Regulating complex financial products post-crisis: between the STS regulation and ESMA product intervention powers

Regulators and policy-makers have converged in recognising structured products as the engines that brought increasing instability in financial markets in the years before the 2008 global financial crisis. Innovations in structured finance, which culminated with the development of synthetic CDOs at the turn of the millennium, contributed to long and opaque channels of credit intermediation, and to the build-up of an uncontrolled level of leverage. Interestingly, in the pre-crisis years this area of finance law was not identified as one deserving regulatory intervention. This was so because of the undisputed reliance on neoclassical models of regulation, rooted in the assumption of arm’s length contracting and the use of disclosure, which in turn were deemed sufficient to rein in the risks flowing from these products.

The sentiments towards structured finance started to change around 2014, when policy-makers such as the IMF and IOSCO started blaming the near-death of securitisation as one of the reasons for the slow economic recovery in Western economies. The Bank of England and the European Central Bank started then to promote a revival of securitisation, grounded on a simpler and more transparent transactional approach. At the same time though, product intervention has become more popular with the powers allocated to ESMA to curb excessive risk-taking and prevent malpractice among market participants. This chapter looks ultimately at the balance between these regulatory powers and it assesses the extent to which complex structured products can still impair post-crises financial systems.