Top-level European securities markets regulator ESMA (European Securities and Markets Authority) has announced it will be examining the valuation of UCITS and open-ended alternative investment funds (AIFs) across the EU. ESMA will do this in concert with national regulators such as Luxembourg’s CSSF (Commission de Surveillance du Secteur Financier) in what is ESMA’s third common supervisory action (CSA). The CSSF has announced it will launch the first part of the inquiry in March of this year.
This ESMA-led action is aimed at assessing the “compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets,” said ESMA in a recent news release. This will be conducted through 2022.
The focus will be on authorised managers of UCITS and open-ended AIFs investing in less liquid assets (e.g. unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded and bank loans.)
Common assessment framework
The national regulators will work with a common assessment framework developed by ESMA, that sets out the “scope, methodology, supervisory expectations and timeline” for conducting a comprehensive supervisory action in a coordinated manner.
Throughout this year, the national financial regulators will share knowledge and experiences through ESMA in order to “foster convergence” in how they supervise issues relating to valuation.
One core objective for ESMA is the “consistent and effective supervision” of valuation methodologies, policies and procedure of supervised entities to ensure that less liquid assets are valued fairly both during normal and stressed market conditions, in line with applicable rules.
CSSF explanation
The CSSF said it will ask a “a representative selection of Luxembourg-based UCITS and AIFs investment fund managers as well as a limited number of EU UCITS and AIF investment fund managers managing Luxembourg UCITS and AIFs” to fill in a “a dedicated questionnaire”.
UCITS/AIF investment fund managers will have to use a dedicated CSSF communication channel to submit their completed questionnaires.
The CSSF said the industry will be “duly informed” about when the channel will be ready to use and would receive any additional guidance from itself or from from ESMA in relation to the common supervisory action.
Economic conditions
“The current economic conditions underline the importance of assessing valuation risks which may pose a potential threat to financial stability,” said ESMA. “This exercise is of utmost importance to effectively address this risk at EU level.”
This is the third CSA on asset management that ESMA has carried out with the national regulators. The first two dealt with “UCITS liquidity risk management” and “supervision of costs and fees in UCITS.”