An update on liquidity management good practices for investment firms was published by the FCA on 29 February 2016.
The update follows a request from the Financial Policy Committee for the FCA to work with the Bank of England to gather information from UK asset managers about their strategies for managing the liquidity of their funds in normal and stressed scenarios. As part of this work, the FCA assessed the risk posed by open-ended investment funds investing in the fixed-income sector and met with a number of large investment managers to understand how they manage liquidity in their funds.
In the update, the FCA set out examples of good practices relating to:
- Disclosure of liquidity risks to investors.
- Liquidity risk management and oversight.
- Fund dealing (ie, the management of redemptions and transaction costs related to redemptions).
- Exceptional liquidity tools (eg, swing pricing and dilution levies) and exceptional liquidity measures such as deferred redemptions and suspension of dealing.
The FCA suggested that these good practices may help firms to improve their own liquidity management. It highlighted three areas of focus for firms to evaluate when assessing their liquidity management:
- Tools, processes and underlying assumptions: These require continuous re-assessment and updating to ensure that they remain suitable for market conditions.
- Operational preparedness: Firms should have a high degree of reassurance that tools, particularly extraordinary measures, can be implemented smoothly when required.
- Disclosure: Clear and full disclosure should be given to fund investors on liquidity risks and the tools available to the fund to manage those risks, such as swing pricing, deferred redemption and suspension.