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The Central Bank of Ireland has called on asset management companies to “rigorously” review their practices to avoid recurring episodes during the worst of the coronavirus crisis, during which dozens of funds were confiscated.
The Central Bank of Ireland is the regulator of the country’s 3 trillion euro fund industry. It has instructed all asset management companies operating on the island to conduct a detailed review of its liquidity management process to improve investor protection.
Derville Rowland, Director of Financial Conduct at the Central Bank of Ireland, said in a speech on Wednesday: “The vulnerabilities found in certain sectors of the fund industry must be addressed.”
Serious problems affecting European corporate bonds, real estate and money market funds broke out in March last year, and are likely to escalate into a broader systemic crisis. It was not avoided until the central bank adopted large-scale emergency support measures.
Ireland is one of the most important investment centers in Europe, and many of the world’s largest asset management companies have chosen to settle in Dublin as funds so that they can be sold throughout the European Union.
CBI’s actions are likely to be imitated by other European regulatory agencies as part of the EU-wide effort to solve the liquidity problems suffered by various investment funds when the pandemic escalated in early 2020.
In March 2020, there was a problem in the European 14 billion euro money market fund sector. At that time, the company broke through cash by announcing lock-in measures, and investors also found themselves unable to withdraw funds from some corporate debt funds and British real estate funds.
Roland said at the annual meeting of the Irish Foundation Association on Wednesday: “Some of the funds have not played a role in absorbing shocks, but have played a role in spreading and amplifying pressure.”
CBI has issued 35 risk mitigation plans. After questioning 273 managers, they found specific liquidity problems.
CBI sent a letter this week calling on Irish managers to consider how to adjust their liquidity risk management framework and fund structure to take into account the increase in investor withdrawals during the market turmoil last year.
Most European mutual funds (called Ucits) provide daily liquidity, which allows investors to withdraw funds at any time of their choice. But some funds allocate large sums of assets that are difficult to sell, such as real estate. Investors are eager to exit the crisis, sometimes forcing fund managers to lock up client cash.
According to data from Fitch Ratings, more than 80 European investment funds with assets under management of more than US$40 billion were forced to suspend trading in March 2020.
CBI also called for the establishment of a new macro-prudential framework for European investment funds to improve the protection of investors.
Roland said: “In our view, the lack of such a macro-prudential framework for investment funds is still a major omission in the European regulatory toolkit.”
CBI believes that new restrictive measures should be considered, including measures to limit leverage and resolve liquidity mismatches, so as to enhance the fund sector’s resilience to future shocks.
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