Central Bank of Ireland publishes Markets Update for May 2022

On 16 May 2022, the Central Bank of Ireland (the Central Bank) published the latest of its regular Markets Updates, setting out a number of alerts both from itself and from ESMA and the EBA.

The new Update covers three items:

• Public Statement on actions to manage the impact of the Russian invasion of Ukraine on investment fund portfolios
• Approval Process for UCITS Side-pocketing arrangement in relation to Russian, Belarusian and Ukrainian assets
• Central Bank reminds MiFID investment firms with branches outside the EU / EEA of relevant requirements.

Looking at each of these in turn:

1. Public Statement on actions to manage the impact of the Russian invasion of Ukraine on investment fund portfolios

On 16 May 2022, ESMA published a public statement, "Actions to manage the impact of the Russian invasion of Ukraine on investment fund portfolios" (the Statement).

The Statement seeks to promote convergence across the EU in the management of investment fund portfolios with exposure to Russian, Belarusian and Ukrainian assets, given the material valuation uncertainties and adverse impacts on the liquidity of such assets.

In particular, the Statement looks at managers' obligations to

• manage investment funds in the best interest of investors

• have adequate liquidity management systems in place and

• ensure the fair valuation of assets.

The Statement also gives guidance on when the use of liquidity management tools - specifically side pockets - may be warranted, both by AIFs and by UCITS.

For a fuller summary of the ESMA Statement, see our article here.

(In this context, you should also note the Central Bank's industry communicationof 7 March 2022 in relation to Fund Service Providers (including fund management companies, fund administrators and depositaries) effectively managing risks due to the Russian invasion into Ukraine. For a fuller summary of the Central Bank's communication, see our article here.)

2. Approval Process for UCITS Side-pocketing arrangement in relation to Russian, Belarusian and Ukrainian assets

On 16 May 2022 (the same day as ESMA published the guidance referred to above), the Central Bank issued a Statement (the Central Bank Statement) setting out its expectations in respect of UCITS funds creating side pockets for 'Affected Securities'.

Affected Securities are defined as being "Russian, Belarusian and Ukrainian assets that are directly and/or indirectly impacted by the Russian invasion into Ukraine and/or impacted by sanctions that have been imposed as a result of Russia's invasion of Ukraine".

The Central Bank Statement explains how the regulator would expect UCITS to establish clone funds and gives details of the Central Bank's process for new applications / approvals. Complete applications can be expected to be processed within five working days.

For a fuller summary of the Central Bank's Statement, see our article here.

3. Central Bank reminds MiFID investment firms with branches outside the EU / EEA of relevant requirements

On 16 May 2022, the Central Bank updated its website in respect of MiFID investment firms with branches outside the EU / EEA (i.e., including those in the UK).

In particular, the Central Bank's guidance notes that

• any MiFID investment firm that operates or intends to operate an outgoing third country (i.e., non-EU / EEA) branch should consider the contents of ESMA's MiFID II supervisory briefing on the supervision of non-EU branches of EU firms providing investment services and activities (February 2019), which the Central Bank applies when it considers any existing or proposed outgoing third country branches.

  The Central Bank highlights that it expects a MiFID investment firm

  • to be able to demonstrate, on an ongoing basis, that any such branch structure is consistent with the principles set out in ESMA's supervisory briefing and

  • to provide the information set out in paragraph 18 of the supervisory briefing when the firm initiates a consultation on this topic with the Central Bank

  • to have assessed whether any additional risks arise from the use of a third country branch structure - the Central Bank will consider whether the firm proposes to put any mitigants in place to address these.

• in line with ESMA's Opinion (July 2017) to support supervisory convergence in the area of investment firms in the context of the United Kingdom withdrawing from the European Union, it expects that key function holders within the MiFID investment firm (other than the branch manager) would not be based in the outgoing third country branch.

• PCF-16 has been amended with effect from 4 April 2022 and now includes branch managers in non-EEA countries (including the UK). The amendment extends the pre-approval requirement to all branch managers of regulated financial service providers outside Ireland who are now required to submit confirmation of their assessment under Section 21 of the Central Bank Reform Act 2010 in respect of individuals in situ to the Central Bank by 3 June 2022.