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15 January 2025

Irish Quarterly Legal And Regulatory Report: Asset Management And Investment Funds October - December 2024

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Walkers

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Walkers is a leading international law firm which advises on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey. From our 10 offices, we provide legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers.
On 12 December 2024, ESMA published a consultation paper outlined draft regulatory technical standards ("RTS") on open-ended loan originating Alternative Investment Funds ("AIFs") under Directive (EU) 2024/927 ("AIFMD II").
Ireland Finance and Banking

1. AIFMD & UCITS DEVELOPMENTS

1.1 ESMA consultation paper on regulatory technical standards on open-ended loan originating AIFs under AIFMD II

On 12 December 2024, ESMA published a consultation paper outlined draft regulatory technical standards ("RTS") on open-ended loan originating Alternative Investment Funds ("AIFs") under Directive (EU) 2024/927 ("AIFMD II").

AIFMD II introduces harmonised rules on loan originating funds that such AIFs shall be closed-ended unless their manager can demonstrate to its home national competent authority ("NCA") that their liquidity risk management system is compatible with their investment strategy and redemption policy.

The consultation seeks feedback on the draft RTS that set out the requirements with which loanoriginating AIFs shall comply in order to maintain an open-ended structure. The draft RTS seek to provide a common implementing framework for Alternative Investment Fund Managers ("AIFMs") and NCAs by determining the elements and factors that AIFMs need to consider when demonstrating to their NCAs that the loan originating AIFs they manage can be open-ended.

ESMA seeks responses to the consultation by 12 March 2025 and intends to finalise the draft RTS by Q3/Q4 2025.

Walkers' Asset Management & Investment Funds group has published an advisory which highlights the key features of ESMA's proposals and their implications for asset managers and funds' pursuing loan origination strategies.

1.2 Public consultation on exercise of AIFMD II national discretions (This is a further update to section 1.1 of the quarterly report covering the first quarter of 2024)

On 22 November 2024, the DoF launched its public consultation on the exercise of the national discretions in AIFMD II.

The consultation notes that, while the majority of the provisions in AIFMD II will be transposed on a fully harmonised basis, there are a number of national discretions where each member state has discretion on the application of the provision in question. The DoF invites interested parties to make submissions in relation to the exercise of the following national discretions in AIFMD II, which will be taken into consideration by the DoF when deciding how best to transpose AIFMD II into Irish law:

  • extending the list of ancillary activities and services that may be provided by fund management companies ("FMCs") (to include the tasks carried out by an administrator in accordance with Regulation (EU) 2016/1011 (the "Benchmark Regulation") and in respect of AIFMs only, credit servicing activities in accordance with Directive (EU) 2021/2167 (the "Credit Servicing Directive"));
  • prohibiting AIFs that originate loans from granting loans to consumers in Ireland; and
  • permitting the NCA (the Central Bank) to allow the appointment of a depositary established in another member state, on receipt of a reasoned request from an AIFM and subject to strict conditions.

The DoF notes that it also welcomes views in relation to other elements of the transposition. The consultation period will run until 17 January 2025.

Walkers' Asset Management & Investment Funds group have published an advisory which highlights the key aspects of this consultation.

1.3 ELTIF Delegated Regulation published in the official journal of the EU (the "OJ") (This is a further update to section 1.1 of the quarterly report covering the third quarter of 2024)

On 25 October 2024, Commission Delegated Regulation (EU) 2024/2759 (the "ELTIF Delegated Regulation") supplementing Regulation (EU) 2015/760 with regard to the European Long-term Investment Fund ("ELTIF") regulatory technical standards ("RTS") was published in the OJ.

The RTS specify when derivatives will be used solely for hedging the risks inherent to other investments of the ELTIF, the requirements for an ELTIF's redemption policy and liquidity management tool, the circumstances for the matching of transfer requests of units or shares of the ELTIF, certain criteria for the disposal of ELTIF assets, and certain elements of the costs disclosure.

The ELTIF Delegated Regulation entered into force on 26 October 2024 and is binding in its entirety and directly applicable in all member states.

