Address by Director of Markets Supervision Gareth Murphy at the Irish Funds Symposium

09 October 2015 Speech
Good morning ladies and gentlemen. Once again, many thanks to Irish Funds for the invitation to speak at this event.

I appreciate the opportunity to discuss current regulatory policy matters as well as updating you on some live supervisory issues at the Central Bank of Ireland.

Much of what I have to say today centres on the themes of regulatory reporting and systemic oversight. But let me start by talking first about fund directors' time commitments.

Directors' time commitments

Good governance in fund and fund management companies is an important pillar supporting our regulatory goals. A range of governance-related measures was announced by the Central Bank last June. In relation to fund directors, the Central Bank is keen to draw on the resources of a broad pool talent in order to promote the highest possible standards of fund governance. It is timely that I share with you some supervisory observations drawing on our recent work.

You will be aware that the Central Bank identified a small number of individuals with director concentrations that needed to be reduced. And the Central Bank introduced a framework whereby individuals with over 20 fund directorships and an aggregate professional time commitment of 2,000 hours would be challenged about their director workload.

Since July, all of the directors that the Central Bank has engaged with are taking action to rationalise their commitments. In particular, we have seen a re-evaluation of the time dedicated to the designated person role given how that role has evolved in recent years in the light of regulatory change.

Owing to the diverse nature of individual commitments, a range of issues have surfaced. But one of the interesting areas that has emerged, which I would like to the mention, is the time commitment dedicated to sub-funds. In some cases, we have seen that as the number of sub-funds grows, there is not a corresponding increase in allocated time commitment. Notwithstanding the fact that sub-funds may have common servicing arrangements which lend to economies of scale within a fund complex, sub-funds typically have their own investment objectives, investment strategies and idiosyncratic risk factors.

Put simply, investment fund regulation does not stop at umbrella fund level but applies also at sub-fund (or compartment) level. (This is to be distinguished from corporate governance requirements which mostly sit at the level of the umbrella board.)

The key message here is that the Central Bank expects directors to consider carefully their time commitments to each and every sub-fund and to set aside sufficient time consistent with the nature of the sub-fund in order that they can meet their obligations.

As part of the Central Bank's themed supervisory work next year, we will take the time to do a detailed review of the quality of board discussions by focussing our attention on those fund complexes which have directors with extensive sub-fund responsibilities.

Monitoring the financial system

So let me turn to the main theme of my remarks this morning which is the monitoring of the financial system.

The financial crisis highlighted that weaknesses in the monitoring capability of financial authorities undermined timely and targeted responses to the events which unfolded.[1] In the light of the G20 London Summit in April 2009, data gaps and regulatory reporting is a considerable focus of national supervisors and international organisations such as the International Monetary Fund and the Financial Stability Board.[2]

Just as firms are subject to inspections from time to time, so national jurisdictions (and supervisors) are now subject to regular assessments against international standards and peer practices. In particular, the quality of financial system oversight through regulatory reporting and stress testing is a now recurrent area of focus.

AIFMD Annex IV Data

Regulatory reports filed by AIFMs are now an important element of this monitoring infrastructure. I am conscious that a significant burden has been shouldered by industry filing regulatory returns in relation to the activities of AIFs and AIFMs (under Annex IV of the AIFMD delegated act). These reporting requirements are well and truly established. European supervisors are now exchanging views on the data which has been gathered. Already there is valuable information emerging in relation to risk concentrations and liquidity. However, there is still some way to go to ensure that the data is of the requisite quality. This is especially true in the area of measuring leverage (where it is clear that there is some confusion about which units to report in) and the specification of strategies (where many respondents are using 'Other' as a category). In all likelihood, further clarifications on the use of the AIFMD reporting template will be required to improve the quality and completeness of the reports.

Extended reporting requirements for Irish Special Purpose Vehicles

The Central Bank recently extended its regulatory reporting requirements for financial vehicle corporations (FVCs) to other special purpose vehicles (SPVs) in order that Irish financial authorities can have better information on almost €0.5trn of financial services activity. It has been suggested that there may be some duplication of reporting requirements for those SPVs that are owned by funds which file other regulatory reports. The Central Bank is satisfied that this is not the case in light of that fact that some of the SPVs are wholly-owned subsidiaries of investment funds which file reports to the Central Bank on a consolidated basis. Put simply, the detail in the fund reports in not granular enough.

In relation to regulatory reporting in general, the Central Bank is guided by three principles, namely:

  • that all parts of the financial landscape should be monitored;
  • that regulatory data collection should avoid duplication; and
  • that the data needs to be collected in a granular way which lends itself to cross-comparison and aggregation.

It is not sufficient to collect data on the same sector from different sources which have different formats, different levels of identification and definition. That will not lend itself to effective use of the data in building a picture of financial entities or their interlinkages.

