## _cr16312

## Source details

**Canonical URL:** [_cr16312](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16312.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16312.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16312.pdf.json)

---

### Executive summary — purpose and scope
- Purpose: Take stock of the risks to domestic and international financial stability associated with the asset management industry in Ireland.
- Scope of analysis:
  - Appraise liquidity and ‘solvency’ risk for large money market funds (MMFs).
  - Appraise liquidity risk in large Emerging Market (EM) and High Yield (HY) bond funds.
  - Assess leverage concentration among investment funds (IFs).
  - Examine interconnectedness: exposure of Irish-domiciled collective investment vehicles (CIVs) to the domestic economy; geographical and sectoral concentration risk; and cross shareholdings.
  - Address data gaps relevant to monitoring asset management–related financial intermediation.
- Implementation horizon: authorities can realistically aim to achieve significant progress in all initiatives within the next two years.

### Industry background, scale, and cross-border footprint
- Key magnitude and comparisons:
  - Assets invested via Irish domiciled collective investment vehicles (CIVs) rose from €770 billion in 2009 Q4 to €2.7 trillion in 2015 Q4.
  - This amount is equivalent to 12.6 times GDP and 4 times bank assets.
  - Ireland accounts for just 0.3 percent of world GDP but ranks third in shadow banking assets in the FSB 26-country sample as of December 2014 (behind the United States and United Kingdom).
- Additional industry statistics:
  - Assets in Irish domiciled MMFs and IFs rose from €770 billion in Q4 2009 to €2.3 trillion in Q4 2015.
  - €2.3 trillion = 10.7 times GDP and nearly 4 times bank assets.
  - Irish domiciled MMFs account for 10 percent of the world total and nearly half of the euro area total.
  - Ireland accounts for 9 percent of global hedge fund assets, and more than two-thirds of the euro area total.
  - UCITS funds account for around three quarters of the value of Irish domiciled CIV assets.
  - There are over 4,000 funds and sub-funds listed on the Irish Stock Exchange.
- Cross-border structure:
  - Assets and liabilities of Irish domiciled CIVs are largely offshore.
  - Irish domiciled CIV assets are managed by around 900 asset managers from 50 countries.
  - Entities in Ireland act as administrator for around €3.6 trillion in CIV assets, nearly half of which are domiciled outside of Ireland.
- Regulatory oversight:
  - CIVs domiciled in Ireland fall under EU-wide and domestic regulation; the Central Bank of Ireland (CBI) is charged with supervision and oversight.
  - Virtually all MMFs in Ireland (and the EU) are regulated under the UCITS regime; IFs are regulated pursuant to either the UCITS or AIFM Directives.

