On 22 November 2024, the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) published responses to the European Commission’s consultation on macroprudential policies for Non-Bank Financial Intermediation (NBFI) (which was published in May 2024 and is the subject of a previous blog).

ESMA response

In its response to the consultation, ESMA makes key proposals in areas including:

  • Liquidity management: ESMA notes that despite progress made to date, there is a need to address some remaining issues concerning liquidity mismatches in open-ended funds (OEFs). In particular, it suggests that national competent authorities (NCAs) could require funds that invest in non-liquid assets to be structured as closed-ended funds, and it fully supports the Financial Stability Board’s recommendation relating 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: The response reiterates ESMA’s position on the need to complete the reform of the MMF Regulation.
  • Supervision and data: ESMA calls for a move towards data driven supervision, first by harmonising the framework for analysing 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. It flags that both of these proposals require comprehensive and good quality data to assess financial stability risks, as well as enhanced data sharing between supervisors.
  • Coordination: ESMA suggests enhancing coordination between NCAs by creating a formal reciprocation mechanism for leverage limits under the Alternative Investment Fund Managers Directive, which it says would make national measures more effective by guarding against the potential for regulatory fragmentation or arbitrage across the EU. It also calls for the European Commission to consider granting ESMA the formal power to request the implementation of stricter macroprudential requirements by one or multiple NCAs, in order to address risks at EU-level.

ECB response

The ECB’s response highlights the need for a macroprudential perspective in the regulation of the NBFI. It warns that the current regulatory framework for NBFIs has not been designed with the macroprudential aim of reducing the build-up of systemic risk, and that while the current regulatory framework includes certain requirements that have positive system-wide effects, these have not been sufficient in themselves to reduce the propensity of certain NBFI cohorts to amplify shocks.

The response includes a number of Eurosystem recommendations to strengthen the macroprudential perspective in regulating the NBFI sector, which relate to:

  • Implementing internationally-agreed reforms.
  • Enhancing the NBFI macroprudential toolkit.
  • Introducing system-wide stress testing in Europe.
  • Enhancing NBFI data as well as access to this data by different authorities.
  • Governance arrangements.
  • Monitoring, and adjusting where needed, the regulatory perimeter.