CBI’s Dear Chair Letter: How Can UCITS Firms Bolster Liquidity Frameworks?

Last week the Central Bank of Ireland (CBI) put Irish UCITS firms on notice, warning in a Dear Chair Letter that they must do more to bolster their Liquidity Risk Management (LRM) frameworks before the end of the year.

The letter came just two months after ESMA released a sweeping review that underlined a number of shortcomings among AIF and UCITS funds.‘All Irish authorised UCITS managers are required to conduct a specific review of their practices, documentation, systems and controls by reference to the findings in the ESMA public statement and this letter,’ the CBI said. Reviews should be completed by the end of 2021, and an action should have been approved by the board.This note looks at how your firm can prepare and why partnering with a specialist third party platform can help you future proof your firm.

How can firms prepare?

The easiest way to review your LRM framework is to look at the adverse findings in the Common Supervisory Action (CSA) appendix, and to make sure that your own framework doesn’t exhibit any of the shortcomings, including:

1. Instances of LRM frameworks that were not clearly defined, adaptable and/or independent
2. A lack of formal documented pre-investment forecasting frameworks
3. A lack of formal liquidity escalation policies
4. Cases where no pre-investment forecasting performed
5. Over-reliance on the presumption of ongoing liquidity
6. Oversight of delegates below expectations
7. Shortcomings in the role of the designated person for fund risk management
8. Cases of no liquidity reporting to the board of the UCITS manager
9. Shortcomings in internal control framework

Importantly, the review must also be documented, and must include details of actions taken to address any of the findings in the letter. An audit that includes a checklist or step-by-step analysis makes sense here.

The CBI will continue to focus on LRM in its supervisory role, and future supervisory actions, as well as future engagement with UCITS firms, will be informed by the Dear Chair letter. With fund liquidity still a major priority for regulators in 2021 and beyond, firms can ill-afford to be complacent when it comes to their frameworks.