ESMA agrees with the Commission that areas such as access to information and timely identification of changes in third-country regimes, practices and supervisory approaches should be strengthened.
Further to ESMA’s principles on supervisory approach to relocations from the UK (PDF 144 KB), it has published three sector-specific opinions (PDF 158 KB) for “investment managers” (actually covers UCITS and AIF managers), investment firms (including investment managers) and secondary markets (trading venues). It has also published a letter from Steven Maijoor, ESMA’s chair, to Vice-President Dombrovski, inviting the Commission to consider extending its proposed enhanced approach for the recognition of third country central counterparties (CCPs) to other entities. ESMA’s contributions further underline that the EU’s evolving approach to third countries is a business risk for firms around Europe, which will increase as the UK moves towards its exit from the EU and the future EU-UK trading relationship is negotiated.
In a number of recent publications and speeches, including the Capital Markets Union mid-term review and the review of the operations of the European Supervisory Authorities, the Commission has suggested improvements in the way the EU deals with third countries. ESMA agrees with the Commission that areas such as access to information and timely identification of changes in third-country regimes, practices and supervisory approaches should be strengthened. It also believes there should be the possibility of supervision at EU level.
In particular, ESMA notes that, post-Brexit, a significant number of market infrastructures and corresponding activity with be located outside the EU but will remain of utmost importance for EU financial markets. It therefore supports that the proposed approach to third country CCPs be extended to other market infrastructures and key market players, including credit rating agencies, trade repositories, benchmarks and, possibly, data providers.
ESMA’s sector-specific opinions on “investment management” (UCITS and AIF managers) and on investment firms cover authorisation, governance, delegation or outsourcing, non-EU branches and effective supervision. The wording of the opinions is not identical but has a similar effect. In particular, the opinions apply only to UK applicants for EU27 authorisations, which could leave them subject to stricter requirements than existing and new EU27 applicants.
No reliance should be placed on firms’ existing authorisations and there should be no derogations or exemptions. The choice of Member State should be driven by objective factors and not by regulatory arbitrage. It is not clear how the national regulator of the chosen Member State can evidence that it has objectively assessed the application in this regard. Both the governance and delegation/outsourcing sections go to the question of the “substance” of the firm. In particular, ESMA says that the AIFMD requirements should also be applied to UCITS managers.
Non-EU branches should not be used to provide services to EU clients to the extent that the EU firm is in effect a letter box entity. National regulators should have the capacity and adequate resources to supervise the firm effectively, taking into account the firm’s operations in other jurisdictions and the impact of Brexit on its current delegation model. For UCITS and AIF management, ESMA adds that regulators should consider carefully their ability to assess documentation presented in a foreign language without appropriate translation.
The opinion on secondary markets covers trading venues relocating from the UK and seeking to minimise the transfer of the effective performance of activities in the EU27 by relying on the outsourcing of certain activities to a UK-based entity, including affiliates. ESMA considers that conditions for outsourcing activities to UK-based entities should not generate regulatory and supervisory arbitrage risks. The opinion includes short sections on non-EU branches and effective supervision, but predominantly it comments on outsourcing activity. The principles are said to elaborate requirements in MiFID I and II.