RegTech Intelligence 
Continuing on from part 1, where we discussed the European regulator’s priorities for Credit Rating Agencies (CRAs) and Trade Repositories (TRs) for 2016, we now look at the nature and focus of the work the regulator plans to carry out this year to promote supervisory convergence.
In October 2015, the European Securities and Markets Authority (ESMA) highlighted, within its annual work programme, a number of areas of focus for 2016 that would help the European regulator meet its objectives of enhancing investor protection and promoting stable and orderly financial markets.
One of ESMA’s tasks, since it was established as an independent EU authority on 1 January 2011, was the building of a single rulebook for EU financial markets. In practice, this aligns with the Financial Conduct Authority’s (FCAs) handbook, whereby the handbook “contains the complete record of FCA Legal Instruments and presents changes made in a single, consolidated view”.
However, ESMA’s strategy for 2016 to 2020 notes that, although the establishment of a single rulebook is necessary, it is not itself sufficient to achieve its objectives. Therefore, from “2016 onwards, ESMA’s focus will shift increasingly from rulemaking to implementation. As such, supervisory convergence in the implementation, supervision and enforcement of common EU rules will be a core focus of ESMA’s activities”.
As a result of this, one of the three areas of focus in ESMA’s 2016 work programme is supervisory convergence and, on 11 February, ESMA published its first Supervisory Convergence Work Programme 2016 (SCWP). The SCWP supplements the work programme, detailing the activities and tasks ESMA will carry out to promote sound, efficient and consistent supervision across the European Union.
ESMA chair, Steven Maijoor, emphasised that this publication had marked “a significant change in ESMA’s direction” and solidifies ESMA’s commitment to delivering their “objective of fostering supervisory convergence”.
Overview of ESMA’s SCWP for 2016
ESMA’s primary mission is to “enhance investor protection and promote stable and orderly financial markets”, and an important element in achieving this is supervision – and a logical complementary activity to this is supervisory convergence, as it contributes to EU markets working effectively by creating a level playing field and preventing regulatory arbitrage. Focusing on supervisory convergence in 2016 should help ESMA to achieve its mission in practice.
In developing its first SCWP, ESMA has taken a systematic approach involving the consideration of the regulatory and market environments, national competent authorities’ (NCAs) priorities and the supervisory convergence tools available. In addition, it has applied specific parameters relating to what the work should achieve and how it should be carried out.
Within the overall programme, ESMA has identified a number of priorities for 2016:
- Preparing for the sound, efficient and consistent implementation and supervision of MiFID II/MiFIR
- Finalising the data and IT infrastructure needed to support the effective implementation and supervision of MiFID II/MiFIR and MAR
- Facilitating the sound and consistent supervision of OTC derivatives markets and – in particular – of EU CCPs
- Supporting the effective application of the European Commission’s Capital Markets Union plan.
In addition to this, ESMA has stated that it will prioritise calls on resource for the following activities:
- Promoting ex ante discussion of specific ‘live’ cases
- Providing remediation in cases where difficulties arise.
- Preparing for the sound, efficient and consistent implementation and supervision of MiFID II/MiFIR
The new legislation, MiFID II/R, looks set to overhaul the current financial landscape and will have a significant impact on investors and market participants. Consequently, a great deal of work will have to be undertaken in 2016, regardless of the forthcoming change being made to the timeline for application of the Level 1 legislation. This is to ensure that NCAs, and affected investors and market participants, are provided with clarity within good time.
In particular, for 2016, ESMA’s work will cover:
- Investor protection issues, such as product governance and information on risks, costs and charges
- Preparation for extension of the pre-trade transparency regime to a wider range of financial instruments
- Preparations for use of the ‘product intervention’ powers.
ESMA plans to provide specific measures for this area, including:
- Guidelines
- Q&As
- Common procedures
- ‘Application workshops’
- Supervisory briefings
- Training on key aspects of the new regime
- Preparations for application of the third country regime.
- Finalising the IT infrastructure needed to support the effective implementation and supervision of MiFID II/MiFIR and MAR
This task is closely related to the first. Considering the impact that MiFID II/R will have on EU financial markets, and the impending application date of MAR, ESMA has decided that continuing with the building and testing of IT infrastructure that will be used by NCAs for crucial aspects of both legislations is a priority for 2016.
- Facilitating the sound and consistent supervision of OTC derivatives markets and in particular of EU CCPs
With the first set of clearing obligations now applicable for category 1, and the deadlines for categories 2 and 3 fast approaching, the importance of central counterparties (CCPs) is increasing.
However, the commercial incentives that CCPs face to compete on the basis of risk remain, and consistent data quality is essential for authorities to be able to monitor risks in the OTC derivatives markets.
- Supporting the effective application of the Capital Markets Union through directly relevant supervisory convergence work
On 30 September 2015, the Commission adopted a plan that set out 20 steps to achieve a single market for capital in Europe. With respect to supervisory convergence work for this area, ESMA plans to:
- Conduct thematic studies on home and host responsibilities under UCITS and AIFMD. The aim of this is to clarify the respective responsibilities of NCAs and to enable a smooth operation of the ‘passports’ required for marketing and management
- Use the recently completed thematic study and conduct a peer review in early in 2016 to promote increased convergence in relation to prospectuses. These will be used to inform considerations on new legislation on this area.
Thematic overview for 2016
Within the SWCP, ESMA provides further detail on the supervisory convergence activities it envisages. Due to the cross-cutting nature of the issues, ESMA has identified a list of priorities, along with activities to be undertaken (as long as resources permit) based on the following themes:
- Corporate finance
- Corporate reporting
- Investment management
- Investor protection and intermediaries
- Market integrity
- Post-trading
- Secondary markets
- IT infrastructure to support convergence
- Cross cutting activities.
Within this section, ESMA notes that, as some workstreams are likely to continue past 2016, they will remain important areas of focus in 2017. This reflects ESMA’s transition towards multi-annual work planning to take into account the longer term priorities.
Next steps for the SCWP
The SCWP for 2016 reflects a shift in focus for ESMA towards more activities falling under supervisory convergence. ESMA has listed many activities, within different areas of responsibilities, that will be completed in 2016 and soon after.
The SCWP falls under ESMA’s overall annual work programme for 2016, which was initially budgeted at €40,437,589. The European Commission has since proposed a budget of €38,122,405, requiring a cost reduction of around €2.3 million. Accordingly, ESMA has identified areas where planned works will now not be carried out, including certain IT projects, peer reviews and translation activities.
Therefore, although this may seem like an ambitious plan, other topics for supervisory convergence were left out of scope for 2016. An example of this includes “working towards more consistent enforcement approaches and sanctions”. ESMA notes that these areas will be put forward for consideration when preparing the next SCWP for 2017-2018.
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