These principles have guided the Central Bank's approach to extending the FVC reporting requirements to SPVs. That said, it is reasonable to ask whether the Central Bank's fund reporting requirements avoid duplication. As part of our work programme for 2016, the Central Bank will review the full suite of reporting requirements for investment funds and consider whether some rationalisation should be undertaken.

Definition of shadow banking

All this discussion of regulatory reporting on funds and special purpose vehicles is a neat segue into the question of what is shadow banking. Observing the current regulatory debate, I think, in fact, that two different questions are being asked:

  • How do we define shadow banking? and
  • How should exposures to shadow banking activities be managed?

It is important to distinguish between (a) the issue of defining shadow banking and (b) the mitigation of possible exposures to shadow banking activities for sectoral supervisory purposes.

There has been an extensive debate in relation to this definitional question and various financial authorities have stepped into this space and offered their own definitions for shadow banking activities.

In my view, the management of exposures to shadow banking activities is a matter of supervisory risk appetite. Quite simply, supervisors may, at a given point in time, seek to mitigate exposures of bank and insurance firms to potential shadow banking activities based on a set of guidelines which are necessarily simple in order to be workable. But that supervisory exercise should not be confused with the task of coming up with global definition for identifying and monitoring shadow banking activity.

The key point I would like to make is that the definitional question should be reserved to the FSB. It has the benefit of a global remit and the involvement of almost all of the key jurisdictions around the world which have shadow banking activity. It has developed a sound and objective 'economic function' methodology (in November 2012) for identifying bank-like activities in non-bank entities.[3] It is coordinating data sharing exercises (which the Central Bank is part of) which aim to explain the non-bank, non-insurance financial services sector.[4] This will progressively refine the definitional question. And, in due course, the various sectoral supervisors can adopt more refined approaches to managing exposures to potential shadow banking entities drawing on the work of the FSB.

Market Liquidity

My previous remarks also have relevance for the issue of market liquidity which I would like to talk about next.

In the current market environment, it has been remarked that:

  • many asset valuations are 'stretched';[5]
  • there is greater dependence on ultra short-term liquidity providers (such as high-frequency traders); and
  • there is less investment bank capacity to warehouse market-making risk.

Increasingly, I am seeing market commentary remarking on the frequency of unusually large intra-day volatility spikes in FX and sovereign bond markets. Whilst the debate on non-bank, non-insurance SIFIs (NBNI-SIFIs) has rightly shifted from an entity-based approach to designating systemically important institutions and is more focussed on the detail of their activities, the concern remains that substantial market movements related to asset management activity, whatever their causes, can have systemic outcomes.

As the supervisor of a large funds jurisdiction, the Central Bank is increasingly focussed on harnessing regulatory data to build models to simulate the market impact of a large-scale redemption event. One of the aims of this exercise is to identify which securities, assets or asset classes are likely to suffer the greatest selling pressure in the event of market-wide redemptions. Such exercises are an important part of supervisory preparations for market turbulence which might be associated with elevated redemptions and reduced market liquidity. Equally, asset managers should be refining their own measures of stress as market structures change so that they can better manage the downside risks of market turbulence.

Capital Markets Union

Finally, let me say something about Capital Markets Union (CMU). As you will be aware the road-map for CMU was published last week by the European Commission. This road-map identifies some near-term objectives covering: securitisation, covered bonds, Solvency II, venture capital, and the impact of recent financial services reforms.

Further initiatives are promised in the areas of: prospectus review and cross-border retail financial services.

I think the European Commission has struck the right balance between short term projects (ie quick-wins) and longer-term ambition. I would be hopeful that, in particular, the initiative to improve the coherence of the corpus of financial services regulation which has seen rapid growth in the last 6 years and which continues to grow, will bear fruit by looking at:

  • Rules affecting the ability of the economy to finance itself and grow;
  • Unnecessary regulatory burdens;
  • Interactions, inconsistencies and gaps; and
  • Rules giving rise to unintended consequences.[6]

Ultimately, these regulations aim to ensure that financial services are safe and efficient. These two aims - safety for users and producers of financial services and efficiency in the production and consumption of financial services - must be pursued with equal vigour. Neither of these objectives are supported if regulations are unwieldy or conflicting. At this juncture, some regulatory winnowing and pruning is timely in the light of the complex agenda which has been delivered in recent years so that the ultimate aims of investor protection, market integrity and financial stability can be achieved.

I will pause there to allow some time for some questions. Thank you.


[1] Westwood, R., Murphy G., (2010), "Data gaps in the UK financial sector: some lessons learned from the recent crisis", Proceedings of the Fifth Irving Fisher Committee Conference, Basel.

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[4] To be precise, the FSB is seeking to to decompose the 'Other Financial Institutions' (OFI) category in the system of national accounts. The other categories of financial services activity are Monetary Financial Institutions (MFI), Insurance Companies and Pension Funds (ICPF).

[5] See page page 20 of