### Key findings on risks and resilience
- Overall assessment:
  - Most avenues for domestic financial instability emanating from Irish-domiciled MMFs and IFs appear to be contained at present, subject to limitations in scope.
- Money Market Funds (MMFs):
  - MMFs have liquidity positions (ratio of liquid assets to total assets) that are 2-3 times the industry standard.
  - MMF liquidity positions are 3–6 times higher than levels needed to withstand a repeat of the worst historical redemption shock experienced by each fund over the past decade.
  - MMFs have established liquidity buffers well in excess of those required to withstand historical redemption shocks.
  - MMFs appear able to withstand the impact of large market shocks.
  - Residual vulnerability: high portfolio turnover and the prevalence of prime Constant Net Asset Value (CNAV) MMFs mean a widespread redemption shock cannot be ruled out.
- Emerging Market (EM) and High Yield (HY) bond funds:
  - Large EM/HY bond funds appear positioned to accommodate plausibly-sized redemption shocks for the most part.
  - Emerging market debt funds appear to have greater liquidity than high yield credit funds (shorter estimated times to liquidate part of the portfolio).
  - Findings are sensitive to assumptions over trading volumes; time-to-liquidation estimates are historical and dependent on recent (3-month) traded volume, turnover, price volatility, and bid-ask spreads.
- Market (interest rate) risk stress tests for MMFs:
  - Stress tests: full portfolio revaluation for the 20 largest Irish-domiciled MMF portfolios using security-level holding data.
  - Shocks calibrated in increments of 15bps, 30bps, 60bps and 120bps for combinations of credit spread and risk free interest rate shocks.
  - Result: Prime MMFs would need a simultaneous 60 basis point shock to both credit spreads and risk free interest rates to experience a marked-to-market decline in excess of 0.2 percent.
  - Government MMFs are mostly exposed to duration risk and would need a very large risk-free rate shock to produce a shadow NAV decline requiring immediate remedial action.
- Leverage:
  - Ratio of leverage to NAV is highest for hedge funds: 64 percent.
  - Within CIVs typically regulated under UCITS, the ratio of leverage to NAV is highest for bond funds: 15 percent.
  - Around 85 percent of bond fund leverage is accounted for by less than 5 percent of bond funds.
  - ‘Highly leveraged’ bond funds: leverage to NAV ratio in excess of 100 percent or absolute leverage in excess of €1 billion.
    - Across a population of 867 bond funds, 39 were categorized as ‘highly leveraged’.
    - These highly leveraged bond funds have around half their exposure in sovereign debt and 86 percent in developed market debt securities.
  - Reporting conventions obscure assessment of true economic risk by not distinguishing gross from net derivatives exposure or leverage used for speculative versus hedging purposes.
- Spillovers and interconnectedness:
  - Share of portfolios invested in Irish assets:
    - MMFs: 2.8 percent
    - IFs: 9.4 percent
  - A small fraction of liabilities issued by Irish entities are held by domestically domiciled MMFs and IFs.
  - Main transmission channel likely a redemption shock emanating from the U.K., which accounts for 45 percent of liabilities issued by MMFs and IFs (mostly held by other financial institutions).
  - On the asset side, the largest source of concentration risk is to the U.S. (and the nonfinancial sector in particular).
  - Cross-shareholding concentration:
    - Hedge and mixed funds have the highest proportion of assets invested in other MMFs/IFs.
    - Around one third of hedge and mixed funds have more than half of their portfolios invested in other MMFs and IFs.
    - Many hedge and mixed funds with significant cross-holdings do not offer daily redemption terms.
  - FVC (securitization vehicle) related notes:
    - FVC liabilities linked to Irish banks were €41 billion in Q4 2015, the majority of which are retained securitizations.
    - FVCs hold very little (approximately €7 billion) in the way of debt securities issued by the Irish banking sector in Q4 2015.
    - Ireland’s ‘Other’ sector in financial accounts amounted to €626 billion in Q4 2015; preliminary estimates suggest SPVs amount to around €322 billion.

### Data gaps, recent progress, and priorities
- Progress made by Central Bank of Ireland:
  - Collection of detailed (and timely) portfolio security holding data.
  - Establishing coverage of the special purpose vehicle sector (SPVs).
  - Pooling and sharing of CIV data across the 'Regulatory' and 'Central Banking' pillars.
  - Security-by-security reporting extended to monthly reporting for money market funds from November 2014.
  - Central Bank extended the FVC reporting form in full to other SPVs from Q3 2015.
  - Second version of the security-by-security reporting form for investment funds (issued Q1 2014) added maturity dates, identification of performance pay, quarterly custodian reporting of fund/share holdings, and more detail on fund types and instruments.
- Remaining priorities:
  - Continue to expand coverage of the remainder of the ‘Other Financial Intermediary’ (OFI) sector.
  - Measure IF leverage in economically meaningful terms, as part of an EU-wide initiative.
  - Collect data in a standardized form to allow CIV and sponsor links to be assessed in formal network mapping analysis.
  - Gather more information on characteristics of investors.
- International priority:
  - Consider standardized agreements to facilitate cross-border sharing of non-bank financial data; national legislation currently hinders cross-border data sharing.
- Legal/operational caveats:
  - Potential limits on how data can be used ‘downstream’ (e.g., for regulatory sanction).
  - “Section 110” provides favorable tax treatment of SPVs; reporting was extended to all SPVs availing of Section 110.

