The U.K. Financial Conduct Regulator has published a “Dear Chairman” letter addressed to Authorized Fund Managers requesting them to review certain aspects of the liquidity management arrangements for the authorized funds that they manage. The letter follows the FCA’s recent policy statement establishing new rules for open-ended funds that invest in inherently illiquid assets and aims to address concerns that open-ended funds may not always be able to liquidate funds fast enough to comply with redemption requests. In its policy statement, the FCA acknowledged that its new rules did not capture open-ended UCITS funds such as the LF Woodford Equity Income Fund. This latest letter urges firms to recognise that effective liquidity management is a core function for all open-ended funds.
Key areas that the FCA requests fund managers to review are:
- Portfolio composition: fund managers should consider the appropriateness of the assets they invest in (in accordance with the FCA’s Collective Investment Schemes sourcebook) and should establish robust valuation practices where assets are less liquid;
- Good practice for liquidity management: fund managers should ensure they have appropriate systems, controls and governance in place to manage liquidity risks and should consider the FCA’s guidance, “Liquidity management for investment firms: good practice” when reviewing their arrangements; and
- International Organization of Securities Commissions 2018 liquidity recommendations: fund managers should review the IOSCO recommendations on improving liquidity risk management in open-ended collective investment schemes, which include measures such as setting liquidity thresholds that are proportionate to the redemption obligations and liabilities of the fund and regularly assessing the liquidity of the assets held in the portfolio.