On 21 March 2023, the European Securities and Markets Authority (ESMA) published a speech, given by Verena Ross, entitled ‘The macro-prudential supervision of investment funds – from a global debate to a balanced European regulatory frameworks’. In particular, Ms Ross discusses how remaining vulnerabilities of open-ended funds (OEFs) are being kept under scrutiny at global level.
Ms Ross begins by highlighting the challenges that the financial environment has faced over recent years, adding that it is crucial to identify, monitor and address the remaining vulnerabilities in the asset management sector and identify the possible channels of contagion to the rest of the financial system.
Ms Ross elaborates on this idea by setting out the right regulatory framework to address remaining vulnerabilities in the fund sector and highlights the following:
- Last year, the Financial Stability Board (FSB) and International Organization of Securities Commissions took stock on the effectiveness and implementation of their respective recommendations. Their reports acknowledge the progress made by authorities, but lessons learnt since then indicate that certain further policy enhancements are still necessary.
- The FSB recognised in its report that, given the micro-prudential toolkit already available, there was no need to create, for the time being, new policy tools. The call was mainly for greater use of existing policy tools, such as liquidity management tools (LMTs) and enhancing the availability of European investment fund related data for financial stability monitoring.
- 10 years after the adoption of the Alternative Investment Fund Managers Directive (AIFMD), in 2021, the European Commission published its proposal for the review of the AIFMD, with important changes also proposed in the UCITS Directive. The proposal will keep the European regulatory framework at the forefront of the global regulatory agenda and make the European investment management sector more resilient as well as increasing investor protection.
The speech then goes onto explain what ESMA is doing in terms of supervisory convergence and risk monitoring and notes the following:
- ESMA has identified that there is a need to increase the availability and usability of LMTs by investment funds, as well as the sharing of information between Member State competent authorities. ESMA expects the review of the AIFMD and UCITS Directive to address these shortcomings.
- ESMA expects managers to monitor the alignment of their funds’ investment strategy, their liquidity profile and their redemption policy.
- An important aspect in better managing liquidity risk is the performance of liquidity stress testing, to stimulate the resilience of the funds sector both under normal and stressed market conditions.
- It is crucial that regulators, including ESMA, have access to detailed and timely information to perform risk monitoring.