22 December 2023

Central Bank Of Ireland Imposes Its First Fine On An Investment Fund



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On 30 November 2023, the Central Bank of Ireland (the "Central Bank") published a public statement relating to an enforcement action against an Irish-authorised UCITS ICAV (the "ICAV")...
Ireland Finance and Banking
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On 30 November 2023, the Central Bank of Ireland (the "Central Bank") published a public statement relating to an enforcement action against an Irish-authorised UCITS ICAV (the "ICAV") which has been reprimanded and fined €192,500 by the Central Bank for breach of its reporting obligation under Article 9(1) of the European Market Infrastructure Regulation (EU) 648/2012 ("EMIR").

The sanction was applied on the basis of Regulation 32 of the European Union (European Market Infrastructure) Regulation 2014, as amended (the "EMIR Regulations"). This is the first monetary penalty imposed on an investment fund by the Central Bank and is the Central Bank's first enforcement case under the EMIR Regulations to date. The fine reflected the application of a settlement discount of 30% as allowed for by the settlement discount scheme, taking into account the nature and seriousness of the contravention, the size of the ICAV's operations as well as the ICAV's level of cooperation. This is the 155th enforcement outcome by the Central Bank to date, bringing the total fines imposed by the Central Bank to over €404.7 million.

Article 9(1) of EMIR require details of any derivative contracts to be reported to a registered trade repository no later than the working day following the conclusion of the contract. The ICAV in question admitted that it had failed to report 200,640 derivative trades entered into between January 2018 and May 2020 by one of its sub-funds to a trade repository. The fine and reprimand result from the conclusion of a Central Bank investigation which found that the failure by the ICAV to report these derivative trades to a trade repository constituted a breach of Article 9(1) of EMIR.

Details of breach

In this case the ICAV's appointed management company, with the agreement of the ICAV, delegated responsibility for investment of the assets of the ICAV to an investment manager, including delegation of operational compliance with all applicable laws. This included the ICAV's reporting obligation under Article 9(1) of EMIR.

Following the issue of a letter to derivative users by the Central Bank in February 2019 in respect of industry compliance with Article 9 of EMIR, the board of the ICAV (the "Board") requested a review of EMIR reporting on behalf of all sub-funds of the ICAV in August 2019. No explicit EMIR reporting was carried out by the management company to the Board from April 2016 to August 2019, however the management company confirmed to the Board that the ICAV was compliant with EMIR reporting obligations at three subsequent quarterly board meetings.

Despite these confirmations, in May 2020, the investment manager informed the management company and the ICAV that they had now entered into delegated EMIR reporting agreements and that prior to these agreements being entered into reporting was not comprehensive, leading to a failure to report approximately 21,000 trades by a sub-fund to a relevant trade repository. Following an internal investigation by the investment manager it came to light in 2021 that the number of unreported trades was in fact in excess of 200,000.

A backfill exercise was undertaken by the management company and investment manager leading to 194,000 late reports being submitted on behalf on the sub-fund. These late reports were queried by the Central Bank in March 2021 and the ICAV notified the Central Bank of its failure to report trades during the same month.

On 24 March 2021, the management company confirmed in a letter to the Central Bank that the total number of unreported trades was 200,640 and that these trades occurred from 16 January 2018 to 24 May 2020. On 14 April 2021, the management company confirmed that the unreported trades had been fully remediated. Following its investigation, the Central Bank confirmed that it was satisfied that the situation had been resolved and that this was done at no expense to the ICAV or its investors.

Importantly the Central Bank maintained that delegation of duties to the management company and the subsequent sub-delegation to the investment manager did not negate the ICAV's duty to comply with its regulatory obligations, nor did it affect the Board's ultimate responsibility for all activities of the ICAV.

