Friday October 5 2012
News Source: Fund Regulation
Focus: AIFMD
Type: General
Country: Ireland
Martin Moloney, Head of Markets Policy at the Central Bank of Ireland, recently addressed the International Bar Association on the current issues in the regulation of UCITS.
Mr Moloney discussed how the introduction of the AIFMD will allow for the effective differentiation between UCITS, the more regulated product, and the Alternative Investment Fund – the lesser regulated product. In the fullness of time, the AIFMD and UCITS regime are likely to have common elements which provide investor protection whilst at the same time accommodating investors with different capabilities and risk appetites. By establishing a European regulatory framework for the regulation of managers of an AIF, the EU facilitates countries like Ireland to refine their domestic non-UCITS funds regulatory regime in order to create a more coherent, layered set of regulatory regimes for investment funds.
Of particular interest was the issue of UCITS V, which Mr Moloney referred to as a replica of some of the standards set out in the AIFMD. He went on to note that the Central Bank ‘strongly support the proposals on sanctioning’ which, in their view, is an essential part of an effective regulatory model. However, one UCITS V area noted as needing further work is in the area of eligibility to act as a depositary. Both in UCITS IV and in the AIFMD, entities subject to prudential supervision may act as depositaries. UCITS V seeks to limit this category to MiFID Firms and EU Credit Institutions. However, Mr Moloney made the point that many of Ireland’s most responsible and effective depositaries are in fact neither banks nor MiFID firms. The challenge was described as an operational one for industry to spread the increased risk and ensure reward appropriately follows risks assumed.
Mr Moloney then discussed UCITS VI and stated that he believes there is a case for looking carefully at the role of indices in the structuring of UCITS investment strategies. The recent guidelines issued by ESMA, in his opinion, have not been able to deal with the underlying question of the extent of exposure through indices to ineligible assets. They have attempted to deal with the issue of bespoke indices, but they are untested in that regard.
Furthermore, cross-reference was made to the AIFMD situation in that UCITS cannot currently invest directly in commodities. However, a case was argued for investment by retail AIFs in at least some commodities, particularly those which benefit from a structured, liquid market, and Mr Moloney made it clear that the Central Bank would be happy to engage with people to discuss these kinds of strategies.
Interestingly, Mr Moloney is not convinced that UCITS VI can meet the underlying concern about overly complex investment strategies without facing up to the issue of leverage. If an attempt were made to do so without facing up to that question, there is a danger that an overly restrictive eligible asset rules will emerge. He believes that the obligation is on the industry itself to come forward in a constructive way with solutions which deal with the heart of the Commission’s legitimate concerns.
For a full copy of the speech, please refer to the below link: