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FCA proposes “improvements” to managing illiquidity risk

illiquidityThe UK’s financial regulator has launched consultation on how funds that trade with regular liquidity can handle problems when they are required to sell illiquid assets in stressed market conditions.

The Financial Conduct Authority (FCA) says its consultation on illiquid assets in open-ended funds is intended to reduce the harm to investors - and complaints from them - when stressed conditions lead to a large number of redemptions at short notice.

Following the UK EU referendum, several property funds in the UK were hit by redemptions and trading was temporarily suspended.

The FCA said suspensions and other liquidity management tools had generally prevented wider disruption after the referendum, but that improvements could be made.

The consultation could result in rules that require funds to be suspended when independent valuers express uncertainty about the value of ’immovables’, such as commercial property, that account for a significant part of a fund’s assets.

Managers of funds investing mostly in illiquid assets may also have to produce contingency plans in case of a liquidity problem, and depositaries would oversee the liquidity management process.

More information is also to be disclosed about liquidity risks, tools available to fund managers, circumstances in which they may be used, and what impact they may have on investors.

Christopher Woolard, executive director of strategy and competition at the FCA, said the rules would be intended to increase investors’ understanding and confidence relating to the management of funds holding illiquid assets.

“We expect these changes to result in fewer runs on funds holding illiquid assets, and to reduce complaints from retail investors about perceived unfair treatment when they exit such funds,” he said.

The FCA said it will publish a policy statement with final rules and guidance next year. Responses to the consultation are required by January 31, 2019.

In February this year, the International Organization of Securities Commissions issued recommendations for liquidity management in investment funds and said it would assess implementation across relevant jurisdictions in “two to three years’ time”. The recommendations included fund managers having robust liquidity risk management programmes.

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