September 2021

Welcome to our monthly KPMG Asset Management Insights newsletter, which has been designed to keep you up to date on topical issues within the Asset Management sector.

Central Bank of Ireland updates

1. Central Bank of Ireland publishes notice of intention on the application of ESMA guidelines on stress test scenarios under the Money Market Funds (MMF) Regulation

On 19 August 2021, the Central Bank of Ireland published a notice of intention in respect of ESMA’s Guidelines on stress test scenarios under the MMF Regulation, which were published on 29 June 2021, and are applicable from 29 August. The notice of intention states that the Central Bank expects full compliance with the guidelines from 29 August 2021, which apply to competent authorities, money market funds (‘MMFs’) and managers of MMFs as defined under the MMF Regulation.

The ESMA guidelines provide guidance in relation to stress test scenarios concerning, inter alia, the following areas:

  • certain general features of stress test scenarios for MMFs;
  • hypothetical changes in the level of liquidity and credit risk of the assets held in the portfolio of the MMF;
  • hypothetical movements of interest and exchange rates;
  • hypothetical levels of redemption;
  • hypothetical widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied;
  • hypothetical macro-systemic shocks affecting the economy as a whole; and,
  • the establishment of additional common reference stress test scenarios.

European Commission and ESMA updates

2. ESMA publishes consultation paper on MiFID II remuneration requirements

On 19 July 2021, ESMA published a consultation paper on guidelines on certain aspects of the MiFID II remuneration requirements. The paper is addressed to investment firms and credit institutions providing certain services, but also to UCITS management companies and external AIFMs when providing investment services and activities in accordance with the UCITS Directive and the AIFMD.

The purpose of the guidelines is to enhance clarity and to foster convergence in the implementation of certain aspects of the new MiFID II remuneration requirements, which replace the existing 2013 ESMA guidelines. The draft guidelines are divided into three sections:

  1. Design of remuneration policies and practices: This includes, inter alia, defining appropriate qualitative and quantitative criteria to align the interests of the relevant persons and of the firms with those of clients. In respect of variable remuneration, such criteria should allow firms to assess the performance of the relevant persons. The guidelines also contain provisions relating to the consideration of, inter alia: the setting of performance targets; the taking into account of possible conflicts of interest; and, the inclusion of ex-post adjustment criteria and mechanisms for variable remuneration.
  2. Governance: This section includes guidelines providing that firms should have a written remuneration policy in place, which is periodically reviewed by senior management with the possible input of other control functions to ensure that appropriate performance and risk adjustment criteria are used.
  3. Controlling risks that remuneration policies and practices create: This section includes guidelines providing that firms should set up adequate controls to assess compliance with their remuneration policies and practices, using a wide range of information on business quality monitoring and sales patterns to identify areas of increased risk, and to support a risk-based approach to sales monitoring. The results of such analyses and controls should be clearly documented and reported to senior management together with proposals for corrective action, where necessary.

ESMA expects to publish its final report and guidelines by end-Q1 2022. The deadline for submissions in respect of the consultation is 19 October 2021.

3. ESMA advises of risk of market corrections in an uneven recovery

On 1 September 2021, ESMA published its second Trends, Risks and Vulnerabilities (‘TRV’) Report of 2021. The report notes that EU financial markets saw continued recovery, with valuations at or above pre-COVID-19 levels, with fixed income valuations (notably for HY corporate bonds) being now far above pre-COVID-19 levels amidst increasing corporate and public debt. However, increased risk-taking behaviour has led to volatility in equity and crypto-asset markets.

Going forward, ESMA expects to continue to see a prolonged period of risks to institutional and retail investors of further – and possibly significant – market corrections. ESMA also sees very high risks across the whole of its remit and notes that the extent to which these risks will materialise will critically depend on market expectations on monetary and fiscal policy support, in addition to the pace of economic recovery and on inflation expectations.

In relation to asset management specifically, the report notes that equity funds outperformed the rest of the funds sector in the first half of 2021, both in terms of flows and performance. Most fund categories received positive flows during this period, save for money market funds (‘MMFs’), which demonstrated a general risk-taking preference amongst investors. However, overall, risks have remained elevated in the fund sector, with an increase in credit risk reflected in the quality of fund portfolios. While MMFs have increased their liquidity since the COVID-19 crisis, they remain a core concern for regulators due to their structural vulnerabilities. Although the AIF sector remained stable, the failure of Archegos in the US has further raised concerns in respect of leveraged funds. Among the risk drivers noted for the sector are:

  • Potential over-valuation of asset prices;
  • Fragile risk sentiment; and
  • Funds that are exposed to a liquidity mismatch remain vulnerable.

The report also notes a surge in retail trading since the onset of the COVID-19 pandemic, driven by a range of factors, including innovation, such as new online and mobile trading platforms. Further, the report contains in-depth articles, examining the financial stability risks of cloud outsourcing, credit rating agencies and green bonds.

Industry and other updates

4. IOSCO publishes results of examination of ETF behaviour during COVID-19 induced market stresses

On 12 August 2021, IOSCO published a thematic note, which reviews the operation and activities of the primary and secondary markets of ETFs during the period of market turmoil in March and April 2020, and explores the impact of the stress on the ETF structure and functioning. IOSCO’s analysis examines the causes of the substantial pricing differences between some fixed income ETFs’ secondary market prices and their Net Asset Values, as well as outlines some of the challenging circumstances concerning some derivatives-based ETFs. The information was drawn from responses to a survey from 24 members of IOSCO’s “Committee 5 on Investment Management”, data analysis compiled by a core research group from IOSCO’s Committee 5 on Investment Management, and responses from 49 survey participants in the industry.

The note concludes that, overall, the available evidence has not indicated any significant risks or fragilities in the ETF structure, although notes that a subset of ETFs temporarily experienced unusual trading behaviours. The report also notes that the empirical evidence and stakeholder feedback tended to suggest that the ETF structure was relatively resilient throughout the COVID-19 volatility period. Further, it highlighted that the pricing of ETFs could be different when the liquidity of their underlying assets deteriorated significantly, and also deepened the industry’s understanding of fixed income ETFs’ potential role in providing additional pricing information for the underlying bond markets. Further, it demonstrated the utility of the additional layer of liquidity that is provided by ETF secondary markets.

The note advises that the initial findings contained in the note could serve as an important basis for IOSCO’s consideration of potential next steps, including providing additional guidance to authorities and responsible entities of ETFs, and that IOSCO will consult on possible policy proposals in late 2021 / H1 2022.

5. EFAMA records strong net sales of UCITS and AIFs

On 31 August 2021, the European Fund and Asset Management Association (‘EFAMA’) published its latest monthly Investment Fund Industry Fact Sheet, providing data for UCITS and AIFs for June 2021. Net sales of UCITS and AIFs totalled €75bn (up from €64bn in May), with UCITS having net inflows of €60bn (€55bn in May), and net inflows for AIFs of €15bn (€8bn in May). Total net assets of UCITS and AIFs increased by 2.2% during the period to €20.48tn.

Contact us for more

For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management

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