Gareth Murphy, Director of Markets Supervision at the Central Bank, spoke at the 4th Annual Funds Congress. Significant points of interest included;
- Programme of themed inspections. The Central Bank programme of themed inspections includes;
- fund managers' and administrators' approach to dealing with NAV Pricing Errors;
- operational risks arising from cyber-security and IT failures;
- the quality and integrity of regulatory reporting;
- the quality of oversight exercised by depositories over managers and their delegates; and
- risk management processes employed by UCITS.
- CP86. The Central Bank will be clarifying its expectations for strengthening the organisational arrangements of some of the larger fund management companies following its examination of the operation of fund management companies and, in particular, their oversight of delegates. The Central Bank is considering responses to CP86 and the results of interviews with fund management companies with particular focus on the 4Cs: control, capability, capacity and conflict management while having regard for nature, scale and complexity as measured in terms of (i) AUM, (ii) number of umbrellas structures and sub-funds and (iii) the number of servicing relationships.
- AIFM passport. ESMA is looking at the working of the AIFM passport; the functioning of national private placement regimes; and interaction with third country funds regimes so as to meet the legislative deadline which has been set for ESMA to provide an opinion on the working of the internal AIFM passport and advice on the extension of that passport to third countries. The advice will cover:
- non-EU AIFM compliance with Articles 22, 23 and 24;
- cooperation arrangements for the monitoring of systemic risk;
- investor protection issues;
- impediments to effective EU supervision; and
- issues related to market disruption and distortion of competition
Mr Murphy notes that the third countries which are party to the MOUs which were co-ordinated by ESMA in 2013 differ from one another and ESMA's advice is likely to reflect on these differences.
- UCITS V guidelines on remuneration. ESMA will be issuing guidelines on remuneration as required under the UCITS V Directive and work is already well advanced.
- Securities Financing Transactions Regulation (SFTR) is likely to go live sometime in 2017. SFTR is similar to EMIR insofar as it creates reporting requirements - in this case for counter-parties to securities financing transactions. UCITS and AIFs are in scope.
- Money Market Funds Mr Murphy makes three points:
- The only way to disabuse investors of the idea that sponsors will support VNAV or CNAV MMFs is to ban sponsor support outright - in this regard current proposals do not go far enough.
- There are lessons to be drawn from the US Securities and Exchange Commission in the way that the operational issues of tax and accounting were tackled before producing their final rule; from meetings with industry, it appears that much of the resistance from corporate treasurers to a move away from CNAV to an alternative model, whatever that may be, is based on the need for an operationally workable alternative solution.
- It is undesirable and inconsistent with global financial stability that there would be a patchwork of different regulatory regimes for MMFs; the Financial Stability Board will, in due course, make observations on the implementation of the regulatory reform agenda …and I would not be surprised if the consistency, or otherwise, of the various regulatory approaches is subjected to some critical observations.
- Capital Markets Union – (discussed below). Mr Murphy urges industry to support policy-makers (by providing opinion, evidence and market intelligence) in creating the environment for a more effective flow of finance to the European real economy. He highlights the section headed Company law, corporate governance, insolvency and taxation and instances variations in insolvency law and tax treatments (by way of example, companies are likely to run excessive leverage since most jurisdictions allow debt interest to be tax deductible in contrast to dividend distributions which are not).
- The funds landscape in coming years is likely to be influenced to a greater extent by (i) the liberalisation of the Chinese capital account which goes hand-in-hand with the increasing circulation of the Renminbi and (ii) the greater use of technology in financial services.
In conclusion, Mr Murphy flagged UCITS V, AIFMD, MMFs, CMU, China and developments in technology as important challenges.