### Policy recommendations (selected, agency attribution preserved)
- Liquidity risk
  - Recommendation: Monitor liquidity risk in MMFs and IFs with reference to (i) a minimum weekly liquid asset ratio, and (ii) characteristics and concentration of the investor base. More frequent liquidity stress tests should be informed by security level fund holdings.
  - Relevant Agency: CBI
- Market risk
  - Recommendation: Build internal capacity that would allow for more frequent stress testing with respect to market shocks for MMFs, and IFs that avail of significant leverage.
  - Relevant Agency: CBI
- Leverage
  - Recommendation: Strengthen oversight into the use of leverage by investment funds.
  - Relevant Agency: CBI
- Spillover risk
  - Recommendations:
    - Require evidence of communication from MMFs to investors with regard to contingent parental sponsor support.
    - Encourage MMFs to graduate away from the CNAV convention (beginning with new prime funds) to better reflect variability in the value of underlying securities.
    - Ensure appropriate risk management safeguards are in place where CNAV MMFs continue to operate.
  - Relevant Agency: CBI
- OFI residual
  - Recommendation: Continue cooperation between the Central Bank of Ireland and the Central Statistics Office (CSO) to develop deeper insight into the ‘OFI residual’ composition.
  - Relevant Agencies: CBI and CSO
- SPVs
  - Recommendation: Examine whether oversight of SPV governance arrangements should be stepped up, and the feasibility of a cap limiting the number of individual directorships.
  - Relevant Agency: Irish authorities
- Multilateral cooperation
  - Recommendations:
    - Contribute to the development of standardized cross border data sharing arrangements pertaining to fund management activities/entities through relevant international fora.
    - Advocate at the EU level for reporting conventions on leverage that would help to strengthen stability-related oversight of IFs.
  - Relevant Agencies: CBI with EU authorities

### Coverage limitations and issues beyond scope
- Not assessed in standalone fashion:
  - (i) concentration risk in the investor base for IFs and MMFs;
  - (ii) the ability and/or willingness of parent sponsors to provide support for MMFs in times of stress;
  - (iii) exchange traded funds (subsumed into broader bond fund analysis);
  - (iv) solvency risk for IFs arising from imprudent use of leverage;
  - (v) the core economic function and potential reputational risks posed by SPVs where data are recent;
  - (vi) the remainder of the ‘OFI residual’ in national financial accounts; and
  - (vii) robustness of operational and capital provisioning arrangements for custodian banks in Ireland servicing Irish domiciled CIVs.

*Source: IMF Staff analysis as presented in content unit _cr16312 (IMF).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Introduction
- Purpose: Take stock of the risks to domestic and international financial stability associated with the asset management industry in Ireland.
- Motivations:
  - Irish-domiciled asset management industry has grown rapidly since the last FSAP (2006), which recommended a review.
  - Recently compiled security-level data allow a richer analysis.
  - Aligns with the global trend of increased supervision of asset management activities and entities.

### Industry background and scale
- Ireland has emerged as a globally significant hub for fund-based financial intermediation due to:
  - A highly skilled English-speaking workforce.
  - A business and regulatory environment conducive to cross-border operations.
- Key magnitude and comparisons:
  - Assets invested via Irish domiciled collective investment vehicles (CIVs) rose from €770 billion in 2009 Q4 to €2.7 trillion in 2015 Q4.
  - This amount is equivalent to 12.6 times GDP and 4 times bank assets.
  - Ireland is the domicile of choice for more money market and hedge fund assets than any other country in the euro area.
  - Ireland accounts for just 0.3 percent of world GDP but ranks highly in shadow banking assets (third in the FSB 26-country sample as of December 2014 behind the United States and United Kingdom).

### Scope of analysis
- Focus areas:
  - Appraise liquidity and ‘solvency’ risk for large money market funds (MMFs).
  - Appraise liquidity risk in large Emerging Market (EM) and High Yield (HY) bond funds.
  - Assess leverage concentration among investment funds (IFs).
  - Examine interconnectedness: exposure of Irish-domiciled CIVs to the domestic economy; geographical and sectoral concentration risk; and cross shareholdings.
  - Address data gaps relevant to monitoring asset management–related financial intermediation.

