In the event that voters elect for the UK to leave the EU in Thursday’s referendum, commentators are predicting widespread disruption in the market, with some predicting that the Prime Minister may close the London Stock Exchange on Friday.

There may therefore be difficulties for fund managers in obtaining accurate prices to value funds or we may see runs on redemptions.

If there is a vote to leave the EU, there is likely to be significant market volatility. This may make it difficult to accurately value derivatives contracts and asset price volatility and the prospect of credit ratings downgrades may result in events of default or termination events being triggered or in calls for additional collateral. In such circumstances, funds may need to rapidly consider their options and termination rights and how to exercise these.

We set out below a reminder of the tools which UK authorised fund managers have at their disposal to deal with market disruption and the steps they would need to take to initiate emergency plans.

Tool

COLL rule

When can tool be exercised?

FCA approval required?

Comment

Fair value pricing

6.3.6G

When the AFM believes there is no reliable price available

No. The AFM can revert to its FVP policy in accordance with its terms

The relevant team (and third party providers) should be prepared

8.5.11R (for QIS)

There are no specific rules on FVP for QIS

Declare a non-dealing day

6.2.16R

Where prospectus makes provision for a non-dealing day to be declared

No, where the prospectus permits this

In practice it would be difficult to invoke this power at short notice and without informing holders in advance. Platforms in particular will require advance notice and may not be able to implement immediately

Deferred redemption

6.3.6G

For daily dealing funds this is usually where redemptions at one valuation point exceed 10%

No, if power included in prospectus

In practice administrators may struggle to administer this effectively

8.5.11R (for QIS)

There are no specific rules on deferred redemptions for QIS so reference should be made to the prospectus provisions if any

Move to cash

5.5.3R

It is possible to hold cash to enable redemption of units but holding cash across the whole portfolio is likely to be in breach of most investment policies

No. If prospectus allows it

The manager will also be actively reviewing the portfolio’s stock selection/asset mix

No specific COLL rule for QIS

Again, the investment policy will determine what is permitted

Suspension of dealings

7.2

Where AFM with agreement of the depositary believes it is in the interests of all the holders in the fund

No, but must inform the FCA as soon as possible and any overseas regulator if the fund is registered for sale overseas

Notification must also be made to investors as soon as possible

Firms should be considering their communications strategy in the event of suspension and a suspension review process to enable trading to begin as soon as possible

8.6.3R (for QIS)

Where AFM in agreement with the depositary determines on reasonable grounds that there is good and sufficient reason in the interests of holders

In specie redemptions

6.2.15R

Subject to provisions in prospectus as to when and how in specie redemption triggered

No, but need depositary approval

AFMs should review their in specie redemption policies to establish when these may be used; unlikely to be a practical tool for retail investors

8.3.4R (for QIS)

Subject to provisions in prospectus

It will not be possible for authorised funds to introduce side pockets or gating other than as set out above in relation to deferred redemptions. It is generally considered that use of dilution mechanisms and redemption fees is not appropriate or practicable for managing large redemptions.

Although Brexit itself would be an unprecedented event, and the extent of the associated immediate market disruption cannot be predicted, the regulatory expectation will be that managers are as prepared as possible.