Central Bank of Ireland publishes Markets Update No 8 of 2023

On 4 October 2023, the Central Bank of Ireland (the Central Bank) published Issue No 8 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 - we have identified the following as being of particular interest:

Central Bank publications

James O'Sullivan's speech at the Certified Institute of Fund Directors Annual Conference

On 29 September 2023, James O'Sullivan, Head of Fund and Firm Authorisations, gave a speech entitled, "Funds Regulatory & Supervisory Update".

In it, he provided an outline of the current regulatory agenda, including:

• the Central Bank is in the process of developing a standalone ELTIF chapter in the AIF Rulebook, with the ELTIF to be a standalone product, authorised under domestic funds legislation (and so having the benefits otherwise applicable to an Authorised AIF in Ireland).

• the Financial Stability Board's (FSB) assessment of the global economy placed an emphasis on the non-Bank sector, and the funds and asset management industry in particular. A major focus of the FSB's policy work next year will be to address financial stability risks associated with non-bank leverage.

• at the Central Bank of Ireland (and elsewhere in the EU), work is underway looking at liability driven investment funds (LDI) funds with a view to preventing a repeat of the issues seen last year.

• there are currently two active ESMA Common Supervisory Actions (CSAs) -- on Asset Valuation (which has largely been completed -- the Central Bank expects to issue an industry letter "by the end of the year") and on Sustainability and Disclosure Risk, which is just getting underway. The first phase is focusing on greenwashing risks and is due to conclude by January 2024. The second phase, looking at sustainability and disclosure issues generally, will conclude by September 2024.

• locally, the Central Bank's thematic review on Exchange Traded Funds is expected to conclude later this year, while a number of mini thematic reviews are being carried out. These are looking at (a) the role of non-discretionary investment advisors, (b) conflicts of interest for third party management companies and (c) the use of the Fixed Operating Expense Model in some investment funds.

• the use of mini-thematic reviews will likely be a feature of the regulatory toolkit going forward and industry can expect to see more frequent targeted questionnaires focussed on specific areas of risk.

Central Bank updated Guidance on online Orion applications

The Central Bank has updated a number of guides in relation to Orion applications located on the Central Bank of website, adding an introduction to each document as well as

• updating the Orion General User Guide to bring it up to date with new processes (including naming convention requirements for documentation submitted on ORION for UCITS and RIAIF applications)

• changing the name from '2018 Orion Release Notes' to an ORION Common Troubleshooting guide, with additional guidance and

• updating the ORION Comments User Guide, in particular in relation to naming convention requirements when responding to comments at later drafts of the UCITS/RIAIF application.

ESMA publications

ESMA CSA on MiFID II sustainability requirements

On 3 October 2023, ESMA announced it would launch a Common Supervisory Action (CSA) with the EU NCAs in 2024 with a view to assessing progress made by intermediaries in applying the key sustainability requirements under MiFID II.

The CSA will cover:

• how firms collect information on their clients' "sustainability preferences"

• arrangements firms have put in place to understand and correctly categorise investment products with sustainability factors for the purpose of the suitability assessment

• how firms ensure the suitability of an investment with respect to sustainability

• how firms specify any sustainability-related objectives with which a product is compatible as part of the target market assessment of the investment product.

ESMA Risk Analysis on use of ESG-related language in the EU fund industry

On 2 October 2023, ESMA published a Trends, Risks and Vulnerabilities (TRV) Risk Analysis, "ESG names and claims in the EU fund industry", looking at the use of language related to ESG factors in EU investment fund names and documentation.  

ESAs' second Report on voluntary PAI disclosures under the SFDR

On 28 September 2023, the ESAs (EBA, ESMA and EIOPA) published a second annual Report on the extent of voluntary disclosure of principal adverse impacts (PAI) under Article 18 of the SFDR.

The ESAs' first Report (July 2022) concluded that the extent of take-up of the voluntary PAI disclosures varied significantly across jurisdictions and Financial Market Participants (FMPs) in the scope of SFDR, which made it difficult to identify definite trends.

Since then, detailed implementing measures on such disclosures under the SFDR Delegated Regulation have started to apply. As a result, the ESAs have now found that

• a significant variation still exists in the extent of compliance with the disclosure requirements, both across FMPs and jurisdictions -- however, the new survey shows an overall improvement in the application of voluntary disclosures

• disclosures appear also easier and more straightforward to find on websites

• one area requiring improvement is in respect of explaining the non-consideration of PAIs -- such explanations are "still not fully complete and satisfactory"

• where PAIs are considered, disclosures on the degree of alignment with the Paris Agreement are still vaguely formulated

• an area requiring further analysis in future Reports is the voluntary disclosure of PAI consideration by financial products, where the level of understanding of such disclosures is limited.

