Verena Ross of the European Securities and Markets Authority speaks during the 7th annual Cross-Border Distribution Conference, 12 February 2019
Photo: Blitz Photo Agency
The European Securities and Markets Authority appears to be broadly satisfied that investment funds are not a systemic risk threat, but more could be done. However costs and fees are a problem, and although steps have been taken, hard Brexit could be tricky for individual firms.
Ross congratulated the sector on contributing to the diversification of funding sources in the EU, and said “most open-ended funds have been generally resilient, with the exception of some money market funds”. However she warned against complacency, in particularly highlighting “liquidity mismatches”. These see some funds allowing redemptions over a shorter period than the fund could reasonably be expected to liquidate assets. This is an example of where regulators are increasingly concerned about leverage and liquidity, she added.
In a soon-to-be-published comprehensive Esma report on EU alternative investment funds, Ross said for the most part no liquidity mismatch concerns arose. However, she said that real estate funds tended to be an exception, and that this was a particular problem given that retail investors account for around a quarter of the client base. She recommended “further analysis and review”.
On leverage, as long as risks are understood and contagion limited, it is “not a bad thing,” Ross said. However, good data is needed but too often measurement methods are not standardised, thus making analysis difficult. She pointed to on-going international discussions about this which will eventually “contribute greatly to any future Esma guidance on leverage limits for alternative funds in the EU.”
As for liquidity, Ross praised the role of stress-testing in boosting resilience, and said Esma was contributing to work to establish more robust guidelines for these tests for Ucits and AIFs. They are currently conducting public consultation. Just such a process has come to an end for money market funds, with Esma set to publish a related report “by the second quarter”. On exchange-traded funds, Ross was broadly relaxed about concerns around their exposure to less-liquid assets, but said more work was needed to assess the “arbitrage mechanism” in relation to liquidity provision.
On costs, as detailed by Delano on Thursday, she said these are “a significant drain on fund performance, impacting retail investors to a much higher extent than institutional investors.” On average retail savers pay twice as much. She also bemoaned the lack of data in the AIF and structured retail product areas. She said the Priips directive would help drive costs down “over the long run.” Yet she said “we think an immediate supervisory response is needed in relation to issues concerning … performance scenarios” in Priips.
Several Brexit-related MOUs have been agreed to minimise disruption if no deal is agreed. This includes the continuation of investment management delegation. Nevertheless, Ross recommended each player conduct thorough contingency planning.