RegCORE – Client Alert | Banking Union | Capital Markets Union
QuickTake
In a bumper start to 2024, the European Securities and Markets Authority (ESMA) on 3 January 2024 published five consultations on draft Commission Delegated Regulations (CDRs) to harmonise and simplify the fees it, in its role as direct supervising authority, charges (i) trade repositories under EMIR (derivatives reporting), Show Footnote (ii) trade repositories under SFTR (securities financing transactions), Show Footnote (iii) securitisation repositories Show Footnote as well as for (iv) certain benchmark administrators Show Footnote and (iv) credit rating agencies. Show Footnote
Overall, each of these initiatives aim to harmonise and simplify technical aspects of ESMA's fee collection system so that the fee setting and collection process is less complex and conducted in a more uniform manner across sectors.
At present ESMA relies on seven delegated acts setting differing calculation and payment methodologies relating to fees charged to the different types of entities under ESMA's direct supervision. The draft CDRs do so by amending and/or supplementing existing Commission Delegated Regulations relevant to the aforementioned ESMA-direct supervised entities. Out of scope of the current consultation of CDRs are the existing rules on fees for ESMA's direct supervision of (a) central counterparties and on (b) data reporting service providers as the rules on fees already converge on the main relevant aspects and notion of (1) applicable turnover, (2) payment modalities and (3) the general budgetary approach of ESMA that is being consulted on in this current exercise.
This Client Alert assesses the implications of the above-mentioned consultations on the CDRs, each of which close midnight (Brussels time) on 31 January 2024. Originally, ESMA had planned to have concluded these consultations by the fourth quarter 2023 and it may be a mere coincidence that ESMA's publication of the consultations on the draft CDRs coincided with ESMA's publication of its 2024 Budget on the same day. Show Footnote
Affected firms should very well consider responding to these current consultations in a timely manner and may wish to consider what measures they may want to take to better manage the supervisory fees that ESMA will levy (correctly) of them as each of the draft CDRs change the methodology to be employed by ESMA. Following the close of the consultation period, the CDRs are set to go through the relevant legislative procedure, with the European Commission being able to comment and would enter into force and be directly applicable 20 days following their respective publication in the Official Journal of the EU.
Draft CDR on fees for EMIR relevant trade repositories
This draft CDR makes targeted amendments to Commission Delegated Regulation (EU) No 1003/2013 as it relates to trade repositories. The amendments aim to give effect to the desired cross-sectoral streamlining and simplifications of ESMA's fee setting and collection process.
As expressed in this draft CDR, ESMA's ethos in setting fee levels for relevant trade repositories operates on the basis that annual supervisory fees charged should fully cover:
- ESMA's expenditures relating to the registration (including recognition) and supervision of trade repositories and be determined on the basis of the annual estimate of all direct costs necessary for ESMA's supervisory tasks as well as indirect costs of (national) competent authorities that have carried out work, in particular as a result of any delegation of tasks; and
- a reasonable apportionment of ESMA's fixed and variable overheads. ESMA sets the fees at a level so that its full costs are covered and a deficit is avoided, but at the same time in such a manner that ESMA avoids the accumulation of a significant surplus. Where a significant positive or negative budget result becomes recurrent, ESMA revises the level of fees.
ESMA also states that in order to ensure consistency and comparability of data across supervised trade repositories, the annual supervisory fees should be calculated based on the turnover generated by a trade repository's respective (1) core activities and (2) its ancillary services as reflected in audited accounts distinguishing between the two. ESMA also clarifies that the audited accounts reference year for determining applicable turnover (as calculated or converted into euros) should be two years earlier to the year for which ESMA assesses fees to the trade repository.
To avoid paying an excessive supervision fee in the year of its registration, a registered trade repository should pay an initial supervisory fee proportional to the time the trade repository has been registered within that first year.
