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02/02/2016 2016/138 ESMA updates on supervisory work on closet index tracking , Press Release PDF
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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.

05/02/2016 2016/247 ESMA to focus on governance, strategy, data and fees in 2016 supervision , , Press Release PDF
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The European Securities and Markets Authority (ESMA) has today published its 2016 supervisory priorities for credit rating agencies (CRAs) and trade repositories (TRs), as well as its annual report summarising the key supervisory work and actions undertaken during 2015.

2016 Supervisory Priorities

ESMA has seen a number of changes in the CRA and TR industries during 2015, with new applicants for registration in both sectors, and current authorised entities seeking to develop their businesses. This has included CRAs providing credit ratings on new asset classes or in new geographic areas, and TRs offering trade reporting services for other instrument types.

ESMA identifies its supervisory priorities on the basis of risk assessment exercises conducted throughout the year. In 2015 these identified high levels of governance and strategy risk, and operational risk in the CRA industry and high levels of risk associated with TRs’ data and systems. Therefore, in 2016 ESMA will focus its supervisory activities on:

  • CRA governance and strategy and the quality of credit ratings;
  • TR data quality and data access;
  • Fees charged and information security for all supervised entities.

Steven Maijoor, ESMA Chair, said:

“The credit rating and trade repository industries continue to evolve and develop. We are receiving new applications for registration and existing entities are seeking to develop their businesses by expanding into new areas. ESMA supports these developments where they contribute to the maintenance of stable and orderly financial markets.

“For this reason, in 2016 ESMA will focus its work on the quality of the services being provided by supervised entities. This means we will concentrate on issues surrounding CRA governance, strategy and ratings quality, along with data quality and access to TRs’ data with a broad focus on the fee structures and information security in both industries.”

2015 Annual Supervisory Review – CRAs and TRs

In 2015, following its risk-based approach, ESMA focused its supervisory efforts on CRAs’ governance, risk management and internal decision making and on CRAs’ business development processes. Some notable achievements were:

  • investigating the techniques being applied to validate credit rating methodologies by some CRAs and using the differences identified to encourage industry-wide debate about appropriate validation standards;
  • conducting an IT risk assessment which identified that CRAs are facing serious risks in several areas including IT operations and information security;
  • investigating the process of issuing credit ratings followed by one CRA and raising concerns about the preparation of issue ratings, the workloads of credit rating analysts and their involvement in the provision of ancillary services; and
  • concluding an enforcement case against DBRS Ratings Ltd for internal control failings and imposing a €30,000 fine for past record-keeping breaches. The case highlighted the need for CRAs to establish clear decision-making procedures, organisational structures and effective compliance functions.

The key risks TR supervision focused on in 2015 related to the quality of TRs’ data, access to data held by TRs and the operation and performance of TRs’ systems. In 2015, ESMA continued working with TRs to implement the data quality action plan established in September 2014 including:

  • harmonising TRs’ data validation;
  • monitoring the inter-TR reconciliation process; and
  • ensuring the harmonisation of the aggregate data made available on TRs’ websites.

ESMA has also been monitoring National Competent Authorities’ (NCAs) access to TR data. It has entered into a number of Memoranda of Understanding (MoUs) to help third country regulatory authorities access TR data and is developing an IT system to allow NCAs to submit data queries through a centralised web portal.

15/02/2016 2016/291 ESMA consults on implementation of the Benchmarks Regulation , , Press Release PDF
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The European Securities and Markets Authority (ESMA) has today published a Discussion Paper (DP) regarding the technical implementation of the incoming Benchmarks Regulation (BR). ESMA is seeking stakeholder’s input to inform its future proposals on draft Regulatory Technical Standards (RTS) and Technical Advice (TA) to the European Commission.

Benchmarks are used in financial markets as a reference to price financial instruments and to measure performance of investment funds, as well as being an important element of many financial contracts and their integrity is critical to financial markets and to investors in particular. The BR’s objective is to improve the governance and control over the benchmark process, thereby ensuring their reliability and protecting users. The changes aim to:

  • improve the quality of the input data and methodologies used by benchmark administrators;
  • ensure that benchmark contributors provide adequate data and are subject to proper controls; and
  • ensure the supervision and viability of critical benchmarks.

Steven Maijoor, ESMA Chair, said:

“The Benchmark Regulation, once implemented, will ensure the accuracy, robustness and integrity of benchmarks and the benchmark setting process by clarifying the behaviours and standards expected of administrators and contributors. These requirements will ensure that benchmarks are produced in a transparent and reliable manner and so contribute to well-functioning and stable markets, and investor protection.

“ESMA, in preparing for its work on regulatory technical standards and technical advice, is keen to ensure that all affected stakeholders have their views heard on this important topic and we hope that all interested parties will take this opportunity to contribute.”