2. CENTRAL BANK UPDATES

2.1 PCF and CF annual confirmation and certifications 2025 (update) (This is a further update to section 2.7 of the quarterly report covering the first quarter of 2024)

During December, the Central Bank published on its fitness and probity ("F&P") webpage updated preapproval controlled function ("PCF") annual confirmation and controlled function ("CF") certification Guidance (the "Guidance") for 2024.

The Guidance outlines the process for the first submission in 2025 of the additional certification regarding compliance with F&P standards (relating to the 2024 calendar year), introduced under the Certification Regulations (S.I. No. 2 of 2024). The Guidance has been updated to include the steps for the annual CF certification submission in respect of CF holders at year end 2024. The additional certification process will be similar to the current PCF Annual Confirmation process. The Guidance includes confirmation that no document upload is required to complete the annual CF certification and firms are not required to submit to the Central Bank the register comprising individuals performing CF roles unless requested to do so.

Both the PCF annual confirmation and CF annual certification facility will be open on the online portal (the "Portal") from 1 January 2025. The submission windows will align with the previous annual confirmations.

2.2 Authorisation processes updated for open-ended ELTIFs with limited liquidity (This is a further update to section 2.2(a) of the quarterly report covering the first quarter of 2024 and section 1.3 of this report)

On 25 October 2024, following the coming into force of the Commission's Delegated Regulation supplementing the ELTIF Regulation, the Central Bank updated its authorisation processes for AIFs and the ELTIF application form. The update was published to facilitate the authorisation of open-ended ELTIFs with limited liquidity in accordance with Article 18 of the ELTIF Regulation.

The update provides that a pre-submission, made prior to the filing of the application for authorisation, is now required for the establishment of Qualifying Investor or Professional Investor open-ended with limited liquidity ELTIFs (whether umbrella/standalone/sub-fund) i.e. which propose to provide for the possibility of redemptions during the life of the ELTIF.

The pre-submission must contain at least the following detail:

  • A narrative explanation of the results of the liquidity stress testing carried out in accordance with Article 15(3), point (b), and Article 16(1), second subparagraph of Directive 2011/61/EU (AIFMD), demonstrating whether and how, in severe but plausible scenarios, the ELTIF is able to deal with redemption requests;
  • Where redemptions are proposed to take place more frequently than quarterly, justification by way of confirmation of the appropriateness of the redemption frequency and its compatibility with the individual features of the ELTIF.
  • Where the notice period of the ELTIF is proposed to be less than 3 months, the reasons for the shorter notice period, and an explanation as to how that shorter notice period is consistent with the individual features of the ELTIF.

Pre-submissions should be sent to fundsauthorisation@centralbank.ie and clearly marked as a "Presubmission for an ELTIF". Pre-submissions must be made in good time to allow these to be considered by the Central Bank in advance of for the desired authorisation date.

The updated ELTIF application form provides for updated requirements in accordance with the RTS, including without limitation and as applicable to the characteristics of the individual ELTIF:

  • detail on the use of financial derivative instruments;
  • redemption policy detail, including:
    • where the ELTIF provides for the possibility of redemptions during the life of the ELTIF the AIFM is required to submit a narrative explanation of the results of liquidity stress testing as well as a letter addressing the information required by Article 4(1) of the ELTIF Delegated Regulation; and
    • where the ELTIF provides for the possibility of redemptions more frequently than quarterly or notice periods shorter than three months, the AIFM is required to submit an explanation as to how the redemption frequency is compatible with the individual features of the ELTIF; and
  • details of any secondary market transfer matching mechanism.

The updates were also incorporated in Central Bank markets update (issue 10 of 2024).

2.3 Investment funds supervision bulletin

On 16 December 2024, the Central Bank published its inaugural Investment Funds Supervision Bulletin 2024 (the "Bulletin").

