Luxembourg: Financial Sector Assessment Program—Technical Note on Investment Funds: Regulation and Supervision

LUXEMBOURG IMFCountryReportNo.24/181 June2024 FINANCIALSECTORASSESSMENTPROGRAM TECHNICALNOTEONINVESTMENTFUNDS:REGULATIONANDSUPERVISION ThisTechnicalNoteonInvestmentFunds:RegulationandSupervisionfortheLuxembourgFSAPwaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund May20,2024 LUXEMBOURG FINANCIALSECTORASSESSMENTPROGRAM TECHNICALNOTE INVESTMENTFUNDS:REGULATIONANDSUPERVISION ThisTechnicalNotewaspreparedbyIMFstaffinthecontextoftheFinancialSectorAssessmentPrograminLuxembourg.ItcontainstechnicalanalysisanddetailedinformationunderpinningtheFSAP’sfindingsandrecommendations.FurtherinformationontheFSAPcanbefoundathttp://www.imf.org/external/np/fsap/fssa.aspx PreparedBy MonetaryandCapitalMarketsDepartment CONTENTS Glossary3 EXECUTIVESUMMARY4INTRODUCTION7 A.Background7 B.InstitutionalStructureforRegulationandSupervision11 C.LegalandMarketStructure11 OVERSIGHTFRAMEWORKFORINVESTMENTFUNDS16 A.Regulation16 B.Authorization28 C.Supervision30 D.Enforcement37 E.Cross-BorderCooperation39 F.InstitutionalMechanismsforSystemicRiskMonitoring40 BOXES 1.UseofArtificialIntelligence/MachineLearningbyAssetManagers28 2.MoneyMarketFunds36 FIGURES 1.AssetsoftheFinancialSectorinLuxembourg:InvestmentFunds,Banks,andtheInsuranceSector7 2.TotalAssetsofRegulatedInvestmentFundSectorinEurope8 3.ShareofUCITSandAIFsDomiciledinLuxembourgOvertheYears9 4.AUMofMMFsDomiciledinLuxembourg9 5.TotalAUMbyInvestmentFundStrategy10 6.AUMofUCITSandDifferentTypesofAIFs15 TABLES 1.MainRecommendationsontheOversightofInvestmentFunds6 2.InvestmentFundTypes13 APPENDICES I.SomeKeyEURequirementsRelatingtoSegregationofAssetsandCustody43 II.LiquidityManagementToolsinLuxembourg44 III.SupervisoryResponsetoGlobalEvents45 Glossary AIFAIFMAIFMDAUMBCLCISCNAVCdRSCSSFECBEEAESMAEUFCPFSAPFSBGDP IFIFMIFRSIMF IOSCOLMTMMFNAVPDAOFIRAIFSCSSCSpSICAFSICARSICAVSIF UCIUCITS VaR AlternativeInvestmentFundAlternativeInvestmentFundManager AlternativeInvestmentFundManagersDirectiveAssetsUnderManagement BanqueCentraleduLuxembourgCollectiveInvestmentSchemeConstantNetAssetValueComitéduRisqueSystémique CommissiondeSurveillanceduSecteurFinancierEuropeanCentralBank EuropeanEconomicArea EuropeanSecuritiesandMarketsAuthorityEuropeanUnion FondsCommundePlacementFinancialSectorAssessmentProgramFinancialStabilityBoard GrossDomesticProductInvestmentFundInvestmentFundManager InternationalFinancialReportingStandardsInternationalMonetaryFund InternationalOrganizationofSecuritiesCommissionsLiquidityManagementTool MoneyMarketFundNetAssetValue ProfessionalDepositaryofAssetsOtherthanFinancialInstrumentsReservedAlternativeInvestmentFund SociétéenCommanditeSimpleSociétéencommanditespécialeSociétéd’InvestissementàCapitalFixe Sociétéd’InvestissementenCapitalàRisqueSociétéd’InvestissementàCapitalVariableSpecializedInvestmentFund UndertakingforCollectiveInvestment UndertakingforCollectiveInvestmentinTransferableSecurities ValueAtRisk EXECUTIVESUMMARY TheInvestmentFunds(IFs)industryinLuxembourgdominatesthedomesticfinancialsectorandtheEUfundslandscape.TheAssetsUnderManagement(AUM)oftheIFindustryinLuxembourgisaround80timesitsGDP,muchhigherthanbanking(13timesGDP)andinsurance(3timesGDP).BasedonIFdomicile,LuxembourghasthelargestfundindustrybyAUMinEurope,followedbyIreland;itisalsothesecondlargestfundindustryintheworld,nextonlytotheUSA. LuxembourghasmadegoodprogressinimplementingIFrelatedrecommendationsfromthepreviousFSAP.Thekeyauthorityforsupervisionoftheinvestmentfundssector,theCommissiondeSurveillanceduSecteurFinancier(CSSF),hasstrengtheneditssupervisoryframework.AsinotherEUcountries,theregulatoryframeworkforIFsandfundmanagersinLuxembourgislargelybasedonEUlevelrequirements,wheretherehavebeensubstantialimprovementssincethelastFSAP,andmanymoreareunderway. CSSFhasarobustsupervisoryframeworkwithsubstantiveimprovementssincethelastFSAP,butsomeareascouldbefurtherstrengthened.ConsideringmorethanhalfofthedepositariesinLuxembourghavegrouplinkswithfundmanagers,CSSFshouldconsiderintegrationofsuchlinksaskeyrisksintherisk-basedsupervisionapproachforbothfundmanagersanddepositaries. Luxembourghasalargethird-partyfundmanagersindustry(alsocalledwhite-labelserviceproviders)withabusinessmodelverydifferentfromthetraditionalintra-groupfundmanagers,eachposingadifferentsetofrisks,especiallyonconflictsofinterest.Thecurrentsupervisoryframeworkshouldbeenhancedbysuitablyincorporatingthedifferentiatedsetsofrisksbetweenthetwodifferenttypesoffundmanagers.Withaviewtoenhancingitscapabilitiesonanalyzingliquidityrisks,CSSFshouldobtainclearandgranulardataoncreditlinesputinplacebyIFs,includingontheextentofshari