Central Bank of Ireland publishes Markets Update No 3 of 2023

On 28 February 2023, the Central Bank of Ireland (the Central Bank) published Issue No 3 2023 of its regular Markets Update, in which it sets out alerts of interest to Irish regulated firms and other market participants.

For our summaries of the previous issues, please see the right-hand column of this page.

The new Update contains a number of items, including the following:

Central Bank publications

Central Bank ends COVID-related regulatory flexibility for Investment Management, Investment Firms and Fund Service Providers

As we reported at the time, the Central Bank allowed regulated firms increased flexibility in relation to a number of regulatory requirements in the face of lockdowns and other business disruption arising as a result of COVID. Its COVID-19 FAQs can be found here.

With the lifting of COVID restrictions in Ireland, the Central Bank no longer considers this flexibility to be needed and has confirmed that, from 28 February 2023, providers and delegates by fund service providers should resume in accordance with previous requirements.

Central Bank updates marketing guidance for UCITS and AIFs

On 27 February 2023, the Central Bank updated its online guidance on national provisions governing marketing requirement for UCITS and for AIFs.

The changes made are in relation to (a) the format and content of marketing material and (b) the Central Bank’s approach to verifying marketing communications.

Article 5 of the Cross-border Distribution of Funds Regulation requires National Competent Authorities (NCAs) to publish on their websites “up-to-date and complete information on the applicable national laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS”.

Article 7 of the same Regulation states that NCAs which require prior notification of UCITS marketing communications must “establish, apply, and publish on their websites, procedures for such prior notification”.

ESMA publications

New Q&As on the application of the UCITS Directive

As we reported at the time, on 3 February 2023, ESMA published an updated version of its Q&As, “Application of the UCITS Directive”.

A single new Q&A (Q. 5e) has been included in the ‘Issuer concentration’ section of the document, clarifying the meaning of the word ‘body’ as used in Article 50(1)(f) of the UCITS Directive.

DORA - the ESAs meet financial sector stakeholders

On 6 February 2023, the three European Supervisory Authorities (ESAs) held an online technical discussion on the EU’s new Digital Operational Resilience Act (DORA).

The event attracted over 2,000 representatives (including credit and payment institutions, investment firms, and ICT third-party service providers). It gave industry an opportunity to share initial views on DORA with the ESAs and to flag potential areas of concern regarding the measures the ESAs must develop in 2023 and 2024.

ESMA’s first market report on EU MMFs

On 8 February 2023, ESMA published an inaugural Market Report on EU Money Market Funds (MMFs), which provides the first comprehensive market-level view of EU MMFs, based on information collected by ESMA and the NCAs.

Among other things, the report noted that

• in 2021, the EU MMF sector held assets of €1.44tn, with 89% of the funds domiciled in France, Luxembourg and Ireland.
• Low-volatility NAV MMFs account for 46% of total assets, Variable NAV (VNAV) MMFs for 42% and Constant NAV (CNAV) MMFs for the remaining 12%.
• MMFs in Ireland are mainly in non-EU currencies and set up mostly as CNAVs and LVNAVs.
• the portfolio structure of EU MMFs remains relatively stable over time, and they are mainly exposed to the financial sector.
• as of 3Q 2021, EU MMFs significantly reduced the interest rate risk sensitivity of their portfolios - measured as the weighted average maturity of assets (WAM) - to improve resilience to a rate rise.
• over 90% of EU MMFs are held by professional investors. Financial corporations are the main unitholders - insurance firms, pension funds and banks together account for 25% of NAV, other financial institutions, including collective investment undertakings, account for 45% of NAV.
• between December 2021 and March 2022, MMFs saw substantial outflows, in part driven by investor expectations linked to the increase in interest rates and investor sentiment moving away from fixed income instruments in general. This trend reversed later in 2022.

ESMA's Trends, Risks and Vulnerabilities Report notes high risks amid fragile markets

On 9 February 2023, ESMA published its first Trends, Risks and Vulnerabilities (TRV) Report of 2023.

The report noted that, overall, risks in ESMA’s remit remain high, and investors should be prepared for further market corrections. Its key findings include

• contagion, operational liquidity and market risks are considered very high, while credit risk is high and expected to rise.
• risks remain very high in securities markets and for asset management.
• the EU fund sector has seen outflows and low performance across most fund types in 2H 2022 – AuM experienced their sharpest decline since the Global Financial Crisis.
• maturity mismatches in Commercial Real Estate Funds persist.
• the impact of the UK Gilt market turmoil on leveraged Liability-Driven Investment Funds in 2H 2022 confirmed existing concerns over fund liquidity risk management and excessive leverage.
• Investor sentiment remains weak - inflation acts as a drag on real investment returns and contributes to falling household savings.
• capital market financing decreased sharply in 2022 - the drop in activity is linked to high investor uncertainty, tighter credit standards for firms, high corporate debt levels and a rapid increase in the overall cost of external financing in the euro area.
• net-zero pledges have come under growing scrutiny, with the energy crisis jeopardising decarbonisation objectives.
• despite this, ESG markets continued to grow, with this trend showing resilience to broader market developments.
• crypto-asset valuations have now fallen by almost 70% year-on-year, driven by macro-economic factors and several high-level collapses in 2022.
• the failure of FTX triggered some large market corrections across crypto-assets.
• contagion within the crypto sector has been substantial, reflected in further price drops of key crypto instruments and knock-on bankruptcies among service providers.