On 4 December 2024, the European Systemic Risk Board (ESRB) issued a press release announcing that it had published a report which provides a response to the European Commission’s (Commission) targeted consultation assessing the adequacy of macroprudential policy for non-bank financial intermediation (NBFI).

Among other things the report notes that progress has been made in enhancing the resilience of NBFI entities and market-based finance, but important gaps need to be closed. As such the ESRB sets out several areas where legislative action is needed by the Commission in both the near and medium term.

Near term action

Near term action includes addressing vulnerabilities in EU money market funds (MMFs) and expediting the reforms to the MMF Regulation so that these reflect the ESRB’s earlier recommendation and the opinion of the European Securities and Markets Authority (ESMA). The ESRB also calls on further efforts to address vulnerabilities in investment funds particularly to reduce liquidity and leverage-related risks. The ESRB explains that it is exploring new policy tools to mitigate liquidity risk from a financial stability perspective and enhance investment fund resilience. These include tools that would give authorities the power to mitigate liquidity risk in a similar way that Article 25 of the Alternative Investment Fund Managers Directive (AIFMD) enables them to address risks associated with leverage. Once this work is finalised, the ESRB will communicate its conclusions to the Commission. The ESRB notes that the definition of a financial instrument is not harmonised across Member States, which leads to differences in how crypto-assets are classified. As the Markets in Financial Instruments Directive (MiFID) is a directive, its definition of financial instruments has not been transposed into national laws in a fully harmonised way. This situation will be partially addressed by forthcoming ESMA guidance for Member State competent authorities on the criteria for classifying crypto-assets as financial instruments. However, the ESRB warns that there may be a need to harmonise the classification of financial instruments and crypto-assets in Level 1 legislation. As there is also uncertainty about the legal status of crypto deposits at EU level, similar considerations apply.

Medium term action

Among the medium term action points the ERSB states that consideration should be given as to how reciprocity under Article 25 of the AIFMD could be implemented. It adds that recent experiences with implementing leverage limits under Article 25 AIFMD have highlighted the importance of engagement between Member States and coordination to ensure the effectiveness of these measures. Given the cross-border nature of the investment fund sector, a reciprocation framework – coordinated by ESMA – is needed to ensure that alternative investment funds do not have an incentive to move to different jurisdictions to avoid regulation