### Key findings on risks and resilience
- Overall assessment: Most avenues for domestic financial instability emanating from Irish-domiciled MMFs and IFs appear to be contained at present, subject to limitations in scope.
- Money Market Funds (MMFs):
  - MMFs have established liquidity buffers well in excess of those required to withstand historical redemption shocks.
  - MMFs appear able to withstand the impact of large market shocks.
  - However, high portfolio turnover of MMFs generally, and the prevalence of prime Constant Net Asset Value (CNAV) MMFs in Ireland in particular, means the risk of a widespread redemption shock cannot be ruled out.
- Emerging Market (EM) and High Yield (HY) bond funds:
  - For the most part, large EM and HY bond funds appear able to accommodate plausibly-sized redemption shocks.
  - Inherent volatility in trading volumes suggests caution.
- Leverage:
  - High levels of leverage are concentrated in a relatively small number of funds.
  - Reporting conventions obscure an assessment of the true economic risk.
- Spillovers and interconnectedness:
  - Potential for destabilizing spillovers from Irish-domiciled MMFs and IFs to the domestic economy appears limited.
  - MMFs and IFs hold only a small share of their portfolios in Irish assets.
  - Only a small fraction of liabilities (typically share units) issued by Irish entities are held by such CIVs.
  - Geographical spillover risk: the main transmission channel would likely be a large-scale redemption shock emanating from the U.K., which holds nearly half of all liabilities issued by Irish-domiciled CIVs.
  - Cross shareholdings are concentrated in hedge and mixed funds, reflecting the greater representation of ‘Fund of Funds’ in this universe.

### Data gaps and recent progress
- Progress: The Central Bank of Ireland has made important progress in addressing long-standing data gaps as they pertain to the asset management and broader shadow banking industry.
- Remaining priorities:
  - Continue to expand coverage of the remainder of the ‘Other Financial Intermediary’ (OFI) sector (which in Ireland’s case is sizeable).
  - Measure IF leverage in economically meaningful terms, as part of an EU-wide initiative.
  - Collect data in a standardized form that would allow for CIV and sponsor links to be assessed in formal network mapping analysis.
  - Attempt to gather more information on the characteristics of investors.

### Policy recommendations (selected and agency attribution preserved)
- Liquidity risk
  - Recommendation: Monitor liquidity risk in MMFs and IFs with reference to (i) a minimum weekly liquid asset ratio, and (ii) characteristics and concentration of the investor base. More frequent liquidity stress tests should be informed by security level fund holdings.
  - Relevant Agency: CBI
- Market risk
  - Recommendation: Build internal capacity that would allow for more frequent stress testing with respect to market shocks for MMFs, and IFs that avail of significant leverage.
  - Relevant Agency: CBI
- Leverage
  - Recommendation: Strengthen oversight into the use of leverage by investment funds.
  - Relevant Agency: CBI
- Spillover risk
  - Recommendations:
    - Require evidence of communication from MMFs to investors with regard to contingent parental sponsor support.
    - Encourage MMFs to graduate away from the CNAV convention (beginning with new prime funds) to better reflect variability in the value of underlying securities.
    - Ensure appropriate risk management safeguards are in place where CNAV MMFs continue to operate.
  - Relevant Agency: CBI
- OFI residual
  - Recommendation: Continue cooperation between the Central Bank of Ireland and the Central Statistics Office (CSO) to develop deeper insight into the ‘OFI residual’ composition.
  - Relevant Agencies: CBI and CSO
- SPVs
  - Recommendation: Examine whether oversight of SPV governance arrangements should be stepped up, and the feasibility of a cap limiting the number of individual directorships.
  - Relevant Agency: Irish authorities
- Multilateral cooperation
  - Recommendations:
    - Contribute to the development of standardized cross border data sharing arrangements pertaining to fund management activities/entities through relevant international fora.
    - Advocate at the EU level for reporting conventions on leverage that would help to strengthen stability-related oversight of IFs.
  - Relevant Agencies: CBI with EU authorities

### Implementation horizon
- The authorities can realistically aim to achieve significant progress in all the areas covered by the initiatives in the near term, defined as within the next two years.

