On 13 November 2020, the European Securities and Markets Authority (ESMA) published a report on the preparedness of investment funds with significant exposures to corporate debt and real estate assets, for potential future adverse liquidity and valuation shocks.
This report sets out ESMA's analysis and conclusions of the investment funds that were reviewed and presents five priority areas identified to enhance the readiness of these investment funds:
- Ongoing supervision of the alignment of the funds’ investment strategy, liquidity profile and redemption policy
- Ongoing supervision of liquidity risk assessment
- Fund liquidity profiles
- Increase of the availability and use of liquidity management tools (LMTs)
- Supervision of valuation processes in a context of valuation uncertainty
ESMA coordinated a supervisory exercise with national financial regulators involving collecting and analysing data on funds exposed to corporate debt and to real estate. The exercise showed that the funds in question managed to respond adequately to redemption pressures. However, the work also revealed shortcomings that must be addressed in order to enhance funds’ preparedness to future shocks, and identified a number of priority areas that funds and supervisors should focus on to address potential liquidity risks in the fund sector.
Concerns around the valuation of portfolio assets have clearly emerged, especially for real estate funds for which the crisis could have a more significant impact over the longer term. Moreover, real estate funds do not frequently adopt LMTs in their liquidity set-up. Against this background, fund managers authorised under UCITS and AIFM Directives should enhance their preparedness to potential future adverse shocks that could lead to a deterioration in financial market liquidity and valuation uncertainty.
In response to the COVID-19 crisis, ESMA has reinforced its coordination role regarding investment fund supervision through the organisation of frequent exchanges with NCAs to discuss market developments and supervisory risks, in particular on liquidity issues.
ESMA’s report can be found here.
The press release can be found here.