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CBI Warns UCITS Firms on Liquidity Management

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The Central Bank of Ireland (CBI) this week warned that UCITS firms must do more to bolster their Liquidity Risk Management (LRM) frameworks, two months after a sweeping ESMA review found a number of major shortcomings.

In a Dear Chair letter on 18 May, the Irish regulator cautioned that ‘ESMA’s public statement details a number of adverse supervisory findings.’ It added that the CSA also highlighted the importance of market participants reviewing their own LRM frameworks, to ensure that none of the adverse findings are found in their frameworks.

Those adverse findings included: 

  • Instances of LRM frameworks that were not clearly defined, adaptable and/or independent  
  • A lack of formal documented pre-investment forecasting frameworks  
  • A lack of formal liquidity escalation policies  
  • Cases where no pre-investment forecasting was performed  
  • Over-reliance on the presumption of ongoing liquidity  
  • Oversight of delegates below expectations  
  • Shortcomings in the role of the designated person for fund risk management 
  • Cases of no liquidity reporting to the board of the UCITS manager
  • Shortcomings in internal control framework 

Further actions will be undertaken by NCAs, it said, to ensure that regulatory breaches as well as other shortcomings or weaknesses identified are remedied. In the case of the CBI, supervisory engagement has already commenced with UCITS managers where specific concerns were identified, with the central bank issuing 35 Risk Mitigation Programmes to date.

Actions required by managers

Overall, the regulator said Irish firms should review their current arrangements in a bid to avoid the shortfalls outlined.

‘In light of the seriousness of the findings of the CSA in the context of the importance of effective LRM frameworks, all Irish authorised UCITS managers are required to conduct a specific review of their practices, documentation, systems and controls by reference to the findings in the ESMA public statement and this letter,’ it said.

By the end of 2021, it expects that a review shall be completed – and that an action plan has been discussed and approved by the board.

‘Liquidity risk management will continue to be an area of supervisory focus by the Central Bank,’ it added.

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