Address by Director of Market Supervision, Gareth Murphy, at the Irish Funds Annual Conference

11 June 2015 Speech

Good afternoon ladies and gentlemen. Once again, many thanks to Irish Funds for the opportunity to speak at this annual conference.

My remarks today will be of interest to all parts of the Irish funds industry. Suffice to say, there will be something for everybody in the audience.

I will speak about six areas related to:

  • fund management companies;
  • directors’ time commitments;
  • NAV calculation;
  • the possible extension of the AIFMD 3rd country passport;
  • capital markets union; and
  • shadow banking.

Central Bank Consultation on Fund Management Company Effectiveness

Let me start by talking about the Central Bank's Consultation on Fund Management Company Effectiveness, or CP86 for short. In the coming days, the Central Bank will provide feedback to the consultation which was launched at the end of last year. Almost 50 respondents took the time to set out their views on the questions raised in the consultation and they represented a good cross section of stakeholders in the industry.

Along with this, my supervisory staff conducted in-depth interviews with a diverse sample of fund management companies who would not ordinarily respond to a consultation such as this. This separate body of work was conducted with a view to exploring the issues of control, capability, capacity and conflict management, having regard for diversity of these firms (when measured in terms of (i) AUM, (ii) number of umbrella structures and sub-funds and (iii) the number of servicing relationships).

The Central Bank's feedback statement to CP86 carefully considers both the consultation responses and this supervisory exercise. In response to the questions posted in CP86, I would highlight the following points that will be published in the feedback:

  • the Central Bank will clarify the meaning of the designated person role - a fund governance concept which has been in existence since 2003 but which has evolved as a result of regulatory change and industry practice; in particular, we make it clear that designated persons are responsible for managerial functions in the fund management company;
  • the Central Bank will confirm that these managerial functions have been streamlined to six key areas covering (i) investment portfolio management, (ii) investment risk management, (iii) distribution, (iv) operational risk, (v) capital and financial management and (vi) compliance. After careful consideration, we have decided that the 'organisational effectiveness' role which we consulted on will not be a managerial function but rather is a task that must be performed by one of the independent directors;
  • in relation to the Irish residency requirement, the Central Bank believes that it is unnecessary to relax the 'two Irish resident director rule’; I will say more on this in a few moments (when I discuss the outcome of the Central Bank's themed inspection on directors' time commitments) but it is important to emphasise that having local directors makes supervision easier for the Central Bank;
  • in relation to measuring residency, the Central Bank is satisfied that the 110 working-day rule should be easy to manage particularly now that there are many tools that facilitate personal diary management;
  • on the proposal to document the rationale for Board composition, I can confirm that this is retained as set out in the CP86; and
  • finally, the Central Bank will launch, in the coming days, a short consultation on a revised document which incorporates much of the material produced by the industry-composed Committee on Collective Investment Governance in their document which was set out in Appendix I of CP86.

To reiterate the purpose of this work, the Central Bank expects Irish fund management companies to be run effectively with due regard for the interests of investors and market participants and the Central Bank must be able to satisfy itself that this is the case. For the larger and more complex fund managers, we will need to elaborate further on the implications of the feedback statement, in due course.

Directors' time commitments

The second area I would like to discuss today is the issue of directors' time commitments (in the funds industry). You will be aware that the Central Bank undertook a themed review on this issue last year. This involved comparing those directors who we identified as having an extensive set of commitments with a number of directors in a so-called 'control group' who appeared to have a more reasonable set of commitments. The focus of this work is on (what we call) 'aggregate professional time-commitment'. Where we see a large 'aggregate professional time commitment' the Central Bank is concerned that fund governance standards on relevant boards may be undermined.

We have drawn some valuable conclusions from this combined work (on CP86 and this themed review on directors' time commitments):

  • We see that the Irish funds industry has a substantial population of over 2,000 active directors with a broad range of expertise. Amongst this population, there is clearly a strong level of commitment to pursue high ethical standards and directorial responsibility. As I alluded to earlier, this is one of the reasons for the decision to retain the requirement for two Irish resident directors (in CP86).
  • However, as recently reported, there are some concentrations that must be addressed.     

In light of the increased complexity of investment strategies and the additional obligations under AIFMD and UCITS regimes, directorships require a greater time commitment than may have previously been the case. In addition to this, governance standards in the funds industry may be undermined as a result of excessive concentration at board level. In the coming days, the Central Bank will issue guidance to fund boards which will limit concentrations and seek to ensure that the full range of expertise and capability of the Irish fund director population is utilised.

Where the Central Bank assesses that an individual director has aggregate professional time commitment in excess of 2,000 hours a year including commitments to at least 20 fund boards, the individual concerned and the boards on which they serve will be subject to additional supervisory attention under the Central Bank's risk-based approach.

Strong governance of financial services firms is a key priority for the Central Bank and we will use the full range of our supervisory tools and regulatory powers where necessary.

Outsourcing of final Net Asset Value (NAV) calculation and the treatment of NAV errors

The third area I would like to remark on is the calculation of fund NAVs and specifically (i) the outsourcing of final NAV calculation and (ii) the treatment of NAV errors.