ESMA's Work Programme for 2024

On 28 September 2023, ESMA published its work programme for 2024, in which it notes its intention to work to (among other things):

• develop rules for sustainable finance as part of the new European Green Bond Regulation

• publish its final report on greenwashing, which will propose actions to combat this practice

• enhance financial stability and investor protection through tasks mandated under the recently concluded AIFMD and UCITS Directive reviews and

• assist with the finalisation of the new Retail Investment Strategy.

Update to ESMA's European Single Electronic Format Reporting Manual

On 6 September 2023, ESMA published the annual update of its Reporting Manual on the European Single Electronic Format (ESEF) to provide technical improvements, such as:

• clarifying the formats of images embedded in the xHTML document

• updating Data Type Registry references

• clarifying ESMA's position on the application of Calculations 1.1 specification in the context of ESEF and

• fixing previously identified errors.

ESMA sees prevailing market uncertainty as downside risks rise

On 31 August 2023, ESMA published its second TRV Report of 2023, "ESMA Report on Trends, Risks and Vulnerabilities". Its main findings include:

• Securities markets: Equity markets rose in H1 2023, even though there were increased volatility and bid-ask spreads in March and April as a result of the market stress related to US banks. Credit risk indicators showed mixed signals.

• Asset management: The EU fund sector partly recovered after a historic decline in 2022. Fund risks remain high due to prevailing credit, valuation, liquidity and interest rate risks, especially for funds combining several vulnerabilities, such as in the real estate fund sector.

• Consumers: Investor sentiment remained negative and performance of retail investments remained subdued, reflecting sustained price pressures in the underlying asset markets.

• *Infrastructures and services: *H1 2023 saw renewed growth in equity trading volumes. After the peak in H2 2022, CCP margins relating to commodity products decreased in H1 2023, in line with the drop in energy derivative prices.

• Market-based finance: Non-financial corporations found it slightly easier to raise funds through capital markets, while corporate bond issuance peaked, with concentration in shorter term maturities given monetary policy expectations.

• Sustainable finance: The EU market for ESG products and sustainable investments has continued to grow at a robust pace. The demand for funds with a sustainable investment objective remained strong.

• Crypto-assets and financial innovation: Crypto-asset valuations rebounded in early H1 2023 but remained far below their historical peak. Financial markets have started exploring potential implications of Artificial Intelligence after the launches of various Generative AI tools in H1 2023.

ESMA's analysis of the cross-border investment activity of firms

On 19 July 2023, ESMA and the NCAs announced the results of an analysis of the cross-border provision of investment services undertaken during 2022. 

Data from across 29 jurisdictions was collected and analysed, with the key findings including

• around 380 firms provided services to approximately 7.6 million retail clients on a cross-border basis in 2022 - of these 59% are investment firms, the others being credit institutions
• at 23% of the total, Cyprus is the primary location for firms providing cross-border investment services, with Luxembourg (16%) and Germany (13%) following
• more than 75% of the EU/EEA retail clients receiving cross-border investment services are served by firms based in three jurisdictions -- Cyprus (around 2.5 million cross-border retail clients), Germany (around 2 million) and Sweden (more than one million).
• the average number of retail clients per firm was about 19,000, ranging from 189 for the only firm in Italy to about 140,000 retail clients for the 8 firms based in Sweden
• Germany, Spain, France and Italy are the most significant host Member States for investment firms providing cross-border services

ESMA plans to perform the data collection exercise annually to publish a Report based on the findings of the next exercise in 2024.

ESMA report on 2022 AIFMD and UCITS sanctions

On 18 July 2023, ESMA published reports on the use of penalties and sanctions under the UCITS Directive and the AIFMD from 1 January 2022 to 31 December 2022.

Since 2013 (for AIFMD) and 2016 (for UCITS), the pattern has that the level of sanctions remains stable and generally low.

UCITS

In 2022, 9 NCAs imposed a total of 38 penalties (as against 12 NCAs imposing 61 penalties in 2021). These totalled approximately EUR 97.5 million

98% of the penalties were imposed by a single NCA (the AMF), while 16 NCAs imposed no sanctions in 2022.

The Central Bank issued one sanction under the UCITS Directive in 2022, which was of EUR 117,600.

AIFMD

In 2022, 10 NCAs issued a total of 128 penalties, totalling EUR 2.5M (as against 10 NCAs imposing 78 penalties in 2021, amounting to EUR 42.9M).

60% of the total amount of penalties was imposed by a single NCA (again, the AMF).

The Central Bank imposed no sanctions under AIFMD in 2022.