ESMA’s Output Unaffected By Remote Work

We are not living in normal times. Just ask my family: Never before have they seen so much of me. (That’s not necessarily a good thing, depending on who you ask.) Much like most of the global workforce, I’ve been working remotely, navigating the crisis alongside my wife and kids. Like most families, we have settled into a new form of routine as best we can. Regulators too have been impacted in the exact same way and have had to readjust to these uncertain and unusual circumstances. In that context, one may have expected the level of output to decrease somewhat. However, in the case of European Securities and Markets Authority (ESMA), they appear to be particularly well suited to this new work from home environment. How do we know? Because their cadence of regulatory output has not dropped off in recent weeks, in fact it’s ramped up across a wide range of topics.

At the start of this year, I wrote about the varying areas of regulatory focus and dubbed “2020 the year of clarity and precision.” I was wrong, of course – 2020 will be defined across the board as the year of COVID-19.  That is not to say that there remains a robust regulatory change agenda distinct from COVID-19. This is shown by the continued steady stream of policy publications from ESMA and others.  

Here I pick out five recent ones from ESMA that carry significance to asset managers:

Credit rating data – why pay?

“Big Data” has been an industry buzzword for several years now. A critical subset of an asset managers data inventory is credit ratings data. ESMA has called for feedback from all users of credit rating data on the frequency and nature of their data usage. ESMA’s primary curiosity relates to why data users (who are often asset managers) rely on third party provider subscription services rather than information currently provided free of charge on platforms such as the European Rating Platform (ERP) and on credit rating agencies’ (CRAs) public websites. Currently most asset managers sign up to a paid subscription services where they can access more granular data and information around the ratings.  Respondents are asked to consider any improvements which would result in more efficient access to credit ratings, including possible scope to improve usability of the “free” information already available. This consultation runs until 3 August 2020. 

The democratization of market data and the reduction in data costs is an area of focus for many global regulators. The Securities and Exchange Commission (SEC) Regulation NMS, for instance, and the cost of required data for the upcoming EU ESG rules represent two other areas of market data under the regulatory purview currently. This is a theme we will revisit in more detail in the coming months.  

EU cross-border distribution: Quest for harmonization continues

ESMA recently returned to one of their favorite quandaries: why don’t more EU funds sell a on a cross border basis? This has been a multiyear assessment that recognizes the fact that even though UCITS funds are theoretically “passportable” across all 27 EU member states, very few do. The primary purported reason the fragmentation of rulesets across the bloc, where gold-plated local country requirements add an additional layer cost and bureaucracy to the registration process.   

This most recent consultation looks to establish standard forms, templates, and procedures that EU27 regulators should use. The aim is for these regulators to publish information on their websites to facilitate more efficient cross-border distribution of funds.

The consultation paper proposes that each regulator discloses on its public website all laws, regulations, and administrative provisions to govern marketing requirements for AIFs and UCITS. It also proposes that any applicable regulator fees and charges  for carrying out their duties in relation to the cross-border activities of fund managers be made public. These disclosures would aim to highlight and thus reduce the number of non-standard processes or charges across member states.

This consultation runs until 30 June 2020 with a view to finalizing technical standards for submission to the European Commission (EC) for their approval by 2 February 2021.

Final report on inducements and costs and charges disclosures

One of the overarching debates in the EU funds market is that there is a proliferation of cost and charge disclosures coming from a multitude of regulations — PRIIPS, UCITS, MiFID II, AIFMD mixed in with some local country requirements.  As such, a single version of the truth when it comes to comparing EU funds can be vexing. The other elusive element of fund sales relates to the disclosure and level of inducements that may be paid to distributors of products. 


Late last summer, ESMA conducted a consultation aimed at enhancing disclosures and generally assisting investor understanding of inducements. Last week they published a report on their findings. 

The report suggests that overall the MiFID regime has worked well in disclosing the costs of products to investors, but the report does suggest a shift to more explicit and “plain language” disclosures  and a scale back of othersmay be appropriate.

The other significant element within the report relates to telephone dealing in funds and the fact that it is often “impossible” to provide the required disclosures while on the phone.  Recognizing the difficulty in multitasking, the final report allows some leeway and states that if it is not possible to provide the cost disclosures in good time before the transaction, then the relevant costs disclosures may be provided immediately after the transaction is concluded.

Leverage risk in AIFMD funds

This consultation poses the question of whether there ought to be hard coded leverage limits for Alternative Investment Fund (AIF) managers, such as hedge funds and private equity in Europe. Currently, under AIFMD, managers themselves get to set their own leverage limits and the thresholds are not standardized across the various domiciles. The other area of ESMA focus is the fact that AIFs can employ financial and derivatives leverage, but synthetic derivatives are “off balance sheet” thus making it difficult for regulators to assess specific or general risk.

Under the proposed guidelines, any AIF with more than €500 million in assets under management (AUM) who employ leverage will be identified by their national regulator. They could find themselves under greater scrutiny and may be required to explain the leverage utilized. In some cases, they may be asked to reduce or curb the amount of leverage utilized if it is considered “excessive” by the regulator. While the imposition of a consistent pan-EU methodology to calculate leverage would be welcomed by industry, less welcome is the possibility of allowing national regulators to intervene in the chosen investment strategies of AIFs. 

The ESMA AIF leverage consultation runs until 1 September 2020.

Fines and penalties for non-EU CCPs

Publication of the final technical advice to the EC on rules for imposing fines and penalties on third country central counterparties (TC-CCPs) is highly technical but highly controversial. The ability for the EU to levy sanctions on non-EU entities is highly politicized and sensitive, particularly in terms of the UK where some of the largest entities reside. Let’s not forget that one of the underpinnings of Brexit was for the UK to be free of EU bureaucracy.   

The advice covers aspects ranging from independent arbitration, detailed procedures on imposing fines, statutes of limitation and calculation, and collection parameters. While the existing framework has always had enforcement built in, the level of detail and the fact that Brexit’s shadow remains a constant source of tension when it comes to extra territorial impacts of EU regulation. This is an area which will be of huge interest and significance when such penalties become a reality rather than a concept.

So while we are all rightly occupied by managing the COVID-19 crisis, it is important to stay abreast of the regulatory developments. If the actions of ESMA are any indication it seems regulators are functioning well in their remote working environment.