MFA Warns Against One-Size-Fits-All NBFI Regulation

 MFA urged the European Commission (EC) to refrain from applying a one-size-fits-all macroprudential regulatory framework to nonbank financial intermediaries (NBFIs) in a comment letter submitted today. The letter is in response to the EC’s targeted consultation on macroprudential policies for NBFIs.

The letter emphasizes that the NBFI sector is diverse and encompasses a wide range of financial institutions with varying risk profiles, operational structures, and regulatory oversight.

Alternative investment funds (AIFs) and their managers are important, well-regulated, and do not pose a systemic risk to the economy. MFA contends that, considering the diverse nature of the NBFI sector, it would be unsuitable to impose uniform macroprudential regulations across all NBFIs.

AIFs increase liquidity, enhance capital markets, and supply vital capital to businesses of all sizes, which creates jobs and drives economic growth across EU Member States. AIFs also generate returns throughout the economic cycle for their investors, which include pension funds and foundations. An ill-suited macroprudential regulatory framework would stifle AIFs, harming markets, investors, and broader economic growth and competitiveness.

“Alternative investment funds are an important, well-regulated part of Europe’s economy and are not a systemic risk. Imposing a one-size-fits-all regulatory framework on alternative asset managers would restrict their ability to provide capital to European companies, create jobs, and enhance capital markets,” said Bryan Corbett, MFA President and CEO. “Europe should seek to foster investments from alternative investment funds in order to best achieve the Savings and Investments Union objectives, and not burden it with ill-fitting regulations that fail to recognise their distinct characteristics and risk management controls.”

MFA’s letter outlines the reasons why AIFs should not be subject to macroprudential regulations similar to those applied to depository institutions. Appropriate and dynamic risk management is a cornerstone of the AIF industry. AIFs are not a systemic risk because they have:

• Sophisticated investors: AIFs are funded by sophisticated institutional investors who fully understand investment risks. They are not funded by depositors nor backstopped by the government.
• Liquidity management: AIFs’ redemption limitations are calibrated to the liquidity of underlying assets, preventing “run risk”.
• Risk management: AIFs use limited leverage and maintain detailed, robust margin and risk management practices with their dealer counterparties.

The letter also encourages regulators to harmonise reporting requirements across global markets. This would improve the effectiveness of oversight without imposing unnecessary or duplicative reporting burdens on market participants.

Read the full comment letter here.

Source: MFA

ESMA Responds to the EC consultation on assessing the adequacy of macroprudential policies for NBFI

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor sent its response to the European Commission (EC) consultation on assessing the adequacy of macroprudential policies for NBFI.

In its response to the consultation, ESMA makes key proposals in several areas, as follows:

Liquidity Management: ESMA recognises the progress made with the revised Undertakings for Collective Investments in Transferable Securities (UCITS) and the Alternative Investment Fund Manager (AIFM) Directives. This is especially the case with the provisions on liquidity management tools.

ESMA however still considers that there is a need to address some remaining issues concerning liquidity mismatches in open-ended funds (OEFs). In particular, competent authorities could require funds that invest in assets that are not liquid to be structured as closed-ended funds. This is why ESMA fully supports the Recommendation of the Financial Stability Board related to the classification of OEFs based on asset liquidity and calls for appropriate efforts to ensure the convergent and consistent application of these recommendations in the EU.

Money Market Fund Regulation (MMF) Review: ESMA reiterates its position on the necessity to complete the reform of the MMF Regulation, considering the vulnerabilities identified in its Opinion.

Supervision and Data: ESMA proposes to progress towards data driven supervision, first by harmonising the framework to analyse risks posed by investment funds (especially regarding liquidity risks), and second by developing an EU system-wide stress test across NBFI and the banking sector. These proposals imply having comprehensive and good quality data to assess financial stability risks. Supervisors also need enhanced data sharing, ensuring that ESMA and other authorities have all required information and avoiding unnecessary burden on reporting market participants.

Coordination: ESMA suggests enhancing coordination between competent authorities by the creation of a formal reciprocation mechanism for leverage limits under the AIFMD. This mechanism would make national measures more effective by guarding against the potential for regulatory fragmentation or arbitrage across the EU. In addition, ESMA calls for the EC to consider granting ESMA the formal power to request the implementation of stricter macroprudential requirements by one or multiple national competent authorities, in order to address risks at EU-level.

Background

On 22 May 2024, the EC launched a targeted consultation aimed at assessing the adequacy of macroprudential policies for NBFI, as a response to major events in recent years and the related financial stability concerns that have emerged.

Next Steps

ESMA stands ready to further collaborate with the Commission on any of the proposals made in its response.

Source: ESMA