On 27 July 2012, ESMA published its response (dated 24 July 2012) to the European Commission’s March 2012 Green Paper on shadow banking.
Definition of Shadow Banking
In its Green Paper the Commission relied on the FSB definition of the shadow banking system – “the system of credit intermeditation that involves entities and activities outside the regular banking system”. The Commission concluded that this definition implies the shadow banking system is based on two intertwining pillars:
- Entities operating outside the regular banking system
- Activities, such as securities lending and repos/reverse repos that could act as important sources of funding of non-bank entities
ESMA considers that the definition should be more focused on activities than on the entity performing the activity. This approach would help reduce the risk of regulatory arbitrage and avoid an undue focus on particular entities or products.
Shadow Banking Entities and Activities
The Green Paper lists money market funds and ETFs as shadow banking entities. ESMA broadly agrees with this but considers that it is crucial to have a flexible and evolving framework that would allow the inclusion of financial innovations. As an example ESMA points to investment funds that are created to receive impaired bank assets.
Interaction between Supervisory Authorities
ESMA agrees with the Commission that stricter monitoring of the shadow banking system is necessary but emphasises that it is also important to ensure the transmission and disclosure of information and an appropriate level of collaboration, between supervisory authorities at national, EU and global levels.
Regulatory Arbitrage
ESMA believes that it is important to reduce the scope for regulatory arbitrage as much as possible. In this context, it considers that it would be inappropriate to focus unduly on ETFs. Instead, all exchange traded products and not just those taking the legal form of a UCITS or alternative investment fund merit consideration on a cross-sectoral basis in the EU.
Regulatory Measures applicable to Shadow Banking in the EU
ESMA emphasises its on-going work relating to entities and activities identified by the Commission as being involved in shadow banking, such as money market funds, ETFs and alternative investment funds.
Securities Lending and Repos/Reverse Repos
ESMA notes the lack of data available to supervisory authorities on securities lending and repo/reverse repos transactions and positions and that there is “little or no regulation” in this area, a position which ESMA says could be remedied with a better reporting regime, as well as “an appropriate and harmonised regulatory framework in the EU”. It suggests that such a framework could take the form of a standalone initiative or build on existing regulation (MiFID, CRD, UCITS) depending on the assessment of the regulatory amendments required.
For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.