The DP is seeking stakeholder’s feedback in the following areas:

  • definition of benchmarks;
  • requirements for the benchmark oversight function;
  • requirements for the benchmark input data;
  • governance and control requirements for supervised benchmark contributors;
  • authorisation and registration of an administrator; and
  • transparency requirements regarding the benchmark methodology.

The exact date when the Benchmarks Regulation will enter into force is still unknown as it has not yet been published in the Official Journal of the EU.

Next steps

ESMA will hold an open hearing on the DP on 29 February 2016 in Paris. It will use the responses to its DP to develop detailed implementing measures on which it will publish a follow-up consultation in Q3 2016.

31/03/2016 2016/472 ESMA publishes UCITS remuneration guidelines , Press Release PDF
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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);

 

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

 

  1. 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.

07/04/2016 JC/2016/21 PR Joint Press Release draft RTS on PRIIPs , , Press Release PDF
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31/05/2016 2016/774 Q&A on the Application of the EuSEF and EuVECA Regulations Q&A PDF
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30/06/2016 2016/1047 Press Release Prospectus Peer Review , Press Release PDF
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01/07/2016 2016/1066 ESMA appoints new Securities and Markets Stakeholder Group , Press Release PDF
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The European Securities and Markets Authority (ESMA) has published the new list of members of its Securities and Markets Stakeholder Group (SMSG) following its approval by its Board of Supervisors. The selected individuals begin a 2½ year term on 1 July 2016 and will replace the group whose mandate expired on 30 June 2016.

The new SMSG will be composed of 30 individuals drawn from across 13 Member States and representing ESMA’s key stakeholder constituencies – financial market participants (10), employee representatives (2), consumer representatives (6), users of financial services (3), small and medium sized enterprises (2) and academics (7). The new SMSG will feature 27 new members. A number of the incoming members have served in the previous SMSG.

The SMSG was established according to ESMA’s founding regulation and facilitates consultation between ESMA and its key financial market stakeholders on its work. The SMSG provides ESMA with opinions and advice on its policy work and must be consulted on technical standards and guidelines and recommendations. Additionally, it can inform ESMA of any inconsistent application of European Union law as well as inconsistent supervisory practices in Member States.

19/07/2016 2016/1138 ESMA advises on extension of funds passport to 12 non-EU countries Press Release PDF
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21/07/2016 2016/1157 Press release- ESMA fines Fitch Ratings Limited €1.38 million , Press Release PDF
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15/11/2016 2016/1577 ESMA finalises Guidelines on the validation and review of Credit Rating Agencies’ methodologies , Press Release PDF
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21/11/2016 2016/1586 Questions and Answers on UCITS Directive Q&A PDF
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01/12/2016 2016/1620 ESMA to provide free credit ratings information to public , Press Release PDF
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The European Securities and Markets Authority (ESMA) has today launched its new database, the European Ratings Platform (ERP), to provide access to free, up-to-date information on credit ratings and rating outlooks on its website. The ERP is an important element of ESMA’s work, following the financial crisis, to increase transparency around credit ratings and help investors make informed decisions.

The benefits of the new ERP include:

  • allowing investors and other users of ratings to easily compare all credit ratings that exist for a specific rated entity or instrument;
  • lowering information costs by centralising information; and
  • helping smaller and new credit rating agencies gain visibility in the market.
16/12/2016 2016/1669 2016-1669 Q&A on AIFMD Q&A PDF
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21/12/2016 2016/1682 2016-1682 Press Release on Feedback Statement on ESEF , , , Press Release PDF
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30/01/2017 ESMA71-844457584-331 Opinion on UCITS Share Classes Press Release PDF
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02/02/2017 ESMA71-844457584-339 Press Release ESMA Supervision 2016 annual report and 2017 work programme , Press Release PDF
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29/03/2017 ESMA71-99-376 Feri EuroRating Services AG CRA registration withdrawn following acquisition , Press Release PDF
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The European Securities and Markets Authority (ESMA) has today withdrawn the credit rating agency (CRA) registration of Feri EuroRating Services AG (Feri EuroRating).

04/04/2017 71-99-378 ESMA proposes updates to endorsement guidelines for 3rd country credit ratings , Press Release PDF
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The European Securities and Markets Authority (ESMA) has published a consultation paper (CP) on updating its Guidelines on the application of the endorsement regime under the CRA (Credit Rating Agencies) Regulation. Endorsement is a regime under the CRA Regulation, which allows credit ratings issued by a third-country CRA, and endorsed by an EU CRA, to be used for regulatory purposes in the EU. A credit rating that has been endorsed is considered to have been issued by the endorsing EU CRA. The endorsement regime is available for CRAs of systemic importance with global networks of affiliates.

24/05/2017 ESMA71-99-468 ESMA consults on Money Market Funds rules , Press Release PDF
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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.