The European Systemic Risk Board (ESRB) recommended to ESMA that relevant NCAs across the European Union (EU) undertake focused supervisory engagement with investment funds that have significant exposures to corporate debt and real estate. This is to assess the preparedness of those two segments of the investment funds sector to potential future adverse shocks, including any potential resumption of significant redemptions and/or an increase in valuation uncertainty. The ESRB also recommended that ESMA report to it on the conclusions reached regarding the preparedness of the relevant investment funds to potential future adverse shocks. Market corrections and an increase in liquidity risks triggered by the COVID 19 pandemic have prompted stress in particular parts of the investment fund sector, such as those with significant exposures to corporate debt and real estate.
ESMA has issued a public statement supporting the ESRB recommendation. ESMA also stated their support for the ESRB’s public communication on the importance of the timely and effective use of liquidity management tools by investment funds with exposures to less liquid assets.
The ESRB’s recommendation aligns with ESMA’s ongoing work on liquidity management by investment funds. In response to the pandemic, the ESMA has stepped up information exchange among NCAs on the use of liquidity management tools by UCITS and Alternative Investment Funds. This complements ESMA’s previous supervisory action on UCITS funds, issued in January, whereby NCAs agreed to assess how market participants adhere to the UCITS liquidity rules on a day-to-day basis using a consistent methodology. The sharing of this information with ESMA by NCAs ensures supervisory convergence in the way NCAs supervise UCITS liquidity risk management.
ESMA also set out concerns they share with the ESRB regarding the potential deterioration of the credit quality of corporate bonds, and the need for this to be carefully reflected in credit ratings based on high quality data.
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