New KPMG study explores fund regulation challenges following pandemic turmoil

Reporting

Asset managers and investment funds have largely remained “operationally resilient” during the coronavirus crisis, but depressed asset volumes along with closer scrutiny of leverage and short-selling remain key issues for the sector during the ongoing pandemic, according to a new KPMG study into regulatory scrutiny of the industry.

The tenth edition of KPMG’s Evolving Asset Management Regulation series – titled ‘Supporting Growth and Ensuring Care’ – took the temperature of the global fund management regulatory agenda.

It examined an assortment of regulatory issues looming large over the asset management sector - including the ways in which liquidity and leverage are measured and monitored, and firms’ operational resilience during the coronavirus crisis, among other things.

KPMG described the prevailing environment as the “most challenging economic and operational backdrop in living memory”, but added that “regulatory agendas have not changed, only relative priorities and perspectives.”

For hedge funds specifically, increased scrutiny of managers’ use of leverage, the ways in which derivative instruments are used to hedge certain risks, and the impact of short-selling during the market turmoil in March, was all flagged up in the paper.

While the European Securities and Markets Authority lowered thresholds for disclosing short positions earlier this year, and backed decisions by a handful of member states to ban short selling, KPMG noted that most European watchdogs, including the UK’s Financial Conduct Authority, did not ban the practice during the Q1 maelstrom.

Elsewhere, ESMA indicated earlier this year that the hedge fund sector has been increasing its use of leverage, but noted how large cash buffers have offered some security for investors’ holdings, the study observed. The pan-European financial regulator is now consulting until September on new guidelines to encourage convergence among national regulators in assessing leverage risks in the AIF sector and in designing, calibrating and implementing leverage limits.

Meanwhile, reporting by alternative investment funds (AIFs) remains under consideration as part of the European Commission’s ongoing review of its Alternative Investment Fund Managers Directive, which affects hedge fund managers looking to market certain products in Europe.

KPMG noted that the Autorité des Marchés Financiers, France’s national regulator, recently highlighted issues with several French fund managers’ AIFMD reports, relating to systems, controls and quality of reports, as well as shortcomings around leverage, liquidity, stress tests and investor disclosures.

The wide-ranging study also weighed up the regulatory response to the growth of ESG products, as well as the use of technology, which has accelerated during the pandemic.

KPMG found that asset managers and investment funds have largely proved operationally resilient during the Covid-19 crisis, but acknowledged that the pandemic has squeezed assets under management and asset values.

“This, coupled with changing investor demands, could lead to mergers, a re-focusing of businesses and changes to outsourcing practices,” KPMG said.

Reflecting on wider changes to the industry, the report pointed to an “evolving new reality”, which comprises an “increasingly digital society, changes to working practices, demands for sustainable finance and greater awareness of global interconnectedness.”