Thought Leadership  •  March 01, 2024

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What is ESMA?

The European Securities and Markets Authority, ESMA, was formed in 2011. ESMA is a financial regulatory agency based in Paris, with the goal of keeping the European Union (EU) financial system secure. ESMA sees itself as something of a financial systems watchdog within the broader EU region. Learn more about the history of ESMA and its initiatives.

History of ESMA

In 2009, the de Larosière report was released, which provided specific proposals to bolster the European Union economy and financial sectors. One such recommendation was to establish an entity such as ESMA, which would take on the role of securities regulation within the block.

It is worth mentioning that a previous body known as the Committee of European Securities Regulators (CESR) was already in existence. CESR performed some of the regulatory functions now done by ESMA. Since its rollout, ESMA has performed the duties previously performed by CESR and new duties, in line with the de Larosière recommendations.

As the main securities market regulator within the EU, ESMA is in charge of investigating any incidents and fining those who do not comply. ESMA is also in charge of generally developing policies and protocols and enforcing those.

ESMA reporting to the European Union focuses on securities metrics, which provide a glimpse into the overall health of the market. For example, ESMA tells the EU about the frequency and types of trading, trading markets and other data points.

ESMA Initiatives and Mandates

ESMA currently lists three strategic priorities:

  • Fostering financial stability
  • Strengthening supervision of EU markets
  • Better protecting retail investors

Keeping these priorities in mind, let's review some of the initiatives and mandates put forth by ESMA.

  • Creating an EU Financial Market Rulebook: ESMA believes that all companies must play by the same rules when it comes to the financial markets. One of its primary mandates was the creation of a single rulebook for all EU-block markets.
  • Spearheading the EU's Regulatory Program: ESMA financial regulation is another top priority. ESMA is a regulatory agency. They spearheaded the development of a regulatory program within the EU and continue to have a supervisor role. As the supervisor, they share best practices between member states, so that all EU parties can deploy the same best practices when it comes to ESMA regulations and reporting.
  • Retail Investor Risk Assessment: Part of ESMA authority is to look out for retail investors. Their risk assessment work helps them do this. ESMA performs periodic risk assessments of the financial markets as a whole and large companies within those markets. Risk assessment data is used to protect investors and prevent market crashes.
  • Sustainability Standards: Environmental, social and governance (ESG) priorities are increasingly of interest to investors. ESMA incorporates ESG into its regulatory and supervisory tasks, with the goal of creating a more sustainable Europe and of helping investors factor ESG criteria into their investment decisions.
  • ESEF Reporting Format: ESEF stands for European Single Electronic Format. ESMA requires companies to mark up financial reports using ESEF. They developed the reporting format standard and are the go-to source for advice on implementing ESEF.
  • ESMA market abuse regulation: Through their Market Abuse framework, ESMA guards against manipulation, insider trading and other abuses.

Who Must Comply With ESMA Mandates?

ESMA is a regional mandate, so its scope is limited to entities that are active within the European Union. This includes international companies that issue securities on EU markets.

Within the EU entity, there are two broad types of actors that must comply with ESMA mandates:

  • Securities market: ESMA is the chief regulatory body for securities market within the EU. Thus, the securities market must adhere to ESMA mandates.
  • Specific financial entities: Technically, ESMA can regulate any financial organization. In reality, they tend to focus on three types of entities. Those include credit rating agencies, securitization repositories and trade repositories.

As ESMA enters its second decade, it's helpful to understand its priorities, market initiatives and role in protecting the financial markets. ESMA plays a leading role in developing and facilitating best practices within the EU, looking out for retail investors, and doing its part to make ESG commitments clear and transparent.