Gareth Murphy's address to the IFIA
At the Annual UK Symposium of the Irish Funds Industry Association (IFIA) on 28 November 2014, Mr. Gareth Murphy, the Director of Market Supervision of the Central Bank, summarised the current Irish and European regulatory initiatives, and gave his thoughts on the anticipated next wave of European regulatory developments.
Recent Irish developments
CP84 – Consultation on the adoption of ESMA's revised guidelines on ETFs and other UCITS issues
Mr. Murphy explained this consultation was the Central Bank of Ireland’s (CBI) response to the discrete changes introduced by ESMA’s ‘Guidelines on ETFs and Other UCITS Issues’ of 2013. CP84 aims to minimise the risk that a shock to the creditworthiness of a sovereign could ultimately lead to credit losses for the UCITS. He noted that the feedback statement from the CBI on CP84 would provide guidance on how the CBI expects fund managers to manage their collateral management processes.
CP86 – Consultation on Fund Management Company Effectiveness - Delegate Oversight
CP86 proposes measures to ensure that boards of fund managers are conducting appropriate oversight of delegates. Mr. Murphy noted that the CBI’s feedback on CP86 will be based both on the supervisory evidence uncovered from their imminent themed inspection of fund management companies as well as the responses received to CP86 from market participants. He noted that the diverse range of such participants would uncover varied issues.
Loan Origination by Investment Funds
Mr. Murphy reported that the Loan Originating Qualified Investor Alternative Investment Fund (‘Loan Fund’) had seen considerable interest from various promoters, peer regulators and international bodies since its launch on 1 October 2014. He added at present only two countries in Europe have bespoke loan origination funds, three prohibit non-banks from lending and most other European countries allow loan origination by default rather than by design.
The introduction of the Loan Fund comes amid debate amongst policy makers on the need for complementary or alternative funding channels outside the banking regime. Mr. Murphy noted that he sensed ‘an increasing appetite amongst regulators to consider a more harmonised approach’, adding his view that any efforts at harmonisation must focus on investor protection, financial stability and financing the real economy.
Recent EU developments
Money market funds
Discussing the current draft of the Money Market Funds regulation, Mr. Murphy expressed his concerns regarding the issue of investor moral hazard – he noted that the current text of the MMF does not properly deal with the area of external support in exceptional circumstances by fund sponsors. He explained that ‘the risk of an investor run manifesting itself on a central bank balance sheet via a sponsor’s support is still there since the sponsor is typically a bank’. His preferred solution would be an outright ban on external support, although this would be politically unfavourable. He noted that some part of the CNAV industry would likely move to VNAV, and highlighted that the relevant tax and accounting issues need to be addressed before this happens and that existing CNAV investors are not operationally disadvantaged.
AIFMD – Depositary Asset Segregation
Mr. Murphy noted that the topic of asset segregation within the depositary chain had been one of the most contentious issues of his tenure as chair of ESMA’s Investment Management Standing Committee, which in his view was due to an insufficient exploration and clarity around the costs and benefits of extra segregation through the depositary chain. He stressed that more information on the costs and benefits of extra levels of segregation would assist, and urged stake-holders to express their views on this matter.
AIFMD - Third country passport
Discussing ESMA’s Call for Evidence on the AIFMD passport and third country AIFMs, Mr. Murphy stressed that this was ‘probably the most substantial funds-related issue which ESMA will consider’ in 2015. He recalled that this issue was one of the most contentious during the original AIFMD negotiations in 2010, adding that his preference would be to focus on the ‘technical regulatory and supervisory issues and that it should avoid attempting to resolve some of the thorny political questions which could not be resolved back in 2010.’
Remarking on the wider regulatory agenda under the new European Parliament and European Commission, Mr. Murphy welcomed the sentiment expressed by the new Internal Markets Commissioner, Lord Hill, which would set the tone for the coming years:
‘….it is only common sense to take a step back after five busy years of legislating in crisis conditions and ask ourselves this question: have we always struck the right balance between reducing risk and encouraging growth?’
He echoed this sentiment, re-iterating that the cost-benefit calculus of the regulation towards investor protection must work, otherwise the regulatory agenda will lose credibility and that may be unpredictable political consequences. He stressed that he thought it was time to take stock and to reflect ‘on what ‘good’ and ‘bad’ looks like when viewed through the prism of a disciplined process of regulatory policy formation, as we have had many examples of both over the last five years’.
In his concluding statements, Mr. Murphy noted that the history books would view the recent slew of regulatory reform to have been one of the most significant events in the financial industry in the twenty-first century, potentially only eclipsed by ongoing technological developments.
He stressed the CBI’s goals of investor protection, safe-guarding financial stability and preserving market integrity.