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In 2016, ESMA continued to make progress in its mission of enhancing investor protection and promoting stable and orderly financial markets through its four activities of:
The Report contains details about ESMA’s work under each of these activities, with a focus on the key achievements in each of those areas.
ESMA’s key focus is on its supervisory convergence work. Supervisory convergence may be a dry term, but the work itself, looking at how harmonised EU rules are applied in practice, is vital to ensuring the single rulebook is consistently applied across the EU to support investor protection and stable financial markets, and to avoid regulatory arbitrage between national markets.
Our supervisory convergence work spans a range of activities and uses a variety of tools. In 2016, we published the results of peer reviews on CCPs’ margins and collateral requirements and on prospectuses, published various guidelines, updated existing Q&A’s as well as issuing new ones. In particular on MiFID II/MiFIR, we have given clarity on implementation matters.
ESMA passed an important milestone with the first EU-wide stress test for Central Counterparties (CCPs), which was also a global first. The stress test focused on the counterparty credit risk that CCPs would face from severe price shocks and multiple clearing member defaults, with the results showing that the CCPs were resilient to the extreme, but plausible stress scenarios used. The second stress test of CCPs is currently being prepared and we will undertake stress test work in the asset management sector in 2017, taking into account the sector-specific characteristics.
In 2016, ESMA highlighted the regulatory action taken against several investment firms, in one Member State, where ESMA has coordinated a number of national regulators’ activities relating to high-risk speculative products offered to retail clients across the EU. Protecting investors is one of our core objectives, and the growth in the sale of these high-risk products – such as contracts for difference (CFDs), binary options and rolling spot forex – has been a source of consumer detriment and we have sought to raise awareness by warning investors about these products.
ESMA's supervisory convergence work in the asset management sector is an important building block of the Capital Markets Union (CMU), which aims to foster deeper and more integrated EU capital markets that can develop alternative sources of funding to the banking sector and boost economic growth. Last year ESMA took some important steps in this direction, including issuing our work on closet indexing, which identified serious concerns regarding the practice, and addressing an Opinion to the EU co-legislators on what should be the key principles for a European framework on loan origination by funds.
ESMA’s work in 2016, as the supervisor of credit rating agencies (CRAs) and trade repositories (TRs), brought tangible results, including increasing transparency around credit ratings with the launch of the European Ratings Platform, and levying our largest fine to date, €1.38m, on a CRA for breaches of the CRA Regulation. Linked to ESMA's supervisory work, has been their data quality project aimed at ensuring the consistency and clarity of data submitted to TRs by counterparties. ESMA also issued the first fine of a TR for data access failures. Looking forward to 2017, strategy and governance will be a key theme for both CRAs and TRs, particularly in light of the UK’s decision to leave the EU. ESMA will also focus on the quality of ratings, internal controls and risk assessment for CRAs, and data quality, technology trends and internal control for TRs.
Preparing for MiFID II/MiFIR’s go-live date has been a key project in 2016 and while there are still some rules to finalise in 2017, our focus is now on implementation. This includes approving opinions on position limits and waivers, clarifying issues through Q&A’s and developing the IT infrastructure to collect, process and publish financial instruments’ reference data and additional data to support the MiFIR transparency regime.
ESMA continues to play an important role in international cooperation regarding regulatory and supervisory matters. In 2016 we recognised 11 third country CCPs and advised the Commission on extending the passport under the Alternative Investment Funds Managers Directive (AIFMD) to non-EU Alternative Investment Funds Managers (AIFM) and Alternative Investment Funds (AIF) in 12 countries. We continued our active participation in the IOSCO Board, several IOSCO policy committees as well as its European Regional Committee. While, we also participated in various FSB work streams relating to stability and financial markets.
The UK decision to leave the EU is an unprecedented development in the EU’s history, which will have a significant impact on financial markets and ESMA will have a key role to play in helping market participants adjust and prepare. In this respect, our focus is on supervisory convergence, and avoiding regulatory arbitrage, by ensuring that regulatory standards apply consistently to firms wishing to relocate activities to the EU27. We also see a need to rethink the framework for third countries in financial markets legislation including, the need to strengthen supervisory tools and to introduce regular enforcement powers regarding certain third country entities.
Another major issue that will influence ESMA's future is the Commission’s review of the operations of the European Supervisory Authorities and ESMA is committed to support the development of any actions resulting from this consultation.