Global Trustee and Fiduciary Services News and Views Issue 48

Global Trustee and Fiduciary Services News and Views

| Issue 48 | 2017

holders, it is easier to get the information from

some intermediaries than others. Further new

requirements under MiFID II, which come into

effect on 3 January 2018, will have the effect

of increasing the flow of information between

funds and distributors regarding investors, so

there does not appear to be a strong case for

further rules at present, at least until MiFID II

changes have bedded down.

Portfolio structure and liquidity buffer

The FCA is considering whether to strengthen

the rules on portfolio structure, including a

possible cap on the proportion of assets held as

illiquid assets or a minimum amount of the fund

required to be held in cash.

The concern is whether such rules or guidance

would be proportionate to the risk and whether

this guidance would in effect micromanage a

fund’s asset allocation. Such measures could

have a significant impact on an investor’s ability

to choose to invest in the illiquid asset class

involved. As with the concerns surrounding the

mixing and separation of retail and professional

investors discussed above, requiring a material

cash buffer could also create a significant first-

mover advantage for investors who exit a fund

at the beginning of a period of stress.

Similarly, the FCA also considers requiring funds

to hold more diversified assets, but this is likely to

materially affect investor choice. Investors wishing

to invest in a real property fund want that fund to

hold real property, not a balanced range of assets.

The idea of implementing a system of liquidity

“buckets” as adopted by the U.S. Securities

and Exchange Commission (SEC) as part of its

liquidity classification scheme for highly liquid

funds is also referred to in the DP.

Under the

SEC rules, fund managers are obliged to classify

each fund holding into one of four liquidity

buckets based on how quickly each asset can be

liquidated. Fund managers need to consider, and

document their consideration of, appropriate

factors to determine an instrument’s liquidity.

The liquidity of each holding must also be

reviewed on a monthly basis. Given that the DP

deals with funds that hold illiquid assets, the

proposals do not easily read across, and the FCA

itself does not regard this proposal as practical.