In the coming weeks, the Central Bank will also consult on new requirements for fund administrators which outsource certain tasks in relation to the NAV calculation process. We have seen in recent years requests for derogations from the requirements for Irish administrators to finalise NAVs of daily dealing funds for a variety of reasons related to (i) the location of investors, (ii) the geography of the fund assets and (iii) whether the fund is an ETF or a Money Market Fund. The new requirements aim to provide a coherent and transparent framework. This will allow fund NAVs to be calculated and released in the affiliate offices of Irish fund administrators in limited circumstances. Given the need of many international investors to receive NAVs on a daily basis, this avoids the well-known (operational) risk of process errors when the work is carried out around the clock in one jurisdiction.

Later in the year we will also consult on new rules for fund administrators and fund managers where there are errors in the calculation of NAVs. This is necessary and will ensure a consistent and transparent approach to the treatment and reporting of pricing errors and the protection of investors’ interests where an error arises in the NAV calculation process.[1]

AIFMD 3rd country passport

The fourth area I would like to mention this afternoon is the forthcoming ESMA Opinion[2] on the possible extension of the AIFM passport to non-EU countries. This opinion (to the European Commission, European Parliament and European Council) must issue by 22 July. ESMA has produced a detailed framework which will ensure that each non-EU country is assessed on a consistent basis. One of the key elements of this framework is that ESMA must have sufficient information of the regulatory regime in the non-EU countries and that there are strong levels of supervisory cooperation with regulators in these jurisdictions. This body of work covers all non-EU countries with whom an MOU was agreed over the last two years under AIFMD, covering 44 non-EU jurisdictions. Though it is too early to indicate what the final advice might contain, two points are clear:

  • first, the ESMA advice will be provided on a country-by-country basis as opposed to a blanket advice on the extension of the passport;
  • second, given the fact that the AIFMD regime has only really been live for 11 months, it is clear that there is insufficient experience of how some non-EU regulatory regimes are likely to support the extension of the AIFMD passport; this is critically important as EU national competent authorities designated as 'member states of reference' will have to rely on these non-EU regulatory regimes in various ways.
  • As chair of ESMA's Investment Management Standing Committee, my preference is that the balance of the ESMA advice prioritises quality over haste.

Capital Markets Union

For the fifth area I would like to cover, let me say a few words about Capital Markets Union (or CMU for short). This was announced by the incoming president of the European Commission last year. At last count, there were 425 responses to the European Commission's Green Paper on CMU.[3] By any standards, that is a strong statement of the significance of this initiative and the broad appreciation of its potential to improve the European economy.

It is also very encouraging. For CMU to be a long-term success, industry has a significant role providing the necessary evidence and market intelligence to policy-makers so that they are informed and galvanised in the face of the challenges that lie ahead.

The evidence is clear. Europe's real economy currently relies on sources of finance which are fragmented and predominantly bank-reliant. And the contrast with other jurisdictions could not be more striking.[4] However, the fault-lines which give rise to this outcome are very significant.

Reading the European Commission Green Paper, it is encouraging to see that CMU will aim to deliver some quick wins - and I note the initiatives in relation to prospectuses and securitisation. However, I would hope that there is sufficient collective ambition to tackle some of the really significant issues which give rise to fragmented capital markets in Europe.[5] Though these are called out towards the end of the Green Paper I do hope that they are given due priority over the coming years even if it takes longer than a political cycle to deliver them.

In its response to the Green Paper, the Central Bank highlighted, in particular, the need to take a strategic approach to gathering data in relation to financial services firms. The regulatory reform agenda has led to multiple demands on regulators and industry rolled out on a piecemeal basis. This creates duplication and ultimately additional overhead if the data is to be used for effective monitoring purposes.

What is needed is a pan-European and cross-sectoral approach to data. This is a complex exercise and would require the commitment of many regulatory bodies. It goes beyond CMU but it is needed to support effective measurement of the benefits of CMU and sound monitoring of the variety of activities which make up the financial sector.

Shadow banking / Market finance

The final topic I would like to discuss is shadow banking. As more of the banking reform agenda is completed[6], attention is inevitably shifting towards the potential risks of the so-called 'shadow banking system' - a term coined by Paul McCulley in 2007. The Financial Stability Board (FSB) has issued a number of framework documents in relation to this area since 2011 and has highlighted the varied nature of non-bank financial activity which is caught under the shadow banking moniker such as (i) repo, (ii) securitisation and (iii) money-market funds, to name a few.

However, even at this stage, it is clear that there are still disagreements about (i) how to define the so-called 'shadow banking sector', (ii) where the risks are and (iii) how to mitigate them.

