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.  The aim of DP11's was 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.

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, published in July 2024, 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.

As outlined in the Feedback Statement, 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 also contributed to the European Commission’s 2024 targeted consultation on the adequacy of  macroprudential policies for non-bank financial intermediation (NBFI) (see below).

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.

Central Bank of Ireland response to the European Commission’s targeted consultation assessing the adequacy of macroprudential policies for non-bank financial intermediation (NBFI)

The Central Bank of Ireland published its response to the European Commission consultation on assessing the adequacy of macroprudential policies for non-bank financial intermediation (NBFI) on 22 November 2024. The objective of the EU consultation was to seek public authorities’ and stakeholders’ view on the adequacy of the macroprudential framework for NBFI. The consultation aims to identify the vulnerabilities and risks of NBFIs and map the existing macroprudential framework for NBFIs. It also sought to gather feedback on the current challenges to macroprudential supervision and discuss areas for further improvement.

Similar to developments at a global level, the NBFI sector in Ireland has grown significantly since the Global Financial Crisis, driven by the growth in investments funds. The development of macroprudential policy for the non-bank sector remains a key priority for the Central Bank of Ireland and our response to the European Commission consultation builds on the approach previously outlined in DP11. Specifically, our response focuses on a number of key areas relevant for the development of macroprudential policy for NBFI and, in particular, investment funds. These include: (i) implementing internationally-agreed reforms; (ii) enhancing the macroprudential toolkit; (iii) ensuring effective governance arrangements; (iv) introducing system-wide stress testing for the EU; (v) enhancing data sharing; and (vi) monitoring – and, where needed, adjusting – the regulatory perimeter.

The Central Bank of Ireland was also heavily involved in developing the single Eurosystem response. The Eurosystem response is closely aligned with the Central Bank of Ireland’s response and focuses in particular on a number of questions relevant for central banks. The Eurosystem’s response to the European Commission consultation presents a unique opportunity to drive forward the development of a macroprudential framework for NBFI. Given the Central Bank of Ireland’s dual mandate as a central bank and securities regulator, it has also responded - or provided extra detail - to questions that are more supervisory focused.