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.
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.