The European Securities and Markets Authority (ESMA) has published its work plan for 2020. In its “2020 Work Programme (WP),” released on October 1, 2019, the European regulator has provided a brief outline of its areas of governance, to strengthen investor protection and maintain the integrity of the financial markets.
Some of the key areas of focus, under this programme, will be the body’s enhanced role in supervisory convergence, direct supervision of the markets, strategic ties with developing nations and promoting technological innovation. Also high on the minds of the regulatory team is the upcoming Brexit negotiations, and eventual withdrawal of the UK from the European Union.
ESMA will continue to prepare for both Brexit scenarios, soft and hard, and the immediate risks associated with each of them. Uncertainty over these negotiations might impact some of the powers vested in ESMA. These include the impact on the application of MiFID II, MiFIR and all other benchmark regulations, and the use of UK data in ESMA’s databases.
Here is a brief overview of the 2020 WP.
ESMA plans to prioritize on 4 main activities in the newly launched mandates for the upcoming year. It will adapt its governance and organisational structure to integrate the revised legislations and deployment of its powers.
The financial watchdog wants to stress on the problems that arise in the implementation of MiFID II/MiFIR frameworks in the secondary markets, and better ways to solve them to enhance investor protection. By fostering exchanges on supervisory matters, it aims to achieve common interpretation of laws and consistency in their applications.
The quality of data reported has to be given extra attention, in order to establish a data driven supervisory framework. Also, on the forefront will be driving convergence activities in regulating financial innovations like crypto trading, ICOs, fintech products, regulatory sandboxes and cyber security.
Data and statistics have to be derived from trusted and integrated systems, to ensure high quality and total transparency. Proprietary data that the regulatory body collects will be put to good use, to assess risks as well as promote cooperation among all states in risk analysis.
ESMA will concentrate on the three critical areas of the European Commission’s action plan. These include Capital Markets Union Action Plan, Sustainable Finance Action Plan and Fintech Action Plan. A new supervisory and regulatory framework of EMIR 2.2, applicable to both the EU and third-country Central Counterparties (CCPS), will be launched. The regulatory body will be busy developing various technical standards and advise under this plan, to ensure a single rulebook for all EU financial markets.
Continuing its role as a direct supervisor, ESMA will focus on legal registration of Credit Rating Agencies (CRAs), Securitisation Repositories, Central Securities Depositories (CSDs), Trade Repositories (TR) under Securities Financing Transactions Regulations (SFTR) and recognition of third-country CCPs under EMIR 2.2. Two new direct supervisory powers are in the pipeline, to be enforced from January 1, 2022, for which ESMA will start its preparations in 2020.
The new EMIR 2.2 framework changes how CCPs are registered and regulated in the EU. Although work on this has begun from 2019, further strategy implementations will continue throughout 2020. This includes the introduction of the CCP Supervisory Committee. Tier 2 CCPs will be continuously assessed and their impact on the EU markets will be closely monitored. The ESMA will create Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) for the promotion and use of SME growth markets. SMEs are small and medium sized enterprises, introduced as a new sub-category of Multilateral Trading Facilities (MTFs), under MiFID II.
The UK leaving the European Union will create major changes in the EU’s financial markets. The role of ESMA, in managing the immediate risks and confusion, will be critical in the coming years. Although the regulatory body published its 2020 WP document at a time when October 31, 2019 was being considered as the Brexit deadline, ESMA has revisited its plans, following the decision to extend the deadline to January 2020.
Uncertainty certainly hangs over the regulatory body, but it is clear that MiFID II will need extensive follow-up, regarding how it will be applied in future. Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), recently made a statement during a keynote address in Frankfurt regarding this. He said that in the coming months, the industry can expect many reviews of the MiFID II clauses, pertaining to derivatives trading obligations and double volume cap.
The 2020 WP talks about a focus on managing the relationship between the EU-27 and the UK, in the area of financial services, post-Brexit. In case of a no-deal Brexit, ESMA will take adequate steps to manage the immediate chaos. If a withdrawal agreement comes into effect, the regulatory body will advise the European Commission on the adoption of equivalence decisions on the UK. Regular communications with companies, market participants and stakeholders will be conducted.
In 2020, ESMA will continue its support of financial innovations, while keeping investor protection as a priority. To identify potential technologies that could be useful to consumers, the body has set up a financial innovation scorecard, which will analyse products quantitatively and qualitatively. Key areas where ESMA plans to support technological innovations are fintech services, crowd funding, tokenisation of assets, crypto-asset trading, artificial intelligence and machine learning.
Through such monitoring activities, the European regulator intends to play a more proactive role in gauging retail consumer trends, gathering market intelligence data, tapping product costs and performance, and mitigating cyber-security risks.
New guidelines for outsourcing work to cloud service providers will be established. Also, the body will contribute to financial innovation at the international levels, working with organisations like the European Forum of Innovation Facilitators, Financial Stability Board (FSB) and International Organisation of Securities Commission (IOSCO).
ESMA is considered one of the most trusted and evolving financial watchdogs. In the current climate of geo-political uncertainties, its role as a financial regulator will be an extensive and important one. This is a time when traders and investors in the EU and UK are keeping a close watch on the latest press releases by ESMA, to ensure that they understand the laws and make informed decisions.