The European Securities and Markets Authority (ESMA) has published its 2018 Work Programme (WP), which sets out its priorities and areas of focus for 2018 in support of its mission to enhance investor protection and promote stable and orderly financial markets.

For 2018, the key areas of focus under ESMA’s activities of supervisory convergence, assessing risks, single rulebook and direct supervision will be:

• Providing guidance and promoting the consistent application of MiFID II and MiFIR by market participants and National Competent Authorities (NCAs);

• Ensuring the quality, integration, usability and transparency of the data that ESMA collects;

• Contributing to the development of Level 2 measures in relation to the revised Prospectus regime; AND

• Enhancing the effectiveness and lasting impact of supervisory activities at individual credit rating agencies (CRA) and trade repositories (TR) level.

The overall budget for 2018 is expected to be €42,051,386 with a projected staff of 232.

The European Securities and Markets Authority (ESMA) has published a Consultation Paper (CP) on the Money Market Funds Regulation (MMFR). The CP contains proposals on draft technical advice (TA), draft implementing technical standards (ITS), and guidelines under the MMFR. The key proposals relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios.

The European Securities and Markets Authority (ESMA) has published its final Guidelines on sound remuneration policies under the UCITS Directive and AIFMD. ESMA has also written to the European Commission, European Council and European Parliament on the proportionality principle and remuneration rules in the financial sector.

UCITS Remuneration Guidelines

The UCITS Remuneration Guidelines provide clarity on the requirements under the UCITS Directive for management companies when establishing and applying a remuneration policy for key staff. The Guidelines will ensure a convergent application of these provisions and provide guidance on the governance of remuneration, requirements on risk alignment and disclosure. The Guidelines will apply to UCITS management companies and national competent authorities from 1 January 2017.

Proportionality Issue

ESMA, while finalising its UCITS Remuneration Guidelines, had to balance the alignment with the AIFMD Remuneration Guidelines and the obligation to closely cooperate with the European Banking Authority (EBA) in order to ensure consistency with requirements developed for other financial services sectors, in particular credit institutions and investment firms.

The UCITS Directive prescribes that proportionality shall apply to the full set of remuneration principles set out under this Directive. However, the Guidelines do not include guidance on the possibility of dis-applying certain specific requirements on the pay-out process. This follows recent work and legal analysis, including the EBA’s Guidelines under CRD IV, which have called into question the existing understanding that the proportionality provisions as set out under the UCITS Directive and AIFMD may lead to a result:

1. where – under specific circumstances – the requirements on the pay-out process i.e. the requirements on variable remuneration in instruments, retention, deferral and ex post incorporation of risk for variable remuneration are not applied; or
2. where it is possible to apply lower thresholds whenever minimum quantitative thresholds are set for the pay-out requirements e.g. the requirement to defer at least 40% of variable remuneration.

ESMA considers that these scenarios should remain possible in certain situations and, in its letter to the European institutions, suggests that further legal clarity on this possibility could be beneficial to all the interested parties. Legislative changes in the relevant asset management legislation could be one way to further clarify the applicable regulatory framework.

ESMA believes that it would be inappropriate for the following fund managers to be subject in all circumstances to the requirements on the pay-out process:

1. smaller fund managers (in terms of balance sheet or size of assets under management);

2. fund managers with simpler internal organisation or nature of activities; or

3. fund managers whose scope and complexity of activities is more limited.

ESMA also considers that it would be disproportionate to apply the requirements to relatively small amounts of variable remuneration and to apply certain requirements to certain staff when this would not result in an effective alignment of interests between the staff and the investors in the funds.

AIFMD Remuneration Guidelines

The amended AIFMD guidelines will come into force on 1 January 2017. The amendment to the AIFMD guidelines relates to the section of these guidelines dealing with the application of the remuneration rules in a group context and is intended to acknowledge the potential outreach of the CRD rules in a banking group.

The current AIFMD Guidelines will not be amended to bring them into line with the UCITS Guidelines pending clarification on the application of the proportionality principle.

Next Steps

The Guidelines in Annexes III and IV will be translated into the official languages of the European Union and the final texts published on the ESMA website. The deadline for compliance notifications will be two months after the publication of the translations.

Unauthorised use of ESMA’s identity and logo

The European Securities and Markets Authority (ESMA) has been informed that its identity and logo have been used in communications targeting company employees in order to request the transfer of company money.

In addition, ESMA has been informed that attempts were made to use the name of a senior member of ESMA staff also for the purpose of fraudulent scams targeting a savings bank and a listed issuer.

Please note that all references to ESMA or any ESMA employees in these communications, which do not originate from ESMA, are entirely false and have been made without ESMA’s knowledge or consent.

In order to protect yourself against these unauthorised communications, ESMA advises you:

• To check whether the e-mail received is genuine;
• To inform your superior in case of suspicious e-mails;
• To contact ESMA if any suspicion arises;
• To contact the police;

Be aware that fraudsters might use ESMA’s name, logo or the name of an ESMA staff member, a bogus website which appears to be that of ESMA, and/or make bogus references to people said to work in ESMA. Be aware of the following when making your checks:

• ESMA is a European Supervisory Authority established by a Regulation of the European Parliament and of the Council;
• ESMA is based in Paris, France and has no affiliates or branch offices elsewhere;
• ESMA’s emails end with the address @esma.europa.eu;
• ESMA’s telephone number begins with the prefix +33 for France, no other prefix is valid;
• ESMA’s official website can be found at www.esma.europa.eu

The European Securities and Markets Authority (ESMA) has published its first Supervisory Convergence Work Programme 2016 (SCWP), which details the activities and tasks it will carry out to promote sound, efficient and consistent supervision across the European Union.

The publication of the SCWP expands on the high-level objective outlined in the Annual Work Programme 2016 and fulfils a key commitment in ESMA’s Strategic Orientation 2016-2020 to outline how it would refocus its resources from single rulebook to supervisory convergence work.

The European Securities and Markets Authority (ESMA) has published a Statement providing details of its work on closet index tracking funds.

Closet indexing, also known as index hugging, refers to the practice of fund managers claiming to manage portfolios actively when in reality the fund stays close to a benchmark. ESMA is concerned the practice may harm investors as they are not receiving the service or risk/return profile they expect based on the fund’s disclosure documents while potentially paying higher fees compared to those typically charged for passive management.

ESMA conducted research on a sample of 2,600 funds for the period 2012-2014 to determine whether it could find any indication of closet indexing at an EU-wide level. Quantitative metrics, such as the percentage of a UCITS’ portfolio that does not coincide with the underlying equity benchmark, indicated between 5 and 15% of UCITS equity funds could potentially be closet indexers. ESMA then reviewed the investor disclosure documents of the funds concerned, to see how they described their management strategy, and found they tended to confirm the quantitative analysis results.