Equally, ESMA accounts for synergy effects in the supervision of such trade repositories that are registered for EMIR but equally for SFTR purposes. In such instances, the EMIR relevant fees are payable in full and a reduced fee (based on a new Article 3(2) and (3) introduced by the CDR) applies for trade repositories that have extended their registration for SFTR purposes. Such EMIR/SFTR trade repositories are required to maintain audited accounts which distinguish between (1a) the core functions and (1b) ancillary services relevant to EMIR trade repository activity and those relating to (2a) the core functions and (2b) ancillary services relating to the SFTR trade repository activity.
Draft CDR on fees for SFTR relevant trade repositories
Unsurprisingly this draft CDR, which amends Commission Delegated Regulation (EU) No 2019/360 as it relates to SFTR trade repositories, is drafted to give effect to the desired cross-sectoral streamlining and simplifications. This CDR largely follows the conceptual approach taken in the above-mentioned CDR on EMIR trade repository fees. Minor differences on methodology are included to account for the comparably more concentrated market composition of SFTR-only trade repositories that are currently registered – most of which are also EMIR relevant trade repositories or in the same corporate group.
Draft CDR on fees for securitisation repositories
The securitisation repository market is even more concentrated than the amount of SFTR trade repositories. Accordingly, this CDR makes targeted changes to Commission Delegated Regulation (EU) 2020/1732 and follows the same concepts as discussed above notably on costs. This CDR however also reflects the specifics that securitisation repositories are to provide ESMA with audited accounts on an annual basis, by electronic means by 30 September each year. This deadline is relevant for ESMA to be able to set supervisory fees for the following year that are charged for securitisation repositories.
Draft CDR on fees for certain benchmark administrators
This CDR amends Commission Delegated Regulation (EU) 2022/805 and conceptually follows the approach taken above in respect of repositories. One noteworthy point is that the approach used in the in the existing Commission Delegated Regulation is a targeted amendment introduced by the CDR whereby the calculation of the annual supervisory fee for a recognised third country benchmark administrator is changed from using the accounts from the most recent completed financial year as a reference point to instead be calculated on the basis of audited accounts from the previous two years.
Equally, the late payment interest rate is streamlined to follow the same approach as used in the other CDRs – namely such rate is calculated in accordance with Article 99 of Regulation (EU, Euratom) 2018/1046, instead of the previous rate for late payment interest applied to certain benchmark administrators which was a fixed daily penalty equal to 0,1% of the amount due.
Lastly, the CDR corrects an error in the aforementioned Commission Delegated Regulation in Article 5 setting out the calculation method for the first-year supervisory fee for both administrators of critical benchmarks and recognised third country benchmark administrators.
Draft CDR on fees for credit rating agencies
Arguably, in comparison to the other CDRs under consultation, this CDR makes perhaps the most comprehensive upgrades of all amending CDRs and does so in relation to Commission Delegated Regulation (EU) No. 272/2012. This makes sense as this existing Commission Delegated Regulation is a of a considerably earlier vintage than those discussed above.
Conceptually these upgrades however follow the approach highlighted above, in particular as to scope and aims of fees, introduction of a notion of applicable turnover based on audited revenues from both (i) core and (ii) ancillary services based on audited accounts from the preceding two years which are to be submitted by 30 September so that ESMA can calculate the respective supervisory fees.
Equally, the concept of a late payment interest rate is introduced on the same basis as in all the other amending CDRs. The same is also true in introducing the concept that fees are not refundable in the case of withdrawal for an application or registration.
As detailed below, the CDR also introduces (as is the case in all other CDRs) the same modalities and frequencies for invoicing and payments of one-off fees as well as the annual supervisory fees and any exemptions.
Lastly, the CDR makes a targeted amendment to exempt certified credit rating agencies from the payment of supervisory fees in the year during which their certification takes effect. Thus, annual fees will become payable by all certified CRAs in the year following their certification by ESMA.
ESMA's 2024 Budget
As set out above, ESMA published its projected Budget for 2024 Show Footnote with EUR 75,145,882 planned versus an overall figure planned in 2023 of EUR 75,204,611 (the 2024 budget communicates an estimated year-end expenditure for 2023, which includes amendments and transfers of EUR 72,509,667) Show Footnote.
