The EU Market Integration Package: the return of the depositary passport and moves toward centralised supervision?

Main legislative reform areas

The Market Integration Package consists of a broad set of legislative proposals targeting three core dimensions of EU capital markets: facilitating cross-border activity (such as fund distribution), modernising market infrastructures, and reforming ESMA’s governance.

1) Cross-border integration

The Package seeks to remove barriers affecting the cross-border distribution of investment products and to facilitate the cross-border provision of investment services.
To achieve these objectives, the Package introduces several changes, including:

a) Introducing an EU-wide depositary passport, allowing funds to appoint a depositary located in any EU Member State.
b) Enabling smoother cross-border provision of investment services by reducing duplicative national obligations and removing national options and discretions.
c) Introducing an annual ESMA review of the supervision of large asset management groups, culminating in an ESMA recommendation and, ultimately, the possibility of a binding ESMA decision to implement such recommendations. While this does not amount to direct centralised supervision, the Commission’s proposal comes as close to it as may be politically feasible.

2) Market infrastructure frameworks

Beyond distribution and services, the Package aims to enhance cross-border clearing and settlement in order to modernise and further integrate EU market infrastructures.
The Commission intends to support:

a) Greater interoperability between CSDs and improvements to the functioning of the CSDR passporting regime.
b) The adoption of digital market infrastructures, in particular through the use of distributed ledger technologies (DLT) and the tokenisation of financial instruments.

3) ESMA governance and supervisory framework

The Package proposes reforms to strengthen supervisory convergence by enhancing ESMA’s powers. In particular, the Commission proposes to:

a) Grant ESMA direct oversight of “significant” trading venues, CCPs and CSDs.
b) Place all CASPs under ESMA’s exclusive supervision.
c) Create a strengthened ESMA Executive Board, composed of a small number of senior civil servants tasked, among other responsibilities, with steering direct supervision of market infrastructures and the annual review of the supervision of large asset managers.