## 1irlea2022008 ## Source details **Canonical URL:** [1irlea2022008](https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1irlea2022008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1irlea2022008.pdf.json) --- ### Overview - Focus: regulation and supervision of the market-based finance (MBF) sector in Ireland, concentrating on investment funds (IFs) and special purpose entities (SPEs). - Key statistics and features: - Ireland has the third largest fund management sector in the world, with total assets under management (AUM) of EUR 4tn at Q1 2021. - AUM of Irish-domiciled IFs correspond to approximately ten times Ireland’s GDP. - Ireland is a prominent global hub for money market funds (MMFs), with AUM of EUR 607 billion at Q1 2021. - UCITS represent 76 percent of investment fund assets in Ireland; AIFs make up the remaining 24 percent. - Around 90 percent of fund management companies delegate a component of portfolio management. - Property funds (a very small share of MBF) cumulatively hold over 40 percent of invested commercial real estate (CRE) assets. ### Progress and remaining gaps in MBF oversight - Implementation progress: - EU Money Market Fund Regulation (MMFR) implemented detailed rules on MMFs (liquidity, diversification, stress testing). - ESMA’s stress testing guidelines for UCITS and AIFs complement MMFR implementation. - The Central Bank of Ireland has strengthened collection, monitoring and analysis of MBF data. - Remaining gaps and priorities: - Legal protection for Central Bank independence: limit Ministerial dismissal of Commission members to specified grounds of serious misconduct (¶20). - Enforcement: Central Bank’s ability to adopt a credibly dissuasive enforcement regime is hampered by challenges in pursuing sanctions against individuals; prioritize Individual Accountability Framework (IAF). - Recruitment and retention: apply sufficient flexibility on remuneration to recruit and retain specialist talent (Recommendation 3, ¶23). - Data gaps: delegation of portfolio management, IF credit lines, underlying investors of IFs, and leverage in the UCITS sector. - Liquidity management tools: regulatory action desirable to broaden use and encourage tools that allocate transaction costs to subscribing/redeeming investors (e.g., swing pricing, anti-dilution levies). - ETFs: intensify engagement with ETF providers to ensure arrangements with authorized participants (APs) and market makers (MMs) are robust. - SPE governance and winding-up: finalize work on IF pricing errors and strengthen oversight of SPE governance and winding-up procedures (including steps when unit-holders cannot be contacted). ### Central Bank governance, resources, and authority - Structure and mandate: - Central Bank is an integrated regulator, macroprudential authority, and national resolution authority under the European Single Resolution Mechanism framework. - Commission composition: the Governor, two Deputy Governors, the Secretary General of the Department of Finance, and at least six but no more than eight other Minister-appointed members (currently six appointed members). - Governance concerns and recommendations: - Legislation specifies removal circumstances for Governor, but wide Ministerial discretion exists to dismiss other Commission members. - Recommendation 1: Amend the Central Bank Act or appropriate legislation so the Minister may dismiss Commission members only on one or more specified grounds of serious misconduct (¶20). - Funding and staffing: - Stable funding; industry funding levy recovers much regulatory cost (Minister approval required). - Since 2015, increased proportion of costs attributed to industry and alignment of pay with public sector agreements and a global grading salary structure. - Recommendation 2: Enshrine in legislation a written procedure for submission by the Central Bank and approval by the Minister of the supervisory levy (¶22). - Recommendation 3: Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶23). ### Systemic risk monitoring, supervision, and regulatory tools - Supervisory focus areas: authorization, ongoing supervision, valuation, liquidity, leverage, segregation/safekeeping of fund assets, and systemic risk monitoring from MBF activities. - Institutional arrangements: - NBFI Steering Group (NBFISG) coordinates identification and management of securities markets and NBFI systemic risks. - Financial Stability Division (FSD) leads macro-prudential analysis; Central Bank publishes Financial Stability Review bi-annually and launched annual MBF Monitor in 2021. - Stress testing and cross-border cooperation: - Develop own stress testing capabilities and intensify planning for cross-border complex financial stability scenarios requiring international cooperation (Recommendation 6, ¶111). - Valuation, NAV, and pricing errors: - UCITS typically publish daily NAVs; AIFs have valuation frequency requirements per AIFM Regulation 20(4)-(6). - Ireland lacks a comprehensive regulatory framework for IF pricing errors; Irish Funds guidance defines material errors as NAV impact of 0.5 percent or more. - Recommendation 9: Finalize a comprehensive framework for treatment of pricing errors (¶55). ### Liquidity management tools and Recommendation 7 - Tools available (Box 2 availability by fund type as stated): - Gates: UCITS Yes; AIF Yes - Side pockets: UCITS No; AIF Yes - Anti-dilution levy: UCITS Yes; AIF Yes - Redemption fees: UCITS Yes; AIF Yes - Redemption in kind: UCITS Yes; AIF Yes - Suspension: UCITS Yes; AIF Yes - Swing pricing: UCITS Yes; AIF Yes - Side letters: UCITS No; AIF Yes - Short-term borrowing: UCITS Yes; AIF Yes - Evidence and policy: - Swing pricing reduces first-mover advantage and discourages runs; appears less widely adopted in Ireland than in the UK and Luxembourg. - Bank of England survey: 202 funds or 83 percent of single-price funds indicated having swing pricing with dilution adjustment. - Recommendation 7: - Prioritize publication of the Central Bank’s discussion paper on IF liquidity risk management. - Encourage wider adoption in offering documents of the full range of liquidity management tools, especially those that make subscribing/redeeming investors bear associated transaction costs (e.g., swing pricing, anti-dilution levies). - Increase Central Bank challenge at authorization once regulatory framework is updated. ### Leverage rules, reporting, and Recommendation 8 - UCITS limits: - Global exposure from derivatives limited to 100 percent of total net value; borrowing up to 10 percent of NAV for non-investment purposes. - AIFMD requirements: - Leverage defined broadly; AIFMs must set leverage limits and calculate leverage via gross and commitment methods. - Article 25 AIFMD: an AIF is “substantially leveraged” when exposure by the commitment method exceeds three times its net asset value. - Reporting: - UCITS submit annual FDI Return; Central Bank expanded reporting beyond UCITS Directive minimums. - AIFMs managing substantially leveraged AIFs must report quarterly on overall leverage and related details. - Recommendation 8: - Central Bank should expand data coverage to obtain a more comprehensive and up-to-date picture of leverage within the UCITS sector (¶60, 65, 107). ### Delegation arrangements and Recommendation 8 (delegation data) - Delegation prevalence: - Majority of fund management companies (responsible for 7,180 IFs, ~90%) delegate portfolio/investment management; often to multiple entities and jurisdictions with the UK as main destination. - Supervisory requirements: - Delegating entities retain full responsibility and must monitor delegates; delegation to non-EU/EEA entities subject to cooperation arrangements. - Recommendation 8 (delegation aspect): - Collect more extensive and systematic data on delegation arrangements to facilitate supervision and assess impacts of potential tightening of delegation requirements. ### Money Market Funds (MMFs) — risks and recommended reforms - MMF types and MMFR parameters: - Types: public debt constant NAV MMFs; low volatility net asset value (LVNAV) MMF; variable net asset value (VNAV) MMF. - Short-term MMFs: WAM no more than 60 days and WAL no more than 120 days. - Standard MMFs: WAM and WAL thresholds 6 months and 12 months, respectively. - MMFs must conduct stress tests at least bi-annually per ESMA parameters. - Recommended reforms to strengthen MMF resilience (paragraph 73): a. Decouple gates and fees from liquidity thresholds. b. Increase minimum liquidity thresholds in normal times while allowing temporary deviations when severe shocks occur. c. Enhance quality and diversification of liquidity assets, including mandatory holding of public debt in private debt MMFs. d. Enhance reporting to authorities and stress testing. e. Mandatory minimum of one liquidity management tool (e.g., anti-dilution levies, redemption fees, swing pricing). f. Impose minimum-balance-at-risk requirement with time-delayed redemption for a portion of recent balances. g. Allow MMFs option to offer redemption in-kind to institutional investors if liquid assets fall significantly below thresholds. h. Introduce industry-wide gates, triggered by supervisory intervention or pre-defined criteria. - Recommendation 11: - Irish authorities, working with ESMA, ESRB and the European Commission (MMFR review), should actively promote these reforms (¶74). ### Exchange Traded Funds (ETFs) — concentrations, risks, and Recommendation 10 - ETF sector metrics: - Ireland domicile for 60 percent of European ETFs by AUM. - ETFs account for 23 percent of Irish IFs’ AUM. - ETF AUM totaled EUR 878bn as at September 30, 2021. - One dominant player manages ETFs totaling 61 percent of ETF AUM. - 97 percent of ETFs are passively managed. - 70 percent of ETF AUM is in equity funds. - Identified risks: - Pricing discount risk (market price vs NAV); observed discounts up to 17 percent during COVID-19 for one Irish ETF. - Settlement risk due to fragmented