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Global Trustee and Fiduciary Services News and Views
| Issue 48 | 2017
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(for example, considering the introduction
of notice periods) and reduce first mover
advantage. Authorities should also review
their guidance on liquidity stress testing.
•
Recommendations on the adequacy of
liquidity risk management tools for stressed
circumstances:
Regulatory authorities should
promote clear decision-making processes for
the use of liquidity risk management tools
during periods of exceptional stress and
should consider whether they ought to direct
managers specifically to use such tools during
periods of stress. Such tools could include
swing pricing and potentially redemption fees.
•
Recommendations on system-wide liquidity
stress testing:
Regulatory authorities should
consider system-wide stress testing to test
the resilience of the wider financial markets
to potential collective selling by funds and
other investors.
As mentioned above, the FSB directs its
recommendations primarily at IOSCO, which is
currently working on updating its liquidity guidance
and has been asked to complete this by the end
of this year. A consultation paper is expected
to be published by IOSCO later this year, which
should flesh out the FSB’s recommendations and
give further guidance to the industry.
FCA Discussion Paper
The FCA has also been considering liquidity
issues in open-ended funds. Reflecting the
FCA’s “forward-looking approach to assessing
potential and emerging harm”, the DP reviews
current liquidity management tools and suggests
proposals for possible improvements
3
The FCA is
keen to receive industry input on these proposals.
In terms of the application of the DP, while its
focus is on authorised funds and their regulatory
framework, its proposals to improve liquidity
management are relevant to unauthorised funds
as managers and depositaries of such funds are
likely to be regulated themselves.
4
Brexit and open-ended property funds
The FCA had already strengthened its supervision
of the largest property funds prior to the Brexit
referendum. The initial effect of the referendum
result was the enhanced supervision by the
FCA of 26 open-ended funds investing in real
property.
5
The FCA also arranged a roundtable of
the relevant funds in July 2016, where a general
suspension of property funds was discussed,
although ultimately this was not implemented
on the grounds that such a move could lead
to further loss of confidence in the market. In
practice, each fund manager was allowed to
decide which steps were appropriate for it to take
acting in the best interests of the fund’s investors.
A total of six open-ended funds were suspended
for varying periods of time, but it is important to
remember that these funds were all daily-dealing
funds (and that the other 20 remained open). The
first suspended fund to resume dealing did so at
the end of September 2016, and all suspended
funds had resumed dealing by December
2016. The FCA’s view that there was no overall
contagion across asset classes, and the fact
that the relevant funds managed the situation
effectively indicates that fund managers already
have access to appropriate tools and that they
can use them in a proportionate manner.
Nonetheless, from the regulator’s point of view,
these events highlighted concerns about the
appropriateness of open-ended funds investing
in illiquid assets while offering frequent
redemption points to investors (particularly
retail investors), and hence was another factor
in the FCA deciding to carry out a review.
Current liquidity risk management tools
Open-ended regulated funds and their
managers are already highly regulated. UCITS
funds, for example, are only allowed to invest in
liquid assets and therefore by definition should
not usually be illiquid. Other authorised funds,
such as non-UCITS retail schemes (NURS), are
subject to extensive rules regarding the type of
assets they can hold, which should also ensure a
high level of liquidity and furthermore managers
should already be aware of their duty to manage
liquidity risk as required under AIFMD.
Current liquidity risk management tools
available to fund managers include:
• Managing the portfolio structure well and
ensuring an appropriate liquidity buffer.
• Using a sliding scale of redemption charges.
• Having a diversified investor base and
understanding investors’ likely behaviour
in times of stress.
• Having an appropriate redemption and dealing
arrangements, including the ability to defer or
limit redemptions in certain situations.
• Having appropriate asset valuation tools (such
as fair value pricing [FVP] and anti-dilution
measures).
• And suspending dealing.