Europe’s asset management industry on Wednesday threw its backing behind a legislative proposal to give asset managers a bigger say in the application of liquidity management tools, or LMTs, at times of market stress. The managers, not the supervisors, should be responsible for deciding on the use of such tools, the proposal says.
The use of LMTs is largely unaddressed in the EU’s existing financial regulation framework. The fallout from Russia’s war against Ukraine for funds invested in that region in recent months made clear that better rules are needed on the use of liquidity tools so that managers can deal more swiftly with stranded assets.
The European Fund and Asset Management Association, known as Efama, said it backed a legislative text proposed by Spanish christian-democrat MEP Isabel Benjumea, rapporteur for the current reviews of the Alternative Investment Fund Manager Directive, or AIFMD, and Ucits funds frameworks in the European Parliament’s Economic Affairs Committee.
‘Prescriptive rules’ best avoided
Benjumea this week tabled a 72-page committee report on the European Commission’s legislative proposal to improve the EU’s investment frameworks. Benjumea’s report extensively discussed the use of liquidity management tools. “The decision of liquidity management tools’ primary responsibility is a task for the manager,” Benjumea said.
Efama, which includes Luxembourg’s Alfi among its members, said it remains “firmly convinced that the decision as to whether a particular liquidity management tool should be activated and when must remain that of the asset manager and that prescriptive rules as to when a particular LMT may be triggered – as per a future delegated act – must be avoided at all costs to prevent against procyclical effects.”
“Recent crises have shown that they may be difficult to predict, including their impact on investment funds,” said Tanguy Van de Werve, Efama’s director general. “It would be detrimental to investor protection and financial stability more broadly to attempt to replace the informed discretion of the asset manager with that of an external party.”
Russia impact on funds raised questions on LMTs
Uncertainty on how to use LMTs became evident in recent months particularly in the cases of investment funds with significant exposure to Russia and Ukraine. In the absence of relevant EU regulation, national supervisory authorities such as the CSSF in Luxembourg provided their own guidance on the use of these tools.
CSSF in April outlined a range of segregation options to handle stranded assets in Russia. In a first under fund legislation in the European Union, the CSSF guidance endorsed the use of “side-pockets” which would group the stranded assets into a new sub share class, a feature from the hedge fund industry that is not envisaged in the EU Ucits directive. Luxembourg’s national supervisor at the time said it believed EU authorities would not block this option because of “exceptional circumstances”.
“CSSF deems this solution to be in line with… the Ucits Directive as the new sub-fund would be another Ucits,” said Luxembourg’s national financial supervisor in its eight-page guidance document last month.
The European Parliament’s economic affairs committee is expected to discuss the Benjumea report in the coming months.
‘Deposity passport’ opposed by MEP, industry
Efama said it supports the rapporteur’s decision to not introduce a depositary passport in the revised AIFMD regime. “The requirement for the depositary to share the same domicile as the fund should be preserved as it represents an important safeguard for investor protection,” it said.
Benjumea’s report also addressed delegation as a “beneficial practice” for asset management companies and their investors, as well as the practice of loan-origination by funds as an additional source of funding to the economy.
“Loan origination by funds can provide an important source of funding to the European economy which will be critical to achieving the CMU goal of a green, digital, inclusive and resilient economic recovery,” Efama said. “It is important to ensure that the proposed rules support rather than hinder this goal.”
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