trading/settlement. - Concentration of AP activity (two most active APs account for up to 90 percent of AP activity for certain ETFs). - Liquidity provider risk if APs/MMs step away. - Recommendation 10: - Central Bank supervision teams should engage ETF providers to ensure AP and MM arrangements are robust and promote smooth functioning, including in market stress (¶92). ### Special Purpose Entities (SPEs) — scale, governance, and Recommendation 12 - SPE scale and composition: - SPEs held approximately EUR 900bn of the EUR 5tn non-bank financial sector at end-Q4 2020. - SSPEs/FVCs: largest component EUR 150bn holding Collateralized Loan Obligations (CLOs); nearly all European CLO vehicles now located in Ireland. - Governance concerns: - SPEs are not authorized or prudentially regulated by the Central Bank; governance weaknesses noted (individuals on tens/hundreds of SPE boards). - Central Bank no longer holds directorship data due to GDPR. - Potential remedies: caps on directorships or a fitness and probity regime (would fall under ODCE competency and may require legislative change). - Recommendation 12: - Strengthen oversight of SPE governance and introduce rules on directors’ time commitments, making legislative changes where necessary (¶75). ### Winding-up of IFs and Recommendation 14 - Gaps in legislative framework: - Central Bank lacks power to appoint an administrator of an IF; assets typically remain in depositary control. - Unclear steps when unit-holders cannot be contacted; monies must continue to be held and cannot be liquidated. - Dormant Accounts Act engagement explored but legislative situation remains unclear. - Recommendation 14: - DoF and Central Bank should work together to fill gaps in winding-up legislation, including clarifying steps when unit-holders cannot be contacted (¶78). ### Individual accountability, enforcement, and Recommendation 4 - Individual Accountability Framework (IAF) components: - SEAR (Senior Executive Accountability Regime), enforceable Conduct Standards, enhanced Fitness & Probity Regime, and strengthened Administrative Sanctions Procedure allowing direct pursuit of individuals. - Enforcement practice and data: - Administrative sanctions issued against four FSPs in past five years. - Funds Supervision Team issued 124 Risk Mitigation Programs (RMPs) to 29 IFs over same period. - Current legislative constraints require proving firm breach and individual participation before pursuing individuals. - Recommendation 4: - Amend legislation to provide greater individual accountability and enhance powers for direct enforcement against individuals; finalize internal framework to operationalize the upgraded regime (¶102). ### Data collection, reporting gaps, and Recommendations 8 & 15 - Reporting received by Central Bank includes annual/semi-annual financial statements, annual auditor report, KIID (UCITS), annual FDI Return (UCITS), annual fund profile, quarterly balance sheet and profit & loss (monthly for MMFs), monthly NAV data, and ad-hoc regulatory reports. - Improvements and gaps: - Merging Securities Holdings Statistics (SHS) with internal database improved visibility on underlying investors except where holdings are in the UK and the U.S. - Data gaps remain on credit lines (including shared credit lines and drawdowns), delegation arrangements, and UCITS leverage. - Recommendations: - Recommendation 8: expand data coverage on delegation, credit lines, and UCITS leverage (¶60, 65, 107). - Recommendation 15: continue efforts to improve visibility on underlying investors (¶105). ### EU convergence and international cooperation - Central Bank involvement: - Active in ESMA, ESRB, FSB, IOSCO; chairs ESMA Investment Management Standing Committee; co-chaired ESRB work on liquidity risks; led FSB operationalization working group. - EU-level priorities: - Promote convergence on UCITS eligible assets (bank loans, delta-one securities, digital assets) (Recommendation 5, ¶70). - Actively participate in MMFR review to promote MMF resilience reforms (Recommendation 11). - MoU and Enhanced MMoU: - Central Bank is signatory to ESMA MMoU and IOSCO MMoU but not to IOSCO Enhanced MMoU due to legislative impediments related to access to ISP-held records. - Recommendation 13: liaise with DoF to address legislative impediments to become a full Enhanced MMoU signatory (¶113). ### Consolidated main recommendations (selection with timing and priority preserved from source) - 1. Amend the Central Bank Act or other appropriate legislation such that the Minister for Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct (¶20). — DoF, Oireachtas — ST — M - 2. Enshrine in legislation a written procedure for the submission by the Central Bank and approval by the Minister for Finance of the supervisory levy (¶22). — DoF, Oireachtas — ST — M - 3. Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶23). — Central Bank — ST — M - 4. Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime (¶102). — DoF, Oireachtas, Central Bank — MT — H - 5. Continue to promote closer convergence at the EU level on remaining areas of divergence on UCITS eligible assets (¶70). — Central Bank — C — M - 6. Intensify planning on how to manage potentially challenging financial stability scenarios involving cross-border complexity and requiring international cooperation (¶111). — Central Bank — C — M - 7. Prioritize guidance to funds sector on use of full range of liquidity management tools, including encouraging adoption of tools which result in subscribing or redeeming investors bearing the associated transaction costs (¶51). — Central Bank — ST — M - 8. Expand data coverage of investment fund sector including on delegation arrangements, credit lines, and UCITS leverage (¶60, 65, 107). — Central Bank — MT — M - 9. Finalize comprehensive framework for treatment of pricing errors (¶55). — Central Bank — ST — M - 10. Engage with ETF providers to ensure their arrangements with authorized participants and market makers are robust and promote the smooth functioning of the sector, including in times of market stress (¶92). — Central Bank — ST — M - 11. Work with ESMA, ESRB and EU Commission, as part of the Commission’s review of the EU MMF Regulation, to promote MMF resilience (¶74). — DoF, Central Bank — ST — H - 12. Strengthen oversight of SPE governance and introduce rules on directors’ time commitments (¶75). — DoF, Central Bank, DETE — MT — L - 13. Address any legislative impediments to the Central Bank becoming a signatory to the IOSCO Enhanced MMoU (¶113). — DoF, Central Bank — MT — M - 14. Fill gaps in the legislative framework for winding-up of IFs, including by clarifying steps to be taken when unit-holders of an IF that has been wound up cannot be contacted (¶78). — DoF, Central Bank — MT — L - 15. Continue efforts to improve visibility on underlying IF investors (¶105). — Central Bank — C — M *Source: IMF technical note "EXECUTIVE SUMMARY" (Ireland MBF sector oversight) contained in 1irlea2022008.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Overview - This technical note considers the regulation and supervision of the market-based finance (MBF) sector in Ireland, focusing on investment funds (IFs) and special purpose entities (SPEs). - Ireland has the third largest fund management sector in the world, with total assets under management (AUM) of EUR 4tn at Q1 2021. - AUM of Irish-domiciled IFs correspond to approximately ten times Ireland’s GDP. - Ireland is a prominent global hub for money market funds (MMFs), with AUM of EUR 607 billion at Q1 2021. - The MBF sector generally holds non-Irish assets on behalf of non-Irish investors, although domestic interlinkages exist primarily through property funds. ### Progress and remaining gaps in MBF oversight - Implementation progress: - The EU Money Market Fund Regulation (MMFR) has introduced detailed rules on MMFs across EU Member States on liquidity, diversification, and stress testing. - ESMA’s stress testing guidelines for UCITS and AIFs complement MMFR implementation. - The Central Bank of Ireland (Central Bank) has strengthened collection, monitoring and analysis of MBF data. - Remaining gaps and priorities: - Further legal protection for Central Bank independence is recommended (dismissal of Commission members by the Minister to be limited to specified grounds of serious misconduct). - The Central Bank’s ability to adopt a credibly dissuasive enforcement regime is hampered by challenges in pursuing sanctions against individuals; the Individual Accountability Framework (IAF) under preparation should be prioritized. - Recruitment and retention: while resources have increased and are sufficient at present, steps should be taken to ensure competitiveness on resourcing and flexibility for recruiting and retaining specialist talent. - The Central Bank can leverage its expertise to promote EU convergence on MBF oversight and should build on Ireland’s status as an MMF hub to promote reforms increasing MMF resilience (e.g., decoupling gates and fees from liquidity thresholds and increasing liquidity buffers). - Data gaps remain: delegation of portfolio management, IF credit lines, underlying investors of IFs, and leverage in the UCITS sector. - Regulatory action is desirable to broaden the use of liquidity management tools by Irish IFs and encourage tools that result in subscribing or redeeming investors bearing associated transaction costs (for example, swing pricing and anti-dilution levies). - Engagement with ETF providers should be intensified to ensure arrangements with authorized participants and market makers are robust, including in times of market stress. - Finalize work on IF pricing errors and strengthen oversight of SPE governance and winding-up procedures (including steps when unit-holders cannot be contacted). ### Central Bank governance, resources, and authority - The Central Bank is an integrated regulator responsible for almost all of the financial services sector in Ireland and is