Even in normal times, liquidity is at the forefront of financial regulators’ minds, so it is not surprising that during the current market conditions, European regulators have increased scrutiny on fund liquidity.
French and German regulators are now requesting daily updates of redemptions from open ended funds, whilst the Luxembourg regulator is requesting this information on a weekly basis. The Irish regulator has requested funds to provide it with timely updates if there is a prospect that a firm will have to take action on liquidity management tools and the FCA has requested pre-notification ahead of any fund suspensions.
The FCA has also set out in a statement that it expects firms to create plans for meeting potential demands on liquidity and has made clear that for UCITS schemes and NURS, repo transactions must not be entered into solely for the purposes of managing liquidity.
This widespread action is an indicator of the importance of liquidity management in regulators’ eyes. The FPC has previously indicated that it considers fund illiquidity may result in systemic risks. There is currently debate as to whether the asset management sector, given its vast asset holdings, could cause systemic risk and how. Likewise, whether this requires regulatory reform.
Due to the current market conditions, several property funds have gated, by pro-actively implementing FCA’s new liquidity management rules ahead of their formal implementation date in September 2020. This was due in part to material uncertainty about the valuation of their property holdings. The new rules require suspension in such circumstances with a view to avoiding unfairness between departing and remaining investors as well as liquidity management problems. A full analysis of these rules is set out in our blog https://blogs.deloitte.co.uk/financialservices/2019/10/illiquid-retail-funds-fca-strengthens-investor-protection-but-drops-some-measures-trailed-in-its-con.html.
In the current environment, asset managers would benefit from pro-actively reviewing their liquidity management toolkit to ensure that it is sufficient to address sudden and large redemption requests. Regular monitoring of whether liquidity issues are likely to arise, and getting in touch with regulators to discuss options is also likely to be looked upon favourably by the latter. Furthermore prioritising investor protection by keeping investors fully updated on any suspensions and how this may affect their invested money and dividends should also be seen as a key part of liquidity management.