On 4 November 2019, the FCA published a letter sent by the head of its Asset Management Department, Nick Miller, to the Chairs of Authorised Fund Managers (AFMs) in relation to good practices for effective liquidity management.
Mr Miller starts by stressing that AFMs are responsible for ensuring effective fund liquidity, even if investment management has been delegated to another person. Notwithstanding the fact that open-ended funds are not always able to liquidate assets sufficiently quickly in response to increased redemption requests from investors, the FCA notes that firms can prevent this leading to harm through suitable portfolio composition, effective fund governance (including by independent directors), understanding their investor base and investors’ redemption rights, and using liquidity tools appropriately, especially in times of market volatility and stress.
He then moves on to refer to its 30 September 2019 policy statement on illiquid assets and open-ended funds (PS19/24), which sets out measures to strengthen the regulatory framework in this area. Despite PS19/24 focusing on non-UCITS retail schemes, the FCA emphasises that firms should recognise that “effective liquidity management is an irreducible, core function for all open-ended funds”. While the new rules do not come into force until September 2020, it states that fund managers (and depositaries) may wish to consider whether it would be in investors’ interests to adopt some of the measures, like improved liquidity management, prior to the coming into force date, provided these do not conflict with the rules in force before then.
The letter then goes on to ask Chairs to:
- consider their regulatory obligations on portfolio composition, asset eligibility and liquidity management, as outlined in the Collective Investment Schemes sourcebook;
- review their liquidity management arrangements against the 2016 FCA good practice paper and improve them where necessary, to ensure that they comply with the applicable requirements for liquidity management and valuation under FCA rules and directly applicable European regulation. Furthermore, it asks them to review the International Organization of Securities Commissions’ 2018 liquidity recommendations and consider to what extent their own arrangements mirror these.
Finally, the FCA asks Chairs to carry out their reviews “as soon as practicable” so that they and their fellow AFM board members are confident that their practices are appropriate.