also the macroprudential authority and national resolution authority under the European Single Resolution Mechanism framework. - Governance: - The Central Bank is headed by a Commission: the Governor, two Deputy Governors, the Secretary General of the Department of Finance, and at least six but no more than eight other Minister-appointed members (currently six appointed members). - Legislation specifies circumstances for removal of the Governor, but there is wide discretion for the Minister to dismiss other Commission members. - Recommendation: Amend the Central Bank Act or appropriate legislation so the Minister may dismiss Commission members only on one or more specified grounds of serious misconduct (¶20). - Funding and staffing: - The Central Bank has a stable funding source and recovers much regulatory cost through the industry funding levy; legislation provides for Minister approval of the levy and the Central Bank may direct other funds if the levy is insufficient. - Since 2015, the Central Bank has increased the proportion of costs attributed to industry and aligned pay with public sector agreements and a global grading salary structure. - Recommendation: Enshrine in legislation a written procedure for submission by the Central Bank and approval by the Minister of the supervisory levy (¶22). - Recommendation: Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶23). ### Systemic risk monitoring, supervision, and regulatory tools - The mission focused on regulatory and supervisory requirements most relevant for financial stability: authorization, ongoing supervision, valuation, liquidity, leverage, segregation and safekeeping of fund assets, and monitoring systemic risk from MBF activities. - The Central Bank should intensify planning for cross-border complex financial stability scenarios that require international cooperation. - The Central Bank should broaden liquidity management tool usage guidance and prioritize tools that allocate transaction costs to subscribing or redeeming investors. - Oversight improvements needed: - Finalize comprehensive framework for treatment of pricing errors. - Enhance oversight of SPE governance and clarify winding-up procedures for IFs when unit-holders cannot be contacted. ### Main recommendations (table summary) - Recommendations (numbered as in source) with addressee, timing, and priority: 1. Amend the Central Bank Act or other appropriate legislation such that the Minister for Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct (¶20). — DoF, Oireachtas — ST — M 2. Enshrine in legislation a written procedure for the submission by the Central Bank and approval by the Minister for Finance of the supervisory levy (¶22). — DoF, Oireachtas — ST — M 3. Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶23). — Central Bank — ST — M 4. Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime (¶102). — DoF, Oireachtas, Central Bank — MT — H 5. Continue to promote closer convergence at the EU level on remaining areas of divergence on UCITS eligible assets (¶70). — Central Bank — C — M 6. Intensify planning on how to manage potentially challenging financial stability scenarios involving cross-border complexity and requiring international cooperation (¶111). — Central Bank — C — M 7. Prioritize guidance to funds sector on use of full range of liquidity management tools, including encouraging adoption of tools which result in subscribing or redeeming investors bearing the associated transaction costs (¶51). — Central Bank — ST — M 8. Expand data coverage of investment fund sector including on delegation arrangements, credit lines, and UCITS leverage (¶60, 65, 107). — Central Bank — MT — M 9. Finalize comprehensive framework for treatment of pricing errors (¶55). — Central Bank — ST — M 10. Engage with ETF providers to ensure their arrangements with authorized participants and market makers are robust and promote the smooth functioning of the sector, including in times of market stress (¶92). — Central Bank — ST — M 11. Work with ESMA, ESRB and EU Commission, as part of the Commission’s review of the EU MMF Regulation, to promote MMF resilience (¶74). — DoF, Central Bank — ST — H 12. Strengthen oversight of SPE governance and introduce rules on directors’ time commitments (¶75). — DoF, Central Bank, DETE — MT — L 13. Address any legislative impediments to the Central Bank becoming a signatory to the IOSCO Enhanced MMoU (¶113). — DoF, Central Bank — MT — M 14. Fill gaps in the legislative framework for winding-up of IFs, including by clarifying steps to be taken when unit-holders of an IF that has been wound up cannot be contacted (¶78). — DoF, Central Bank — MT — L 15. Continue efforts to improve visibility on underlying IF investors (¶105). — Central Bank — C — M *Timing legend preserved from source: C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years). Priority legend preserved from source: H = High; M = Medium; L = Low.* *Source: IMF technical note "EXECUTIVE SUMMARY" (Ireland MBF sector oversight) contained in 1irlea2022008.* ### 23. Recommendation 3: The Central Bank should apply sufficient flexibility on remuneration to ### Recommendation 3: The Central Bank should apply sufficient flexibility on remuneration to recruit and retain appropriate talent. ### EU institutional and supervisory framework - EU market oversight is primarily the task of national competent authorities (NCAs), which carry out most supervision and enforcement. - The European Supervisory Authorities (ESAs)—ESMA, EIOPA, and EBA—foster harmonized practices across the EU. - ESMA is responsible for direct supervision of credit rating agencies, trade repositories, securitization repositories and third country central counterparties, and has played an increasingly important role in capital markets regulation and supervision. - The single rulebook comprises three levels: - Level 1: EU directives and regulations adopted by the European Parliament and the Council of the EU (regulations are directly applicable; directives must be transposed into national law). - Level 2: implementing regulations or directives issued by the European Commission under delegated authority, or regulatory or implementing technical standards drafted by the ESAs. - Level 3: nonbinding guidelines issued by the ESAs to ensure consistent national application of Level 1 and Level 2 measures. - The Central Bank participates extensively in ESMA and is represented on its Board of Supervisors by the Director General, Financial Conduct. ### Market structure and investment fund types - As an EU member state, Ireland complies with the UCITS Directive and AIFMD; Irish investment funds fall into two categories: UCITS or alternative investment funds (AIFs). - UCITS Directive requires a UCITS fund to be authorized; AIFMD applies to the fund management company and leaves broad discretion to Member States for AIF-specific rules. - The Central Bank authorizes and supervises AIFs under a suite of domestic legislation and rules. - Types and legal forms noted in the source include: Unit trust, Investment company, Common contractual fund, Irish collective asset-management vehicle, Investment limited partnership. - Key statistics: - UCITS represent 76 percent of investment fund assets in Ireland. - AIFs make up the remaining 24 percent. - The vast majority (around 90 percent) of fund management companies in Ireland delegate a component of their portfolio management activity, often across several entities in different global jurisdictions. - The most prevalent IF types are bond and equity funds. - Portfolio assets and investor base are predominantly international with limited links to the Irish economy; property funds (a very small share of the MBF sector) cumulatively hold over 40 percent of invested commercial real estate (CRE) assets. ### Fund service providers and delegation - Key regulated entities (fund service providers, FSPs) include: fund management companies, investment managers, depositaries and administrators. - Fund management companies may be UCITS management companies, AIFMs or dual authorized under UCITS and AIFMD. - Delegation of portfolio management is widespread (around 90 percent), often across several global jurisdictions. ### Developments since the 2016 FSAP - Important changes reflecting EU developments: - Implementation of the EU Money Market Fund Regulation (MMFR) with detailed rules on MMFs (liquidity, diversification, stress testing). - Sustainable Finance Disclosure Regulation and Cross-Border Distribution of Funds legislation. - Brexit led many regulated entities to relocate to Ireland or expand operations there. - A Multilateral Memorandum of Understanding (MMoU) between ESMA and the UK FCA helped mitigate cross-border disruption risks. - ESMA expanded the regulatory framework for IFs, including stress testing guidelines for UCITS and AIFs. - Remaining gaps noted: - Ireland lacks a comprehensive regulatory framework for treatment of IF pricing errors. - Governance of SPEs continues to be an area of concern. ### Systemic risk monitoring, governance and capacity - Central Bank mandates and participation: - Central Bank Act, 1942 sets “stability of the financial system overall” as an objective. - As a member of the ESCB, the Central Bank must “contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.” - The Central Bank is a member of the ESRB and represented on the Boards of ESMA, EBA and EIOPA. - Internal structures and functions: - NBFI Steering Group (NBFISG) established to support identification, monitoring, mitigation and management of systemic risks in securities markets and non-bank financial intermediation (NBFI). NBFISG leverages economists, statisticians, financial stability experts, policy experts and supervisors. - Central Bank has multi-year work to improve data coverage and quality for the MBF sector, including integration of regulatory and statistical data with commercial data sources. - The Central Bank conducts ongoing