Supervision and Convergence
ESMA and NCAs share supervisory responsibilities. ESMA supervises all EU CRAs, TRs and SRs, certain DRSPs, certain benchmark administrators and Tier 2 third-country CCPs. NCAs supervise all other market actors. In such a case, ESMA carries out supervisory convergence activities to promote sound and consistent supervision across the EU.
EU financial markets are primarily supervised at national level, while ESMA supervises some key financial market entities with EU-wide activities.
In its supervisory activities, ESMA centrally supervises at EU level entities that form essential parts of the financial market infrastructure. ESMA aims to supervise these entities through a strong common supervisory culture, approach and methodology across all mandates. ESMA’s supervisory activities target a positive supervisory outcome, aiming for high compliance standards and appropriate changes to the behaviour of the supervised entities where warranted. ESMA makes use of a diversified toolkit, including investigations and on-site inspections.
For those entities that are supervised at national level, ESMA takes an active role to promote sound, efficient, and consistent supervision, and effective coordinated supervision across the EU. This is known as supervisory convergence. The purpose of promoting supervisory convergence is to ensure a level playing field of high-quality regulation and supervision without regulatory arbitrage or a race to the bottom between Member States. Supervisory convergence implies developing consistent interpretation of rules, building sound and effective supervisory capabilities, coordinating approaches and activities, conducting concerted supervisory actions across the EU, and reviewing and sharing good practices. ESMA applies different supervisory tools to its convergence work.
ESMA takes a consistent approach through its supervision and convergence work, by applying commonly shared principles of risk-based, outcome-based and data-driven approaches.
The cornerstone of ESMA’s supervision and convergence activities is a risk-based approach. This means that ESMA applies a structured approach to focus on those areas that need to be prioritised based on the risks that they carry. This approach enables ESMA to prioritise resources and apply a consistent approach to decision-making. It also allows ESMA to adapt to changing market conditions, adjusting the focus of its work as required.
As supervisor, ESMA takes a structured approach in identifying, assessing and treating risks at entity and industry-wide levels. The identification of risks and trends requires continuous monitoring of the periodic information and data provided by the entities ESMA supervises and monitoring of the overall market dynamics. In addition, ESMA monitors industry-wide developments through engagement with the supervised entities and other external stakeholders.
In its supervisory convergence work, ESMA prioritises actions on risks and problems that have a potentially high or systemic impact on investor protection, orderly markets or financial stability at a European level. ESMA and NCAs develop a common understanding of the key risks posed to EU financial markets through the use of an EU/EEA-wide risk heatmap, stress-testing, and stakeholder outreach. As a key output of its risk-based assessment, ESMA also periodically sets out Union strategic supervisory priorities (USSPs) to provide a structured and comprehensive response to address key market risks across the EU/EEA.
With its outcome-based approach ESMA aims to focus on the effect of its interventions, designing its supervisory and convergence activities to address risks effectively, using a full suite of possible actions. The approach avoids a one-size fits all approach and supports proportionality.
In its supervisory activities, ESMA selects the most appropriate tools for supervisory action (for example, investigations including on-site inspections, industry guidance, a firm-level remediation plan, or a thematic review) and, where possible, allows firms to identify the remediation to deliver the outcome ESMA has articulated. As part of outcome-based supervision, ESMA focus on expectations rather than providing a more prescriptive approach and identifies success measures to assess whether the determined outcome has been achieved.
Similarly, in supervisory convergence ESMA promotes a consistent and effective implementation, interpretation and application of EU rules; the overall goal is to strive for high quality comparable regulatory and supervisory outcomes across NCAs. ESMA uses a number of tools to address the risks identified, taking into account their nature and the outcome it desires to achieve (for example, guidance to NCAs and market participants, close dialogue among supervisors, common supervisory actions, peer reviews, mediation, and breaches of Union Law actions). Through these tools, ESMA takes at times a facilitator role, acts as coordinator, or takes a more intrusive role.
ESMA’s supervision and convergence activities are data driven. Data is key to understanding the markets, their features and risks. ESMA uses both market wide and entity-level data in the identification of market-wide trends and risks, and to support its risk-based approach.
As part of its supervision work, ESMA identifies structural sources of data that can be embedded into its risk-based approach, particularly forward-looking indicators of market trends.
In its supervisory convergence work, ESMA aims to promote cooperation on data collection and data sharing among the NCAs and ESMA, facilitates information sharing at the EU level, and develops common analytics.
Further information on ESMA’s specific activities and approaches across its supervision mandates and its supervisory convergence work are available here:
