Address by Director of Markets Supervision Gareth Murphy at the Carne-Dechert Funds Congress

20 March 2014 Speech

Many thanks for the invitation to speak once again at the annual Carne-Dechert Funds Congress.

Last year, I took the time to survey the evolution of the broader regulatory reform agenda since the financial crisis and to offer my views on how it might progress. Whilst my remarks this morning will mostly focus on developments in regulation of the asset management industry (at a national, European and global level) some of the themes from last year remain.

My key messages this morning are:

  • The task of implementing new funds regulations is considerable for both regulators and industry. I see at least another year of significant effort working through the various interpretative issues which have arisen.
  • As industry participants, do not underestimate the voice that you have in informing policy debates. Keeping in mind that the ultimate purpose of financial regulation is to support the safe and efficient delivery of financial services to the real economy, you should not hesitate to engage with European legislators and policy-makers with a view to making constructive proposals and clarifying their impact.
  • As regulators, our focus should be on investor protection, market integrity and financial stability. Ultimately, these support the economic purpose of the asset management industry. A level playing field in Europe and globally is a necessary condition for the fulfilment of these goals. And we look forward to the day when there is better alignment of regulatory frameworks globally. Again, your voice counts in this wider debate.

Some areas of focus for the Central Bank or Ireland

Let me start by referring to some areas of particular focus (in the Markets Directorate) at the Central Bank of Ireland.

A few weeks ago, we published our main supervisory themes along with our enforcement priorities for 2014. This is now an annual exercise since the last three years.

My staff at the Central Bank will (at a minimum) undertake five themed inspections next year focussing on:

  1. outsourcing
  2. data-integrity of regulatory returns
  3. governance in funds and fund managers
  4. conduct of business in investment firms, and
  5. the safekeeping of client assets.

Given the nature of the European asset management industry that we are responsible for supervising, there should be nothing surprising in this list.

Most of the firms which we supervise outsource certain functions to other parties (sometimes located outside of Ireland). Outsourcing is a fact of life in financial services and it is also a source of risk. Likewise scrutiny of outsourcing arrangements - including cross-border visits to outsourcers - is a feature of twenty-first century financial supervision.

Our supervisory strategy relies, in the first instance, on reliable regulatory returns which are then processed and analysed by supervisors for anomalies, trends and possible breaches. This is our first line of defence - if you wish. So sample quality testing - along the lines of a themed inspection - is in order on a regular basis.

Since the financial crisis, the Central Bank has put particular emphasis on improving governance practices across the whole of the Irish financial services industry, including banks, insurance firms, credit unions, investment firms, asset managers, funds and funds service providers. Our focus on governance is a continuation of a general theme to ensure that the process for decision-making and oversight in firms is appropriately sound and robust.


Let me spend some time talking about AIFMD and the work we are doing at the Central Bank of Ireland.

In recent months, we have received many detailed questions on a wide range of issues related to AIFMD. Three issues, in particular, have been recurrent:

  1. the deadline for authorisation;
  2. remuneration; and
  3. delegation.

First, authorisation of AIFMs is proceeding apace. For those firms that applied before 20 February and who meet the authorisation requirements, we expect that you will be authorised by 22 July. So sit tight, let us call you if we have issues but we will get to you.

For existing AIFMs that intend to apply, Art 61(1) of the directive is clear. The application for AIFM authorisation must be filed by 22 July - that is the drop-dead date. And in any case, as an existing AIFM, you will be expected to be compliant with the Directive from 22 July, though formal authorisation may not be received for up to six months following that date (assuming the application is satisfactory).

As regards remuneration, we have, where possible, sought to clarify issues at a European level through ESMA. We see considerable merit in the interpretations which the UK FCA have provided which align the interests of risk-takers and investors and which seek to ensure that the effective management of AIF assets is preserved. And we may produce our own local guidance on certain remuneration issues in the coming months where we believe that would be helpful.

As regards delegation by AIFMs, the Central Bank continues to review industry practice and whether further guidance is warranted (on top of the guidance and Q&A which has been issued and regularly updated since last May). The Central Bank is mindful of the wide variety of models for AIFs (and AIFMs) ‒ whether externally or internally managed across four different legal forms. That said, it is clear that since AIFMD places 169 obligations on the AIFM (across the level I and level II texts), boards and directors must have regard for what is expected of them and they must ensure that there are robust processes coupled with the necessary supports in place in order that they can fulfil their responsibilities.

EU developments in the regulation of the asset management industry

The AIFMD transition period ends in four month's time. The launch of AIFMD has been eventful, to say the least.

This time last year ESMA staff and my regulatory colleagues on ESMA's Investment Management Standing Committee, which I chair, were busy working on co-operation arrangements with over 40 third-country jurisdictions, amongst other things. This was the first time that ESMA had embarked upon such a project to negotiate on behalf of all of the EU national competent authorities. The aim was to use the heft of ESMA's representative negotiating position to deliver a consistent set of MOUs, to minimise national differences and also to limit the resources which national competent authorities would need to invest in establishing these cooperation arrangements. This was a tense and tough but, ultimately, very successful exercise. Last May, over 30 MOUs were agreed at the ESMA Board of Supervisors meeting in Dublin with the remainder to follow in subsequent months.

The guidelines on reporting under AIFMD were issued last November. The data requirements were largely derived from Annex IV of the level II text. ESMA also issued an opinion suggesting that NCAs should also seek to gather some additional data for financial stability purposes. In interpreting the timeframes for the launch of the reporting requirements, we chose the most operationally reasonable start date which would be consistent with the Directive.

ESMA has also launched a Q&A document dealing with various questions arising from the directive. This as a living document which will be updated every few months depending on the flow of questions which are addressed to regulatory authorities and which can be usefully dealt with at a European level. The next iteration of the Q&A document will provide further clarity on reporting requirements.

Passporting Anciliary MiFID services

This time last year, it appeared that AIFMs could not passport additional MiFID services. The upshot of this was that in that in the absence of a UCITS authorisation, a separate MiFID subsidiary would need to be established to passport these services. I am happy to report that various efforts were made to highlight the inconvenience of this issue and the European Commission proposed an amendment in the MiFID II trilogue process which was agreed. This clears the way for AIFMs to passport these additional services. Even though MiFID II will not come into effect for a few years yet, I am reliably informed that under European Community law, passport notifications which issue for such MiFID services cannot be refused as to do so would be to frustrate the intent of the legislators.

ESMA guidelines on ETFs and other UCITS issues

One of the unintended consequences of the ESMA guidelines on ETFs and other UCITS issues which were issued in February 2013 was that UCITS - mostly money market funds - that sought to make investments in government bonds via reverse repo where to be limited to 20% per issuer. Industry made clear and cogent representations on this point seeking an alignment between the diversification requirements for direct investment in government bonds and those for reverse repo. I am pleased to say that industry has been heard and this is being addressed.

Interaction between EMIR and UCITS

EMIR went live last year. Its provisions are implemented on a phased basis until 2017. One of the interesting challenges which has emerged is the application of EMIR to UCITS funds. Whilst EMIR divides the world between counter-parties who clear derivatives with ESMA recognised CCPs and those that do not, Articles 50(1)(g) and 52(1) of UCITS divide the world between funds that trade derivatives on exchange and those that do not. As such, there is an incompatibility between the two pieces of legislation which I believe cannot be fixed using the tools that regulators have at their disposal. Thanks to some very helpful engagement with industry, work is going on to explore all of the issues and provide the relevant advice to the legislators.

New legislation

Beyond AIFMD, there are other developments in the European asset management regulation. Two new regulations for social entrepreneurship and venture capital funds - EuSEF and EuVECA - were adopted last summer. In addition, three other initiatives are being negotiated at present: UCITS V, the regulation on Long Term Investment Funds (ELTIF) and Money Market Fund Regulation (MMF Regulation).

ELTIF and Loan Origination

ELTIF has the potential to be a significant innovation in the development of the European market finance industry. My reading of current drafts of ELTIF under consideration is that this elective regime will, amongst other things, allow funds to originate loans. Given the constraints on European bank balance sheets, it is likely that market finance may become a substitute, in some instances, for bank credit and ELTIF may have a role here, in due course.