monitoring and analysis of the MBF sector on liquidity mismatch, leverage and interconnectedness, with deeper dives into cohorts such as property funds and MMFs. - Work to develop own stress testing capabilities, including international collaboration (e.g., ECB working group on system-wide stress testing). - Financial Stability Division (FSD): - Primary responsibility for macro-prudential analysis within the Central Bank rests with FSD. - FSD expanded due to development of macro-prudential policy at European and national levels, with a significant increase in analytical capacity, including in relation to MBF. - FSD draws on Supervisory Divisions and other directorates (Economics and Statistics Directorate) for system-wide analysis. - Financial Stability Committee (FSC): - Established to direct and consider results of macro-prudential analysis; composed of Deputy Governors, Director General, Directors and senior staff, chaired by the Governor. - Focus is to identify actions to mitigate risks to financial stability; some mitigants may be executed through micro-prudential functions. - Publications and monitoring: - Central Bank publishes Financial Stability Review (FSR) bi-annually to evaluate main risks and resilience of the financial system. - In 2021 the Central Bank launched the annual MBF Monitor to review vulnerabilities across the MBF sector focusing on IFs and SPEs. - The Securities and Markets Supervision Division (SMSD) runs the annual Market Scan to assess market trends, historic conduct events and peer priorities; identified risks are scored for probability and impact and placed on a heat map. The Market Scan feeds into the Securities Markets Risk Outlook Report. ### Regulation, segregation and custody of assets - Regulatory basis: - Ireland’s legislative and regulatory framework for fund management is based on the UCITS Directive and AIFMD. - UCITS Directive facilitates cross-border investment fund offerings to retail investors and lays down rules on authorization, supervision and depositaries. - AIFMD establishes a harmonized framework for managers of alternative investment funds, focusing on managers’ compliance and operational frameworks and investor reporting obligations, including on leverage. - Irish legislation transposes relevant EU legislation and is complemented by Central Bank guidance, Q&As and “Dear CEO” letters. - IOSCO and EU depositary requirements: - IOSCO Standards for the Custody of Collective Investment Schemes’ Assets provide that assets should be entrusted to a custodian that is functionally independent; may include requiring appointment of a single custodian per IF. - UCITS Directive and AIFMD require the appointment of a single depositary for each UCITS fund and AIF. - As a general rule, a depositary must have its registered office or a branch in the same country where the fund is domiciled; a non-EEA AIF’s depositary may be established in the AIFM home state. - The competent authority of the UCITS’ home state must approve the depositary to act for a fund domiciled in that EEA state. - Fund manager and depositary must enter into a detailed written agreement to regulate information flows necessary to perform their roles. ### Safe-keeping, delegation and liability - Safe-keeping rules: - Distinction between assets that can be held in custody (generally financial instruments) and other assets. - Depositary must hold in custody all financial instruments that may be registered in a financial instruments account opened in the depositary’s books and all financial instruments that can be physically delivered to the depositary. - Depositary must ensure financial instruments are registered in segregated accounts in accordance with Article 16 of Directive 2006/73/EC so they can be clearly identified as belonging to the relevant UCITS/AIF at all times. - For other assets, the depositary must verify ownership by the UCITS/AIF and ensure an updated record is kept. - Independence and prohibitions: - IOSCO Standards require the assets of an IF be entrusted to a third party custodian that is functionally independent. - AIFMs and UCITS management companies are prohibited from acting as a depositary, with restrictions on common management of the UCITS management company/AIFM and the depositary. - Delegation of custody: - Permitted under UCITS Directive and AIFMD subject to conditions: depositary must exercise due skill, care and diligence in selection and appointment of the third party and conduct periodic reviews and ongoing monitoring. - UCITS framework is more restrictive, requiring an objective reason for delegation and evidence it is not to circumvent regulatory requirements. - Third party must segregate assets of the depositary’s clients from its own assets and, for UCITS, must take steps to ensure that, in event of the third party’s insolvency, assets of a UCITS held by it in custody are unavailable for distribution among, or realization for the benefit of, its creditors. - Liability for loss of assets: - UCITS and AIFMD Regulations provide depositary is liable to the UCITS/AIF and unit-holders for any loss suffered as a result of “the depositary's negligent or intentional failure to properly fulfil its obligations”. - The AIFMD allows the depositary to transfer its liability to a third party via a written contract which must establish the objective reason for the transfer; the Central Bank is not notified of the use of this option by depositaries. *Source: 1irlea2022008 - Recommendation 3: The Central Bank should apply sufficient flexibility on remuneration to recruit and retain appropriate talent.* ### 45. In general, IFs are expected to calculate their NAV as frequently as they allow ### 1irlea2022008 - 45. In general, IFs are expected to calculate their NAV as frequently as they allow ### NAV calculation frequency and valuation policies - UCITS are required to make prices public each time they sell, issue, repurchase or redeem, and at least twice a month. In practice almost all Irish UCITS offer daily dealing and publish prices accordingly. - AIFM Regulation 20(4): assets must be valued, and the NAV per unit or share calculated, at least once a year. - AIFM Regulation 20(5): if the AIF is open-ended, valuations and calculations must also be carried out at a frequency which is both appropriate to the assets held by the AIF and its issuance and redemption frequency. - AIFM Regulation 20(6): if the AIF is closed-ended, valuations and calculations must also be carried out in case of an increase or decrease of the capital by the relevant AIF. - Valuation policies must be included in the prospectus (for UCITS and RIAIFs) or the constitutional document (AIFs). - For UCITS, a responsible person must establish and ensure adherence to the valuation policy. - Guidance for UCITS (and a similar approach for RIAIFs) clarifies permitted approaches where market prices are not available, including: - use of matrix pricing; - probable realization value (in the absence of a representative market price); - clarifications on which individual or entity may carry out the valuation of such instruments. ### External checks and audit - Accounting information (including a balance sheet or statement of assets and liabilities showing valuation of IF assets at the end of the financial year) must be audited by one or more persons empowered to audit accounts in accordance with the Irish Companies Acts. - An IF must publish an annual report for each financial year, which must include a full reproduction of the auditor’s report to unit-holders, including any qualifications. - AIFM Regulation 20(14): where the valuation function is not performed by an independent external valuer, the Central Bank can require the AIFM to have its valuation procedures or valuations (or both) verified by an external valuer or, where appropriate, by an auditor. ### Accounting standards and NAV accuracy - All Irish domiciled IFs that are not listed (or are listed but do not prepare consolidated accounts) have the option to choose between EU adopted IFRS and local GAAP. - The Irish UCITS Regulations (Schedule 5(37)) require the management company to establish, implement and maintain accounting policies and procedures in accordance with the accounting rules of the UCITS home Member State to ensure accurate NAV calculation. - Article 57 of the AIFMD Level 2 Regulations: AIFMs must establish, implement and maintain accounting policies and procedures and valuation rules that enable timely delivery to the Central Bank of financial accounts reflecting a true and fair view and complying with applicable accounting standards and rules. ### Liquidity management tools (Box 2) - Irish IFs have a range of liquidity management tools available; tools may be provided in legislation transposing the UCITS Directive and AIFMD or in Central Bank domestic regulatory requirements. - UCITS may provide for short-term borrowing, redemption gates, redemption in kind, anti-dilution levies, swing pricing and redemption fees. - AIFs have the same tools available, as well as side pockets subject to certain conditions. - The Central Bank does not actively encourage IFs to have a particular set of tools available at authorization, though authorization application forms specifically contemplate LMTs. - Box 2 — Tool availability by fund type (as stated): - Gates: UCITS Yes; AIF Yes - Side pockets: UCITS No; AIF Yes - Anti-dilution levy: UCITS Yes; AIF Yes - Redemption fees: UCITS Yes; AIF Yes - Redemption in kind: UCITS Yes; AIF Yes - Suspension: UCITS Yes; AIF Yes - Swing pricing: UCITS Yes; AIF Yes - Side letters: UCITS No; AIF Yes - Short-term borrowing: UCITS Yes; AIF Yes - Sources listed: ESMA, Central Bank of Ireland. ### Policy developments, empirical evidence, and Recommendation 7 - International authorities (FSB and IOSCO) are assessing liquidity risks and possible additional measures following COVID-19 market turmoil of 2020. - Academic research and experience suggest that swing