EDHEC-Risk Institute Disagrees With EFAMA On ESMA Guidelines And Reiterates Its Call For Greater Index Transparency

The European Fund and Asset Management Association (EFAMA) recently ventured that the European Securities and Markets Authority (ESMA) had exceeded its powers and mandate by issuing “quasi-regulation (...) on topics which were not previously regulated at EU level.”[1] The representative body for the European investment management industry specifically targeted the ESMA Guidelines on ETFs and other UCITS issues and its provisions in terms of securities lending, collateral management, or the use of financial indices.

EDHEC-Risk Institute, which, like EFAMA[2], has contributed to the consultation process that led to these guidelines[3], takes exception to this language and interpretation and wishes to underline the considerable investor protection and competition advances introduced by ESMA, notably with respect to the mitigation of counterparty risk and the quality and transparency of financial indices.[4]

These guidelines clarify the provisions of the UCITS and Eligible Assets Directives and, where relevant, update pre-existing guidelines; aiming to promote consistent, efficient and effective supervisory practices, they are within the scope of the ESMA mandate.[5]

Recognising that securities lending and other “efficient portfolio management” (EPM) techniques carry counterparty risk, ESMA requires their risk exposure to be taken into account for the computation of UCITS risk limits, along with that arising from OTC derivatives. Consistently, it builds upon the rules for the mitigation of counterparty risk in the context of OTC derivatives[6] to propose a uniform approach to collateral management.