On 30th September new COLL Rules came into effect. The rules introduce new obligations on Authorised Fund Managers (AFMs)/Authorised Corporate Directors (ACDs) regarding their liquidity plans for funds invested in inherently illiquid assets. (COLL 6.6.3CR and 6.6.3ER).

As part of their liquidity management contingency planning, AFMs of Funds Investing in Inherently Illiquid Assets (FIIAs) will require from intermediate holders, investing in their FIIA, confirmation in writing that they can:

  • deploy any liquidity management tools and arrangements on which the authorised fund manager plans to rely as part of its contingency plan;
  • in a timely way, communicate the authorised fund manager’s use of any such tools and arrangements to unitholders; and
  • carry out any other part of the contingency plan which the authorised fund manager has identified as requiring action by that third party.

Changes to COLL Rules

COLL 6.6.3C Additional functions of an authorised fund manager of a FIIA

The authorised fund manager of a FIIA must establish, implement and maintain an adequate liquidity management contingency plan for exceptional circumstances which sets out:

(1) how the authorised fund manager will respond to a liquidity risk crystallising;

(2) the range of liquidity tools and arrangements which it may deploy in such exceptional circumstances, any operational challenges associated with the use of such tools and the likely consequences for investors;

(3) the procedures for working with the depositary in the event the authorised fund manager must deploy these tools and arrangements;

(4) how the authorised fund manager will work with its delegates, such as third-party administrators, and other relevant third parties including intermediate unitholders, to:

(a) deploy the liquidity management tools and arrangements;

(b) communicate their use in a timely way to unitholders; and

(c) implement any other part of this contingency plan;

(5) any operational challenges likely to arise from working with relevant third parties identified at (4); and

(6) communication arrangements for internal and external concerned parties (including the FCA, investors and the media where necessary).

COLL 6.6.4B Specific duties of a depositary: oversight of the liquidity management of a FIIA

The depositary of a FIIA must:

(1) regularly make its own assessment of the liquidity profile of the FIIA and the liquidity risks presented by the scheme property of a FIIA;

(2) take reasonable care to oversee the authorised fund manager’s liquidity management systems and procedures on an ongoing basis, using the assessment it has made under (1), to ensure the FIIA is managed in accordance with the following COLL rules and, in the case of a FIIA managed by a full-scope UK AIFM, the following FUND rules and provisions in the AIFMD level 2 regulation:

(a) COLL 4.2.5R(3)(pa);

(b) COLL 6.6.3CR and COLL 6.6.3ER;

(c) FUND 3.2.2R(8);

(d) FUND 3.2.5R;

(e) FUND 3.6.3R;

(f) article 44(1) and (2)(c) of the AIFMD level 2 regulation;

(g) articles 46 to 49 of the AIFMD level 2 regulation; and

(h) article 108 of the AIFMD level 2 regulation; and

(3) establish an escalation procedure when instances of potential non-compliance with the rules and provisions set out in paragraph (2) are identified, the details of which must be made available to the FCA upon request.