pricing reduces the first mover advantage and discourages destabilizing runs on IFs. - It appears swing pricing may have been adopted less widely by Irish IFs than peers in the UK and Luxembourg. - A Bank of England finding referenced: 202 funds or 83 percent of single-price funds covered by a BOE survey indicated having in place the option to use swing pricing incorporating a dilution adjustment. - European Commission work on UCITS Directive and AIFMD review seeks to make a wide range of LMTs available and to establish a framework for their use; these amendments will be reflected in Irish implementing legislation and in ESMA technical standards. - Recommendation 7: - The Central Bank should prioritize the publication of its planned discussion paper on IF liquidity risk management, taking account of FSB and IOSCO progress and the UCITS/AIFMD review. - Use the initiative to encourage more widespread adoption in IFs’ offering documents of a full range of liquidity management tools among IFs domiciled in Ireland. - Increase Central Bank challenge of IFs at authorization once the regulatory framework is updated. - Emphasize tools that result in subscribing or redeeming investors bearing associated transaction costs, such as swing pricing and anti-dilution levies. ### Suspension and communication powers - Both AIFs and UCITS may temporarily suspend repurchase or redemption of their shares; such suspensions must be communicated to the Central Bank without delay. - The UCITS Directive and the AIFMD also give the Central Bank the power to impose a suspension. ### Pricing errors and Recommendation 9 - IOSCO’s Principles for the Valuation of Collective Investment Schemes: IFs should detect, prevent and correct pricing errors; pricing errors that result in material harm to CIS investors should be addressed promptly and investors fully compensated. - The EU UCITS Directive and AIFMD include general references to treatment of pricing errors; UCITS Directive notes home member state rules apply to NAV calculation errors and investor compensation. AIFMD implementing measures require remedial procedures for incorrect NAV calculation. - Ireland currently has no specific regulatory framework for pricing errors; market practice is largely based on Irish Funds guidance (not approved by the Central Bank), resulting in different approaches on materiality thresholds and compensation circumstances. - Under Irish Funds guidance, material pricing errors are defined as those with a NAV impact of 0.5 percent or more; guidance also provides de minimis limits whereby no compensation is due unless the amount payable exceeds a certain value. - The Central Bank is consulting on a regulatory framework; proposals were set out in Consultation Paper 130 published in September 2019. - Recommendation 9: - The Central Bank should move expeditiously to the next stage of its policy development process and put in place a comprehensive framework for the treatment of pricing errors, including categorization of errors and how they should be resolved. ### Leverage rules, reporting, and Recommendation 8 - UCITS Directive limits a UCITS fund’s global exposure from derivative instruments to 100 percent of the total net value of the UCITS portfolio. - Global exposure is calculated using either the commitment approach or the Value-at-Risk (VaR) method. - Borrowing is not taken into account when determining global exposure of a UCITS, but UCITS are permitted to borrow, on a temporary basis, up to 10 percent of their NAV for non-investment purposes. - AIFMD defines leverage as “any method by which the AIFM increases the exposure of an AIF whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means.” - The Directive requires AIFMs to set leverage limits for each AIF they manage, but does not set maximum limits on leverage. - Leverage must be calculated using two methods: the gross method and the commitment method. - Overall leverage of an AIF is expressed as a ratio between the exposure of the AIF and its NAV. - Article 25 AIFMD: an AIF is considered “substantially leveraged” when exposure calculated according to the commitment method exceeds three times its net asset value; AIFMs managing substantially leveraged AIFs must make available additional information to competent authorities. - Reporting differences: - Prospective investors in a UCITS obtain expected leverage information from the prospectus, the KIID, and the UCITS annual report (which must include a general description of the use of FDIs and EPM techniques). - Prospective investors in an AIF must be given specified information before investing, including investment strategy, types of assets, techniques employed and circumstances for leverage use; additional leverage-related information must be included in the AIF’s annual report. - Central Bank reporting: UCITS submit an annual FDI Return with information on derivatives, leverage and calculation methodologies; the Central Bank expanded this list beyond UCITS Directive minimums. - Leverage-related reporting for AIFs is more extensive: AIFMs must regularly provide information on main instruments, principal exposures and concentrations; AIFMs managing substantially leveraged AIFs must report quarterly on overall leverage, a break-down between borrowing and embedded derivative leverage, extent of asset reuse under leveraging arrangements, and the five largest sources of borrowed cash or securities with amounts from each. - Recommendation 8: - The Central Bank should build on steps already taken through the MMIF reporting framework so that it has a more comprehensive and up-to-date picture of leverage within the UCITS sector, rather than waiting for possible EU-level changes. ### Operational and conduct of business requirements - Ireland applies extensive operational and conduct of business rules to IFs and their managers, derived from MiFID, UCITS Directive and AIFMD. - AIFMs and UCITS management companies can be dual authorized to manage both UCITS and AIFs and must comply with both regimes for the relevant asset classes. - While a MiFID authorization cannot be combined with another type, AIFMs and UCITS management companies can obtain “top-up” MiFID permissions to engage in individual portfolio management and receipt and transmission of orders for individual clients; in those cases, MiFID conduct of business standards apply. - The CBI gathers information allowing it to estimate leverage through gross notional derivative exposures via the quarterly Money Market and Investment Funds (MMIF) statistical reporting. - Additional clarity at EU level on the scope of permissible “top-up” MiFID activities and applicable rules would be helpful; the CBI highlighted these issues in its response to the European Commission’s consultation on the AIFMD Review. *IRELAND INTERNATIONAL MONETARY FUND* ### 62. The primary model used by IFs domiciled in Ireland involves an extensive use of ### The primary model used by IFs domiciled in Ireland involves an extensive use of delegation arrangements ### Delegation practices and supervisory requirements - Majority of Irish fund management companies, with responsibility for 7,180 IFs (approximately 90%), delegate a component of their portfolio/investment management. - In some cases portfolio management is delegated to more than one entity, in more than one jurisdiction. - Countries to which portfolio management is delegated include Brazil, the U.S., Malaysia, and South Africa; the UK is by far the main destination for delegation. - No Irish fund management companies currently delegate risk management. - The Central Bank requires delegating entities to retain full responsibility for the activity, to be discharged in line with the FMC Guidance. - Delegation is permitted by the UCITS Directive and the AIFMD, subject to conditions: - Arrangements must be disclosed to the Central Bank and must not prevent the effectiveness of the Central Bank’s supervision. - The delegating entity must be in a position to monitor the activities of the third party on an ongoing basis. - Where delegation involves portfolio/investment management, the mandate can only be given to entities authorized or registered for asset management and subject to prudential supervision by their home authorities. - Delegation of portfolio/investment management to a non-EU/EEA entity is subject to cooperation arrangements between the Central Bank and the supervisory authorities in the domicile of the third party. - Fund management companies may not delegate to the extent that they become “letter-box entities” as defined in EU legislation; AIFMD and its implementing rules set out a detailed framework and circumstances that would lead to the entity being considered a letter-box. - ESMA issued an opinion stating the UCITS Directive should be interpreted consistently with the AIFMD framework when identifying letter-box entities. - European Commission proposed AIFMD amendments noted that “additional measures would be necessary in order to implement the requirements of the [AIFMD] ensuring that AIFMs deploy the necessary human resources to perform retained tasks where some of their functions are delegated to third parties.” ### Recommendation on delegation - Recommendation 8: - Delegation is common and monitoring procedures are well-established. - The Central Bank gathers information bilaterally from firms at authorization and during ongoing supervision. - Given the extent of delegation, more extensive and systematic data collection on delegation arrangements by the Central Bank is warranted, either at national level or in line with revised EU rules. - Improved data collection would facilitate ongoing supervision and help assess the impact on the regulated population of any tightening of delegation requirements arising from the AIFMD Review, particularly regarding non-EU delegation. ### Governance and FMC Guidance - The Central Bank implemented the Fund Management Companies (FMC) Guidance (finalized