CSSF feedback report on ESMA Common Supervisory Action on valuation

ESMA initiated a CSA in January 2022, in collaboration with NCAs, to evaluate the valuation of UCITS and open-ended AIFs. Concurrently, the CSSF conducted a related supervisory exercise focused on the valuation practices of IFMs during the Russia-Ukraine crisis, which resulted in illiquid/non-tradeable assets due to the crisis and EU-imposed restrictive measures.
ESMA’s CSA on Valuation aimed to assess various aspects, including valuation policies and procedures, valuation under stressed market conditions, independence of the valuation function, and mechanisms to detect valuation errors. On 24 May 2023, ESMA published the final report on the 2022 CSA, titled „ESMA report on the CSA on Valuation,“ encompassing feedback and findings from all EU/EEA NCAs, including the CSSF. The report revealed that most NCAs found the sample of IFMs to be largely compliant with regulatory requirements. Nevertheless, it also identified certain deficiencies and vulnerabilities (please see eventID=21385).
In response to this report and the CSSF’s assessment of the CSA, the CSSF released the „CSSF Feedback Report – ESMA Common Supervisory Action on Valuation.“ This report outlines key observations and recommended improvements to comply with relevant regulatory requirements.
The CSSF report emphasizes the need for enhanced valuation policies and procedures to make timely decisions on affected assets‘ valuation. It also calls for clearer rules regarding the functioning and responsibilities of valuation committees, along with better documentation of valuation decisions made by the governing body/senior management. The periodic review process for valuation policies and procedures should be strengthened, with formal approval from senior management. The valuation function should be conducted by an independent external valuer or a functionally independent unit within the AIFM. The valuation policies must outline the obligations and roles of all parties involved in the process, including senior management. Furthermore, depositaries should verify AIFMs‘ valuation frameworks.
Currently, the CSSF is engaging with most of the IFMs on a bilateral basis to address the weaknesses and vulnerabilities identified during the CSA on Valuation, urging them to implement necessary corrective measures. Additionally, the CSSF requests all IFMs managing UCITS and/or AIFs to conduct a comprehensive assessment of their valuation frameworks in light of ESMA and CSSF’s observations and take appropriate corrective actions by 31 December 2023.