The Bulletin, which was the first in a new series, highlights current and future areas of Central Bank supervisory and authorisation focus, including a range of recent thematic and sectoral work. The Bulletin recapped findings from its targeted reviews of fixed operating expense models and fees paid to funds' investment advisers. It also looks ahead to planned thematic reviews throughout 2025, noting in particular as follows:

  • targeted questionnaire to a sample of FMCs and thereafter communication to industry on its review of liquidity management tools ("LMTs");
  • communication of its findings and actions to industry following the securities lending review; and
  • the Central Bank will also share an industry communication following ESMA's publication of the findings from its common supervisory action ("CSA") report on sustainability risks and disclosures in Q2 2025.

There will likely be further thematic reviews launched during 2025. Other areas of Central Bank focus for 2025 include a review focusing on hedge funds and the recently issued ESMA costs and fees survey. The Central Bank intends to continue to engage with the funds industry to manage the timelines and expectations relating to this work.

From a fund authorisation perspective, the Bulletin notes the Central Bank will continue to perform assessments of the authorisation and post authorisation processes regarding retail investment funds. An area of focus will be Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector ("SFDR"), in particular, ESMA's guidelines on funds names using ESG or sustainabilityrelated terms. Quality assurance reviews will also continue to be carried out post authorisation on a sample of qualifying investor AIFs and all qualifying investor and professional investor ELTIFs.

The Central Bank encourages firms to consider the contents of its Bulletin, and the actions they should take to address any identified risks.

2.4 Financial stability review 2/2024 (This is a further update to section 3.10 of the quarterly report covering the second quarter of 2024 and section 2.9(a) of this report)

On 4 December 2024, the Central Bank published its second Financial Stability Review of 2024 (the "Review") and its accompanying press release entitled "Economy remains resilient, but Ireland's small open economy is exposed to heightened geopolitical risks" alongside the Governor's opening remarks at the announcement.

As with previous iterations of the Review, this version contains sections of interest for investment funds and their service providers relating to:

  • Resilience, whereby the Central Bank cautions that high levels of leverage in parts of the bank and non-bank sector, as well as the growing level of interconnectedness between non-banks and global lenders, could lead to an amplification of market adjustments as a result of shocks.
  • On macro-prudential policy, the Central Bank will focus on evaluating the implementation on its two macroprudential measures relating to cohorts of investment funds (Irish property funds and GBP LDI funds). The Review also reflects on its recent feedback statement to the discussion paper on an approach to macroprudential policy for investment funds.

Regarding the phased implementation of macroprudential limits on leverage of 60% for Irish property funds (effective by November 2027 for pre-existing Irish property funds), the Review notes while Irish property funds are taking action to reduce leverage mainly through adjustments to their liability mix, the current deteriorating commercial real estate ("CRE") market has partially offset these movements. Accordingly, leverage increased marginally across Irish property funds between 2022 and 2023, increasing the overall leverage of the sector by 1.2% mainly driven by asset revaluations. However, the increase in leverage over the period was somewhat offset by net inflows and the conversion of shareholder loans into equity. These actions made the funds' balance sheets more resilient to the falls in CRE prices that occurred over 2023. Nonetheless, it is noteworthy that around a third of both residential and non-residential property funds' AUM is still attributed to funds with leverage above 60%.

2.5 Industry letter on the primary and secondary market trading arrangements of ETFs in Ireland

On 28 November 2024, the Central Bank published an industry letter entitled 'An examination of the primary and secondary market trading arrangements of ETFs in Ireland' (the "Letter") following its thematic review of Irish authorised ETFs (the "Review"). The Letter identified a number of areas where improvements are required and sets out the Central Bank's expectations and actions to be taken by fund management companies ("Firms") in respect of their governance practices in relation to authorised participants ("APs") and contracted market makers ("CMMs"). The key findings focused on the following aspects:

  • inadequate due diligence and limited ongoing monitoring of APs and CMMs;
  • lack of board oversight; and
  • undue AP and CMM concentration.

The Letter sets out a non-exhaustive list of areas to be considered in respect of AP/CMM due diligence and ongoing monitoring as follows:

  • financial health and financial performance;
  • ownership structure;
  • reputation and regulatory history;
  • operational structure and capabilities (including trading, clearing and settlement capabilities, pricing, and inventory management);
  • arbitrage mechanism and liquidity provision, in normal and stressed circumstances; and
  • ensuring receipt of reporting to assess activity.