December 2016) to streamline and strengthen organizational and governance requirements regarding: - Delegation and delegate oversight - Organizational effectiveness - Directors’ time commitments - Managerial functions - Operational effectiveness - Ensuring UCITS management companies and AIFMs do not fall within the definition of a “letter-box entity” - FMC Guidance has raised standards within Irish IF managers and service providers and provided a clear framework to assess business models and resource plans, particularly during Brexit-related relocations. - Anecdotal evidence and Central Bank acknowledgement suggest some entities present in Ireland prior to Brexit may now lag behind newer entrants. - The Central Bank should continue efforts to bring all market participants to the same level, including follow-up of the “Dear CEO” letter issued in December 2020 on “Thematic review of fund management companies’ governance, management and effectiveness”. ### Composition of IF portfolios and UCITS/AIF distinctions - Detailed eligibility requirements apply to assets UCITS may invest in; non-retail AIFs have extensive discretion. - Irish UCITS Regulations incorporate ESMA guidelines concerning eligible assets for UCITS, requiring investment in liquid assets such as: - Listed liquid transferable securities - Money market instruments - Exchange-traded derivatives - Bank deposits repayable on demand or withdrawable and maturing in no more than 12 months - A UCITS is permitted to borrow up to 10 percent of its assets for temporary purposes. - AIFMD does not set portfolio composition rules for AIFs; individual EU member states may impose more stringent rules. - Central Bank differentiates between RIAIFs and QIAIFs: - RIAIFs (designed for retail investors) have portfolio rules largely similar to UCITS. - QIAIFs (targeted at professional investors) are not, with limited exceptions, subject to regulatory restrictions on investments, borrowing or leverage; QIAIFs must respect portfolio asset limitations set out in their prospectus. ### ESMA role and areas of divergence - ESMA issues guidelines and Q&A to ensure consistent interpretation of eligible assets for UCITS. - Evidence indicates remaining areas of divergence across EU Member States on eligible assets, including: - Eligibility of bank loans - Delta one securities - Digital assets - The Director General, Financial Conduct at the Central Bank chairs the ESMA forum charged with promoting convergent application of the UCITS framework. - Recommendation 5: - The Central Bank should continue to play a leading role in ESMA discussions on UCITS eligible assets to develop common approaches to bank loans, delta-one securities and digital assets. ### Money Market Funds (MMFs) regulatory framework and resilience recommendations - MMFR sets prescriptive rules on eligible assets, liquidity and stress testing. - MMFs can be: i) public debt constant net asset value MMFs; ii) low volatility net asset value MMFs (LVNAV MMF); iii) variable net asset value MMFs (VNAV MMF). - MMFR distinguishes between short-term MMFs and standard MMFs: - Short-term MMFs: WAM of no more than 60 days and WAL of no more than 120 days. - Standard MMFs: WAM and WAL thresholds are 6 months and 12 months, respectively. - MMFs must conduct regular (at least bi-annual) stress tests of portfolios based on common parameters developed by ESMA and updated annually. - If stress tests reveal vulnerabilities, the fund manager must produce a report and proposed action plan to the regulator (Central Bank) and ESMA. - International and regional reviews and reforms underway in response to March-April 2020 market stress (FSB, IMF, IOSCO, U.S. PWG, EU MMFR review). - Recommended reforms to materially strengthen MMF resilience (paragraph 73): a. Decouple gates and fees from liquidity thresholds. b. Increase minimum liquidity thresholds in normal times while allowing temporary deviations of liquidity buffers when MMFs face severe shocks. c. Enhance the quality and diversification of liquidity assets held by MMFs, including mandatory holding public debt in private debt MMFs. d. Enhancements to reporting to regulatory authorities and stress testing. e. Introduce a mandatory requirement for MMFs to have available a minimum of one liquidity management tool, such as anti-dilution levies, redemption fees or swing pricing. f. Impose a minimum-balance-at-risk requirement, wherein a portion of each unit-holder’s recent balances at the MMF is available for redemption only with a time delay. g. Allow MMFs the option to offer redemption in-kind to institutional investors if liquid assets fall significantly below regulatory thresholds. h. Introduce industry-wide gates, triggered by supervisory intervention or pre-defined criteria. - Recommendation 11: - Irish authorities, working closely with ESMA, the ESRB and the European Commission as part of the Commission’s review of the EU MMF Regulation, should take an active role promoting reforms, including those listed above. - Ireland is well placed to play a leading part given its expertise on MMFs and the global significance of the MMF sector in Ireland. ### Oversight of Special Purpose Entities (Box 3) - SPEs are companies created for limited specific purposes including: holding pools of assets as security, passing financial risks, availing favorable tax circumstances, and creating liquidity. - SPEs are neither authorized nor prudentially regulated by the Central Bank, though individual SPE activity may be subject to regulation (e.g., prospectus requirements). - Most SPEs submit statistical returns to the Central Bank on balance sheets, profits and losses, activities and links to other entities. - Ireland’s SPE sector: - SPEs held approximately EUR 900bn of the EUR 5tn non-bank financial sector at the end of Q4 2020. - SSPEs/FVCs: largest component EUR 150bn holding Collateralized Loan Obligations (CLOs); nearly all European CLO vehicles are now located in Ireland. - Some IFs use SPEs to avail of more favorable double-taxation treaty treatment; the Central Bank looks through SPEs (when SPE is wholly-owned subsidiary of an IF) for compliance assessment with eligible assets and diversification. - For SSPEs, risk retention requirements exist via EU sectoral legislation requiring originators, sponsors or original lenders of a securitization to retain a 5% “material net economic interest.” - Ireland FSAP 2016 noted potential governance weaknesses in SPEs, including individuals appointed to tens or hundreds of SPE boards; recommended examination of governance and board-level appointments for reputational risks. - No action has been taken on that recommendation; the Central Bank no longer holds directorship data of these entities due to GDPR. - Potential remedies (not yet implemented) could include caps on directorships or a fitness and probity regime, which would fall under the Office of the Director for Corporate Enforcement (ODCE); the ODCE currently treats SPEs like any other company and lacks licensing powers to impose fitness and probity requirements on directors. - Recommendation 12: - Irish authorities should strengthen oversight of SPE governance and introduce rules on directors’ time commitments, making legislative changes where necessary to ensure the relevant body has appropriate powers. ### Winding-up of investment funds - UCITS Regulations require the prospectus to include details of circumstances and procedures for winding-up, particularly regarding unit-holders’ rights. - Dissolution of AIFs is provided for in different pieces of primary legislation depending on legal form. - Gaps in the Irish legislative framework for winding-up of IFs: - The Central Bank does not have the power to appoint an administrator of an IF (assets are typically in depositary control). - Unclear steps when an IF is wound up and unit-holders cannot be contacted; monies of uncontactable unit-holders must continue to be held by the IF and so cannot be liquidated. - The Central Bank has engaged with the Department of Finance on using the Dormant Accounts Act to lodge money of uncontactable investors to permit liquidation; intervention by the Department of Rural and Community Development in 2019 seemed promising, but the legislative situation remains unclear. *Source: IMF staff report content provided in the supplied document.* ### 78. Recommendation 14: The DoF and the Central Bank should work together to fill gaps in the ### Recommendation 14: The DoF and the Central Bank should work together to fill gaps in the legislative framework for winding-up of IFs, including by clarifying steps to be taken when unit-holders of an IF that has been wound up cannot be contacted. ### Authorization - The Central Bank is responsible for authorization of IFs and fund service providers (FSPs). IFs and FSPs are covered by separate teams within the Securities and Markets Supervision Division (SMSD) with close cooperation. - Service standards aim to provide certainty to applicants on the authorization process (though not the outcome). - FSP Authorizations Team process: - Organizes a pre-engagement meeting with every applicant, followed by an iterative application process. - Firms first submit a Key Facts Document (KFD) covering strategy, capital, outsourcing plans, compliance and risk frameworks, and qualifying unit-holders. - A revised KFD may be requested depending on Central Bank staff findings. - The formal application must contain a standalone business plan and staffing details, including individuals for pre-approval controlled function (PCF) roles. - Individuals applying to hold a PCF role are subject to a fitness and probity assessment and may be interviewed. - A check-point meeting is held internally after the firm’s response to the first set of Central Bank comments. - The Central Bank may refuse authorization or impose conditions where required standards are not met. - Funds Authorization Team approach: - Distinguishes between UCITS and