Date Published 16/03/2022
Central Bank update on Implications of Ukraine War
The Central Bank of Ireland (the “Central Bank”) has issued a letter to all Irish fund service providers, including management companies, administrators and depositaries in relation to responses to the ongoing war in the Ukraine. The contents of this letter are stated to be of relevance for any related future supervisory engagements, including potential enforcement actions and are required to be brought to the attention of board members, pre-approved control function holders in funds and other relevant persons.
The Central Bank has published details of relevant sanctions that have been imposed as well as related guidance on its website. It has reminded relevant service providers of their obligations to ensure compliance with related measures. It should be noted that relevant obligations include not only stopping transactions (potentially including subscription or redemption activity in the context of funds) that would constitute a breach of the sanctions, but also reporting such attempts to the Central Bank.
Implications for Funds
The implications of current events for funds potentially go beyond adopting procedures to ensure compliance with sanctions and related measures. Key issues for funds include the possible impact on valuations, liquidity and breaches of investment restrictions due to price volatility.
Valuations – the Central Bank has noted the potential for impaired valuations of underlying assets of funds during the current turbulence, including stale, unavailable or unverifiable prices. It can be noted that valuations are already the subject of a common supervisory action at an EU level and hence are set to be an area of increased regulatory scrutiny in any event. Management companies are subject to an ongoing obligation to ensure that fair, appropriate and consistent pricing models and valuation procedures are applied. Current procedures may require examination to ensure that they remain fit for purpose in the current stressed environment.
Liquidity – management are required to ensure that the liquidity of a fund’s portfolio is – and remains- appropriate in light of its redemption policy as well as anticipated redemptions. Market volatility can exacerbate redemption requests while limiting portfolio liquidity. Accordingly, the current circumstances may necessitate an increase in funds’ liquid holdings as well as potentially triggering the use of liquidity management tools such as swing pricing, anti-dilution levies, redemption charges or even suspensions. The Central Bank has already issued extensive correspondence and guidance on the requirement to apply a liquidity risk management framework for funds (a copy of our related detailed article is available on request).
Investment Breaches– price volatility may lead to inadvertent breaches of applicable investment restrictions. Where these are passive in nature the obligation is to return the portfolio to compliance taking into account the best interests of unitholders, rather than to engage in immediate sales. However, as it is unclear how long the current crisis will last, or indeed if it will further escalate, the situation needs to be closely monitored and funds would be advised to ensure they have appropriate relevant policies in place.
Central Bank Engagement
The Central Bank has clarified that in addition to ensuring that the required regulatory reporting is carried out, regulated entities should initiate timely engagement with Central Bank supervisors where matters of concern arise or potential risks seem likely to crystalise.