Tuesday October 1 2019

News Source: Fund Regulation

Focus: Closet Trackers

Type: General

Country: UK




On 30th September 2019, the FCA announced new rules requiring that  investors are provided with clear and prominent information on liquidity risks, and the circumstances in which access to their funds may be restricted.

This places additional obligations on the managers of funds investing in inherently illiquid assets to maintain plans to manage liquidity risk. The rules also aim to reduce the potential for some investors to gain at the expense of others, and reduce the likelihood of runs on funds leading to ‘fire sale’ of assets which disadvantage fund investors.

The new rules also include:

  • Introducing a new category of ‘funds investing in inherently illiquid assets’ (FIIA). Funds that fall into this category will be subject to additional requirements, including increased disclosure of how liquidity is managed, standard risk warnings in financial promotions, enhanced depositary oversight, and a requirement to produce liquidity risk contingency plans. These requirements will not apply where a fund matches the dealing frequency of its shares to the liquidity of its assets.
  • A requirement that NURSs investing in inherently illiquid assets must suspend dealing where the independent valuer determines there is material uncertainty regarding the value of more than 20% of the fund’s assets. Following feedback the FCA will, however, allow fund managers to continue to deal where they have agreed with the fund’s depositary that this is in the investors’ best interests.

Funds which hold less liquid assets can encounter liquidity difficulties if significant numbers of investors simultaneously try to withdraw their money at short notice, as seen shortly after the EU referendum in 2016 when a number of property funds had to suspend dealing. In stressed market conditions, assets that are less liquid can also suffer from a high degree of valuation uncertainty.

The FCA and the Bank of England are assessing how funds’ redemption terms might be better aligned with the liquidity of their assets in order to minimise financial stability risks, and provide appropriate protection to investors, without compromising the supply of productive finance.

Further information on how these new rules fit into this work can be found in the Policy Statement.

The new rules announced today come into effect on 30 September 2020.

Click on the above link for further information.