RIAIFs on one hand and QIAIFs on the other. - UCITS applications are triaged through team meetings to identify need for enhanced scrutiny (e.g., investment in CFDs or binary options, unusual fee structures). - QIAIF applications are not typically subject to review due to the sophisticated nature of target investors and prior authorization of relevant FSPs; certain QIAIFs (property funds and loan origination funds) are subject to a pre-approval process. - Investment Fund Authorizations (table of fund authorizations): - UCITS: 560 (2018), 421 (2019), 410 (2020), Total 1391 - AIF – Unit Trusts: 49 (2018), 19 (2019), 32 (2020), Total 100 - AIF – Designated Investment Companies: 74 (2018), 56 (2019), 51 (2020), Total 181 - AIF – ILP: 0 (2018), 0 (2019), 0 (2020), Total 0 - AIF – Common Contractual Funds: 31 (2018), 13 (2019), 15 (2020), Total 59 - AIF - ICAV: 403 (2018), 294 (2019), 209 (2020), Total 906 - Total: 1117 (2018), 803 (2019), 717 (2020), Total 2637 ### Supervision - Supervision is informed by the Central Bank’s risk-based framework, Probability Risk and Impact SysteM (PRISM). - PRISM assigns firms to a four-point impact scale: high, medium-high, medium-low and low. - Authorization staff prepare a handover note to inform the relevant supervision team’s PRISM assessment. - Metrics for determining firm impact have been revised to better capture operational dimensions. - Risk Governance Panels (RGPs): - Supervision teams can draw on expertise across the Central Bank via RGPs for constructive discussion of key risks and supervisory strategy. - RGPs are advisory; decision-making rests with Heads of Supervisory Divisions and relevant Director(s). - Crisis monitoring and data: - During Brexit and COVID market volatility, SMSD monitored daily redemption activity across all asset classes and fund types. - Analysis was presented daily to subject matter experts; Central Bank plans to continue much of this data collection on a less frequent basis and to introduce automated filing. - FSP supervision: - Engagement includes inspections (on-site and off-site, periodic and ad hoc), thematic reviews, and desk-based analysis. - Breaches identified in inspections result in remediation instructions; Risk Mitigation Programs (RMPs) may be issued. - Desk-based supervision uses regulatory returns and report-generated alerts when key risk indicators are triggered. - Trigger-based approach relying on formal reporting and informal channels (news, investor complaints, inputs from other Central Bank divisions and other authorities). - Depositaries and auditors are required to notify the Central Bank promptly of material breaches and to prepare reports on fund management compliance. - Depositary supervision specifics: - Most Irish depositaries are standalone entities authorized under domestic legislation but with a credit institution parent; Central Bank engages with prudential regulator of the parent (typically the U.S. Federal Reserve). - Other depositaries are branches of EU banks offering only depositary activities in Ireland. - Credit institutions seeking to offer depositary services must apply and are treated as new authorizations. - Supervisory work often targeted at depositary level due to depositaries acting for multiple IFs. - Funds supervision: - Thematic-based and data-driven, reflecting funds’ low impact categorization in PRISM. - Main driver historically: ongoing monitoring and analysis of regulatory reporting. - Triage approach used to record matters for initial assessment and possible focused supervisory engagement. - Over the past five years, the Funds Supervision Team opened 3,291 triages, most triggered by a depositary or regulatory alert. - Review underway of supervisory impact model for funds to better capture actual impact of fund failure; a proto-model has been developed. ### Exchange Traded Funds (ETFs) - Key sector metrics and characteristics: - Ireland is the domicile for 60 percent of European ETFs by assets under management (AUM). - ETFs account for 23 percent of Irish IFs’ AUM. - The AUM of ETFs has more than doubled since 2017 and totaled EUR 878bn as at September 30, 2021. - One dominant player manages ETFs totaling 61 percent of AUM. - 97 percent of ETFs are passively managed. - 70 percent of ETF AUM is in equity funds. - For bond ETFs, the sector is split evenly between government and corporate debt. - Specific risks identified (Box 4): - Pricing discount risk — disparity between market price of ETF and its NAV. - Settlement risk — fragmented trading and settlement leading to more frequent settlement delays. - Liquidity providers — only authorized participants (APs) have direct access for subscription/redemption; market makers (MMs) could choose to step away from providing liquidity. - Direct redemption risk — ESMA guidelines allow investors to redeem at ETF provider level but there are doubts about feasibility. - Observed stress episode: - During COVID-19 market turmoil, large differences occurred between certain fixed income ETF share prices and estimated asset values (up to 17 percent in the case of one Irish ETF); discounts generally levelled off within a week per Central Bank analysis. - Mitigations and concentrations: - Settlement risk mitigated by migration of all Irish ETFs to ICSDs in Belgium and Luxembourg, though operational shortcomings at MMs may persist. - Concentration risk among liquidity providers: two of the most active APs are responsible for up to 90 percent of AP activity for certain ETFs of the dominant player. - No evidence of MMs stepping away during COVID market stress, but this remains an area for close monitoring. - Recommendation 10: - Central Bank supervision teams should engage with ETF providers to ensure arrangements with APs and MMs are robust and promote smooth functioning, including in market stress. - There should be closer cooperation between supervisors of IFs and colleagues supervising APs and MMs. ### Thematic Inspections - Thematic inspections: - An important targeted tool to review, assess and mitigate sector and firm-level risks. - The Themed Inspections Team engages colleagues across SMSD and the Central Bank’s Funds Policy team when considering themes. - Inspections can be desk-based or on-site depending on topic, sample size/scope, and methodology. - Sources of themes: - Supervisory experience (e.g., performance fees), new regulation, media reporting, or engagement with other regulators. - ESMA Common Supervisory Actions (CSAs) play an increasingly important role in selecting thematic inspections. - First CSA in IFs launched January 2020 covered UCITS liquidity risk management; results published March 2021. - Second CSA under way covers UCITS costs and charges. - CSA process is the primary annual focus for the Central Bank’s Themed Inspections team; Central Bank must balance CSA-driven work with inspections initiated on its own. ### Enforcement - Enforcement strategy: - Aims to promote principled and ethical behavior in regulated entities and individuals and to achieve a sufficiently dissuasive enforcement regime using extensive intervention powers. - Powers include access to any document, requiring persons to provide information, on-site inspections, and allowing auditors or experts to carry out verifications or investigations. - Intervention considerations: - Nature of intervention considers seriousness of breach, duration, and firm’s willingness to rectify. - Use of a Supervisory Tools Pyramid (Figure 1) ranging from industry guidance to formal sanctions (including fines) or revocation of authorization. - Interventions may evolve depending on entity behavior; supervisory and enforcement areas cooperate closely. - Administrative sanctions process: - Supervisory staff are encouraged to consult Enforcement Directorate early; an Enforcement Relationship Manager is assigned to each Division to advise on evidential requirements. - Enforcement has a formal Case Governance Framework for commencing and managing investigations and ensuring oversight. - Case selection informed by alignment with Central Bank strategy and seriousness; resources prioritized to cases that best achieve strategic objectives and deterrent effects. - Procedural steps upon case acceptance: - Investigation letter sent to regulated entity and a call arranged to explain the process. - Central Bank can issue statutory requests for information; non-compliance may be an aggravating factor in settlement or pursued in court. - Interviews may be organized as part of the investigation. - Case team recommends appropriate sanction to the Director of Enforcement based on seriousness, duration, and deterrence objectives; recommendation is escalated within the Central Bank before being sent to the regulated entity. - If the entity agrees to settle, sanctions are imposed and a public statement issued. - If the entity does not settle or matter is not appropriate for settlement, the matter may be referred to Inquiry for determination. - The Central Bank’s Regulatory Decisions Unit supports the Inquiry process and is independent to Enforcement. *Source: IMF staff report extract on Ireland — sections F. Authorization through H. Enforcement.