The UK’s Financial Conduct Authority (FCA) has told asset managers to increase their focus on liquidity risk, after finding a number of firms lacking in liquidity management.
The regulator’s review found some firms demonstrated very high standards but also a wide disparity in the quality of compliance regarding regulatory standards and depth of liquidity risk management expertise. Additionally, the FCA found a minority of firms in the review had inadequate frameworks to manage liquidity risk.
Camille Blackburn, director of wholesale buy-side at the FCA, said: “We have seen examples in the market where liquidity risk has crystallised and the impact this can have on investors. This review should serve as a warning to all asset managers that they need to get this right.”
The review found that while the tools for effective liquidity management were usually in place at firms, these lacked coherence when viewed as a full process and were not always embedded into daily activities.
Additionally, many firms attach insufficient weight to liquidity risk management in their governance oversight arrangements, as well as insufficient challenge and escalation, particularly in volatile environments.
Some firms’ models assumed that they would always sell the most liquid assets, without ever giving regard to the liquidity of selling a ‘vertical slice’ of the portfolio.
And while firms typically had governance and organisational arrangements in place to meet large one-off redemptions, many did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund.
There were also wide variations in the application of anti-dilution tools such as swing pricing, which could affect the price investors receive when redeeming.
“We expect boards to discuss our findings and assure themselves that their firms are not amongst the minority with serious gaps in managing liquidity risk. It’s vital the outliers take quick action. They risk regulatory intervention if they don’t take this opportunity to address weaknesses,” Blackburn added.
©Markets Media Europe 2023
