fundamental norm of European law, and the related stability mechanisms, we are bound to be more sceptical.  Is it not the case that the new agencies are to be another front in ensuring that ‘financial stability’ is maintained at all costs; the kind of resilient dynamism that was called for at the 2013 Davos Summit?

The essence of the Case was that the UK, as counsel for the City of London, had challenged Article 28 of Regulation 236/2012 on short-selling and certain aspects of credit default swaps.  The UK first argued that the powers of ESMA under Article 28 to adopt measures which had legal effects for third parties exceeded the constitutional limits of the authority of an agency as established by the Court in its earlier Meroni and Romano jurisprudence.  The UK’s second argument was that the powers conferred by Art.114 FEU Treaty had been exceeded (if not twisted to breaking point).

Back in September 2013 Advocate-General Jääskinen delivered an Opinion that insofar as ESMA exercised centralised implementing powers with legal effects for third parties in circumstances which either replaced the decisions of national competent authorities or filled a void created by their inaction, the result was neither harmonisation nor the adoption of uniform practices as required for Article 114 TFEU as a legal basis for Article 28.  This was not to say that legislative powers could not be entrusted to agencies, but that Art.114 FEU Treaty aimed at harmonisation of national laws NOT simply overriding national laws in special cases, however good the reason.

The ECJ disagreed.  In its Tobacco Advertising judgement the Court established that Article 95 EC (now 114 FEU Treaty) did not grant the EU general competence to regulate the internal market. Rather, the aim of any measure with a legal basis in Article 114 TFEU genuinely had to contribute to the establishment and functioning of the internal market by removing distortions to competition and/or obstacles to free movement.

The ECJ viewed the power vested by Article 28 of the Regulation as one element of the overall framework intended to ensure the proper functioning of financial markets. While the Advocate-General was troubled by the shifting of the power to adopt binding decisions for third parties from the national competent authorities to an EU agency, the ECJ felt the broader context of a push for financial stability, in which decisions were made by comitology, made the powers acceptable, especially because the powers were limited in significant ways in the relevant regulation (although this is hardly the point).

The point here is to the see the double exception: (i) the exceptional power of ESMA to overrule national competent authorities in special circumstances, and (ii) the exceptional reading of FEU Treaty 114 and the short-selling regulation, which took the view that harmonisation of the internal market and financial stability were the same thing.  This is precisely the same shift we saw with the TSCG, namely that the discourse of free-trade bloc was openly replaced with the discourse of financial stability.  We thus had a motion from a right to participate in exchange for an obligation to open markets, to an obligation to do all necessary to secure financial stability in exchange for … finance; stability finance to help repair national balance sheets weighed down by bank guarantees.

Once the financial stability/austerity nexus is uncovered we begin to understand how the apparently acceptable general principle (stability), in its apparently acceptable particular form (a ban on short selling), bears only the veneer of acceptability.  For in the linkage with austerity we now understand what financial stabilisation implies: it is not finance which is to be stabilised, but everything else.  If finance is unstable it is because the national structures/policies in which finance must operate are inadequate to the task and must be reformed.  Financial stabilisation is nothing other than the neoliberal “development” of national markets, and nothing like actually trying to stabilise finance itself (which in any case is impossible).

The predication of ‘neoliberal’ is important.  By this we mean not a fanatical devotion to laissez-faire (as is not uncommonly believed) but the evangelical pursuit of marketisation, even if this means heavy regulation and wielding of arbitrary powers.  Markets must be constituted everywhere (by force as necessary), and they must be made to work (through absolutist intervention).  For, so they believe, the market ist der Gang Gottes in der Welt.  If markets fail because of lack of belief, send in the tripartite Congregation of the Doctrine of the Faith.[aka the Troika]  If national overseers refuse to prevent destructive activities such as short selling, the general needs of the market as such override ‘particular interests’ to the extent that the constitutional order may be broken – the definition of miraculous or absolute power.  Accordingly we should not mistake the UK’s protectionism of Mayfair-based hedge funds as the acts of the pro-capital party against what the Daily Mail would term ‘Eurocratic socialism’.  Rather, the UK can be seen as acting in the interests of hegemonic capitalists, but the EU could be seen as acting in the interests of hegemonic capital qua capital.  Historically, the UK’s discourse remains stuck c.1928 in which capital remains embedded in private individuals (entrepreneurs and magnates) who are constantly fighting state intervention, whereas the EU sees capital not simply as a public issue – an object of public concern – but as public – a subject which is publicly concerned about private backsliding.2Of course the UK is acting derivatively in capital’s interests – it is a question of consciousness of what one is doing.

One may of course argue whether the EU regards its internal market as a means to a higher purpose (peace), or whether the internal market objective has crowded out the post-WWII ideals, Brussels becoming an agency for trans-national corporations.  One may also feel that even if the latter, it is still possible to construct an Union on socialist principles, either from within or by means of a confederation of local leftist movements.  The point I make is simply that such debates are not being had over the desks of the European Securities Market Authority, which recruits its ‘experts’ from the world’s finance houses.  ESMA has its objective, and that is financial stability.

But is it really the case that ESMA and its regulatory brethren are the market-facing vanguard of Europe’s auto-colonisation through financial stabilisation?  Well, I leave the final word on that to the ECJ itself:

Those bodies have a high degree of professional expertise and work closely together in the pursuit of the objective of financial stability within the Union. … Therefore, Article 28 of Regulation No.236/2012, read in conjunction with the other regulatory instruments adopted in that field identified above, cannot be regarded as undermining the rules governing the delegation of powers laid down [the FEU Treaty]. (the Case, paras 85-86)

Ida Ince is an independent researcher in critical legal finance and has previously worked for many years in international finance.

  1 comment for “Regulatory exceptionalism: the EU short selling ban

  1. ‘ESMA has its ob­jective, and that is fin­an­cial stability.’ So, what is yours?

    I mean: what more do you expect? Ignore them if you don’t care.. Building and Dwelling and Working and Living are ontological terms too, to say the least & long live biodiversity! (stop ecocide) – basic income for all – disarm – refugees welcome always – bye now

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