FCA publishes findings from its Liquidity Management multi-firm review
Although this review focused on AFMs, the FCA expects all asset managers to consider the findings of this review and make any necessary enhancements to their liquidity management arrangements.
In a related press release, Camille Blackburn, Director of Wholesale Buy-Side at the FCA stated that a minority of firms had “serious gaps” in their liquidity risk management frameworks.
Key deficiencies found in the FCA’s multi-firm review
Some of the main deficiencies highlighted by the Regulator in the multi-firm review include:
- Most board and committee-level discussions on liquidity risk and associated reporting fell short of expectations, with liquidity risks being flagged only on an exception basis.
- Many liquidity stress-testing models assumed that the most liquid assets would be sold first – affecting the composition of the portfolio – instead of adopting a more conservative pro-rata approach.
- Many firms had not followed all of the ESMA Guidelines on liquidity stress testing in UCITS and AIFs (2019).
- Only one firm conducted rigorous pre and post-redemption testing of the portfolio, to assess whether investors were disadvantaged from a liquidity standpoint by redemptions.
- Thresholds for volumes of redemption triggering ‘swing pricing’ were often the same across all funds, notwithstanding their different underlying asset classes.
The importance of effective liquidity management is key to ensuring investors can redeem at a price that reflects the value of their investment while, at the same time, ensuring fairness for the remaining investors in the fund. Recent enforcement actions show that the FCA has reacted strongly towards failures by AFMs in managing fund liquidity.
To learn more about this update, please reach out to our UK Compliance Solutions team today.