Recent events in the Eurozone have brought the potential for the exit from the Euro of one or more countries into renewed focus. We have been considering with our clients, and more broadly with the industry, the potential issues for authorised schemes and their managers arising from one or more countries exiting the Eurozone.
Authorised fund managers (AFMs) and senior management should, as appropriate, be monitoring and assessing the risks posed, documenting that analysis and planning appropriately and proportionately. The materiality of the risk will differ for each scheme. Most schemes we expect will have adjusted to or factored in the market based risks in the composition of their portfolios. Liquidity risks may impact certain schemes and the extent of that impact will turn on the portfolio involved and the manner in which any crisis might develop.
Senior managers of AFMs cannot anticipate and protect against every risk if a fund is to stay invested, but they do have obligations in approving and reviewing periodically the risk management policy and arrangements, process and techniques. It will therefore be key to ensure that senior management are appropriately briefed and involved in any contingency planning. They face personal liability if they are found to have fallen short of their obligations.
There are prescriptive requirements under UCITS IV and the FSA rules relating to stress testing and scenario analyses which the authorised fund manager needs to undertake and document arising from potential changes in market conditions which might adversely impact a scheme.
The AFM should also assess whether its liquidity risk management process can deal with the potential scenarios and again circumstances may mean that it is appropriate for stress testing to be conducted. AFMs will be familiar with liquidity management techniques and contingency planning is key for the effective and efficient use of those techniques in any Euro-related market events.