Esma issues priorities for funds with less liquidity

investment fund liquidityEurope’s financial regulator has urged fund firms to monitor more closely funds that have significant exposures to corporate debt and real estate.

The European Securities and Markets Authority (Esma) has issued five priority areas for fund managers that run these funds in order to guard against problems associated with liquidity.

The priorities are contained in a report, published last week, about the preparedness of investment funds with these exposures for “potential future adverse liquidity and valuation shocks”.

Esma’s five priority areas are:

  1. Ongoing supervision of the alignment of the funds’ investment strategy, liquidity profile and redemption policy;
  2. Ongoing supervision of liquidity risk assessment;
  3. Fund liquidity profile reporting;
  4. Increase of the availability and use of liquidity management tools; and
  5. Supervision of valuation processes in a context of valuation uncertainty.

Steven Maijoor, Esma chair, said: “In the wake of Covid-19’s initial impact on markets, the EU investment fund industry faced a significant deterioration in liquidity in some segments of the fixed income markets as well as valuation uncertainty in the real estate sector. This coincided with large-scale investment outflows from investors.”

He said data Esma had studied showed that the funds in question managed to “respond adequately” to redemption pressures, but that the work also revealed “shortcomings that must be addressed in order to enhance funds’ preparedness to future shocks”.

“We also encourage swift proposals to amend the EU legislative framework to ensure that liquidity management tools are widely available to asset managers across the EU,” said Maijoor.

Although funds largely coped well, Esma said this fact should be interpreted with caution, since the redemption shock linked to the Covid-19 pandemic was concentrated over a short period of time, amid significant government and central bank interventions which provided support to the markets in which these funds invest.

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