The European Securities and Markets Authority (ESMA) sent its response to the European Commission (EC) consultation on assessing the adequacy of macroprudential policies for non-bank financial intermediation (NBFI). NBFI covers a range of activities contributing to financial intermediation such as repo financing.
In its response to the consultation, ESMA makes key proposals in several areas, as follows:
Liquidity management: ESMA recognizes the progress made with the revised Undertakings for Collective Investments in Transferable Securities (UCITS) and the Alternative Investment Fund Manager (AIFM) Directives. This is especially the case with the provisions on liquidity management tools.
ESMA however still considers that there is a need to address some remaining issues concerning liquidity mismatches in open-ended funds (OEFs). In particular, competent authorities could require funds that invest in assets that are not liquid to be structured as closed-ended funds. This is why ESMA fully supports the Recommendation of the Financial Stability Board related to the classification of OEFs based on asset liquidity and calls for appropriate efforts to ensure the convergent and consistent application of these recommendations in the EU.
Money Market Fund Regulation (MMF) review: ESMA reiterates its position on the necessity to complete the reform of the MMF Regulation, considering the vulnerabilities identified in its Opinion.
Supervision and data: ESMA proposes to progress towards data driven supervision, first by harmonizing the framework to analyze risks posed by investment funds (especially regarding liquidity risks), and second by developing an EU system-wide stress test across NBFI and the banking sector. These proposals imply having comprehensive and good quality data to assess financial stability risks. Supervisors also need enhanced data sharing, ensuring that ESMA and other authorities have all required information and avoiding unnecessary burden on reporting market participants.
Coordination:ESMA suggests enhancing coordination between competent authorities by the creation of a formal reciprocation mechanism for leverage limits under the AIFMD. This mechanism would make national measures more effective by guarding against the potential for regulatory fragmentation or arbitrage across the EU. In addition, ESMA calls for the EC to consider granting ESMA the formal power to request the implementation of stricter macroprudential requirements by one or multiple national competent authorities, in order to address risks at EU-level.