Short-Changed on Short-Selling?

Prof. Kenneth A. Armstrong

The United Kingdom government has been spending a lot of time in Luxembourg in the last 18 months. More particularly, it has brought legal actions challenging the legality of a number of EU measures taken in the wake of the financial crisis. The UK has challenged the legality of the Council Decision to authorise enhanced cooperation in the adoption of a proposed Financial Transaction Tax (FTT) Directive (Case C-209/13), and more recently the provisions of the Capital Requirement Directive (CRD) as they relate to bankers’ bonuses (Case C-507/13). Today the Court of Justice has given its judgment in an earlier outing to Luxembourg, (Case C-270/12) in which the UK challenged the powers of the European Securities and Market Authority (ESMA) to take measures to limit or prevent so-called ‘short-selling’. The Court has dismissed the UK’s action in a ruling which highlights the powers and capacities of EU regulatory agencies in the post-Lisbon constitutional order.

Legal Context

The focal point of the legal challenge was Article 28 of Regulation 236/2012 on short-selling and certain aspects of credit default swaps. In essence the legal case centred around two main themes. The first theme amounted to the claim 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 second theme turned attention back to the limits of Article 114 TFEU as a legal basis for approximation of the laws of the Member States.

The wide-ranging  Opinion of Advocate General Jääskinen delivered in September 2013 concluded 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. Article 352 TFEU could have provided an additional legal basis to support the measure, but in view of UK opposition to Article 28 during the legislative negotiations, this would likely have created a legislative impasse. For the constitutional and administrative lawyers, the Advocate General offered the view that the post-Lisbon landscape had extended judicial review into the work of EU agencies, thereby differentiating modern EU agencies from the type which underpinned the restrictive approach in Meroni and Romano. Meanwhile, while the empowerment of the European Commission to adopt delegated measures of general application argued against the vesting of such a power in agencies, that did not prevent implementing powers being entrusted directly by the EU legislature in EU agencies.

The Court’s Ruling

The judgment of the Court is an interesting addition to the corpus of EU case law on the competence to harmonise and the powers of agencies. In so doing it highlights the tension between the increasing demands for EU-level action to manage complex economic risks and the limits to EU competence within the internal market, including judicial limits laid down in its Tobacco Advertising ruling. That tension has been played out in the context of the financial crisis as evidenced not only by the ESMA challenge but also by the legal debates surrounding the use of Article 114 TFEU as a legal basis for the Single Resolution Mechanism that forms part of the EU’s banking union initiatives.

The Court and it’s Advocate General parted company on the issue of the scope of Article 114 TFEU. In its Tobacco Advertising judgement the Court established that Article 95 EC (now 114 TFEU) 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. What was under attack in that case was a legislative measure. Subsequent legal challenges considered whether Article 114 TFEU could be a legitimate legal basis for downstream measures that elaborated or implemented substantive rules contained in EU legislative measures.

In many ways, the short selling legal challenge extends a line of thinking established in respect of the use of comitology to adopt implementing measures. In this respect it is instructive to consider an earlier legal challenge brought by the United Kingdom (Case C-66/04) known as the ‘Smoke Flavourings’ case. The UK argued that a regulation adopted by the EP and Council establishing a centralised mechanism (subject to a comitology procedure) for evaluating and authorising the use of smoke flavourings in foodstuffs did not fall within the concept of ‘approximation’ as it is used in Article 114 TFEU. For the UK, the power vested in the EU legislature was to harmonise national laws and not to establish bodies or confer on bodies functions associated with the implementation of rules in respect of particular products (a task typically undertaken by national competent authorities). The Court stated that the EU legislature had a discretion to choose the most appropriate technique for harmonisation particularly in technical fields that relied upon expertise. That discretion was subject to two limitations. First, it was for the legislature to establish the substantive normative framework to be implemented and second, the result of the exercise of implementation powers must be harmonisation. In a subsequent case brought by the United Kingdom (Case C-217/04 “ENISA”), the Court also stated that the addressee of measures adopted under Article 114 TFEU was not restricted to Member States, opening the way for implementing acts to be adopted that applied to natural or legal persons. Such measures could be entrusted to a body established to facilitate implementation.

The Court’s short selling judgment extends this analysis to the exercise of implementing powers by an agency. It 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 Court seems largely to have extended the approach it established in Smoke Flavourings from the institutional framework of comitology to the more contemporary setting of European agencies.

As to the constitutional limitations on the powers of agencies, the Court draws a distinction between the agencies at issue in its its early  Meroni and Romano rulings from the contemporary ‘agencification’ of the European administrative landscape.  What concerned the Court in its earlier case law was both the ex ante control over the delegation of discretionary implementing powers and the ex post capacity for judicial review to ensure that bodies and agencies acted within legal limits. Looking at an agency like ESMA, the Court was satisfied that it acted within a legal framework in which it’s discretion to act, in a context of complex and sophisticated financial instruments, was sufficiently confined by the general legal framework establishing ESMA as well as more substantive norms including those laid down in delegated acts adopted by the Commission. Moreover, with the changes made by the Lisbon Treaty, EU agencies are now directly subject to judicial review (albeit that the locus standi of non-privileged applicants to challenge measures adopted by agencies which are not regulatory acts of general application will still be subject to pre-Lisbon requirements to show ‘individual concern’).


The Court’s ruling is important given that the interpretation given to the scope of Article 114 TFEU is at issue in a number of the EU’s recent interventions to respond to the financial crisis. As for the United Kingdom, while it’s challenge to the FTT risks being inadmissible because it is premature, the outcomes of its action in respect of the CRD will be watched with interest. No doubt the successes or failures of the UK government before the EU courts will play into domestic debates about the division of competences between the EU and the Member States. But as the subject matter of the ESMA litigation so clearly illustrates, it may be time to be much more realistic about how to balance the competing desires for a clear delineation of competence and the need to ensure that EU institutions and agencies have the necessary powers and flexibility to respond to risks as they emerge in complex and global financial markets.

1 thought on “Short-Changed on Short-Selling?

  1. Professor Armstrong,

    Thank you for your insightful analysis of the judgment in this case. I was wondering what your thoughts are on a couple of points made in the opinion of the AG and the judgment itself:
    – The AG talks about art. 28 of the 236/2012 Regulation as being a case of direct attribution from the EU legislator to agencies whereas the Court never mentions attribution at all but seems to regard this as a different type of legislation. Is this something new, or does the AG just use different words for the same idea?
    – As far as I can see the Court seems to state that the regime of Meroni and Romano doesn’t apply to agencies as strictly anymore as thought of. However, does this judgment entails a more loosened approach to agency powers and possibly even true regulatory powers?
    – My previous question is especially focused on the ambiguous state of the Binding Technical Standards. It seemed as if the Commission had to be involved to prevent the ESAs from establishing these ‘rules’ on their own, but whether this was because of a supposed ‘discretionary power’ or because of a restriction on ‘legislative powers’ is not entirely clear to me. Does this case gives us a reason to have another look at the set-up of the system of BTS and perhaps move on to a system where the ESAs themselves enact these rules? My thought is that although it does give them regulatory powers, this can not be seen as a discretionary power. The BTS are only supposed to be drafted when sectoral legislation refers to the ESAs to draft it. Furthermore, the ESAs need to consult, need to get it approved and both the Council and Parliament can prevent the enactment. So, somewhat similar to all the boundaries to the art. 28 emergency powers, this BTS-draft process seems also to be heavily encapsulated in control mechanisms and thus should not allow a wide margin of discretion in my view.

    I’m really curious about your thoughts on these subjects.
    I hope you can reply to my questions. Thank you in advance!

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