19 June 2013

ESMA/Maijoor: Keynote speech at ISLA's 22nd Annual Conference

Shadow banking could constitute an alternative source of lending, and our view is that some channels may indeed contribute to final financing, such as securitised assets. However, there is some evidence that much of the financing provided by shadow banking remains within the financial system, meaning that the impact of the activity on the real economy is limited. Taking into account the additional regulatory requirements that may soon be applied to shadow banking activities, we should remain realistic about the extent to which it could become a replacement for traditional bank financing.

ESMA published its final guidelines on ETFs and other UCITS issues in December 2012. It is important to stress that these guidelines cover a wide range of topics and were conceived with two key objectives in mind: strengthening investor protection and reducing systemic risk, objectives which I believe to be complementary. I will not speak about all of the issues addressed by the guidelines but will concentrate on a few that may be of particular interest.

For example, the guidelines set out strict requirements on the financial indices to which UCITS may gain exposure. We took this action as we had become aware of an increasing number of UCITS that were obtaining exposure to indices which were, to all intents and purposes, investment strategies wrapped in an index.

I would like to stress that the inclusion of these provisions in the guidelines should not be taken as a criticism of securities lending or repo activity by UCITS per se. We recognise that these activities represent a means of managing portfolios in a more efficient manner, and that they potentially increase the revenues of the fund. However, we identified a need to put in place additional safeguards, taking into account the retail focus of UCITS funds and the need to ensure liquidity. We were also of the view that fees arising from securities lending, net of direct and indirect operational costs, should be returned to the UCITS. Although that particular reform was met with surprise by some stakeholders, we believe it is a key principle that is in the interests of UCITS investors. Indeed, there may be merit in carrying out further work in this area in order to monitor the application of the principle on the ground.

Let me now turn my attention to another important area of ESMA’s work in recent months, namely our evaluation of the impacts and review of the Short Selling Regulation. We carried out this review in response to a request for advice from the European Commission. The review was published at the beginning of this month and covers many aspects of the Short Selling Regulation. ESMA’s main recommendations cover such issues as the transparency and reporting requirements, the restrictions on uncovered short sales in shares and sovereign debt, the ban on uncovered sovereign CDS transactions and the emergency measures in case of a significant fall in price.

I will now turn my attention to my final topic. As you are no doubt already aware, the development of a single rulebook is only one of ESMA’s objectives. Indeed, we have a much broader range of tasks that includes monitoring and assessing market developments and informing the EU institutions about the relevant micro-prudential trends, potential risks and vulnerabilities or TRV. One issue that we looked at in more detail as part of our recent TRV report was the supply of collateral in the securities lending, repo and OTC derivative markets.

The main conclusion of our analysis is that the availability and use of collateral needs to be monitored, particularly in view of the potential financial stability risks linked to relative collateral scarcity. It will also be important to separate trends that are due to regulatory changes, such as OTC derivatives regulation or Basel III, from those that are indicators of increased risk perception or a weakening of unsecured markets. We will keep this on our radar as part of our on-going monitoring of developments in financial markets.

Full speech

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