On 7 August 2019, the Central Bank of Ireland (the “Central Bank”) issued an industry letter (the “Industry Letter”) regarding the importance of ongoing, effective liquidity management and ensuring compliance with relevant legislation and regulatory obligations for UCITS1 and AIFs.2
The Central Bank issued the Industry Letter as part of its ongoing work and engagement with the fund industry on Brexit preparedness, which has included since January 2019 increased monitoring of fund liquidity and redemption activity. The issuance of the Industry Letter by the Central Bank follows the recent European Securities and Markets Authority (“ESMA”) consultation on draft guidelines on liquidity stress tests for investment funds (the “ESMA Consultation”)3 and the much publicised fund liquidity issues surrounding a number of UK-based asset managers, and subsequently launched FCA investigations.
Liquidity management and ongoing assessment
The Industry Letter highlights the importance of the execution of an appropriately calibrated liquidity risk management framework by Fund Management Companies4 for each fund under management, taking into account on an ongoing basis: (i) dealing frequency of the fund; (ii) the fund’s investment strategy; and (iii) the fund’s portfolio composition and investor profile. The Central Bank notes that this may involve daily and intra-day monitoring.
The Central Bank identifies liquidity stress testing as a key part of the monitoring process, noting that liquidity and investor demands can change quickly and without warning.
The Industry Letter emphasises that the use of liquidity management tools such as duties and charges, gates and suspensions should be transparent and proportionate, taking into account the best interests of the investors.
To ensure that the liquidity position of each fund under management is in line with the respective redemption policy, the Central Bank expects Fund Management Companies to conduct ongoing assessments of the liquidity position of each fund’s portfolio, taking into account potential investor redemption requests. From a disclosure perspective, all fund documentation should be clear, accurate and in line with relevant legislative and regulatory requirements.
The Industry Letter makes it clear that the responsibility of liquidity risk management rests with the board of Fund Management Company, the individual directors and the relevant designated persons.
The Industry Letter is the latest in a series of such letters issued by the Central Bank covering issues such as fitness and probity and closet indexing. However, for the first time, the Central Bank specifically references the responsibility of “individual directors” in addition to the collective responsibility of the board of the Fund Management Company. It also seeks to ensure that the Industry Letter is brought to the attention of all concerned with liquidity management including the relevant responsible persons within delegate fund service providers.
There is no requirement for Fund Management Companies to respond to the Industry Letter, however all Fund Management Companies, and specifically the designated person for fund risk management should undertake a review of their risk management framework to take account of the issues highlighted in the Industry Letter, the ESMA Consultation and recent market events, particularly with regard to stress testing.