*EXECUTIVE SUMMARY*

### 7.      The non-bank industry has become increasingly prominent in Ireland, particularly

### _cr16312 - 7.      The non-bank industry has become increasingly prominent in Ireland, particularly

### Industry evolution and scale
- Shift from bank-dominated cross-border activity toward non-bank, fund-based services driven by:
  - Banks domiciled in Ireland shrinking or slowing balance sheet growth and retrenching from principal investment activities.
  - Post-2009 recovery in global asset prices generating positive revaluation effects and attracting new investment flows to CIVs under the UCITS and AIFM Directives.
  - Ireland’s competitive cross-border business environment, robust implementation of EU harmonized CIV regulation, and close ties with U.K. and U.S. funds management industries.
- Key size and market-share statistics:
  - Assets in Irish domiciled MMFs and IFs rose from €770 billion in Q4 2009 to €2.3 trillion in Q4 2015.
  - €2.3 trillion = 10.7 times GDP and nearly 4 times bank assets.
  - Irish domiciled MMFs account for 10 percent of the world total and nearly half of the euro area total.
  - Ireland accounts for 9 percent of global hedge fund assets, and more than two-thirds of the euro area total.
  - UCITS funds account for around three quarters of the value of Irish domiciled CIV assets.
  - There are over 4,000 funds and sub-funds listed on the Irish Stock Exchange.

### Cross-border structure and market footprint
- Cross-border characteristics:
  - Assets and liabilities of Irish domiciled CIVs are largely offshore.
  - Front, middle and back office staff, and many fund governing board members, are often located abroad (particularly in the U.K. and U.S.).
  - Irish domiciled CIV assets are managed by around 900 asset managers from 50 countries.
  - Entities in Ireland act as administrator for around €3.6 trillion in CIV assets, nearly half of which are domiciled outside of Ireland.
- Regulatory oversight:
  - CIVs domiciled in Ireland fall under EU-wide and domestic regulation; the Central Bank of Ireland is charged with supervision and oversight.
  - Virtually all MMFs in Ireland (and the EU) are regulated under the UCITS regime; IFs are regulated pursuant to either the UCITS or AIFM Directives.

### Financial stability analysis: structure and scope
- Analysis structure:
  - Assessment of CIVs’ potential to encounter or transmit stress via: liquidity and “solvency” risk for MMFs; liquidity risk in EM/HY bond funds; and leverage concentration among IFs.
  - Examination of interconnectedness and spillover risk via exposures to the domestic economy, geographic and sectoral concentration, and CIV cross-shareholdings.
  - Identification of data gaps relevant to monitoring evolving financial intermediation through asset managers.
- Coverage and sample notes:
  - MMF and bond fund liquidity analysis covers the largest funds.
  - Sample of 20 largest MMFs used comprises 80 percent of Irish domiciled MMF assets; individual funds range from €5 billion to €25 billion.
  - Sample of 20 largest EM and HY bond funds covers 46 percent of emerging market bond fund assets and 36 percent of high yield credit assets; individual bond funds range from €0.7 billion to €7 billion.

### Liquidity risk in Irish domiciled MMFs
- Buffers and liquidity positions:
  - MMFs have liquidity positions (ratio of liquid assets to total assets) that are 2-3 times the industry standard.
  - MMF liquidity positions are 3–6 times higher than levels needed to withstand a repeat of the worst historical redemption shock experienced by each fund over the past decade.
- Definitions and benchmarks:
  - ‘Industry standard’ liquidity buffers reference the IMMFA code of practice and 2013 European Commission MMF reform proposals (minimum buffer: at least 10 percent daily liquidity and at least 20 percent weekly liquidity).
  - Liquid assets definition includes overnight cash and repo, securities maturing within one week, and sovereign debt securities with a credit rating of AA or above.
- Residual vulnerabilities:
  - High portfolio turnover in MMFs and prevalence of prime CNAV MMFs mean a widespread redemption shock cannot be entirely ruled out.
  - Regulatory momentum in the U.S. and EU is encouraging a move away from the CNAV valuation approach.

