As part of its preparations for Brexit, the CBI has published a letter to Irish fund managers on the topic of liquidity management, highlighting the importance of funds’ regulatory and investor protection obligations. The letter’s focus on liquidity issues is also notable for its timing, following the suspension of the Woodford Equity Income Fund.
The Central Bank of Ireland (CBI) has sent a letter, dated 07 August 2019, to the chairs of Fund Management Companies reminding them of the importance of effective liquidity management and to observe their obligations under the UCITS and AIFMD directives (the Letter). A Fund Management Company is defined in the Letter as:
- A UCITS management company
- An authorised AIFM
- A self-managed UCITS investment company or
- An internally managed AIF which is an authorised AIFM.
The CBI states that the Letter forms part of its engagement with the Irish funds industry in the context of Brexit. The recent suspension of the LF Woodford Equity Income Fund in the UK is also likely to be relevant, as liquidity management concerns have likewise been raised by the FCA as posing a threat to investor protection.
In the Letter, the CBI highlights the following factors as playing an important role in liquidity management:
- Each fund should operate under a framework that takes into account dealing frequency, investment strategy, portfolio composition and investor profile as relevant considerations for effective liquidity management. This could involve both daily and intra-day supervision if necessary.
- Liquidity stress testing should allow for the fact that in turbulent markets, individual asset liquidity and investor demands can change abruptly and without warning.
- Liquidity management mechanisms such as duties, charges, gates and suspensions should be used transparently and proportionately.
- Liquidity management should be overseen by the Board of the Fund Management Company, individual directors and relevant designated persons. They should ensure, on an ongoing basis, that the liquidity of a fund’s investment portfolio is consistent with its redemption policy and takes into account investors’ redemption demands.
- Fund documentation should be clear, accurate and consistent with legislative and regulatory obligations.
The CBI also notes that as part of its Brexit preparedness work, it will continue to monitor and collect data on investment fund liquidity and redemption activity. It also states that the contents of the Letter will form part of future supervisory engagements.