Hedge Funds and Risk Decoupling: The Empty Voting Problem in the European Union

The law must remain adaptive and responsive to the constantly changing challenges of our society and our business life. One of the most pressing challenges of the past years is the emergence of alternative investment funds, in particular hedge funds, which masterfully exploit the traditional categories of corporate law, financial derivatives, and risk management. This Article is only concerned with the first of these two forms— negative decoupling.9 It looks at the various forms of negative riskdecoupling strategies and tries to shed light on their overall desirability. Three distinct theoretical perspectives are used as an analytical framework to examine the vast challenges of risk-decoupling: (1) a classical agency costs approach; (2) an information costs perspective; and (3) a view from corporate finance. This Article argues that shareholders with hedged risk exposure do not correspond to the traditional market expectations of shareholders. Based on the insight developed from these policy perspectives, this article develops regulatory reform proposals, particularly with regard to the EU context

Keeping up with Innovation: Designing a European Sandbox for Fintech. CEPS ECMI Commentary no 58 | January 2019

In the aftermath of the 2007-09 global financial crisis, regulators in all major jurisdictions introduced significant new requirements for financial firms. Certainly justified in purpose, these regulations have increased market barriers, both directly through specific obligations, and indirectly through the sheer magnitude and complexity they involve. Regulators primarily focused on bolstering financial stability and consumer protection, while frequently disregarding their objective of promoting financial innovation. Ten years after the crisis, we believe that it is time to reconsider the appropriate balance between those objectives. In this commentary, we show how EU financial regulation may stifle the innovation of financial services. We use the example of automated investment advice, so-called ‘robo-advisors’, and we show how a proper balance between regulatory objectives could be achieved through establishing a ‘guided’ regulatory sandbox

The regulation of AI trading from an AI life cycle perspective

Among innovative technologies, Artificial Intelligence (AI) is often avouched as the game changer in the provision of financial services. In this regard, the algorithmic trading domain is no exception. The impact of AI in the industry is a catalyst for transformation in the operations and the structure of capital markets. In effect, AI adds a further layer of system complexity, given its potential to alter the composition and behaviour of market actors, as well as the relationships among them. Despite the many expected benefits, the wide use of AI could also impose new and unprecedented risks to market participants and financial stability. Specifically, owing to the potential of AI trading to disrupt markets and cause harm, global financial regulators are faced today with the daunting task of how best to approach its regulation in order to foster innovation and competition without sacrificing market stability and integrity. While there are common challenges, each market player faces problems unique to the context-specific use of AI. In other words, there are no one-size-fits-all solutions for regulating AI in automated trading. Rather, any effective and future-proof AI-targeting regulation should be proportionate to the particular and additional risks arising from specific applications (eg, due to the specific AI methods applied with their respective capability, validity and criticality). Therefore, financial regulators face a multi-faceted challenge. They must first define the additional risks posed by specific use cases that call for more in-depth scrutiny and, hence, identify the technical specificities that can facilitate the occurrence of those risks. Based on this assessment, they finally need to determine which AI characteristics require special regulatory treatment. Inspired by the EU AI Act proposal, this paper examines the advantages of a ‘rule-based’ and ‘risk-oriented’ regulatory approach, combining both ex-ante and ex-post regulatory measures, that needs to be put in perspective with the ‘AI life cycle’. By advocating for a multi-stakeholder engagement in AI regulatory governance, it proposes a way forward to assist financial regulators and industry players – but even actors in public education – in understanding, identifying and mitigating the risks associated with automated trading through an engineering approach for the purpose of complexity mastering

