EU Responses to Consultation on Macro-Prudential Policies for Non-bank Financial Intermediation

The European Central Bank has published the Eurosystem's response to the European Commission's consultation on macroprudential policies for non-bank financial intermediation. This is on behalf of the ECB and the national central banks of member states in the eurozone. On the same day, the European Securities and Markets Authority published its response to the consultation.

In its response, the Eurosystem considers the potential sources of systemic vulnerability in, and the need for a macroprudential perspective in, the regulation of the NBFI sector. It then makes a number of specific recommendations including:

• the recently agreed reforms to the global NBFI regulatory framework need to be implemented in Europe without delay, including the Financial Stability Board's October 2021 proposals to enhance Money Market Fund resilience and its 2023 recommendations on open-ended fund resilience;
• the introduction of an explicit macroprudential tool to mitigate the risks that can arise from structural liquidity mismatch in open-ended funds ex ante as well as closing the gaps relating to leverage in the existing toolkit. This includes requiring all Undertakings for the Collective Investment in Transferable Securities funds using value-at-risk to report and disclose regularly on their leverage, based on the commitment approach, and introducing a discretionary tool to impose tighter leverage restrictions for these funds;
• the introduction of system-wide stress testing in Europe;
• enhancing NBFI data, including granting EU authorities access to a broad range of already existing NBFI datasets, given the significance of NBFI for financial stability; and
• increasing monitoring of, or adjusting where necessary, the regulatory perimeter.

ESMA's recommendations focus on:

• Liquidity management: ESMA considers that there is a need to address some issues concerning liquidity mismatches in open-ended funds. In particular, competent authorities could require funds that invest in assets that are not liquid to be structured as closed-ended funds. ESMA fully supports the Recommendation of the FSB related to the classification of open-ended funds based on asset liquidity and calls for appropriate efforts to ensure the convergent and consistent application of these recommendations in the EU.
• MMF Review: ESMA reiterates its position on the necessity to complete the reform of the MMF Regulation.
• Supervision and Data: ESMA proposes to progress towards data driven supervision, first by harmonizing the framework to analyse risks posed by investment funds, and second by developing an EU system-wide stress test across NBFI and the banking sector.
• Coordination: ESMA suggests enhancing coordination between competent authorities through the creation of a formal reciprocation mechanism for leverage limits under the Alternative Investment Fund Managers Directive. 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.

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