The letter also endorses a number of measures in the Good Practices Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds (May 2023) and notes the IOSCO report represents a good framework for the governance practices of Firms.

To address the findings of the Review, the Central Bank requires that Firms consider the actions outlined and, where appropriate, incorporate the necessary changes to their frameworks and practices by the end of Q2 2025.

2.6 Daily investment funds return

During the period, the Central Bank communicated draft details to industry on the new daily investment funds return ("DIFR").

The DIFR has been introduced under the Central Bank Act, 2013 to enhance data-driven supervision, crisis management, research and analysis capabilities within the Central Bank. In particular, the data compiled is intended to enhance supervisory warning systems, to follow the risk and enable more targeted supervisory queries.

The DIFR applies to every Irish authorised, non-money market investment fund with shares/units/interests in issue and with a non-zero net asset value ("NAV"). The first phase of reporting captures dealing day data, including subscriptions, redemptions, NAVs, shares/units/interests in issue and funds liquidating.

Following a period of industry testing beginning in October 2024, the phase 1 implementation of DIFR reporting via the Portal commenced in mid-December 2024.

2.7 Dear CEO letter on MiFID II (2014/65/EU) marketing communications to retail clients (This is a further update to section 4.3(m) of the quarterly report covering the second quarter of 2024)

On 10 October 2024, the Central Bank published its Dear CEO Letter on the findings from a thematic review on the application of MiFID II marketing and advertising requirements (the "Letter"). The Letter is addressed to Irish authorised MiFID investment firms, credit institutions and fund management companies providing MiFID services to retail clients (each a "Firm"). The Letter is to be read in conjunction with ESMA's report earlier in 2024 on the findings of its CSA on marketing disclosure rules under MiFID II (the "ESMA Report").

A schedule to the Letter details the Central Bank's key findings and supervisory expectations of Firms as well as examples of good practices observed. The findings demonstrate the need for Firms marketing to retail clients to enhance their marketing and advertising practices to ensure they are fair, clear and not misleading and in compliance with standards under the MiFID Regulations.

The schedule to the Letter, includes the following expectations:

  • ensuring that all marketing communications and advertisements are:
    • clearly identifiable as such,
    • are fair, clear and not misleading,
    • are presented in a way that is likely to be understood by a retail investor, and
    • are appropriate in terms of content and distribution channel for the target audience;
  • reviewing governance controls and outsourcing arrangement in light of regulatory guidance and rules; and
  • all regulated investment firms are expected to review their marketing and advertising arrangements and practices to ensure that they are meeting the highest standards of investor protection and delivering fair outcomes that seek to secure their clients' interests.

Firms are required to review their practices against the ESMA Report and the schedule to the Letter and include details of actions taken to address the findings in the ESMA Report and the Letter. This review should be completed and an action plan discussed and approved by the board of each Firm by 31 January 2025, with the minutes of the relevant board meeting reflecting the discussions and approval of the board.

2.8 Cross-sectoral guidance on authorisation expectations (This is a further update to section 3.2 of the quarterly report covering the second quarter of 2024)

In November 2024, the Central Bank published cross-sectoral guidance outlining its expectations for applicants seeking authorisation (the "Authorisation Guidance").

The Authorisation Guidance expands on existing sectoral guidance and provides further detail on how the Central Bank discharges its authorisation mandate. The Authorisation Guidance seeks to increase the transparency of the authorisation process for firms seeking to be authorised and regulated by the Central Bank and to support firms in understanding its high-level requirements and expectations of applicants, in turn driving better quality applications. The Authorisation Guidance is addressed to natural and legal persons applying for initial authorisation and applying or notifying the Central Bank of changes such as business expansions.

The Authorisation Guidance outlines key principles of the application process as well as setting out a non-exhaustive list of expectations applicable to applicant firms of all sectors. The expectations describe common areas of substantive focus as the starting point for all applicant firms.

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