Luxembourg’s top supervisor for investment funds on Wednesday reassured the country’s fund management community, describing the sector as “very robust” and speaking about “quite normal” levels of volatility, even though it is not fully immune to the liquidity issues that have rocked global financial markets in recent weeks.
Speaking on stage at the end of ALFI’s 2023 European Asset Management conference, Marco Zwick, director of fund supervision at financial supervisor CSSF, had reassuring messages for investors. While laying out what the CSSF is doing to ensure a healthy fund sector in Luxembourg, he also called on the industry to pay more attention to the need to adopt technological change, to the interests of clients, cybersecurity, and to accept increasingly tight financial regulation as a fact of life.
Referring to the “dynamic nature” of Luxembourg’s fund sector, Zwick noted the “industry has over and over again shown that they are really capable of embracing change, even as difficult as it may be, but typically almost like a strategic opportunity, rather than just the issue.”
‘Stay in the driving seat’
“The best is to stay in the driving seat, not just for the next ten years, but for more years to come,” he said. “There is much more implementation of technology to scope needed. At the end we all want to do the same. We want to improve efficiency, to reduce costs, while maintaining and improving to some extent, the investor benefit and fund protection.”
Zwick urged the industry not to lose sight of the need to serve clients.“Don’t forget the client. We need to serve investors. We need to protect their assets. That is our obligation. That is our duty. And I think that without that, we will lose confidence. And we have seen how fragile confidence is these days. The first to get it wrong gets it wrong for the whole industry.””
Asked how CSSF sees the current volatility in financial markets in the context of the demise of Silicon Valley Bank and Credit Suisse, Zwick made clear that the Luxembourg fund sector, with some 5,000 billion euro in assets under management, is “very robust”. The 2022 decline in assets under management - nearly 900 billion euro - he attributed to market movements, and some outflows. Money market and property funds saw inflows last year, but fixed income and high yield funds were “more difficult.
‘Impact on the fund industry’
“Unfortunately we move from one crisis to the next one…. It’s more linked to the banking sector, which however also has an impact on the fund industry,” Zwick said. “Liquidity management is part of fund management. It is in the DNA of the fund management. Without liquidity management you cannot do your job correctly.”
The current levels of volatility, Zwick noted, are not as high as they were at the beginning of the Covid-19 pandemic in March 2020, when they were about six times higher than normal. “Volatility has now reached, since the beginning of this year, contrary to what one may think, quite normal levels,” he said.
In the course of 2022, Luxembourg’s fund industry had to contend with the fallout from Russia’s invasion of Ukraine, which saw the sudden suspension of dozens of funds that held investments in these two countries. Special liquidity management tools were discussed extensively, between the sector and CSSF, and Luxembourg’s industry representatives.
Only two funds with side pockets
Zwick said that in the end, only two funds choose to adopt side pockets as a way to handle their exposures to Russia and the Ukraine. That is well below the dozens of funds that were considering this option a year ago. “At the end of the day we have a very limited number of side pockets, market players found alternative ways which are working.”