### Liquidity risk in emerging market and high yield bond funds
- General findings:
  - Large EM/HY bond funds invested primarily in emerging market debt and high yield credit appear positioned to accommodate plausibly-sized redemption shocks for the most part.
  - Findings for bond funds are more sensitive to assumptions over trading volumes than for MMFs.
- Relative liquidity:
  - Emerging market debt funds appear to have greater liquidity than high yield credit funds, evidenced by shorter estimated times to liquidate part of the portfolio in response to a redemption shock.
- Methodology caveats:
  - Time-to-liquidation estimates use an advanced pricing algorithm based on recent (3-month) traded volume, turnover, price volatility, and bid-ask spreads; they are historical, not forward-looking.
  - Asset sales are conservatively assumed to occur in pro rata fashion; a waterfall approach would shorten liquidation times but materially change portfolio composition.

### Market (interest rate) risk stress tests for MMFs
- Stress-test design:
  - Full portfolio revaluation performed for the 20 largest Irish-domiciled MMF portfolios using security-level holding data (yield, coupon, maturity, duration).
  - Shocks calibrated to combinations of credit spread and risk free interest rate shocks in increments of 15bps, 30bps, 60bps and 120bps.
- Results:
  - Prime MMFs would need to be subjected to a simultaneous 60 basis point shock to both credit spreads and risk free interest rates to experience a marked-to-market decline in excess of 0.2 percent.
  - Government MMFs are mostly exposed to duration risk and would need to encounter a very large risk-free rate shock to produce a shadow NAV decline requiring immediate remedial action.

### Leverage in investment funds and concentration
- Leverage across fund types:
  - Ratio of leverage to NAV is highest for hedge funds: 64 percent.
  - Within CIVs typically regulated under UCITS, the ratio of leverage to NAV is highest for bond funds: 15 percent.
  - Around 85 percent of bond fund leverage is accounted for by less than 5 percent of bond funds.
- Highly leveraged bond funds:
  - ‘Highly leveraged’ bond funds defined as those with a leverage to NAV ratio in excess of 100 percent or with an absolute leverage figure in excess of €1 billion.
  - Across a population of 867 bond funds, 39 were categorized as ‘highly leveraged’.
  - These highly leveraged bond funds have around half their exposure in sovereign debt and 86 percent in developed market debt securities.
- Reporting limitations:
  - Current reporting conventions obscure a detailed assessment of true “economic risk” by not distinguishing gross from net derivatives exposure or leverage used for speculative versus hedging purposes.

*Source: IMF staff analysis in chapter section 7 of the provided IMF document.*

### 15.      The potential for destabilizing spillovers from Irish domiciled MMFs and IFs to the

### 15.      The potential for destabilizing spillovers from Irish domiciled MMFs and IFs to the

### Key findings on spillovers and concentrations
- Overall potential for destabilizing spillovers from Irish domiciled MMFs and IFs to the domestic economy appears limited, consistent with earlier Central Bank analysis.
- Share of portfolios invested in Irish assets:
  - MMFs: 2.8 percent
  - IFs: 9.4 percent
- A small fraction of liabilities issued by Irish entities are held by domestically domiciled MMFs and IFs.
- Main transmission channel likely to be a redemption shock emanating from the U.K., which accounts for 45 percent of liabilities issued by MMFs and IFs (mostly held by other financial institutions).
- On the asset side, largest source of concentration risk is to the U.S. (and the nonfinancial sector in particular).
- Cross-shareholding concentration:
  - Hedge and mixed funds have the highest proportion of assets invested in other MMFs/IFs.
  - Around one third of hedge and mixed funds have more than half of their portfolios invested in other MMFs and IFs.
  - Many hedge and mixed funds with significant cross-holdings do not offer daily redemption terms.
- FVC (securitization vehicle) related notes:
  - FVC liabilities linked to Irish banks were €41 billion in Q4 2015, the majority of which are retained securitizations.
  - FVCs hold very little (approximately €7 billion) in the way of debt securities issued by the Irish banking sector in Q4 2015.
  - FVC OFI figure here are mainly deposit and loans between Irish FVCs, which are not linked directly to the domestic economy and inflate the figures.

