[ESMA34-466-295 ] The macro-prudential supervision of investment funds – from a global debate to a balanced European regulatory frameworks

Verena Ross, Chair of ESMA, spoke at the ALFI Conference 2023 on the macro-prudential supervision of investment funds. She discussed the recent market developments in the investment management sector and its vulnerabilities, including liquidity mismatch and excessive leverage. She also addressed ongoing regulatory agendas at international and European levels, focusing on financial stability and macro-prudential supervision. Ross emphasized the need for risk monitoring and adaptation by asset managers in the new economic environment, with high credit risk and sudden shocks from unexpected vulnerabilities. She highlighted the efficient cooperation between competent authorities during crises and ongoing efforts to address remaining vulnerabilities in the asset management sector.
ESMA is monitoring and managing the systemic risk of open-ended investment funds (OEFs), particularly regarding liquidity and excessive leverage. Liquidity risk is mitigated by regulations such as UCITS Directive and AIFMD, with requirements on liquidity risk management processes and stress tests. ESMA is actively monitoring liquidity risk in the fund sector, particularly since the Covid-19 outbreak, and has identified a need to increase the availability and usability of LMTs by investment funds, as well as the sharing of information between NCAs. Additionally, leverage risk is also actively monitored, with ESMA issuing guidelines to NCAs on risk monitoring and setting up leverage limits for AIFs. Regulators benefit from access to detailed and timely information to perform risk monitoring, although some important gaps still need to be addressed.
Overall, the regulatory framework on investment management has been significantly reinforced over the last 10 years, but further regulatory adjustments are still necessary to address the remaining vulnerabilities of the investment management sector.