The Central Bank of Ireland launched a discussion paper on loan origination by investment funds, last summer. This was a deliberate attempt to explore solutions to meeting the credit needs of the real economy whilst carefully considering the issues of investor protection and financial stability.

Whether or not loan origination is formally permitted in Europe in due course, it is important that the risks of investor runs, misaligned incentives and mispriced credit are addressed. In the downswing of a credit cycle, mispriced credit may lead to an excessive number of bankruptcies and their associated deadweight costs on the economy.

Currently, the scale of loan origination by funds in Europe is relatively small. Market practice suggests that most investment mandates are given to (a) specialised credit teams with proven track records (b) where there are lock-up periods on investments (to align with the profiles of the loans) and (c) where there is co-investment by managers. If loan origination by funds is to benefit from a regulatory stamp of approval and grow, there must be a baseline of regulatory mitigants to ensure that good market practice is maintained throughout the credit cycle.

Global developments in the regulation of the asset management industry

I would like to spend a few moments talking about global developments in the asset management industry and industry's role here.

Monitoring the financial system

Gathering data on the financial system is a necessary feature of disciplined policy formation and a key element in good stewardship of an increasingly complex financial system.

This first and most critical form of regulatory engagement would be appreciated more widely if regulators could agree on common reports and common reporting formats.

Questions have been asked about the purposes of gathering lots of data from hedge funds. Promoters complain - with some justification - that it is duplicative and costly to have two reporting regimes, Form PF in the US and the ESMA AIFMD Reporting Guidelines in Europe. Certainly, I do believe that harmonising these requirements is a worthy goal. The problem however, is insufficient trans-Atlantic dialogue amongst rule-makers in this area and a regional appetite to layer additional requirements on top of FSB recommendations.

Misalignment in relation to MMF reform

Another example where there could be greater dialogue is in the area of MMF reform.

At present, there is a risk that the global MMF industry will bifurcate according to which regulatory tools are used to make MMFs safer, ie NAV buffers or mandatory gates and dilution levies. And to what end? High quality investment paper can be equally accessed by all fund managers so investible funds will simply follow the path of least cost to achieve their investment objective wherever that is in the world.

In years to come, we may look back in puzzlement and wonder why the policy debate on MMFs confused the debt-like liabilities of banks with the equity-like liabilities of funds. We may also wonder how an analysis of the risks of open-ended fund vehicles regards tools for maintaining solvency (like capital buffers) as being superior to the tools for managing redemption requests (like maturity profiles, gates and redemption fees). In the fullness of time, we may still have to come back to the central issue - which in its own right poses big challenges for all of the MMF industry - namely, that most MMF investors do not have the expectation and have not fully priced the full costs of sponsor support for either CNAV or VNAV funds.

The asset management industry is a global industry where there is free movement of capital and largely freedom of incorporation. In some cases, differences between the EU and the US may serve to progress the global regulatory debate but this may come at the cost of displacing existing activity which may have implications for financial stability.

The role of industry

I have heard it repeatedly said, and it is evident in various asset management surveys, that industry is looking for a more harmonised set of rules globally. That makes sense. But this is an issue that needs political impetus. Industry has a significant role here in pushing this up the agenda. Harmonised frameworks for financial regulation are ultimately a good thing:

  • they are the fruits of extensive regulatory cooperation, which is a good thing;
  • they reduce opportunities for regulatory arbitrage and make the world safer;
  • they can reduce barriers in a global marketplace leading to more choice and competition;
  • and ultimately reduce the cost to end-investors and end-issuers.


As regulators, our focus should be on investor protection, market integrity and financial stability. A level playing field in Europe - and globally - is a necessary condition to the fulfilment of these regulatory aims.

We have been busy in the last year doing the job that the legislators have asked us to do implementing AIFMD and elaborating on aspects of funds legislation. This has presented many challenges and we recognise the issues which industry have faced. Where possible we have sought to provide clarifications at national and European levels. And we have also escalated issues to legislators which were not within our gift to solve.

Lastly, let me remind you, once again, that you also have a valuable role engaging with the legislative and policy formation process. Whether it is highlighting problematic aspects of rulebooks, arguing for more thorough cost-benefit analysis of policy proposals or pressing for greater global coordination and alignment - more engagement from industry is needed.

Thank you for your attention. Have a good day.