### Data gaps and recent progress
- Authorities have made important progress addressing long-standing data gaps in the asset management and shadow banking industry, aiding supervisory capacity.
- Notable data improvements:
  - Collection of detailed (and timely) portfolio security holding data.
  - Establishing coverage of the special purpose vehicle sector (SPVs).
  - Pooling and sharing of CIV data across the 'Regulatory' and 'Central Banking' pillars at the Central Bank of Ireland, enabling Markets Supervision Directorate and Statistics Division to deepen analysis.
- ECB and Central Bank reporting developments:
  - Euro area domiciled investment funds required to report balance sheets on a security-by-security basis from Q4 2008.
  - Visibility into securitization vehicles (FVCs) increased from Q4 2009.
  - ECB reporting requirements expanded slightly in Q4 2014.
  - Security-by-security reporting extended to the insurance sector in H1 2016; early stage coverage likely to extend to pension funds.
  - Central Bank of Ireland implemented these initiatives and in some respects led regional practice.
- Specific Irish initiatives:
  - Second version of the security-by-security reporting form for investment funds (issued Q1 2014) extended remit to regulatory monitoring and financial stability analysis; added fields include maturity dates for each security, identification of performance pay, quarterly custodian reporting of fund/share holdings, more detail on fund types and characteristics of equity, debt, lending and derivative instruments.
  - Second version of the FVC reporting form introduced Q1 2014 incorporated some new fields.
  - Security-by-security reporting form for investment funds extended in full to monthly reporting for money market funds from November 2014.
  - Central Bank extended the FVC reporting form in full to other SPVs from Q3 2015.
  - Ireland’s ‘Other’ sector in financial accounts amounted to €626 billion in Q4 2015; preliminary estimates suggest SPVs amount to around €322 billion.
  - These granular data will allow for a more refined definition of shadow banking in Ireland.
- Limits and legal/operational caveats:
  - Potential limits on how data can be used ‘downstream’ (e.g., for regulatory sanction).
  - Legislation known as “Section 110” allows favorable tax treatment of SPVs; reporting was extended to all SPVs availing of Section 110.

### Remaining data priorities
- International level: consider standardized agreements to facilitate cross-border sharing of non-bank financial data; national legislation currently hinders cross-border data sharing.
- Domestic priorities:
  - Continue to expand coverage of remainder of the ‘Other Financial Intermediary’ (residual) sector of the financial accounts.
  - Measure leverage use in economically meaningful and risk adjusted terms.
  - Collect data in a standardized form to allow CIV and sponsor links to be assessed in formal network mapping analysis.
  - Further efforts to gather information on the investor base.

### Issues beyond the scope of the study
- No standalone assessment was made of:
  - (i) concentration risk in the investor base (which could contribute to ‘run risk’) for IFs and MMFs;
  - (ii) the ability and/or willingness of parent sponsors to provide support for MMFs in times of stress;
  - (iii) exchange traded funds (which were subsumed into the broader analysis of bond funds);
  - (iv) solvency risk for IFs arising from imprudent use of leverage;
  - (v) the core economic function of (and potential stability or reputational risks posed by) SPVs on which the Central Bank has only recently begun to compile data;
  - (vi) the remainder of the ‘OFI residual’ in the national financial accounts; and
  - (vii) the robustness of operational and capital provisioning arrangements for custodian banks in Ireland servicing Irish domiciled CIVs.

