ESMA hits out at UK and German regulators over CSD lending exemptions

The watchdog has called upon UK and German regulators to revise national exemptions on collateral requirements within the UCITS framework. 

By Jonathan Watkins

Europe’s market watchdog has criticised the exemption of securities lending programmes from Europe’s two largest central securities depositaries (CSDs), which it found to be in breach of UCITS guidelines. 

Both Euroclear and Clearstream have been provided exemptions by UK and German regulators, respectively, according to The European Securities and Markets Authority’s (ESMA) peer review on the guidelines on ETFs and other UCITS issues. 

ESMA said the exemption is “not consistent with a level-playing field for UCITS in the Single Market”. 

The watchdog has subsequently called upon UK and German regulators to revise national exemptions on collateral requirements. 

Euroclear declined to comment, and Clearstream could not be reached at the time of publication. 

In response, the FCA has said it will “review the exemption and whether the justification for it remains, in terms of the Euroclear Bank Programme processes and risk management.” 

German regulator BaFin hit back by saying it found the Peer Review Assessment Group’s view that the German investment code is not compliant with the ESMA Guidelines too formal. 

BaFin added that the exemption “only relates to transactions cleared through approved institutions and is only available if investors’ interests are safeguarded, including by way of collateral requirements similar to the ones set forth in the ESMA Guidelines.”

It added that an ‘insufficiently compliant’ seems “disproportionate considering that there is hardly any substantive difference between BaFin’s practice and the rules and mechanisms set forth in the ESMA Guidelines.” 

UCITS rules on collateral management have been criticised in the past for restricting funds’ ability to engage in securities lending.  

Under rules set out by ESMA, UCITS can only enter into repo and reverse repo agreements if they can recall the assets or cash at any time. Furthermore, UCITS are restricted engaging in fixed term securities lending.