Central Bank of Ireland publishes Markets Update No 13 (December 2022)

On 7 December 2022, the Central Bank of Ireland (the Central Bank) published Issue 13 of its regular Markets Update, in which it sets out alerts of interest to Irish regulated firms and other market participants.

The pace of the Markets Updates has noticeably quickened recently – having previously been essentially monthly publications, this is the fifth new issue since the start of November. For our summaries of the previous issues, please see the right-hand column of this page.

Of the various items covered in this Issue, we would highlight, in particular, the following:

Central Bank publications

1. The Central Bank updates the pre-submission process for QIAIFs proposing to invest in Irish property assets

The Central Bank requires certain Qualifying Investor AIFs (QIAIFs) to make a pre-submission to be made and cleared by the Central Bank before an application for authorisation of the QIAIF can be filed.

Pre-submissions should be sent to fundsauthorisation@centralbank.ie, marked clearly as a “Pre-submission for a Qualifying Investor AIF – [property fund] [crypto-assets]” and made in good time for the Central Bank to consider them ahead of the desired authorisation date.

The pre-submission rules apply to QIAIFs proposing to invest in

• Irish property assets and
• crypto-assets as per the Central Bank’s AIFMD Q&A (in particular Q&A ID1145).

What should the pre-submission include?

Note, the following are non-exhaustive lists – see the Market Update for fuller detail.

For QIAIFs proposing to invest in Irish property funds:

• copies of the prospectus/supplement(s), as relevant
• a completed model portfolio template
• an indication of the QIAIF’s expected target market
• details of the maximum LTV/leverage limits that will apply
• details of the QIAIF’s liquidity status
• details of the applicable redemption provisions.

For QIAIFs proposing to invest in crypto-assets:

• information as to how the crypto-assets can be appropriately risk managed and
• for direct investment in crypto-assets, details from the proposed depositary demonstrating how it is satisfied that it can provide for the safe-keeping of the QIAIF’s in accordance with the EU’s AIFM Regulations.

No pre-submission is required where a QIAIF proposes to invest no more than 10% of its net asset value in cash-settled Bitcoin futures traded on the Chicago Mercantile Exchange provided that:

• the cover letter accompanying the QIAIF’s application refers to the inclusion of crypto-assets exposure and
• where it is an application for a post authorisation amendment, shareholder approval is obtained for the revision to the QIAIF’s investment strategy to introduce exposure to crypto-assets. (This must also be set out in the cover letter.)

2. Central Bank consultation on own funds requirements for UCITS ManCos and AIFMs authorised to provide discretionary portfolio management services

On 1 December 2022, the Central Bank published CP 152, “Own funds requirements for UCITS Management Companies and AIFMs providing discretionary portfolio management services”.

Under current rules, the level of own funds that UCITS ManCos and AIFMs must hold is directly proportional to the level of collective assets held.

Such firms may, though, be authorised under the UCITS Regulations or AIFM Regulations (as applicable), to provide discretionary portfolio management services and additional non-core services and are not subject to own funds requirements at EU level in relation to of such services.

To level the playing field with MiFID investment firms providing discretionary portfolio management services - which are subject to own funds requirements under the Investment Firms Regulation (IFR) - the Central Bank is proposing to introduce bespoke own funds requirements for UCITS ManCos and AIFMs authorised to provide discretionary portfolio management and additional non-core services via Central Bank regulations and a condition of authorisation.

Such firms that do not meet conditions to be a “small and non-interconnected firm” (modelled on similar conditions under the IFR) will be required to apply the higher of

• the own funds requirement under the UCITS Regulations/AIFM Regulations (as applicable) or
• a Risk to Client K-factor own fund requirement modelled on the Risk to Client K-Factor applicable to MiFID investment firms under the IFR.

UCITS ManCos and AIFMs authorised to provide discretionary portfolio management services will continue to be required to undertake an ICAAP in line with a similar requirement applicable to all MiFID investment firms.

The consultation period closes on 23 February 2023.

3. Dear Chair Letter - Follow up on thematic review of fund management companies’ governance, management and effectiveness

On 7 December 20922, the Central Bank sent an Industry Letter to the Chairs of Fund Management Companies (FMCs) entitled, “Follow up on thematic review of fund management companies’ governance, management and effectiveness” (the Letter).

A summary of the Letter can be found here.

The Central Bank expects the Letter to be discussed by the Board and that any areas that require improvement ‘are given due consideration’.

The findings from the FMC review will inform the Central Bank’s policy development. The Central Bank will continue to work on identifying changes necessary to enhance and clarify certain aspects of the existing FMC requirements and Guidance.

A summary of the key points raised in the Letter was also given in a speech given on 6 December 2022 by Patricia Dunne, the Central Bank’s Director of Securities and Markets Supervision.

ESMA publications

4. ESMA issues advice on proposals for leverage limits on real estate funds in Ireland

As we reported at the time, on 24 November, the Central Bank published its Macroprudential Policy Framework for Irish Property Funds (the Policy), introducing new limits on leverage and Guidance to limit liquidity mismatch in property funds.

This followed ESMA’s formal advice published the same day, which confirmed that ESMA considered the leverage limit proposal which the Central Bank had notified to it was “appropriate to address the concerns relating to the stability and integrity of the financial system”.

5. ESMA welcomes NCAs’ work to maintain resilience of liability driven investment (LDI) funds

As we reported at the time, on 30 November, Darragh Rossi, Head of the Central Bank’s Securities Markets and Funds Supervision Division sent an Industry Letter, “Liability Driven Investment Funds” (the Letter), which was sent on 30 November 2022 by.

The Letter specified steps to be taken by managers to reduce an individual GBP LDI Fund’s resilience below the levels achieved in the period following the dislocation in the UK gilt market.

It followed interactions between the Central Bank, the Luxembourg regulator, the CSSF and ESMA in the wake of volatility in yields associated with UK gilts.

On the same day as the Letter was published, ESMA released a statement welcoming the Central Bank’s initiative (and that of the CSSF in Luxembourg) in relation to LDI funds.

6. ESMA updates guidelines on stress tests for money market funds

On 30 November, ESMA published its Final Report setting out the 2022 update of guidelines on stress tests under the Money Market Funds (MMF) Regulation.

Article 28 of the MMF Regulation requires ESMA to annually update its guidelines for the stress tests that MMFs or their managers must conduct, taking into account the latest market developments.

The Final Report sets out ESMA’s text of the updated guidelines and the calibration of the scenarios for 2022, with changes from the '2021 guidelines' (published in May 2022) shown in red.

The parameters set out in the new final report must be used for the first period to be reported after the updated guidelines start to apply – this will be 2 months after they have been formally published on the ESMA website, translated into the official languages of the EU.

Until then, managers are expected to use the parameters set in the 2021 Guidelines and report the results accordingly.