Although there is some room for improvement, liquidity risks in corporate debt and real estate investment funds do not pose any substantial risk for financial stability, the EU’s top financial securities markets regulator said on Wednesday.
Together with national financial supervisors in EU member states, the European Securities and Markets Authority (Esma), has carried out a supervisory review of investment funds that have significant exposures to corporate debt and real estate, in order to assess their preparedness to potential future redemptions and valuation shocks.
While its assessment of Ucits funds and open-ended alternative investment funds is still ongoing, Esma said it found that corporate debt and real estate funds “do not pose any substantial risk for financial stability”.
Review triggered by March 2020 sell-off
The review was triggered by mass redemptions in investment funds in the Spring of 2020 when the onset of the Covid-19 pandemic led to a dash-for-cash that threatened to undermine liquidity positions in particular at open-ended money market funds.
“While the overall degree of compliance is satisfactory, it also highlights some room for improvement and continued monitoring, especially on the liquidity stress testing and valuation of less liquid assets,” Esma said.
Assessment of Ucits and AIFs still to come
It added that many national supervisors, such as CSSF in Luxembourg, reported that management companies were able to manage episodes of valuation uncertainty in March 2020 and that they have not identified any strong valuation issue for the funds in the scope of the exercise.
Esma said that it plans to facilitate further discussions on these topics, including on the application of the liquidity stress testing guidelines in Ucits funds and alternative investment funds. The regulator also is coordinating a supervisory assessment on the valuation of less liquid assets in Ucits and open-ended AIFs.
G7 finance ministers are due to discuss liquidity risks in securities markets at their Bali meeting at the end of the summer.
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