FCA has updated its page on liquidity management to share good industry practice it observed during its assessment of risks posed in the fixed income sector as part of its review into the risks when open-ended funds invest into the fixed income sector. Good liquidity risk management is necessary to ensure redemption requests can be met in varied market conditions and is a key requirement in FCA rules relating to the operation of open-ended funds. FCA identified the following as contributors to strong liquidity risk management and oversight:

  • disclosure of liquidity risks to investors, so investors understand the nature and size of them;
  • processes to ensure that the fund dealing (subscriptions and redemptions) arrangements are appropriate for the investment strategy of the fund;
  • a regular assessment of liquidity demands;
  • an ongoing assessment of the liquidity of portfolio positions;
  • the use of liquidity buckets;
  • an independent risk function that monitors portfolio bucket exposures regularly and reports breaches to the set limits;
  • stress testing used by fund managers to assess the impact of extreme but plausible scenarios on their funds;
  • good practices on dealing including portfolio adjustments following redemptions; and
  • use of exceptional liquidity tools and measures.

(Source: FCA updates good liquidity management practice for investment managers)