The European Securities and Markets Authority (ESMA) has published a speech given by its chairman, Steven Maijoor. The speech is entitled Systemic risks and current policies in the EU fund industry – Can asset managers be too big to fail?
In the first part of his speech, Mr Maijoor discusses the systemic importance of the asset management sector. He notes that addressing systemic risks in the financial sector is one of the most important tasks in the wake of the financial crisis. The G20 commitment goes far beyond the banking sector and concerns all financial institutions. Relevant to the asset management industry is that the Financial Stability Board (FSB), in consultation with the International Organization of Securities Commissions, has started work on a methodology to identify systemic entities with respect to market intermediaries, finance companies and investment funds. This initiative marks an important first step towards global rules for systemically relevant asset management activities. Existing regulatory frameworks including the EU’s UCITS Directives and the Alternative Investment Fund Managers Directive (AIFMD), have improved the functioning of markets, their transparency and ultimately the protection of investors but now these regulations need to be complemented with an efficient framework to address systemic risks.
Mr Maijoor discusses two examples of activities whose impact on financial stability may need to be specifically addressed. These are money market funds and securities financing transactions. Having discussed these examples, Mr Maijoor comes to the conclusion that during the designation process of systemic entities it is important to identify the activities that can foster directional market moves and contagion. While not ruling out that individual asset managers can be systemically relevant, Mr Maijoor states that consideration should be given to the specific characteristics of the asset management sector as systemic risks might well be the result of certain activities conducted by a group of asset management firms.
Mr Maijoor also touches on the point that data is of the essence when it comes to designating, monitoring and supervising systemic entities or activities. In the EU, the implementation of the European Markets Infrastructure Regulation and the AIFMD have significantly increased the harmonised data available to regulators, especially regarding over-the-counter derivatives and alternative funds. However, Mr Maijoor states that there needs to be an assessment as to whether there are still unknown areas in the system that need more regulatory insight and bridge the remaining data gaps. In this context, Mr Maijoor supports the European Commission’s recent proposal to enhance regulators’ and investors’ understanding of securities financing transactions.
In the second part of his speech, Mr Maijoor considers some of ESMA’s policy work streams and initiatives that are relevant to asset management. In particular he touches on three priority areas for ESMA’s work on the AIFMD. These are:
- the development of a Q&A document;
- preparatory work has already begun in view of the opinion and advice that ESMA must deliver to the EU institutions in July 2015 regarding the possible extension of the passport to non-EU funds and managers; and
- efforts will continue to clarify the reporting obligations on alternative investment fund managers and, at the same time, building an IT system that will facilitate the centralisation of the data that is reported.