Following a Q&A session between Luxembourg finance minister  (DP) and Association of the Luxembourg Fund Industry chair --where they discussed the evolution of the financial sector in the grand duchy--it was the turn of the head of the European Securities and Markets Authority, Verena Ross, to address the attendees of Alfi’s annual conference on asset management.  

“I thought I would spend some time discussing the macroprudential environment of investment management sector and in particular how remaining vulnerabilities in open ended funds are being kept under close scrutiny at a global level,” started Ross, before looking back on the regulatory landscape in the past years.

The current economic market will remain “highly uncertain,” she continued. Unforeseeable crises and shocks--like the covid-19 pandemic or the war in Ukraine and its repercussions--“have created unexpected challenges for asset managers,” impacting the financial sector and increasing risks for certain funds--risks that could turn systemic. Money market funds, high yield bond funds and LDIs (liability-driven investments) are particularly concerning for Esma.

Prudence required in management

Inflation, money tightening, rising interest rates are changing the world, so “asset managers need to adapt to this new reality after operating for many years in a low-yield and low inflation environment.”

Ross underlined that--as the SVB and Credit Suisse demise a few days before showed--“there is no room for complacency.” Risks remain elevated, she said. “If the recent past has taught us anything, it is that risks are likely to come also from sudden and unexpected shocks on top of the existing vulnerabilities.”

So it is “crucial to identify, monitor and address the remaining vulnerabilities also in the asset management sector,” and to fight “the potential contagion” to other sectors.

However, she said, managers had cooperated well with local authorities, like the Luxembourg financial sector watchdog CSSF, in these times of crisis.

The European Union is well-covered by regulation created and implemented over the past years--like Mifir, Mifid 2 and AIFMD--but “certain further policy enhancements are still necessary.”

More resilience

Further proposals from the European Commission will retain the EU’s regulatory framework at the forefront of the regulatory agenda, make the EU investment management sector more resilient and protect investors more, said Ross.

However, despite a positive evolution of the regulatory landscape over the past 10 years, the review of the Money Market Funds Directive “is still missing.” “The vulnerabilities that surfaced during the pandemic have demonstrated that legislative changes to enhance the resilience of the money market fund sector are needed sooner rather than later.”

Esma wants “managers to monitor the alignment of the fund investment strategy, their liquidity profile and redemption policy,” said Ross. “Managers should put in place accurate assessment and strong controls around management of liquidity risks.” Liquidity stress testing is also vital to make sure the sector will do well.

"We expect asset managers to assume the responsibility in managing their funds prudently in these challenging macroeconomic times,” concluded Ross.