Macroprudential Policy for Investment Funds
The funds sector is diverse, with different types of fund cohorts presenting different systemic risk profiles. This needs to be accounted for in any systemic risk assessment as well as policy deliberations.
Overall, as the funds sector has continued to grow and become more integral to the wider functioning of several key financial markets, the regulatory framework needs to evolve. The current regulatory framework for the funds sector – which has been largely designed around the protection of investors – helps address some funds-specific elements that can contribute to systemic risk. However, as evidenced by recent episodes, the current framework has not been sufficient to reduce the propensity of certain fund cohorts to amplify shocks in times of stress.
A macroprudential perspective is therefore needed in the regulation of the funds sector. Significant progress in this direction has been made recently, including through the FSB’s and IOSCO’s package of measures on MMF resilience and on liquidity management of OEFs. As the nature of systemic risk is multi-faceted and constantly evolving, developing an overarching macroprudential framework for the funds sector would strengthen the overall regulatory architecture. In turn, this would better equip the sector to serve as a resilient form of financing, supporting broader economic activity.
Discussion Paper
In July 2023, the Central Bank of Ireland published Discussion Paper (DP11) on an approach to macroprudential policy for investment funds. DP11's aims to advance the discussion on how a comprehensive macroprudential perspective in the regulation of the funds sector could be achieved. It covers what the objectives of a macroprudential framework would be; outlines key principles that could underpin its design; discusses potential tools that could be used to achieve these macroprudential objectives; and considers a range of practical issues that would need to be progressed to make such a framework operational. DP11 sought stakeholder views on a number of issues relating to the fund sector, including:
- Systemic risks
- The current regulatory framework
- The objectives and principles of macroprudential policy
- The design of macroprudential tools
- Considerations for operationalising this framework.
DP11 is structured as follows:
Section 1 outlines the size, scale and diversity of the fund sector, both globally and in Ireland. It outlines the relevance of the sector for the functioning of the financial system and real economy, and the financial intermediation role the sector plays.
Section 2 considers the systemic risk posed by the fund sector. It explores the sources of systemic risk, the underlying economic frictions and vulnerabilities in funds, and the channels of shock transmission to the broader financial system. It also outlines previous fund-related financial instability episodes.
Section 3 outlines the current regulatory framework for funds in the EU (i.e. UCITS, AIFMD and the MMFR), which was developed primarily for investor protection. It explains how this framework can have a positive macroprudential impact, but also discusses the limitations of such tools in reducing the amplification of shocks.
Section 4 proposes potential objectives and key principles for a macroprudential framework for the funds sector. It outlines a number of factors that need to be considered when designing a macroprudential framework for this sector.
Section 6 outlines some of the practical considerations for operationalising a macroprudential framework for funds, including international co-ordination, the role of regulatory authorities, and data requirements.
Section 7 concludes with a summary of the issues discussed throughout the Discussion Paper. It invites stakeholders to submit written responses to the questions outlined in the Discussion Paper.
Feedback Statement to DP11
The Central Bank of Ireland invited stakeholders to provide written responses to the questions outlined in DP11 from 18 July 2023 until 15 November 2023. Written responses were primarily received from industry associations and fund managers. View the individual responses.
The Central Bank of Ireland also engaged bilaterally with key stakeholders, and organised an international conference on macroprudential policy for investment funds, held on 20 May 2024.
The Feedback Statement to DP11 encompasses a summary of the written feedback received; the Central Bank of Ireland’s high-level response to this feedback; an overview of key points from bilateral engagements; and a high-level summary of the key themes that emerged during the May-2024 conference.
One of the main areas of focus for the Central Bank of Ireland in the coming years is actively contributing to the various international work to strengthen resilience of the NBFI sector, including funds. This includes implementation of the recently updated FSB recommendations on open-ended funds (OEFs) in Europe and the FSB’s ongoing work on addressing vulnerabilities from non-bank leverage. Building on the Discussion Paper, and the feedback received, the Central Bank of Ireland will also be contributing to the European Commission’s 2024 consultation on a macroprudential framework for NBFI.
Domestically, the Central Bank of Ireland will continue to monitor the ongoing implementation and effectiveness of two macroprudential measures introduced in Ireland for Irish authorised property funds and Irish authorised GBP-denominated liability driven investment (LDI) funds.
The Central Bank of Ireland would like to thank all stakeholders who took the time to make a submission on DP11. The submitted feedback helps to inform our own thinking as well as contribute to the wider international debate on the macroprudential framework for the funds sector. The resulting Feedback Statement covers some or all of the topics raised in the written responses.
Feedback Statement to DP11: an approach to macroprudential policy for investment funds.