ESMA Response To Commission's Green Paper On Shadow Banking
The European Securities and Markets Authority (ESMA) has published its response to the European Commission's Green Paper on shadow banking, published in March 2012.
The main findings from ESMA's response were:
- Definition of shadow banking: While it broadly agrees with the proposed definition, ESMA considers that it should be more focused on the activities performed rather than on the entity performing the activity, to ensure a consistent approach across sectors.
- Framework: For monitoring purposes, ESMA sees it as crucial to have a flexible and evolving framework that would allow the inclusion of financial innovations as long as their features and the risks attached to them are consistent with the definition of the shadow banking system.
- Monitoring and transparency: It agrees with the need for stricter monitoring of the shadow banking system and considers that transparency and adequacy of information, together with smooth data exchanges between competent authorities, are key to achieving this objective.
- Reducing risk of regulatory arbitrage: There is a risk of regulatory arbitrage by focusing on entities. In this regard, ESMA considers that it would be inappropriate to focus unduly on exchange traded funds (ETFs) rather than shadow banking activities per se.
- Reporting regime: ESMA concluded that there was a lack of data available to regulators on lending, repo transactions and positions and little or no regulation in these areas. ESMA therefore recommends developing a reporting regime because of the lack of data available on securities in terms of the stock available for lending at a certain point in time (because there are only private providers of this kind of data). Some of the issues are covered through sectoral regulations (CRD, UCITS etc.) but there is a lack of a consistent framework at a European level. The regulatory options to be assessed could include an analysis of the current market structure of the securities lending and repo segment.
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