On 20 January 2022, the European Securities and Markets Authority (“ESMA”) launched a Common Supervisory Action (“CSA”) with national competent authorities (“NCAs”) on valuation of UCITS and open-ended AIFs (the “CSA on Valuation”) across the European Union (the “EU”).
Background of the CSA on Valuation
The CSA on Valuation follows a recommendation issued by the European Systemic Risk Board, in May 2020 in the context of the Covid crisis, that ESMA should coordinate with NCAs on a focused supervisory engagement with investment funds that have significant exposures to corporate debt (different from Money Market Funds) and real estate, in order to assess their preparedness to potential future redemptions and valuation shocks.
The purpose and functioning of the CSA on Valuation
The purpose of the CSA on Valuation is to assess the compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets.
One core objective of ESMA through this exercise is ultimately to achieve consistent and effective supervision of valuation methodologies, policies and procedures of supervised entities to ensure that less liquid assets are valued fairly both during normal and stressed market conditions, in line with applicable rules.
The work under the CSA on Valuation will be done, consistently with ESMA practices, using a common assessment framework developed by ESMA, which sets out the scope, methodology, supervisory expectations and timeline for how to carry out a comprehensive supervisory action in a convergent manner.
The CSA on Valuation is taking place in collaboration with the 27 EU NCAs and is expected to take place in different phases throughout 2022. Over the year, NCAs will share knowledge and experiences through ESMA.
The first phase started in early March 2022.
Managers impacted and what is requested
The CSA on Valuation focuses on UCITS and authorised investment fund managers of open-ended AIFs investing in less liquid assets.
Mid-March 2022, the Commission de Surveilance du Secteur Financier (the “CSSF”) contacted a representative sample of Luxembourg based UCITS and AIF managers, as well as a limited number of EU UCITS and AIF managers (the “Managers”) providing them with a questionnaire to be filled in. Managers who have not received the said questionnaire as of 11 March 2022 are not concerned by the exercise. However, Managers who did receive it shall fill it in for all UCITS and AIFs they manage.
The response questionnaire will have to be submitted by the Managers through a dedicated communication channel set up by the CSSF which will be accessible in due course. The industry will be informed once the communication channel will be available and additional guidance on how to file the response questionnaire should be provided at the same time.
The CSSF also informed the industry on 24 January 20222 through a Communiqué that any complementary guidance from ESMA that may become available in that context at a later stage will also be made available and the communication channel updated accordingly.
As a reminder, this is the third CSA that ESMA and NCAs have launched in respect of the asset management industry. The first two CSAs covered UCITS liquidity risk management in January 2020 and supervision of costs and fees of UCITS in January 2021. Following the first CSA, ESMA issued the Guidelines on liquidity stress testing in UCITS and AIFs.
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