Central Bank comments

In its press release, the Central Bank commented on the findings that it has "reiterated the importance of data quality and of EMIR reporting to industry over a number of years and in each Securities Markets Risk Outlook Report published since 2021. The gap in data reporting which gave rise to this investigation only became apparent to the ICAV upon a review of its EMIR reporting arrangements, prompted by the Central Bank's letter to industry in 2019 on this theme".

The Central Bank notes in its public statement that it was clear in this case that there had been "confusion among the delegates regarding what reporting needed to be completed, was being completed, and which parties were handling the reporting".

Ms. Seána Cunningham, the Central Bank's Director of Enforcement and Anti-Money Laundering, commented that "(f)irms must have appropriate oversight of data reporting from Board level down, including where data reporting is delegated or outsourced. The delegation of reporting obligations must be appropriately managed in order to avoid confusion between the delegates as to their respective reporting responsibilities".

Takeaways for Financial Services clients

This enforcement action by the Central Bank has once again reiterated the importance of maintaining appropriate oversight of reporting functions, whether delegated or outsourced. Accurate reporting under EMIR and other sectoral legislation increase transparency and enables the Central Bank to obtain a complete picture of each firm's operations, to fully understand the risks facing firms operating in securities markets, and thereby to address systemic risk.

In its most recent Securities Markets Risk Outlook Report 2023, the Central Bank again highlighted that it expects financial service providers have appropriate oversight of data reporting (such as those gathered in line with AIFMD (2011/61/EU), EMIR, Market in Financial Instruments Regulation ((EU) 600/2014) (MiFIR) and the Securities Financing Transactions Regulation ((EU) 2015/2365) (SFTR)) from Board-level down (including where data reporting is outsourced) and to ensure escalation channels are in place to promptly address data reporting issues.

An aggravating factor in determining the penalty in this case was that while the ICAV knew about the failure to report from 28 May 2020, it failed to report the contravention until 15 March 2021, after engagement initiated by the Central Bank. The Central Bank expects that firms should report material failures to it at the earliest opportunity.

Responsibility under Article 9 of EMIR for reporting the details of all OTC derivative contracts entered into from 18 June 2020 by a fund now lies with its fund management company. Aside from the EMIR Article 9 reporting obligation, EMIR compliance obligations remain the responsibility of the investment fund. The alteration of the reporting obligation is one of several amendments to EMIR introduced by Regulation (EU) 2019/834 ("EMIR Refit"). The remaining aspects of the EMIR Refit regime, including revised counterparty transaction reporting rules, will come into effect from 29 April 2024 which will necessitate further changes to EMIR reporting frameworks. Financial counterparties ("FCs") and non-financial counterparties ("NFCs") should engage with their report submitting entities and their trade repositories ("TRs") to ensure that they are in a position to report under the new reporting requirements as of 29 April 2024 deadline. In particular, relevant FCs and NFCs should take into account ESMA's guidelines on reporting, the validation rules applied by TRs, the reconciliation tolerances as well as the ISO 20022 XML schemas to ensure that reporting is performed according to the EMIR Refit regime, including the specifications of the technical standards on reporting and on the reconciliation and verification of data.

This latest enforcement action from the Central Bank has again drawn attention to broader issues around the accuracy and oversight of data reporting to TRs and to boards of regulated firms. The public statement emphasises the importance of ensuring clarity in the appointment and process around the allocation of responsibilities between the firms themselves, their delegates and service providers as to the respective data reporting responsibilities. It is clear that compliance by the industry with data reporting obligations will continue to be a strong area of focus for the Central Bank in the future.

Key Takeaways

This case highlights a number of key reminders for financials services clients:

  • Confirmation of compliance with EMIR reporting should be integrated into board reporting as a standing item;
  • Policies and procedures on EMIR data reporting should be reviewed by fund management companies;
  • Boards should ensure there is appropriate active oversight of reporting obligations by delegates;
  • In the event of a material failure, firms should ensure there is early engagement with the Central Bank and appropriate reporting in line with its expectations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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