Helping You Understand CP130
On 9th September 2019, the Central Bank of Ireland (“CBI”) published its consultation paper (“CP130”) on the regulatory framework that it proposes to establish regarding the Treatment, Correction and Redress of Errors in Investment Funds.
The International Monetary Fund in 2014 issued a recommendation to the CBI that it publish rules prescribing how fund pricing errors should be treated. These errors include:
- Net Asset Value Error — an error in the calculation of the Net Asset Value (“NAV Error”);
- Investment Breach Error — an error relating to the investments of a fund & non-compliance with the applicable investment restrictions;
- Fee Error — an error related to the overpayment of a fee; and
- Control Breach Error — other errors that do not fall into the above categories.
Firstly, the CBI addressed this recommendation by conducting a thematic review of the fund industry’s approach to the treatment of errors and breaches issued by Irish Funds. CP130’s proposed framework ensures that where a fund error occurs it must be identified, assessed and corrected. The relevant fund/investor must be “Appropriately Rectified” based on the type of error as listed above, which involves:
- Treatment — how errors should be treated as and when they arise;
- Correction — how errors should be corrected including appropriate reporting and notification; and
- Redress — how the fund/investors should be appropriately rectified following an error.
Currently there are reporting obligations to the CBI for both the Fund Management Company (‘FMC’) and depository however, the CBI proposes both the FMC and the depositary will now be required to maintain a written record of all errors that occur. This will be a new requirement in respect of depositories for Alternative Investment Funds (AIFs) as this obligation is already in place for depositaries of UCITS funds. The fact that an error must be addressed and rectified without delay is an indication for FMCs to adopt a solution that allows them to quickly identify any error and handle the rectification process.
GECKO Governance can ensure this latest reporting requirement is met with transparency and consistency. We provide a real-time monitoring solution to ensure the relevant FMC and depositary can immediately identify and correct an error without delay. They can assess the materiality of the error promptly in order to inform how the error is to be dealt with, taking into account the quantitative and qualitative criteria. Depending on the type of investment fund the quantitative thresholds will vary as follows:
- MONEY MARKET FUNDS 0.10% OF NAV
- Other investment funds 0.50% of NAV
If the fund breaches these thresholds, our system can flag an immediate alert that the user can action and then rectify. If an error does not meet the quantitative thresholds for materiality, it will still need to be assessed under qualitative factors. The CBI proposes an extensive list of qualitative factors which include:
(i.)The circumstances which resulted in the error (for example inadequate controls)
(ii.)The duration of the error
Materiality will depend on the circumstances and nature of the error and should be assessed on a case-by-case basis. Regardless of the materiality of the breach, FMCs and the depositary must notify the CBI and keep maintenance of all errors that occur which can be easily housed within our ‘Document Repository’. The system provides a full audit trail, which is optionally integrated with Blockchain technology, providing a full audit trail, promoting transparency in compliance. Users can easily record and retrieve documents with the click of a button and produce reports to comply with the CBI’s dual reporting obligations enabling FMCs and depositaries to easily adjust to the development of this framework.
Compliance-by-Design is an important strategy to ensure existing and developing regulation can be properly adhered to such as UCITS Regulations and Central Bank AIF Rulebook/AIF Regulations, all of which can be controlled and managed within our solution. The GECKO team have the expertise and products to implement our RegTech solution both quickly and effectively and advise you on best practices within your organisation. If you would like some help understanding your compliance requirements, please contact us at: [email protected]
About GECKO Governance
GECKO Governance provides a suite of Advisory, Consulting and Technology services to the crypto and asset management industries.
The company was founded in 2014 and built the first RegTech solution globally to integrate with Blockchain.
The team have over 120+ years combined financial & crypto compliance experience and are based at 3 global offices — New York, Ireland (HQ) and Sydney, Australia.
Our Advisory and Consulting business provides clients with definitive compliance solutions for their crypto and fund projects on a global basis.