On 14 May 2020, ESMA published a statement (the “Statement”) supporting the recommendations of the European Systemic Risk Board (the “ESRB”) on liquidity risk in investment funds (the “ESRB Recommendations”). The aim of the recommendations is to address the COVID-19 pandemic from a macroprudential perspective and to assess the readiness of the investment fund sector to deal with further liquidity stress episodes.
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SUPERVISION OF INVESTMENT FUNDS WITH EXPOSURE TO ILLIQUID ASSETS
ESMA welcomed the ESRB Recommendation for the relevant National Competent Authorities (the “NCAs”) across Europe, coordinated by ESMA, to undertake focused supervisory engagement with investment funds that have significant exposures to corporate debt and real estate, being two areas pinpointed as being high priority for enhanced scrutiny from a financial stability perspective.
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EFFECTIVE USE OF LIQUIDITY MANAGEMENT
ESMA further supported the ESRB in highlighting the importance of the timely and effective use of liquidity management tools by investment funds with exposures to illiquid assets.
In response to the COVID-19 pandemic, ESMA has intensified the exchange of information among the NCAs on the use of liquidity management tools by UCITS and AIFs domiciled in the European Economic Area. On 30 January 2020, ESMA had already launched a Common Supervisory Action on UCITS liquidity risk management. As a result, the NCAs agreed to assess simultaneously how market participants in their jurisdictions adhere to the UCITS liquidity rules in their day-to-day business. The assessment was to be performed on the basis of a common methodology and shared with ESMA on an ongoing basis in order to ensure the supervisory convergence of UCITS liquidity risk management. As a result the CSSF directly contacted and requested a large sample of Luxembourg-based UCITS managers to complete a dedicated questionnaire for all Luxembourg and non-Luxembourg domiciled UCITS managers.
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DOWNGRADES OF CORPORATE BONDS AND ENTITIES ACROSS THE FINANCIAL SYSTEM
ESMA also shared the view expressed in the ESRB Recommendations regarding the potential impact of procyclical downgrades of corporate bonds and entities across the financial system. While the impact of the COVID-19 pandemic on issuers is still to be assessed, deterioration in a credit quality needs to be carefully reflected in the ratings on the basis of high quality data. The proposed top-down analysis coordinated by the ESRB with the European Supervisory Agencies and the European Central Bank will help assessing the impact of large-scale downgrades across all parts of the financial sector.
CSSF RESPONSE
In response to the ESRB Recommendations and the Statement, the CSSF and the Banque Centrale du Luxembourg published on 5 June 2020 a joint communication informing the industry participants of those policy actions and pointing out their importance and impact on investment funds and their activities.
On 10 July 2020, the CSSF published a communication informing the industry that it had asked a larger sample of UCITS and AIFs to complete by 31 July 2020 a questionnaire based on the data collection questionnaire prepared by ESMA. All concerned investment fund managers have been contacted directly by the CSSF in that context.
The response questionnaire for corporate debt funds will have to be submitted by the investment fund managers through CSSF’s eDesk portal. A dedicated section to complete this questionnaire will be accessible in the eDesk portal on 20 July 2020.
The CSSF will inform the industry once this section, together with related guidance, will be available for use.
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