Head of ESMA sets out vulnerabilities for the fund sector

In a speech delivered on 21 March 2023 at the ALFI fund industry conference, Verena Ross, Chair of the European Securities and Markets Authority (ESMA), discussed the macroprudential supervision of investment funds and set out details about what ESMA expects of market participants.

Ms Ross explains that in the current economic and geo-political environment, it is more important than ever that investment funds are resilient to economic shocks. “In that context, liquidity and excessive leverage are the two main risks we are actively monitoring,” she said.

Expectations for asset managers

Liquidity risk:  Lessons can be learnt from the challenges of the financial environment of recent years and ESMA expects fund managers to prepare for “further and prolonged adverse events”. It is therefore important for fund managers to monitor the alignment of their funds’ investment strategy, their liquidity profile and their redemption policy. In addition, managers should put in place accurate assessment and strong controls around the management of liquidity risk. Ross added that these obligations should also be regularly monitored through the ongoing supervision by the national regulators.  Finally the speech stressed the importance of liquidity stress testing in better managing liquidity risks

Leverage:  As the regulatory expectations in this area tighten, it is important to be prepared for the active monitoring of leverage risk.

Future changes to the regulatory landscape (MMFs)?

Legislative changes to enhance the resilience of the money market fund sector are needed “sooner rather than later”, according to Ross. It is thought that ESMA’s proposals set out in its Opinion on the review of the Money Market Fund Regulation, published last February, would help strengthen the European framework.

The speech is available here.