The future of capitalism, the disruption of asset management, and the ESG revolution were just some of the topics covered at the recent Funds Congress event on the 6th of February.
But for those with a regulatory interest, the late morning panel, bringing together leading policymakers from the Financial Conduct Authority (FCA), Central Bank of Ireland (CBI), Autorite des Marches Financiers (AMF) and the Commission de Surveillance du Secteur Financier (CSSF), proved to be particularly useful and insightful.
Not only did they outline their top priorities, many of which they’re working on in tandem, they also cautioned that 2020 is likely to be one of their busiest, and potentially most ‘intrusive’ years yet.
- Liquidity and new ‘intrusive’ CSA
Not surprisingly, liquidity proved to be a hot topic, with policymakers growing increasingly concerned about the liquidity risk posed by regulated funds in recent months.
‘Liquidity will be a key focus in 2020,’ said Kevin Mullen, Head of Markets Policy at the CBI. ‘When it comes to some of the recent high-profile cases, it’s important to recognise that there are idiosyncratic factors at play. But we will be implementing the 2019 recommendations by ESMA on liquidity [stress tests], and the common supervisory action (CSA) will be a feature for most of this year.’
Importantly, the latest ESMA liquidity CSA, launched late last month, is set to be quite hands-on, according to the panel. National competent authorities will soon begin requesting quantitative data from a large majority of UCITS funds. They’ll then focus on a smaller sample of UCITS to carry out onsite reviews and supervisory analysis.
‘Asset managers can expect the process to be quite intrusive,’ warned AMF Deputy Executive Director Frederic Pelese. But, he added, ‘it is in the spirit of an audit, and is quite different from prudential regulators. We generally take a positive view of the regulations, so it is more about making sure that UCITS firms are compliant. However, the exercise reveals a lot about the new mindset of the regulators and the common supervisory role we want to play.’
The FCA’s Head of Asset Management, Nick Miller, also took the time to reiterate what the regulators expect from managers. ‘Liquidity management is an irreducible art of what a fund manager should do,’ he explained. ‘That speaks to the whole life-cycle of the funds – including dealing. You also need to think about the liability side of the balance sheet; do you understand your investor base and their concentration?’
- Review of AIFMD
Elsewhere, the Director of the CSSF, Marco Zwick, confirmed that European regulators are continuing their review of the Alternative Investment Fund Managers Directive (AIFMD). While a major review of AIFMD last year found that the directive had played a ‘major role’ in helping to create a robust internal market for AIFS, it also found that some provisions may actually run counter to its aims.
‘There are no big issues with the directive in general, but there will be some micro and macro issues we look at in 2020,’ Zwick said. ‘On the micro side, the framework was constructed with UCITS in mind, so it doesn’t necessarily have the granularity for other types of funds.’
He added that ‘on the macro side, there are all different types of reporting being produced and no harmonised definition of leverage between UCITS and AIFMD. We also recognise that the NCAs need to be quicker with feedback once firms have submitted their data. And we will be taking a closer look at the term “other AIFS”.
- Liquidity management tools
Finally, the regulators seemed supportive of the use of liquidity management tools (LMTs) in times of market stress and spoke of the need to eventually harmonise the potential tools that AIFs and UCITS can use.
‘While not all jurisdictions permit asset managers to use liquidity management tools, we are broadly supportive of them,’ said Frederic Pelese. ‘It would be good to see the AIFMD and others list the LMTs that are available, as well as in which circumstances funds can use them.’
The use of LMTs, including gating, side pockets, and limits or fees on redemptions, remains haphazard across Europe. Generally speaking, local regulatory regimes dictate the tools available, as well as how they can be used and under what circumstances they can be implemented.
Because of this, the Asset Management and Investment Council (AMIC) and European Fund and Asset Management Association (EFAMA) earlier this year updated their 2016 report on liquidity risk management.
Although they acknowledged that strides had been made with regards to the regulation of money market funds (MMF) (2017) and liquidity stress testing of UCITS, AIFs and MMFs (2019), they insisted that more needs to be done in making LMTs more widely available and harmonised across the EU, not just certain local jurisdictions.
Whether that happens remains to be seen. Yet with the intense focus from regulators, fund liquidity will remain front and centre of the regulatory landscape in 2020.