The CSSF has published a paper outlining their considerations on macroprudential policy for investment funds. Studies by the Financial Stability Board (FSB) and European Central Bank (ECB) demonstrate a significant increase in the investment fund sector since the 2007/2008 global financial crisis which, accompanied by recent crises such as Covid-19 and ongoing conflicts, has sparked a conversation on whether UCITS and AIFM regulations are robust enough to address the risks arising from global affairs. While the CSSF clearly express their positive view of how the UCITS and AIFM frameworks have proven to provide resilience for investment funds in the past, they also recognise a need for improvement in some areas of the framework due to vulnerabilities from recent crises.

Risks identified from crises:

Increased liquidity mismatches
- May result in higher sales of the underlying assets by investment fund managers, impacting market prices and affecting other market participants.
Investment funds with excessive leverage levels
- More vulnerability to significant market fluctuations which can affect their investors, counterparties, and the companies they invest in, as well as worsening liquidity risks.
Investment funds interconnectedness with other market participants
- Have the potential to spread risk and market tensions to other market participants and sectors.

CSSF suggestions on areas for improvement in UCITS and AIFM frameworks:

Necessity to improve the availability of data on leverage.
Consistency in leverage definitions and risk-sensitive measures are lacking.
Reporting should sufficiently address the risks associated with various types of AIFs, including REIFs and Private Equity Funds, to ensure a solid foundation for a thorough and meaningful risk assessment.
Importance of increasing the frequency of reporting during times of crises.

Press Release: https://www.cssf.lu/wp-content/uploads/Macroprudential_policy_investment-funds.pdf