June Global Regulatory Brief: Risk, capital and financial stability

Bloomberg

21 hours ago

SEBI enables co-investment within the AIF structure, replacing the PMS detour
The Securities and Exchange Board of India (SEBI) approved reforms that let Category I and II Alternative Investment Funds (AIFs) invite their own accredited investors to co-invest inside the fund itself through a newly-minted Co-Investment Scheme (CIV scheme).
Background context: The change follows the May 2025 consultation paper and the recommendations of the Ease-of-Doing-Business working group and the AIF Policy Advisory Committee.
In more detail: Under the earlier framework, any investor wishing to top-up an AIF's position had to do so through a separate Portfolio Management Services (PMS) account. That arrangement forced managers to hold dual licenses, imposed PMS investment caps on unlisted securities, and left investee companies grappling with a long tail of direct shareholders. Exit timing could also diverge, because PMS clients were free to sell before the AIF, upsetting alignment of interests.
What has changed: The new policy sweeps those frictions aside.
An AIF may now launch one dedicated CIV scheme for every co-investment it undertakes.
Participation is limited to accredited investors already committed to the parent AIF scheme, preserving the fund's investor-of-record status on the target's cap table.
CIVs inherit the Category I or II label of the main fund yet enjoy targeted regulatory relief: they are exempt from diversification limits, sponsor-commitment requirements and the three-year minimum tenure rule.
Exit remains co-terminous with the main AIF, ensuring that co-investors and pooled investors realise returns side-by-side.
Looking ahead: Based on approval by the SEBI Board, the above changes would be effective post suitable notification of amendments to the framework.
ECB analyses bank exposure to private market funds
The Chair of the European Central Bank Supervisory Board, Claudia Buch, set out in further detail the implications of growing banking sector exposure to private market funds.
Wider context: The ECB understands growing bank involvement in opaque and illiquid private markets as a potential transmission channel for systemic risk, especially under stress scenarios.
The ECB is concerned by the lack of reliable and consistent data within private markets, the lighter disclosure requirements, and the typically illiquid nature of the investments.
Important risk metrics – such as default histories, loss and recovery rates, and asset valuations – are often unavailable or hard to compare and this is leading to sub-standard supervision.
ECB aim: The ECB is seeking to achieve more consistent and transparent reporting by providers of private equity and private credit, recognising that while this may increase the cost of doing business it should enhance risk management and broader financial stability.
ECB findings – in more detail: The ECB Banking Supervision has found that a few specialised and larger banks engage with private equity and private credit funds through a wide range of financing relationships, including:
Banks lend directly to funds, to fund investors and to the companies held in fund portfolios.
Banks sell derivatives that funds and portfolio companies use to hedge interest rate or foreign exchange risk.
This, in turn, creates counterparty credit risk exposures for the banks.
Some banks are entering the private credit space themselves, either by directly lending to private borrowers using their balance sheets, through their asset management arms, or by partnering with third-party asset managers.
Supervisory concern – in more detail: The ECB found that banks often struggle to systematically identify overlapping exposures or co-lending arrangements and supervisors are concerned because bank exposures to private markets may imply risks to solvency and liquidity that risk management frameworks do not adequately capture.
Enhancing risk data aggregation as a priority: Enhancing risk data aggregation and reporting (RDARR) is a supervisory priority and the ECB is stepping up pressure on banks that fail to address deficiencies in this area. The ECB review found that many banks face challenges when aggregating exposures across business lines or counterparty types.
Two main reasons for poor risk management: (i) insufficiently developed risk management systems within banks, (ii) insufficient information on private markets activities.
Reporting: Addressing the limited ability of banks to understand their exposures will require more consistent and transparent reporting by providers of private credit and private equity.
Existing regulatory framework: The EU framework includes some disclosure requirements from private market funds and it is beginning to adapt I.e. recent revisions to the Alternative Investment Fund Managers Directive (AIFMD) introduce stricter requirements for loan-originating funds.
Looking ahead: An exploratory scenario analysis on counterparty credit risk (CCR) is currently underway, focusing on vulnerabilities linked to NBFI exposures; aggregate results will be published alongside the 2025 EU-wide stress test report.
Supervisory expectations on banks: The ECB states that banks need to build more robust, integrated risk management frameworks to keep pace with the growing complexity of their exposures to private markets. This includes better data aggregation across business lines, routine stress testing that reflects the potential for correlation and contagion, and clear governance around exposure limits to individual sponsors or fund groups.
Regulatory co-ordination: The ECB states that a more coordinated approach is needed – within Europe and globally – to close data gaps, align regulatory treatment and ensure that risks accumulating outside the traditional banking perimeter do not go undetected or unmanaged. The European Commission's recent exploration of macroprudential policies for NBFIs provides an opportunity to introduce targeted tools to address leverage and liquidity mismatch, system-wide stress testing, better data access, and stronger coordination across authorities.
Summary: Ultimately, the ECB's message is that traditional banking supervision must evolve to reflect the blurred boundaries between banks and NBFIs, and that better data, governance, and coordination are prerequisites for sound risk management.
UK Government outlines proposals to boost pension investment in UK growth
The UK government has published the final report of the Pension Investment Review, which sets out a series of reforms aimed at tackling fragmentation, increasing returns, and unlocking greater investment in UK productive assets such as infrastructure, high-growth companies, and private markets.
In more detail: The review highlights the need for defined contribution (DC) schemes to deliver better outcomes for savers by improving investment performance and encouraging greater scale and diversification. This includes:
Scale and consolidation: Reduce fragmentation in the DC market by consolidating into fewer, larger schemes capable of investing more effectively. AUM targets of £25 billion by 2030 are set for providers and master trusts.
Disclosure regime: Introduce a mandatory Value for Money framework requiring schemes to report on net returns, costs, and service quality. This aims to support better decision-making and identify underperforming schemes for improvement or consolidation.
Asset allocation: Explore setting baseline targets for allocations to private assets and improve transparency on investment strategies, including UK vs. overseas splits.
UK pipeline of investment opportunities: Strengthen the supply of investable projects through better data, greater investment readiness, and increased public-private coordination.
Wider context: With over £2 trillion in assets under management, UK pensions represent a major source of long-term domestic capital. The reforms are part of broader efforts to boost economic growth, resilience, and retirement outcomes.
Looking ahead: Legislation to implement the reforms will be introduced via the upcoming Pension Schemes Bill. Phase Two of the Review, focusing on the adequacy of retirement outcomes, will launch in the coming months.
Dubai finalizes capital reforms for asset managers
The Dubai Financial Services Authority (DFSA) has finalized its long-anticipated reforms to capital requirements for Category 3 firms (primarily asset managers, fund managers, and advisors) in the DIFC.
Policy aims: The goal of the reforms are to enhance proportionality, reduce unnecessary burden, and align more closely with EU/UK standards (notably the IFD/IFR regime).
In summary: This reform affects how firms calculate capital adequacy, manage liquidity, and engage with compliance operations — with implications for regulatory data, capital modelling, and client advisory tools.
Implementation timeline: The new framework takes effect on 1 July 2025, with a transition period lasting until 1 July 2026. Further guidance will be provided on managing capital and liquidity buffers during the transition.