The Politics of Capital Markets Union

EU policymakers are currently implementing the capital markets union (CMU) agenda-a collection of individual steps that, taken together, should strengthen cross-border market integration in EU capital markets. However, the imminent departure of the United Kingdom from the EU reshuffles the cards in this project, since the absence of the United Kingdom as the continent's most developed capital market jeopardizes the objective of creating a truly Europe-wide deep and liquid market that merits its name. This paper argues that the purpose of the CMU project can and should be redefined. The initial thrust behind the project in 2014-2015 seems to have been to court the British public in a bid to influence the Brexit referendum. After the UK's vote to leave, that objective no longer provides the glue that holds the CMU agenda together. Instead, I show that CMU can helpfully be redefined and reexplained in an entirely new context. Specifically, the CMU agenda provides a sensible set of measures to strengthen the architecture of the Eurozone: cross-border integration of national financial markets holds the promise of promoting so-called 'private risk sharing' that can serve as an important boost to reinforce the fragile framework of the common currency. This paper makes two points. First, it explores the initial motivation behind launching the CMU agenda. The paper argues that the initial purpose was - among other things - a political bid to influence the growing anti-EU attitude and to win over the City of London. Since this strategy was ultimately unsuccessful - at least, it did not suffice to secure a majority voting for a UK-wide 'remain' vote - the entirety of the CMU project was put into question. In a second step, the paper shows that the CMU agenda currently on the table - if sufficiently reinforced and expanded - may find a new purpose in strengthening the Eurozone architecture. The latter point comes amid the ongoing policy debate on the future of the Euro

Investor-led sustainability in corporate governance

The transition to a sustainable economy currently involves a fundamental transformation of our capital markets. Lawmakers, in an attempt to overcome this challenge, frequently seek to prescribe and regulate how firms may address environmental, social, and governance (ESG) concerns by formulating conduct standards. Deviating from this conceptual starting point, the present paper makes the case for another path towards achieving greater sustainability in capital markets, namely through the empowerment of investors. This trust in the market itself is grounded in various recent developments both on the supply side and the demand side of financial markets, and also in the increasing tendency of institutional investors to engage in common ownership. The need to build coalitions among different types of asset managers or institutional investors, and to convince fellow investors of a given initiative, can then act as an in-built filter helping to overcome the pursuit of idiosyncratic motives and supporting only those campaigns that are seconded by a majority of investors. In particular, institutionalized investor platforms have emerged over recent years as a force for investor empowerment, serving to coordinate investor campaigns and to share the costs of engagement. ESG engagement has the potential to become a very powerful driver towards a more sustainability-oriented future. Indeed, I show that investor-led sustainability has many advantages compared to a more prescriptive, regulatory approach where legislatures are in the driver’s seat. For example, a focus on investor-led priorities would follow a more flexible and dynamic pattern rather than complying with inflexible pre-defined criteria. Moreover, investor-promoted assessments are not likely to impair welfare creation in the same way as ill-defined legal standards; they will also not trigger regulatory arbitrage and would avoid deadlock situations in corporate decision-making. Any regulatory activity should then be limited to a facilitative and supportive role

The European Company Statute in the context of freedom of establishment

One of the key features of the new Europeanwide legal form “European Company” (“Societas Europaea” or “SE”) is the possibility of transferring the company’s seat from one Member State to another without having to be wound up or to re-register. As this possibility does not exist for companies formed under national law, the formation of an SE will often present the only possibility for companies to transfer their incorporation and corporate headquarters between Member States. This is a big advantage and a milestone towards the European Internal Market. However, some doubts remain as to the practicability of the system. The mandatory linkage of the head office to the registered office within the same Member State according to Article 7 of the SE Regulation is very problematic and, in light of recent ECJ decisions such as Centros, Überseering, and Inspire Art, may violate EC primary legislation. Why should companies that are formed under national law be allowed to have the head office in a Member State different from their registration state, while an SE – as an instrument of Community Law and a symbol of the Internal Market – is not? Furthermore, the detailed procedural rules laid down in the Regulation are sometimes overprotective and may significantly reduce the attractiveness of the SE’s mobility. It is argued that Article 7 of the SE Regulation is secondary law that itself is inconsistent with the (primary) EC Treaty. Furthermore, the Member States also tend to be overprotective when enacting safeguard measures for the benefit of creditors, minority shareholders and employees. Here again, freedom of establishment does not allow protectionist measures that contravene the gist of the SE’s mobility.</p