The Big Reveal: Three Takeaways from ESMA’s Future Plans

January 27, 2020

We are still at that time of the year where people make and break resolutions for the immediate future. Regulators are no different. On January 9, the European Securities Market Authority (ESMA) laid out its strategy document for the next three years. This release dovetails with its more immediate and focused “2020 Annual Work Programme,”published last September. 

These documents, that outline goals through 2022, are instructive to all asset managers operating within the EU and give the first indication of what EU asset management policy looks like without the UK. ESMA’s stated mission is to protect investors, ensure orderly markets, and promote financial stability across the EU’s 27 member states. However, ESMA’s rules often have extraterritorial impacts and so ESMA’s actions often reverberate far beyond EU borders. There are also several recent instances where ESMA set standards that later become a de facto global standard. 

The ESMA plans covers a wide spectrum of activities, but three key themes stand out.

1. Supervisory convergence

Currently, most EU financial regulation is framed for Pan-European implementation but is then applied under each member state’s national legislation. This leads to a certain amount of divergence on the specifics. Now, ESMA has increased convergence and coordination powers and is focused on harmonizing these rules over the next few years. This could include changes to the EMIR Refit, UCITS delegation models, MiFID II consistency, and consistency of cost and performance disclosures. 

ESMA expressed its commitment to use of “super powers” in the report:

"To help national authorities in the daily supervision of financial markets and build on the experience being gathered through real supervisory case discussions, ESMA will, together with [National Competent Authorities] NCAs, also develop a Union Supervisory Handbook."

There may be some growing pains as NCAs will likely have less wiggle room in how they choose to implement pan-European regulations, but ESMA suggests that regulatory inconsistencies erode trust in the market, while increasing complexity and costs. ESMA explicitly stated it plans to take a more central role and make greater use of enforcement and product intervention powers. While ESMA suggests it will maintain and respect the principle of “subsidiarity” (that national regulators should primarily supervise regulated entities in their local country), the direction of travel is more concentration of power residing at ESMA, particularly with respect to the rules that determine the criteria of local country supervision.

The likely impact to asset managers of this adjustment is more consistency and prescription of regulation across EU borders, however it is also likely to result in less room for maneuvering as rulesets become less divergent.  

2. Equivalence determinations

The EU’s system of regulatory equivalence has become an increasingly important area of focus particularly in the context of Brexit. UK firms who currently enjoy market access to the EU will wish to be deemed equivalent for a raft of regulations, but that decision will largely be predicated on the overall future relationship agreement between the EU and UK, as well as the consistency of UK rules with EU standards as they separately develop over time.

ESMA will now be more deeply involved in equivalence assessments of third-country regulatory and supervisory frameworks than ever before. Their new tasks will include:

  • Assisting the European Commission in the preparation of equivalence decisions.
  • Ongoing monitoring of regulatory and supervisory developments in third countries who have already been granted equivalence.
  • Representing the EU’s interest in the international policy discussions of global regulatory bodies such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB).

Many non-EU countries consider the EU’s equivalence determinations to be an opaque and lengthy process. A prime example may be found in AIFMD, where several non-EU countries were recommended by ESMA for equivalence for the purpose of AIFMD’s third-country passport in 2015 but have been waiting ever since to be granted these permissions by local regulators. Increasingly, equivalence appraisals are seen not just through the regulatory prism but are also becoming a political tool used in negotiations between various countries and trading blocs by incorporation in bilateral trade deals. 

3. New direct responsibilities

Since its inception, ESMA has played a central role in the oversight of the EU’s capital markets, but the main ongoing supervision and responsibilities for investor protection will now lay with the NCAs in each member state – an important distinction. This will not entirely change, but in line with the convergence powers discussed above, ESMA has also been mandated by the European Commission with a set of significantly expanded direct supervisory tasks and powers.  

ESMA is already the direct supervisor of credit rating agencies (CRAs), trade repositories (TRs), EU central counterparties (CCPs) under EMIR, and third-country central securities depositaries (CSDs). With their increased supervisory powers, however, come a series of additional responsibilities.

The immediate additional responsibilities residing with ESMA include responsibility for directly overseeing securitization repositories, Securities Financing Transaction Regulation (SFTR) reporting, and non-EU third country central counterparties (CCPs) under EMIR. 

What’s next?

In addition to the above, the transitional provisions of the EU’s Benchmark Regulation mean that in January 2022, ESMA will take direct supervision of EU critical benchmarks and their administrators. With the rise of passive investments and exchange traded funds (ETFs), the central role and importance of benchmarks and benchmark providers has never been more important. This puts the onus on ESMA to oversee these critical market participants, many of whom reside outside the EU. It is no small task or responsibility.

Another future area of expanded ESMA responsibility taking effect in 2022 relates to data service providers and trading data under MiFID II. Data providers were newly regulated as part of the implementation of MiFID II. Approved Publication Arrangements (APAs), Authorized Reporting Mechanisms (ARMs), and Consolidated Tape Providers play different roles in publishing transparent trade reporting on behalf of MiFID regulated investment firms. Again, many of these providers are non-EU firms, but from January 2022, ESMA will be responsible for directly authorizing and supervising these critical market participants. 

In a world where the nature of international cooperation is changing, EU regulators are looking to strike a delicate policy balance which helps protect and benefit EU firms and investors while at the same time not adversely impacting the EU’s global competitiveness. Regulators are seeking to develop close regulatory cooperation and alignment where possible with non-EU countries and stakeholders.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction