European Fund and Asset Management Association (EFAMA)
According to the consultation paper, there are two fundamental criteria which must concomitantly be met in order to identify a “shadow banking entity”: (i) the conduct of a “banking activity”; and (ii) that this activity occur outside an existing EU or equivalent regulatory (prudential and supervisory) framework. While concurring with the EBA’s exclusionary approach to identify “shadow banking entities” based on the above criteria, we believe that the list of legal acts under Annex I - referred to under Article 1(2) of the draft RTS - should be amended to necessarily include references to the EU Money Market Fund Regulation (MMFR) , thereby scoping out money market funds from the definition of “shadow banks”.
Our argument in this regard is essentially two-fold:
1. According to EFAMA’s industry-wide statistics, the overwhelming majority of European MMFs abiding by the MMFR are at the same time UCITS authorised and supervised funds (and to a far lesser extent AIFs) . In fact, as the consultation paper also accurately recognises (par. 82), the MMFR is built upon and complementary to the UCITS/AIFMD frameworks, where the MMFR-specific requirements apply in addition to the core UCITS/AIFMD ones. Therefore, despite the specific characteristics of MMFs that the MMFR regime recognises as offering returns in line with money market rates or preserving the value of the investment , MMFs in Europe are authorised and supervised either under the UCITS, or to a far lesser extent the AIFM, framework directives. The fact that a large majority of MMFs in Europe are thus comprehensively regulated under the UCITS regime would therefore formally justify an explicit reference under Annex I of the draft RTS for these to be excluded from the definition of “shadow banking entities” altogether;
2. The inclusion of MMFs within the “shadow banking” definition at the time the EBA’s Guidelines were finalised in 2015 was reasonably warranted by caution, recognising that the final text of the MMFR was at the time still being negotiated by the EU co-Legislators . With the final text having been published in the EU Official Journal on 30 June 2017, no previous attempt has been made until now by the EBA to review the status of European MMFs for CRR purposes. While this consultation is certainly a very welcome occasion to review the EBA’s 2015 conclusions, such review must necessarily account for the fact that a) a final MMFR text now exists and has been effective since 1 January 2019, complete with additional requirements (as the annual ESMA stress-testing Guidelines’ update); and b) the effective resilience demonstrated by the EU regime throughout the course of the pandemic-induced financial market shock in March 2020 has proven that the MMFR regime is ultimately “fit for purpose”. We turn to discuss this second aspect in greater depth in our response to Question 7 below.
Another ancillary consideration relates to reporting, whereby Article 37 of the MMFR requires MMFs to periodically and extensively report data to their national competent authorities and in turn to ESMA. Such data is further transmitted to the ECB for monitoring and statistical purposes, as more generally eurozone UCITS have to provide ongoing statistical reporting on fund holdings and liabilities to the ECB. All this data is a counterfactual to the EBA’s assumption of poor transparency over MMFs and must instead be credited as another major regulatory advance since the EBA’s 2015 Guidelines.
On the basis of these observations, we deem that MMFs deserve to be excluded from the scope of the RTS by virtue of their comprehensive regulatory framework.
Our view is that the decision to also include AIFs that are “leveraged on a substantial basis” within the scope of the RTS should also be reviewed. This is true especially in light of the additional work on leverage in investment funds led by IOSCO as an intentional standard-setter, followed by ESMA’s own Guidelines on Article 25 of the AIFMD published in December 2020 and prompted by the ESRB’s own specific Recommendations. We include further details to argue for the exclusion of specific types of AIFs in our response to Question 8 below.
Please refer to our answer to Q. 1 above
Please refer to our response to Questions 1 and 2 above, as well as to Question 8 further below.
As per our answer to Question 1 and 2 above, we further explain why we believe European MMFs – as UCITS or AIF regulated funds and additionally meeting the MMFR requirements - should not be treated as “shadow banking entities” for the purposes of Article 394, par. 2 of CRR. While appreciating the EBA’s openness to review this categorisation in light of ESMA’s ongoing work to prepare the review of the MMFR over the coming years, as well as of the broader parallel mandates of the global standard-setters (FSB/IOSCO), we argue that:
The “vulnerabilities" identified by ESMA through the means of its March 2021 consultation paper are by no means conclusive. Far from constituting a policy-document, the consultation paper encapsulates ESMA’s very preliminary views on the March 2020 money market stresses. Absent market participants’ views and additional data, it would be extremely premature for the EBA to rely on ESMA’s early and uncorroborated views to determine that MMFs meet the definition of “shadow banking entities”;
Instead, we resolutely believe that the EBA – for the purpose of its RTS - should base its analysis on the final letter of the MMFR, further supported by the following evidence-based facts in light of the March 2020 market correction :
i. The events of March 2020 have become in many ways the MMFR framework’s first general “stress test”. The fact that no European MMF had to introduce liquidity fees, gates or even suspend redemptions as a result, bears testimony to the quality of the regulations put in place following the 2008 global financial crisis in Europe. Moreover, we note that the most recent market correction was provoked by an exogenous shock prompted by a global pandemic, rather than by inherent weaknesses in the EU regulatory and supervisory framework. Consequently, any regulatory response should be cognisant of the non-financial nature of such shocks;
ii. Whereas liquidity management proved challenging for all market participants, European MMFs – whatever their formal denomination under the MMFR and irrespective of their base currency denominations – met all redemption demands. Moreover, they continued to provide a high-quality, well-diversified and liquid investment option at a time when markets underwent considerable stress, all while offering both investors and regulators complete transparency around funds’ portfolio holdings and liquidity levels;
iii. Provisions in the MMFR mandating high levels of daily and weekly liquidity for each type of EU MMF, prudently supplemented in practice with even higher amounts of liquidity based on investor profiling and in light of gradually deteriorating market conditions at the start of 2020, ensured that European managers entered the pandemic with sufficient liquidity able to meet all consequent redemption demands;
iv. Greater caution is warranted when considering the extent of official sector interventions in the course of March 2020, as no case can be made to suggest that the European MMF industry benefitted from the direct support of the ECB. Rather, the ECB’s Pandemic Emergency Purchase Programme (PEPP), unveiled on 18 March, was limited both in nature and scope to support the recovery of the Eurozone real economy as national government lockdown measures began curtailing essential (non-financial) economic activities. In addition, its actual implementation through the six Eurosystem central banks participating in the programme only began several weeks later, by which most MMFs had already recorded their largest outflows. In terms of limited scope, the Bank of England and HM Treasury’s Covid-19 Corporate Financing Facility (CCFF) was in many ways similar to that the of the ECB. On the other hand, the accompanying measures of the ECB in the form of refinancing operations and waivers for dealer bank operations proved essential for the resumption of the bidding process in underlying money markets.
Based on the comprehensiveness of the MMFR regime in force, as well as on our evidence-based findings covering the March 2020 market events, we would therefore call on the EBA to exclude European MMFs from its list of “shadow banking entities” by amending Annex I to the proposed RTS accordingly.
EFAMA appreciates that the consultation paper excludes most non-MMF AIFs from the definition of “shadow banking entities”, with the exception of AIFs that a) employ leverage on a “substantial basis” as per the definition under Article 111(1) of Commission Delegated Regulation (EU) 231/2013, b) grant loans or c) purchase third parties’ lending exposures onto their balance sheet.
In relation to those under a) above, we would invite the EBA to review its decision to include these specific AIFs within the scope of its RTS, considering that, in addition to the extensive reporting requirements and intervention powers of the competent supervisory authorities (respectively under Article 24 and 25 of the AIFM Directive), ESMA has more recently (December 2020) issued specific Guidelines on common criteria for national supervisors to promote greater convergence when assessing the extent to which the use of leverage within the AIF sector contributes to the build-up of systemic risk in the financial system, as well as when designing, calibrating and implementing leverage limits . We recall that such Guidelines translate IOSCO’s “2 step-approach” into the European risk management framework for investment funds, as well as follow the explicit recommendations of the European Systemic Risk Board (ESRB) published in April 2018 . We believe that these recent evolutions constitute important specifications of existing supervisory powers to monitor and regulate leverage levels for a limited category of AIFs, enough to no longer justify their inclusion withing the original “shadow banking entities” definition.
Regarding those other specific types of AIFs that either b) grant loans or c) purchase third parties’ lending exposures onto their balance sheet, we would recall that such fund categories often take the form of closed-end structures (i.e. thus neutralising risks from liquidity mismatches) and are typically available only to sophisticated institutional investors. Lastly, while these types of funds are not presently covered by a dedicated EU legal regime, they do benefit from more specific and stringent domestic regulations in the Member States where they are authorised and domiciled. We invite the EBA to please refer to the individual submissions of EFAMA’s national association Members for further details in this respect.
In line with our response to Questions 1, 2 and 7 above and for the reasons explained, we deem that MMFs – whether authorised as UCITS or AIFs - should not fall within the scope of the present RTS.
If AIFs were to be retained in scope of the RTS, Article 1(5) letter c) of the draft RTS would need to be further specified. We note in fact that the EBA’s reference to AIFs that originate “exposures in the ordinary course of business” or purchase third-party exposures for their own account is too broad, with the potential to unintendedly capture AIFs which do not undertake activities consistent with the EBA’s stated policy intention as set out in Recital 4. Where for instance, an AIF’s incorporating documentation does not explicitly prevent it from originating or purchasing third-party exposures, it is not necessarily the case that said AIF is indeed originating or purchasing third-party exposures. Moreover, there is need to better qualify what is meant under the term “exposures” under Article 1(5) letter c). As defined under the CRR - Regulation (EU) No 575/2013- the term designates “any asset or off-balance sheet item”, which in our view would range far beyond the narrower references to loans and third-party lending exposures which are proper of the EBA’s 2015 Guidelines.
For the wording of Article 1(5) letter c), the EBA could alternatively revert to the wording under paragraph 75 of the consultation paper, i.e. to a positive inclusion of AIFs only to the extent these are (…) entitled to grant loans or purchase third parties` lending exposures onto their balance sheet (…) pursuant to the AIF’s rules or instruments of incorporation.
From a general perspective, we agree with the list of legal acts referenced under Annex I. As explained, we advocate for the inclusion of the reference to the MMFR, so as to exclude European MMFs from the broad definition of “shadow banking entities”, as well as for a narrower requalification of the term “exposure” referred to specific types of AIF under Article 1(5) letter c) thereof.
For the reasons explained above, please include references to the MMFR – Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds – into Annex I.