The 2024 figures were published two weeks earlier than in 2023 Show Footnote and sees some changes in the following figures (all quoted in EUR) for 2024 versus (vs) those in the 2023 budget:
- Contributions from NCAs from Member States: 30,336,936 in 2024 vs 29,162,058;
- Contributions from National Supervisory Authorities for delegated tasks: 349,112 vs 3,334,000;
- Contribution from Observers: 939,224 vs 902,850;
- Additional EU funding stemming from service level agreements: 605,463 vs 347,371;
- Trade repositories under EMIR fees charged by ESMA: 1,697,850 vs 1,930,844;
- EMIR 2.2 fees charged by ESMA: 6,282,772 vs 5,958,208;
- Trade repositories under SFTR feeds charged by ESMA: 990,157 vs 870,348;
- Securitisation repository fees charged by ESMA: 406,708 vs 376,137;
- Benchmark administrator fees charged by ESMA: 980,586 vs 813,685;
- Credit rating agencies fees charged by ESMA: 10,382,288 vs 10,220,532; and
- Data Service Reporting Provider feeds charged by ESMA: 2,852,899 vs 2,700,00.
ESMA's fixed and variable costs are also set to increase in 2024 vs 2023 as is the headcount. In part this reflects increased general operating costs but equally to accommodate additional supervisory mandates and tasks allocated to ESMA, including in respect of the establishment and operation of the European Single Access Point (see standalone coverage on that development from our EU RegCORE).
Outlook
It should be noted that ESMA's move to simplify its fee structure follows on from a comprehensive review conducted by the Internal Audit Service of the European Commission in 2018. That exercise concluded that the lack of harmonisation between the seven Delegated Regulations resulted in "unnecessary complexity and meant that ESMA's resources were not being used as efficiently or effectively as possible. In the same year, the European Court of Auditors observed that the complexity of ESMA's fee funding system creates risks for the correct calculation of fees". Following those findings, the European Commission requested technical advice from ESMA and equally conducted preliminary consultations. This most recent move in January 2024 however truly aims to bring all ESMA-direct supervised entities into the same streamlined state of how fees are calculated, how they are charged and that they are not refundable.
Each of the draft CDR and their respective amendments also clarify that one-off fees such as registration fees and recognition fees should in any case be paid within 30 days from the date of ESMA's invoice. Separately, annual supervisory fees should be paid in a single instalment during the first three months of the calendar year for which such fees are due and ESMA should send invoices for the payments of such annual supervisory fees at least 30 calendar days before the relevant payment date. As in previous efforts of EU authorities as well as ESMA's own rulemaking efforts, all the amending CDRs all set out the same applicable interest rate methodology to be applied to any late payments. Equally, all of the CDRs also contain the principle permitting exemptions for annual supervisory fees becoming due if a supervised entity is registered in December of that same year.
Moreover, each of the draft CDRs also state that ESMA shall generally not be required to refund any one-off fees (such as a registration fee (or where it exists a recognition fee, certification fee or an extension of registration fee) and/or annual supervisory fees. It remains to be seen how this will be treated in the case of any over-payments and/or any court contested proceedings by supervised firms.
In terms of next steps, each of the draft CDRs are, based on estimates as at the time of writing hereof (3 January 2024), expected to be published in the EU's Official Journal prior to the European Parliament's elections in June 2024. If this is the case, then the new methodologies would likely take effect in the subsequent supervisory cycle set for 2025. Both existing affected firms as well as applicants operating in the categories captured by the respective CDRs may wish to consider whether any corresponding changes in how their supervisory fees are charged may merit changes to their own counterparty and client facing documentation as well as internal systems and controls beyond accommodating ESMA's new calculation methodology and payment modalities. While ESMA's long overdue move may be certainly welcome in its aims of streamlining and simplifying the supervisory fees process it remains to be seen whether the proposed changes will result in consistently lower amounts being payable overall.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
