37265 - Financial Market Regulation

Course Unit Page

Academic Year 2018/2019

Learning outcomes

At the end of the course the student has an introductory but complete knowledge of the principles, bodies and the main regulatory provisions. Particular focus is devoted to the international aspect of financial regulation, both about the issue of stability (Basel regulations and Financial Stability Board) and that of transparency (market abuse and MIFID regulations).

Course contents

Most, if not all, relevant aspects of international and European financial law have been undergoing reform in the last few years and some are in the process of being reconsidered within the CMU initiative and to complete the Banking Union. This course endeavours to offer a comprehensive picture of European financial law as it stands today and thus to offer a chart to navigate it; it should help understanding its underpinnings, organise (as simply as possible) internal linkages and test the overall consistency of the system. In doing so, this course revolves around a simple idea: to properly understand European financial rules, it is necessary to identify the paradigms that like “deep currents” run underneath them, in order to capture their proper meaning and finality and to measure their consistency and proportionality. This course is meant to be, therefore, a conversation about the rationale(s) of the rules and tools of European financial law as well as on the needs for future simplification and reform (proposals for simplification are part of the exercise).

Detailed course program

In 2010 Europe set the ground for the upheaval of entrenched national financial laws. Using in a quite unconventional way Articles 114, 290 and 291 TFEU, unprecedented rule making authority was conferred upon the European Commission (EC) and three newly established financial supervisory authorities (EBA, ESMA and EIOPA), called to deliver a single rule book in banking, securities and insurance, respectively. Savvy institutional engineering inspired by the ECB model for monetary governance under the Treaty of Maastricht made it possible to centralise regulatory functions without expropriating of their decentralised role the existing national authorities, who are being made an active component of the three European authorities. This process of “decentralised integration” has progressed further, within the Euro system, in 2013 in the banking sector with the establishment of the single supervisory mechanism (SSM) for micro and macro prudential bank supervision, followed in 2014 by the establishment of the single resolution mechanism (SRM); this paved the way for the Capital Markets Union (CMU). In all likelihood, this complex regional system offers now the most advanced experiment of multilevel governance of financial markets worldwide. It will be thoroughly examined and discussed in class, putting it in the context of global financial regulation and shall be measured against comparative institutional settings in North America, South America and Asia-Pacific.

At the same time, to navigate European financial regulation it is necessary to have a clear understanding of its micro and macroprudential regulatory underpinnings. We see financial regulation, and in particular European regulation, as a problem-solving tool. Its major goal is to ensure that the financial system properly functions as an efficient mechanism to channel funds from persons who have them to persons who need them, and can make the best use of them. To do that, financial regulation needs to lay down some basic rules that determine the behaviour that may be expected by those who supply funds from those who demand them and vice-versa,as well as the behaviour that both can expect of the entities and markets that operate as a go-between between them. The more concrete goals of those basic rules are to (a) facilitate transactions, (b) foster the parties’ confidence in the system, and (c) protect the system’s stability. These goals pervade the whole system of rules, and constitute the common denominator, the consensus about what that system of rules should achieve. With the consensus in mind, there are different approachesto pursue those goals, which give different weight to them, or see their relationship in different terms. Although each reform may pursue a very concrete strategy, with a very specific understanding of the relationship between the above goals, these strategies tend to follow one of three paradigms, or approaches, which we will use for explanatory purposes, following an “incremental” narrative, from the least to the more interventionist.

a) The market-reliant or market-based approach: an example is offered by the private ordering of relationships for the payment of sums, the holding of property rights over financial instruments, or the hedging or securities financing agreements via ISDA or ICMA standard model contracts, which help shape current financial markets’ infrastructures;

b) The principal-agent approach. In the case of financial markets’ infrastructures, this paradigm is present in the specific rules applicable to the governance of banks and financial institutions as stand-alone entities, regarding risk-management functions, or remuneration of key personnel. It is also present in the rules that ordain the relationship of those financial intermediaries vis-à-vis their clients, and which have a “fiduciary” inspiration, including duty of custody, the duty to avoid conflicts of interest, the duty of best execution, the duty to give proper advice, the duty of loyalty, the duty of prudent management.

c) The market-design paradigm.This is the case, for example, of “product manufacturing and distribution” rules, or the “consumeristic” evolution of some transparency rules concerning financial instruments Regarding market infrastructures, a market-design approach is present in the rules that deal with the risk posed by financial institutions, both from the perspective of the prevention of actions that may put their clients and the system at risk (prudential rules), and that of dealing with the institution once it has failed (resolution rules). Regarding the infrastructures’ “links” a market-design view is present in the gradual centralization of payment systems by central banks, the imposition of centralized clearing and settlement for certain products, such as OTC derivatives, the pre-determination of the types of venues where financial instruments may be traded, or the increasingly “structural” and/or “consumeristic” approach applied to some conduct duties of financial intermediaries vis-à-vistheir clients.

In addition to the market-reliant, principal-agent and market-design paradigms, there is, however, another dimension of the problem that needed to be properly captured. This is the fundamental distinction betweenex ante and ex post approaches. Indeed, aside from the three paradigms discussed above, it is further necessary to distinguish whether problem-resolution is meant to be preventative or remedial. Ex anteapproaches rely on the applicability of the rule beforethe problem arises, whereas ex postviews focus their attention on the way we deal with the problem once it has arisen.

Based upon the foregoing, the course will cover the following main issues:

1.- The Composite EU Legal Order of Financial Markets.

a) A Brief History of the Evolution of Financial Institutions and of their Regulation

b) The Composite Structure of EU Financial Regulation

2.- The Composite EU System for Implementation, Enforcement and Adjudication.

a)The Regulation of the European System of Financial

b)The Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM

3.- The Composite EU Regulation of Soundness and Stability of Financial Intermediaries and Market Infrastructures.

a)Ex ante Micro-Prudential Regulation

b) Ex ante Systemic Stability Regulation

c) The Ex-Post Approach to Market Infrastructure, Soundness and Stability


M. Lamandini, D. Ramos Muñoz, EU Financial Law. An Introduction, Wolters Kluwer, 2016, chapters 1, 2, 3, 4, 7, 8 and 9.

Teaching methods

Lectures with slides available on IOL. The use of these materials in study and preparation for examination is to be considered as complementary and not substitute for the use of the manuals indicated.

There will be testimonies of experts of recognized reputation in the field.

If necessary, contact Dr. Francesca Pellegrini at the email address francesca.pellegrin7@unibo.it

Assessment methods

Oral examination. The exam tests the knowledge gained in the course, the ability to develop critical insights and the accuracy of the oral presentation.

To subscribe to the exam, you must sign up using the AlmaEsami application, with due regard for the deadlines provided. Those who failed to sign up by the due date are required to report in a timely manner (and in any case before the official closing of the enrollment lists) the problem with the teaching secretariat. It will be the faculty of the professor to admit those who did not sign up for the test.

The verbalisation of the evaluation is done on the date set and indicated in Almaesami.

Teaching tools

Slides and materials available on IOL.

Office hours

See the website of Marco Lamandini