On March 3rd 2020, the CBI hosted a seminar which was mainly focused on the fund authorisation process. The seminar was attended by attendees from the investment manager, legal, ManCo and independent director communities. KB Associates (“KBA”) was represented at the seminar by Frank Connolly (Director).
Ireland is a leading jurisdiction with fund AUM in excess of €3 trillion (December 2019) which has resulted in enhanced scrutiny from the European Securities and Markets Authority (“ESMA”). In addition, wider market conditions have necessitated enhanced scrutiny of the fund authorisation process. These wider market conditions include:
- Low interest rates
- Increased costs
- Increase in socially aware funds
- Market shocks
This is the first of three seminar/workshop events the CBI intends to organise. A summary of the key points discussed is provided below.
CBI Supervision Mission
The CBI reiterated its supervision mission to provide high quality regulation, to ensure an enhanced level of confidence in its supervision and to ensure that robust enforcement is in place.
Fund Authorisation – Enhanced Scrutiny and Modified Application Process
The CBI stated that it will review new fund authorisations using a risk based assessment. This means that more complex fund authorisation requests will require increased scrutiny. This has been demonstrated in January 2020 when the CBI updated its UCITS Q&A guidance to clarify that UCITS, which invest in CLOs, CFDs and contingent convertible bonds, will be subject to increased scrutiny.
The CBI stated that it has finite resources but it is taking more time on certain applications where additional scrutiny is required and normal turnaround times will not apply.
A summary of the key areas of focus in the fund authorisation process as highlighted by the CBI are detailed below.
Fund Board Responsibility
The CBI highlighted each fund board’s responsibility to consider all aspects of a fund’s structure prior to a new application being submitted. It was stated that some fund boards believe they are not responsible for the application prior to it being submitted to the CBI. This is not the CBI’s view who believe that fund boards should be heavily involved in the pre-application stage. Boards should be able to demonstrate prior due diligence on proposed investments, service providers, consideration of liquidity and market risk and where relevant the retail nature of UCITS.
A liquidity assessment of proposed new fund authorisations is a key requirement for the CBI. Consideration of a number of aspects, including the following, will be undertaken:
- Average trading volume
- The availability of transparent pricing
- The availability of proven price records
- An assessment of remaining time to maturity of relevant assets
- The number of “zero” trading days
The CBI stated that it will continue to focus on leverage in fund applications. The leverage should be related to the strategy of the proposed fund, there should be headroom in the leverage used compared to the leverage limit and the leverage used should be transparent. The CBI provided an example of an application submitted requesting approval of a QIAIF proposing leverage of 1,000,000% (which was obviously not approved by the CBI).
A new component of the application process is the CBI requirement for a model portfolio to be provided. This allows proper consideration by the CBI of disclosures made around areas such as risk and liquidity.
Another new component of the application process is the CBI requirement to demonstrate that stress testing on model portfolios has been completed which allows the CBI to understand how the portfolio would work in a stressed environment.
Due Diligence on Service Providers
The CBI cited an overreliance on generic questionnaires completed by service providers/delegates (administrators/depositaries), which are not properly scrutinised, as a problem. They requested that evidence of scrutiny should be available if requested.
A comment was also made about non-discretionary investment advisors appearing to act with discretion. This was also flagged as a concern for the CBI.
Download your copy of the Central Bank of Ireland UCITS Funds Gatekeeper Seminar here
KBA will be pleased to provide a summary of all future CBI seminars that take place. If you would like to discuss any issues raised in this article, please feel free to contact:
Frank Connolly (+353 1 667 1987; firstname.lastname@example.org)
Mike Kirby (+353 1 667 1980; email@example.com ) or
Andrew Kehoe (+353 1 613 6396; firstname.lastname@example.org).