Is it about all non-bank intermediation (which includes debt and equity liabilities)? [7]
Is it about the supply of credit by non-banks?[8]
Is it only about forms of non-bank intermediation that have some sort of underwriting backstop from a bank or a public institution?[9]
Or should it be defined by reference to activities as opposed to entities?[10]
Surprisingly, this definitional matter is not settled. I believe that any approach to defining shadow banking should include the key ingredients of credit extension, maturity transformation and liquidity transformation. These are the potential risk factors that can lead to deadweight bankruptcy costs[11], investor runs leading to excess asset price volatility and credit interruptions which choke growth in the real economy.[12]

My point in raising this international policy debate today is to highlight the fact that Ireland’s international financial services sector is frequently mentioned in policy circles, including the ESRB, OECD and FSB. Given the limited knowledge in these circles on the rationale behind these activities, the Central Bank understands the importance of having a seat at the table.

The Irish funds industry is required to be compliant with a substantial set of regulations and it is extensively monitored. As such, this puts the Central Bank in very good stead to address the various questions which might arise about it in the context of shadow banking. However, regulatory engagement with other sections of the Irish international financial services landscape is limited and in some cases there is not even mandatory regulatory reporting. In due course, I would expect that they will be brought into the fold (for regulatory reporting) as the need to complete the global financial services jigsaw presses further and further into previously uncharted territories.


Whilst the banking system was the at epicentre of the financial crisis, the regulatory aftershocks have moved beyond the issues of capital quality and prudent lending and indeed, well beyond, the banking sector. They touch every other part of financial services including market infrastructure, asset management and retail intermediation. New parts of the landscape are being reconfigured from the low-lying areas of solvency and liquidity towards the higher ground of individual behaviour and corporate culture. And international institutions and standard-setters are some of the key architects.[13] I would like to thank Irish Funds for their continued constructive engagement and I look forward to leadership from all parts of the industry to positively shape regulatory developments at home and abroad.


[1] See IMF (2014a), available at:

[2] Under Art 67 of AIFMD

[3] See European Commission (2015) paragraph 36. Available at:

[4] See Chart 1 of Anderson et al. (2015).

[5] This short extract from the European Commission (2015) is instructive: "It is true that many of the issues at stake – insolvency and securities laws, tax treatments – have been discussed for many years. The need to make progress is, however, more pressing than ever. While this will be a long term project, requiring sustained effort over many years, that should not stop us making early progress".

[6] Which includes new rules covering micro and macro prudential capital rules, new liquidity requirements, stricter remuneration rules and resolution frameworks.

[7] FSB (2014), in their Global Shadow Banking Monitoring Report, consider all non-bank financial intermediation which is based on a broad estimate referred to as the Monitoring Universe of Non-Bank Financial Intermediation (or MUNFI for short).

[8] FSB (2014) also produce a narrower measure of shadow banking, which is constructed by filtering out non-bank financial activities that have no direct relation to credit intermediation (e.g. equity investment funds, intra-group activities of non-financial groups and retained securitisation).

[9] See Claessens and Ratnovski (2014).

[10] See Figure 2.15 of IMF (2014b) for an overview of the different definitions of shadow banking

[11] See, for example, White (1983) and Leland and Toft (1996).

[12] See Central Bank of Ireland (2013) page 14 for the definition proposed by Lane (2013). Lane posits that “shadow banking comprises activities involving some element of maturity and liquidity transformation, credit extension, and risk transfer, conducted partly or wholly outside the “traditional” banking system. It covers a wide range of activities, including securitisation, repos, and money market funds (MMFs) as well as some activities of non-bank financial institutions such as finance companies and credit hedge funds.”

[13] As promulgated by the Basel Committee of Banking Supervisors (BCBS), the International Organisation of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS) and the Financial Action Task Force (FATF).



Anderson, N., Brooke, M., Hume, M., and M. Kurtosiova (2015), “A European Capital Markets Union: implications for growth and stability”, Bank of England Financial Stability Report No. 33, February.

Central Bank of Ireland, (2013), “Loan Origination by Investment Funds”, Discussion Paper, July 2013, Central Bank of Ireland, Dublin.

Central Bank of Ireland (2014), “Consultation on Fund Management Effectiveness – Delegate Oversight”, Consultation Paper CP 86, September 2014, Central Bank of Ireland, Dublin.

Claessens, S., and L. Ratnovski (2014), “What is Shadow Banking?”, IMF Working Papers 14/25, International Monetary Fund.

European Commission (2015), “Green Paper: Building a Capital Markets Union”, COM (2015)63, Brussels, February.

FSB (2014), “Global Shadow Banking Monitoring Report 2014”, November.

IMF (2014a), “Detailed Assessment of Observance: IOSCO Objectives and Principles of Securities Regulation”, Detailed Assessment Report, International Monetary Fund, April.

IMF (2014b), “Shadow Banking Around the Globe: How Large and How Risky?”, Chapter 2, Global Financial Stability Report 2014, International Monetary Fund, October.

Lane, T. (2013), “Shedding light on shadow banking,” Speech delivered at the CFA Society Toronto, Canada, 26 June 2013

Leland, H.E and K.B. Toft (1996), "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.

White, M.J. (1983), "Bankruptcy Costs and the New Bankruptcy Code," Journal of Finance, American Finance Association, vol. 38(2), pages 477-88, May.