ESMA reports points out improvements needed in supervision of asset valuation

ESMA has released its Final Report about the 2022 CSA on asset valuation, highlighting the need for improvements in the supervision of asset valuation. The report focuses on the CSA conducted with NCAs regarding the asset valuation rules under the UCITS and AIFM Directives.
ESMA’s report identifies several areas where enhancements are required. These areas include the appropriateness of valuation policies and procedures, valuation under stressed market conditions, independence of the valuation function and the use of third-party valuers, and the implementation of early detection mechanisms for valuation errors and compensation to investors.
Given the current economic environment, ESMA emphasizes the importance of NCAs addressing the deficiencies identified during the CSA exercise. It urges close attention to potential valuation issues arising from less liquid assets, particularly in investment funds focused on PE and RE assets. These types of funds face revaluation risks due to their heavy reliance on long-term models and the illiquidity of their assets.
The CSA, initiated in January 2022, aimed to assess compliance with asset valuation requirements and principles, ensuring the reflection of true and fair values under normal and stressed market conditions. The exercise revealed the need for better supervision and adherence to valuation standards.
ESMA plans to facilitate discussions among NCAs regarding asset valuation, especially in stressed market conditions. The goal is to improve preparedness to address valuation-related challenges in future periods of stress. ESMA acknowledges that NCAs have committed to follow up on the identified deficiencies and encourages the appropriate use of enforcement measures.