Recently, the Court of Justice of the European Union (the Court) handed out a judgment in a case on the European regulation of short selling that might well be seen as a landmark case for EU law in general. Although the subject matter of the case pertains to the short selling Regulation, the importance of the case transcends the realm of financial law and will be significant for both the interpretation of the so-called Meroni doctrine as well for the scope of Article 114 TFEU.
In short, the facts of the case are as follows. The UK objected to Art. 28 of the European Short Selling Regulation (SSR) that awards the European Securities and Markets Authorities (ESMA, which is one of the three ‘new’ European Supervisory Authorities since 1 January 2011) with ‘interventionist’ powers. The UK thus questioned the validity of this article. I will focus on two of its four main arguments. The first being whether constitutional limits that follow from the Meroni case (known as the Meroni doctrine) oppose the transfer of the powers as granted to ESMA in Art. 28 SSR since these would entail a large measure of discretion. The second question is whether or not Art. 114 TFEU is the correct (and a sufficient) legal basis for the adoption of Art. 28 SSR. The Court firstly decided that the powers available to ESMA under Art. 28 SSR do not entail a measure of discretion contrary to the Meroni doctrine since these are precisely delineated and amenable to judicial review in the light of the objectives established by the delegating authority. Furthermore it stated that Art. 114 TFEU can carry Art. 28 SSR, firstly because it aims at harmonising Member States’ regulation on short selling and secondly because it is actually and objectively apparent that it aims to improve the conditions for the establishment and functioning of the internal market.
The outcome of the case was eagerly awaited by financial markets and financial authorities alike because this was a first litmus test (albeit an indirect one) to see whether or not ESMA’s role as a supervisor of national supervisors would hold up against the light of the constitutional limits of the Treaties for the conferral of powers. The reasoning of the Court is disputable. Art. 28 SSR provides ESMA with the powers to overrule the (in)decision of national supervisory authorities albeit under exceptional and highly conditioned circumstances, namely when the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the Union are threatened (See Art. 9(5) SSR). These powers seem not to be aimed at the harmonisation of national regulations, but rather at elevating to the EU level, and more precisely to ESMA, an intervention competence. This was also the opinion of AG Jääskinen. And the main objective as I see it, is not to improve the functioning of the internal market, but rather to safeguard the stability of the financial system by prohibiting or restricting certain financial activities (in some cases).
For now, the ESMA can take a deep breath, relieved in the knowledge that it can use its powers as provided for in Art. 28 SSR. I am not sure what to think of the overall outcome of the Court yet. However, I am sure that some of the arguments on the use of Art. 114 TFEU as the correct legal basis in this specific case are less than convincing and I wonder not if, but when the first (academia, practitioners, market makers?) will come forward to object to the (implicit) transferal of interventionist powers to the Union via the 114 TFEU route.