* ### 100. The current legislative framework should be strengthened to ensure that the Central ### 100. The current legislative framework should be strengthened to ensure that the Central Bank can pursue individuals directly for their misconduct. ### Individual Accountability Framework (IAF) — structure and intent - The Central Bank’s 2018 report reviewing bank culture and behavior suggested an enhanced Individual Accountability Framework (IAF) to achieve behavioral, cultural and regulatory objectives (paragraph 100). - The IAF is comprised of four key components: - The Senior Executive Accountability Regime (SEAR) will require firms to set out, clearly and comprehensively, where responsibility and decision-making lie in order to achieve transparency as to who is accountable for what within firms. - The enforceable Conduct Standards set out the behavior expected of firms and their staff, including obligations to conduct themselves with honesty and integrity, to act with due skill, care, and diligence, and in the best interest of consumers. - The Central Bank’s Fitness & Probity Regime will be enhanced and will place a greater onus on firms to proactively certify that certain staff are fit and proper and capable of performing their roles with integrity and competence. - The Central Bank’s Administrative Sanctions Procedure will be strengthened to ensure that individuals can be pursued directly for their misconduct rather than only where they have participated in a firm’s wrongdoing. The reforms will also provide for greater process efficiency, clarity and administrative consistency to all involved, including those who may be the subject of enforcement action. - A continued focus by the Central Bank on proportionality and fair procedures is a key theme of its IAF proposals (paragraph 100). - A legislative process has been launched to put in place the IAF; the process is led by the Department of Finance and the Central Bank has been heavily involved at all stages in the drafting of the provisions. The Central Bank is hopeful that the legislation will be enacted as soon as possible (paragraph 100, footnote 54). ### Enforcement practice and recent data - The FSAP’s review indicates the Central Bank has tended to favor Risk Mitigation Programs (RMPs) over formal enforcement action as a means of addressing concerns (paragraph 101). - Recent enforcement statistics (paragraph 101): - Administrative sanctions have been issued against four FSPs in the past five years. - Over the same period the Funds Supervision Team has issued 124 RMPs to 29 IFs. - The low number of formal enforcement actions should be viewed against gaps in the legislative framework and the challenges these can create in pursuing enforcement actions against individuals; the Central Bank is currently required to prove that a regulated firm has committed a breach, then show that individuals (known as “Persons Concerned in Management” cases) participated in the breach, although sanctions have been imposed on a few individuals in recent years (paragraph 101). - Recommendation 4 (paragraph 102): - The Irish authorities should amend relevant legislation to provide for greater individual accountability and enhance the powers of the Central Bank to take direct enforcement action against individuals. - The Central Bank should finalize the related internal framework to operationalize execution of the upgraded accountability regime. ### Reporting and data collection for IFs and FSPs - The Central Bank receives an extensive set of reports and data from Irish IFs and FSPs (paragraph 103). - Required periodic reporting for UCITS and AIFs includes (paragraph 103): - (i) annual/semi-annual financial statements; - (ii) annual auditor report; - (iii) key investor information document (UCITS only); - (iv) annual financial derivative instrument return (UCITS only); - (v) annual fund profile; - (vi) quarterly balance sheet and profit & loss data for statistical reporting (monthly for MMFs); - (vii) monthly net asset value data. - Ad-hoc reports include a regulatory report of material issues and a depositary report. An internal system monitors a series of key indicators generated from various returns related to annual/interim accounts and capital requirements (paragraph 103). - Merging the Securities Holdings Statistics (SHS) with the Central Bank’s internal database has improved understanding of the underlying investor base of IFs; SHS gives greater visibility on underlying investors of IFs, except for those who hold their securities in the UK and the U.S. (paragraph 104). - The Central Bank has urged funds to look through to underlying investors to identify which entity holds decision-making power on redemptions; the next iteration of the EU’s Anti-Money Laundering Directive (AMLD6) may seek to address this issue more broadly (paragraph 104, footnote 55). - Recommendation 15 (paragraph 105): - The Central Bank should continue its efforts to improve visibility on underlying investors. - Data gaps remain despite expanded data collection (paragraph 106). In particular: - IFs often have credit lines in place with credit institutions to help manage short-term liquidity pressures; having access to information on credit lines, including whether they are shared with other funds, gives a clearer picture of how IFs would cope with unusually high levels of redemptions and/or unexpected illiquidity in their portfolio assets (paragraph 106). - Recommendation 8 (paragraph 107): - The Central Bank should make progress on collecting data on credit lines put in place by IFs, including whether the credit lines are shared and to what extent they have been drawn down. - This can be achieved either as part of the next update to the ECB’s Investment Fund Statistics Regulation or through changes to domestic rules (paragraph 107, footnote 56). ### International cooperation and cross-border complexity - The Central Bank plays an active role on policy development within European and international fora and cooperates extensively with peer regulators for supervision and systemic risk monitoring (paragraph 108). - Cooperation mechanisms and counterparties (paragraph 108): - Use of Memoranda of Understanding (MoU) entered directly, through ESMA, or as a member of IOSCO. - Frequent engagements with the UK Financial Conduct Authority, CSSF (Luxembourg), AMF (France), BaFin (Germany), and national regulators in Asia, North America and the Caribbean. - The Central Bank is active in FSB, IOSCO, ESMA and ESRB fora; it co-chaired work producing the ESRB’s 2020 Recommendation on liquidity risks in investment funds, led the working group on operationalizing the FSB recommendations on liquidity management, and chairs ESMA’s Investment Management Standing Committee (paragraph 109). - Cross-border complexity increases challenge to the Central Bank’s mandates; issues noted include the UK’s departure from the EU and potential conflicts where domestic financial stability measures could have adverse effects in other jurisdictions (paragraph 110, footnote 57). - Recommendation 6 (paragraph 111): - The Central Bank should intensify planning on how to manage potentially challenging financial stability scenarios involving cross-border complexity and requiring international cooperation. - MoU signatory status and legislative impediments (paragraph 112): - The Central Bank is a signatory to the ESMA MMoU and the IOSCO MMoU on Consultation and Cooperation and the Exchange of Information. - The Central Bank is not yet a full signatory to IOSCO’s Enhanced MMoU due to obstacles related to accessing and sharing records held by telephone and internet service providers; legislative change would be needed to give this power to the Central Bank, or alternatively it may obtain such records from another authority but it is not clear that it has a firm legislative basis for doing so. - Recommendation 13 (paragraph 113): - Although not being an Enhanced MMoU signatory has not had an adverse impact on the Central Bank’s ability to provide or seek cooperation thus far, it should liaise with the DoF to address any legislative impediments and allow it to become a full signatory in due course. ### Conclusions and consolidated recommendations (paragraph 114 and following) - Oversight of MBF in Ireland should reflect the globally systemically important nature of the sector. The Central Bank is well placed to build on an already robust regime by making further enhancements in the following areas: a. Central Bank independence, powers and resourcing - Legislative changes regarding the Minister’s power to dismiss Central Bank Commission members are needed to secure the Central Bank’s de jure independence. - The Central Bank’s powers should be enhanced to provide a sound basis for direct enforcement action against individuals. - Enshrine in legislation a written procedure for the submission by the Central Bank and approval by the Minister for Finance of the supervisory levy. - The Central Bank should apply sufficient flexibility on remuneration to recruit and retain appropriate talent. b. Financial stability - The Central Bank should prioritize the adoption of guidance on liquidity management tools, including tools such as swing pricing which result in subscribing or redeeming investors bearing the associated transaction costs. - The Central Bank should engage with ETF providers on arrangements with APs and MMs. - The Central Bank should intensify planning on how to manage potentially challenging financial stability scenarios involving cross-border complexity and requiring international cooperation. c. Data - Collection of data should be expanded in the areas of delegation, UCITS leverage, and credit lines. - The Central Bank should continue its efforts to improve visibility on underlying investors. d. EU convergence - The Irish authorities should take an active role in promoting reforms to the EU MMFR that will materially strengthen the MMF sector. - The Central Bank should push for the adoption of common approaches at EU level to UCITS eligible assets requirements. e. Regulatory framework - The Central Bank should proceed expeditiously to finalize its new approach to IF pricing errors. - The Irish authorities should work together to strengthen governance of SPEs. - The DoF and the Central Bank should work together to fill gaps in the legislative framework for winding-up of IFs, including by giving the Central Bank the power to appoint an administrator and clarifying steps to be taken when unit-holders of an IF that has been wound up cannot be contacted. *Source: IMF Financial Sector Assessment (Ireland), relevant sections and recommendations as presented in the supplied content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022008.pdf_