### Main policy recommendations
- a. Liquidity and Run Risk
  - Increase monitoring, on the asset side, of liquidity risk in MMFs with reference to a minimum weekly liquid asset ratio and suitable indicators for other IFs.
  - On the liability side, step up monitoring of the characteristics and concentration of the investor base.
  - More frequent liquidity-based stress tests should be informed by granular security level fund holdings.
- b. Market Risk
  - Build internal capacity to allow for more frequent stress testing with respect to market shocks for MMFs, and IFs that avail of significant leverage.
- c. Spillovers
  - To minimize spillover and moral hazard risk, authorities should:
    - (i) require evidence of communication from MMFs to investors that clearly spells out the nature of contingent parental sponsor support;
    - (ii) encourage CNAV MMFs to graduate away from the CNAV accounting structure (beginning with new prime funds) to better reflect the inherent variability in the value of underlying security holdings; and
    - (iii) ensure appropriate risk management safeguards are in place where CNAV MMFs continue to operate.
- d. Leverage in IFs
  - Strengthen oversight into the use of portfolio leverage by IFs (particularly hedge and bond funds) via surveys to better distinguish: gross from net exposure; constrained from unconstrained potential loss; and hedging from speculation.
  - Implementation of harmonized European standards on leverage reporting would be most desirable; authorities may wish to consider instigating a regional effort.
- e. OFI residual
  - Continue cooperation between the Central Bank and the Central Statistics Office to develop a richer understanding of the components of Ireland’s relatively large ‘OFI residual’.
- f. SPVs
  - Examine whether the governance structure (particularly board level appointments) associated with certain types of Irish domiciled SPVs might pose future reputational risks for Ireland.
- g. Multilateral cooperation
  - Pursue full implementation of the standardized cross-jurisdictional data sharing arrangements as they pertain to CIVs operating under the AIFMD to strengthen supervisory oversight.

### Annexed technical distinctions (selected)
- Banks vs. Asset Managers (entity-level risk distinctions):
  - Banks: Large by assets; High concentration risk; High spillovers to financial sector; Yes solvency risk (as principal).
  - Asset Managers: Large by assets under management; Moderate/high concentration risk; Moderate/low spillovers; No solvency risk (as agent).
- Banking vs. Asset Management (activity-level):
  - UCITS Money Market Funds: No leverage via borrowing; Hedging only via derivatives; 5/10/40% rule, 20% group limit; Duration of assets > liabilities: Yes; Run risk mitigants include liquidity buffers; exit fees; payment in kind; gates; sponsor support.
  - UCITS non-Money Market Funds: No leverage via borrowing; Limited portfolio leverage via derivatives (Commitment Approach: <100% of NAV); 5/10/40% rule, 20% group limit; Duration mismatch: Yes; Run risk mitigants include liquidity buffers; exit fees; payment in kind; gates.
  - Alternative Investment Funds (Hedge/Private Equity): Yes leverage via borrowing; No portfolio leverage limit via derivatives; No counterparty concentration limits; Moderate duration mismatch; Run risk mitigants include lockups; quarterly notice; gates; side pockets.
- Leverage calculation methods (summary)
  - UCITS Directive: standard methodology is the commitment approach; global exposure only takes into account financial derivatives and SFTs that generate leverage; UCITS funds can use VaR (Relative VaR or Absolute VaR) when specified conditions met.
    - Relative VaR: portfolio VaR limit is twice the VaR of the unleveraged reference portfolio.
    - Absolute VaR: risk limited to maximum of 20 percent of NAV; specific requirements on confidence interval, holding period and effective observation period of risk factors.
  - AIFMD: AIFMs must calculate exposures using the commitment method (includes all positions) and the gross method (sum of absolute values of assets without netting and hedging; cash and cash equivalents excluded).
    - AIFMD commitment method: Direct positions: accounting value + Derivatives: sum of market value of equivalent position (after netting/hedging) + SFT: market value of collateral received (including cash) when reinvested + Reuse of cash borrowing: the higher of the market value of the investment realized or the total amount of the cash borrowed.
    - AIFMD gross method: Direct positions: absolute value - Cash equivalents.

*Source: IMF Staff analysis as presented in content unit _cr16312 (IMF).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16312.pdf_