The European Systemic Risk Board (ESRB) has today published an issues note describing how the EU regulatory framework for investment funds, which is currently being revised, could enhance the prevention and mitigation of systemic risks.
The note focuses on investment funds with large exposures to corporate debt and real estate. This reflects the priority areas for enhanced scrutiny from a financial stability perspective that the ESRB identified during the COVID-19 pandemic. However, the policy options presented in this note might also be applicable to other fund types with vulnerabilities similar to those present in corporate debt funds and real estate funds.
In the issues note the ESRB welcomes the provisional agreement reached between the European Parliament and the Council of the European Union on the review of the regulatory framework for investment funds. The agreement provides a basis to apply broader systemic risk considerations to investment fund regulation. In line with the ESRB’s previous proposals, several new provisions will enhance the regulatory and supervisory framework for investment funds from a financial stability perspective. In particular, the ESRB welcomes that the provisional agreement foresees an increased availability and consistent use of liquidity management tools (LMTs) for fund managers.
The ESRB also concludes that the resilience of investment funds with large exposures to corporate debt and real estate could be further improved by adapting some of the policy tools already present in the regulatory framework. These include closer alignment between fund redemption terms and investment strategy, the use of anti-dilution LMTs, and better preparedness for cash needs stemming from margin and/or collateral calls in derivative and repo transactions.
In addition, the development of new tools might increase the resilience of investment funds and thus benefit the stability of the financial system. These new tools could include a liquidity bucketing approach and the development of an ex-ante policy instrument aimed at mitigating the build-up of liquidity risk. The ESRB will also reflect on the role of authorities in applying certain policy tools to address shocks triggered, transmitted or amplified by (the collective action of) investment funds....
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Issues note
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