knowledge | 21 May 2021 |

Common Supervisory Action on UCITS Liquidity Risk Management

The Central Bank of Ireland has issued a “Dear CEO Letter”  (the "Letter") in relation to the 2020 Common Supervisory Action on UCITS Liquidity Risk Management, which was recently conducted by ESMA together with the competent authorities of EU/EEA Member States. In the Letter, the Central Bank elaborates on some of the findings of the Common Supervisory Action (the "CSA") and requires all Irish authorised UCITS managers to conduct a specific review of their practices, documentation, systems and controls by reference to both the Letter and the Statement. 


ESMA launched a CSA on UCITS LRM on 30 January 2020 with the purpose of assessing whether UCITS Managers comply with their LRM obligations across the Member States.

ESMA presented the results of the CSA on UCITS LRM in a Statement (here), published on 24 March 2021.  According to ESMA “In most cases, the exercise found that the level of compliance with the applicable rules on LRM was satisfactory with entities meeting their regulatory obligations.” However, the exercise also identified shortcomings in some cases and the need for improvements in certain key areas.

While the CSA was on-going, the European Systemic Risk Board (the “ESRB”) recommended that ESMA undertake a focused piece of supervisory exercise with investment funds that have significant exposures to corporate debt and real estate assets to assess the preparedness of these two segments of the investment funds sector to potential future adverse shocks. ESMA published its resulting report in November 2020, in which it identified five priority areas to enhance such preparedness (here) (the “Report”).

The Letter

The purpose of the Letter (here) is to elaborate on some of the findings in the Statement and to require all Irish authorised UCITS managers to conduct a specific review of their practices, documentation, systems and controls by reference to the Report, the findings in the ESMA Statement and the specific items related to those findings detailed in the Letter’s annex, namely:

  • Instances of LRM frameworks that were not clearly defined, adaptable and/or independent
  • A lack of formal documented pre-investment forecasting frameworks
  • A lack of formal liquidity escalation policies
  • Cases where no pre-investment forecasting was performed
  • Over-reliance on the presumption of ongoing liquidity
  • Oversight of delegates below expectations
  • Shortcomings in the role of the designated person for fund risk management
  • Cases of no liquidity reporting to the board of the UCITS manager
  • Shortcomings in the internal control framework.

The review must be documented and must include details of actions taken to address any of the findings in the Statement and the Letter. The Central Bank expects fund managers to have completed the review and to have discussed and approved an action plan at board level, by the end of Q4 2021.

According to the Letter, the Central Bank will continue to focus on LRM in its supervisory capacity and may have regard to the consideration given by a firm to the matters raised in the Statement and the Letter, in the course of future supervisory engagement, or when exercising its supervisory and/or enforcement powers in respect of potential non-compliance with any regulatory matters relevant to LRM.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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