What is ESMA?

The European Securities and Markets Authority (ESMA) is an EU regulatory authority established to ensure the stability and effectiveness of the financial markets in the European Union. It was created on 1 January, 2011.

ESMA is an agency of the European Union and it is, by law, headquartered in Paris, France. Is is one of three European Supervisory Authorities set up within the European System of Financial Supervision; the other two are the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority.

How the agency is structured

• A Board of Supervisors
• A Management Board
• A Chairperson
• An Executive Director
• A Board of Appeal

Legal framework

ESMA derives its legal force from Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority). It is known as the ESMA Regulation, and ESMA came into existance on 1 January 2011 as per article 82 in it.

The ESMA regulation states in Article 1(5): “The objective of the Authority shall be to protect the public interest by contributing to the short-, medium- and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses.“

You can find more detailed information about ESMA´s tasks in Article 1(6), which states that ESMA shall contribute to:

• (a) improving the functioning of the internal market, including in particular a sound, effective and consistent level of regulation and supervision
• (b) ensuring the integrity, transparency, efficiency and orderly functioning of financial markets,
• (c) strengthening international supervisory coordination
• (d) preventing regulatory arbitrage and promoting equal conditions of competition
• (e) ensuring that the taking of investment and other risks are appropriately regulated and supervised
• (f) enhancing customer and investor protection
• (g) enhancing supervisory convergence across the internal market

Background

On 1 January, 2011, ESMA replaced the Committee of European Securities Regulators (CESR).

The creation of ESMA was largely prompted by the 2007-2008 financial crisis and the 2010 Eurozone crisis. It became clear that the existing supervision framework had not been able to prevent these events and the older Lamfalussy framework was eventually replaced by the new De Larosière framwork.

The European System of Financial Supervision (ESFS) was launched in 2011 and ESMA is a part of it. The Lamfalussy framework had consisted of four levels, and its the level 3 agencies – CESR, EIOPA, and EBA – were now replaced with ESMA, EIOPA, and EBA.

What Is ESMA Doing?

Regulating Financial Markets

ESMA develops and enforces rules for EU financial markets, promoting transparency, efficiency, and fairness.

Supervising Financial Entities

ESMA directly supervises certain financial entities, including credit rating agencies and trade repositories, ensuring compliance with EU regulations.

Protecting Investors

ESMA safeguards investor interests by promoting transparency, preventing market abuse, and ensuring that financial entities provide clear and accurate information.

Enhancing Market Stability

ESMA monitors and mitigates systemic risks in the financial markets, working to prevent financial crises and promote stability.

Trader Protection

Regulatory Framework

ESMA sets and enforces regulations to ensure fair trading practices, market transparency, and investor protection.

Market Surveillance

ESMA monitors trading activities to detect and prevent market abuse, insider trading, and other forms of financial misconduct.

Investor Education

ESMA provides resources and guidance to help traders understand their rights, the risks involved in trading, and how to make informed decisions.

Coordinated Supervision

ESMA works with national regulators across the EU to ensure consistent enforcement of regulations, protecting traders across member states.

Final thoughts

ESMA plays a crucial role in maintaining the integrity and stability of the EU financial markets, protecting investors, and ensuring fair trading practices. Through rigorous regulatory frameworks, market surveillance, and investor education, ESMA safeguards traders and promotes a trustworthy financial environment in the European Union.