Fund Valuation in Focus: IOSCO’s Updated Recommendations and ESMA’s Market Warning

The European Securities and Markets Authority (“ESMA”) published its Trends, Risks and Vulnerabilities (“TRV”) Report No. 2 (2026) on 10 September 2026, highlighting vulnerabilities in EU securities markets, including heightened geopolitical tensions, stretched valuations of technology and AI-related assets, persistent inflation and weaker economic growth. It also flagged rapidly emerging operational threats, including cyber risks linked to developments in frontier AI. ESMA warned that the apparent resilience of markets should not be mistaken for an absence of vulnerabilities, given that the disconnect between deteriorating macro-financial conditions and upbeat market valuations increases the risk of sudden market corrections. As ESMA’s Chair, Verena Ross, put it: “The wider this gap becomes, the greater the risk of an abrupt market correction.” Against this backdrop, the continued growth of private assets, private credit and other less liquid asset classes makes reliable and well-governed valuation frameworks all the more important.

Preceding this, the International Organization of Securities Commissions (“IOSCO”) published its final report, Recommendations on Valuing Collective Investment Schemes (CIS) (FR/03/2026), on 1 June 2026 setting out 13 updated recommendations to strengthen the reliability, consistency and transparency of valuation practices across investment funds globally. The report consolidates, updates and supersedes IOSCO’s 2013 Principles for the Valuation of Collective Investment Schemes and its 2007 Principles for the Valuation of Hedge Fund Portfolios, reflecting developments in fund markets such as increased investment in less liquid and private assets and greater retail participation in such funds. The recommendations are aimed at registered or authorised open-ended funds offered to the public, including exchange-traded funds. Money market funds and unauthorised, non-retail funds are outside their scope.

Read together, the publications provide a timely opportunity for fund managers and investment firms to review the resilience of their valuation frameworks for a changing market environment, including periods of severe market disruption.
The accuracy and reliability of valuations are increasingly central to market integrity, investor protection and financial stability. Valuations underpin the calculation of net asset value (“NAV”), so that investors subscribe and redeem at fair prices and are treated equitably. Asset valuation has therefore become a core governance and investor protection issue for asset managers and a recurring focus for regulators monitoring financial stability. In Ireland, the Central Bank’s Regulatory & Supervisory Outlook 2026 includes a review of valuation oversight, focused on hard-to-value assets and the depositary’s oversight role.

Key Considerations for Firms

Valuation Governance, Independence and Conflicts of Interest

IOSCO recommends comprehensive, documented and robust valuation policies and procedures, appropriate independence in valuation processes, effective arrangements for identifying and managing conflicts of interest, and initial and periodic due diligence on, and documented oversight of, third-party valuation service providers. Its recommendations also address effective and independent oversight of the valuation function, governance under stressed market conditions and the disclosure of material conflicts of interest that cannot be effectively managed or mitigated.

Firms should consider whether valuation responsibilities, oversight arrangements and conflict management procedures remain appropriate, particularly where valuations involve complex or less liquid assets, where portfolio managers contribute valuation inputs, or where fees are calculated by reference to NAV.

Valuation Methodologies and Controls

IOSCO’s report emphasises the importance of appropriate valuation methodologies for each type of asset held and ensuring that all fund assets are valued at fair value, in line with applicable fund regulations and accounting standards. It also addresses the handling and oversight of price overrides, consistent application of valuation policies, periodic review (at least annually) and the use of back testing and calibration to assess the effectiveness of valuation methodologies and processes.

Firms should consider whether valuation assumptions, methodologies and pricing inputs, including those sourced from third-party valuation providers, remain appropriate as market conditions evolve and whether price overrides, pricing errors and their remediation, and material valuation uncertainties are adequately documented, reviewed and subject to appropriate oversight. IOSCO expects firms to have policies to detect, prevent and correct pricing errors, with errors that cause material harm to investors addressed promptly and investors fully compensated.

Market Conditions and Investor Protection

ESMA’s warning highlights the risk that deteriorating economic conditions or an abrupt shift in investor sentiment could trigger sudden market repricing. Its report also identifies valuation risk as an ongoing concern across most fund categories, and includes an in-depth analysis of real estate funds suspending redemptions.

These developments are particularly relevant where funds hold assets that may be difficult to value or realise quickly. Valuation uncertainty, market stress and investor redemption pressures may interact, potentially making it harder to maintain reliable valuations and treat investors fairly. IOSCO’s updated recommendations address this directly: a fund should be valued on every day on which units are subscribed or redeemed, valuations should not be stale or inaccurate, and dealing should generally take place at NAV on a forward-pricing basis.

Firms should consider whether their valuation governance, challenge and escalation procedures and liquidity risk management arrangements adequately address stressed market conditions, including scenarios involving sharply falling asset values, stale or inaccurate valuations and reduced market liquidity, and whether valuation processes and liquidity management tools (such as swing pricing, anti-dilution levies, redemption gates or suspensions) work together in practice.

What Should Firms Do Next?

Fund managers and investment firms should consider whether these publications warrant a review of their existing valuation policies, governance arrangements and risk management controls. Particular attention may be appropriate for funds with significant exposure to complex or less liquid assets, such as private credit, private equity, real estate and other Level 3 assets. Practical steps may include:

• benchmarking valuation policies and procedures against IOSCO’s 13 recommendations and documenting any gaps;
• testing the independence and effectiveness of the valuation function and any valuation committee, including the challenge of portfolio manager inputs;
• reviewing initial and ongoing due diligence on third-party valuation service providers;
• refreshing back-testing, override logs and pricing error procedures; and
• running stress scenarios that combine valuation uncertainty with elevated redemption pressure.
  

IOSCO’s recommendations are international standards and do not themselves create new binding Irish legal obligations. Firms should assess the recommendations alongside the requirements that already apply to them under relevant EU and Irish legislation, including applicable fund management and valuation rules under the UCITS and AIFMD frameworks (as amended by AIFMD II), the Central Bank UCITS Regulations and the Central Bank’s AIF Rulebook, and consider whether changes to existing arrangements are appropriate. Given the Central Bank’s stated focus on valuation oversight and the depositary’s role, firms should expect valuation to remain a live supervisory topic through 2026 and 2027.

For more information and advice on these updates, please contact David Naughton, Doireann O’Daly and Katrina Smyth of our Investment Funds and Financial Services Regulation Department