ESMA report points out improvements needed in supervision of asset valuation
The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has published its report on the Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the supervision of the asset valuation rules under the UCITS and AIFM Directives.
In the final report ESMA presents its analysis and conclusions from the 2022 CSA exercise, and finds room for improvement in the following areas:
- the appropriateness of valuation policies and procedures;
- valuation under stressed market conditions;
- independence of the valuation function and use of third-party valuers;
- early detection mechanisms for valuation errors and compensation to investors.
In light of the current economic environment, it is important that NCAs’ supervision addresses the deficiencies identified in the course of the CSA exercise and keeps paying close attention to potential valuation issues arising from less liquid assets, whose nature can amplify the structural liquidity mismatches of certain types of investment funds. This is particularly true for funds investing in Private Equity (PE) and Real Estate (RE) assets which might be more exposed to revaluation risks in light of the heavy reliance on long-term models and the illiquidity of their assets.
The CSA was launched in January 2022, with the aim of assessing, fostering and enforcing the compliance of supervised entities with the organisational requirements with respect to asset valuation. The CSA also looked at their adherence to valuation principles and methodologies with a view to reflecting a true and fair value of their financial positions both under normal and stressed market conditions in line with the applicable rules.
Building on the findings of the CSA exercise, ESMA will facilitate discussions among NCAs on the topic of asset valuation, particularly under stressed market conditions, in order to ensure that both market participants and NCAs are better prepared to address valuation-related challenges in future periods of stress. Moreover, ESMA welcomes that NCAs have planned to follow-up on the deficiencies identified in the course of the CSA and encourages the use of enforcement, where appropriate.
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