As highlighted in our June briefing (‘ESMA Supports Targeted Review Of Corporate Debt And Property Funds’), ESMA issued a public statement on 14 May 2020 in which it undertook to coordinate a targeted supervisory review by national regulators of corporate debt and real estate funds (the Review).  The Review is being undertaken in response to recommendations from the European Systemic Risk Board (ESRB).  

The Review will target funds with significant (term not defined) exposures to corporate debt and real estate assets, with a view to assessing these funds current state of preparedness for an unexpected increase in redemptions and/or in valuation uncertainty and how they might respond to potential future adverse shocks in the near term.

The Central Bank has begun contacting UCITS managers and AIFMs in relation to the Review and is providing limited timeframes (as short as two weeks) for the collation and submission of data request responses. 

Central Bank data requests will include the following categories of data, as recommended by the ESRB for the purposes of the Review:

Funds with significant corporate debt exposure

• information to assess fund behaviour at the onset of the COVID-19 pandemic.  This information could include:
  • the level of redemptions seen at the onset of the COVID-19 pandemic, when redemptions from a range of corporate bond funds were elevated;
  • how liquidity management tools were used at the time, including the specific tools activated by different fund types; and
  • hat types of assets were sold to meet redemptions and in what manner (for example, by vertical slicing).
• information to assess the current state of preparedness. This information could include descriptions of:
  • the set of liquidity management tools available to the fund;
  • the manner in which fund managers themselves are preparing for any possible future adverse shocks;
  • the manner in which fund managers themselves would likely respond to a possible resumption in redemptions;
  • current liquid asset holdings of the funds identified; and
• the number and nature of investors in the fund (for example, retail versus institutional investors).

Funds with significant real estate exposure 

• information to assess the current extent of valuation uncertainty and redemption activity. This information could include descriptions of:
  • valuation uncertainty issues faced by real estate funds in different jurisdictions, if any;
  • the manner in which liquidity management tools have been used to date, including the specific tools activated; and
  • the size of redemption requests since the onset of the COVID-19 pandemic and the manner in which the fund has responded to these requests.
• Information to assess current state of preparedness. This information could include descriptions of:
  • the structural characteristics of real estate funds (e.g. dealing frequency, notice periods, etc);
  • the set of liquidity management tools that is available to the fund;
  • the manner in which fund managers themselves are preparing for any possible future adverse shocks;
  • the manner in which fund managers themselves would likely respond to an increase in valuation uncertainty/increase in redemptions;
  • the current liquid asset holdings of the fund; and
  • the number and nature of investors in the fund (for example, retail versus institutional investors).

Next Steps

UCITS managers and AIFMs with funds in-scope of the Review should expect to receive (if they have not already) data requests from the Central Bank.  Following the data collection exercise, ESMA will assess the preparedness of the in-scope fund sectors and consider whether any further actions are needed to enhance that preparedness, for example, additional guidance to either funds or supervisors regarding the use of liquidity management tools and/or dealing with valuation uncertainty.

Contributed by Nessa Joyce