The Central Bank of Ireland (the “Central Bank”) has, by letter dated 29 June 2012 and addressed to the investment funds industry, outlined its views on the inadvertent breaches of its credit rating requirements pursuant to the downgrading of many credit ratings by Moody’s Investor Services (“Moody’s”) in recent weeks.
The Central Bank prescribes credit rating requirements for counterparties to:
- over-the-counter derivative transactions;
- efficient portfolio management techniques including stocklending and repurchase transactions; and
- prime brokerage arrangements
with Irish regulated investment funds.
Due to Moody’s recent credit rating downgrades, inadvertent breaches of the Central Bank’s requirements may occur. In the event that such breaches do occur, the Central Bank expects the directors and the trustees of Irish regulated investment funds to give due consideration to the issues as they arise and to always act in the best interests of the unit holders. A remedy of the situation must be the priority taking due account of unit holder interests, with continued monitoring of the counterparty taking place through the use of internal ratings assessments. Should a decision be reached to remain contracted with the counterparty who is in breach of the Central Bank’s requirements, this decision must be supported by the internal ratings assessment. Any breach by a counterparty must be reported to the Central Bank. In addition, remediation plans and the rationale for the approaches to be taken, must be provided to the Central Bank.
In the context of prime brokerage arrangements, the Central Bank has indicated that, in principle, it would be open to the relationship between a prime broker and the fund to remain in place if the downgrade of the credit rating does not fall below A-2. This is provided that the net exposure to the prime broker is maintained at less than 40% or 20/30% in the case of a professional investor fund.