This month’s regulatory round-up pulls together some interesting regulatory developments we have tracked throughout June. The past month brought a number of important developments, particularly on the EU Money Market Fund Regulation, with ESMA publishing updated reporting instructions, and translations to the MMF guidelines.
This month marked one year since the collapse of Neil Woodford’s LF Woodford Equity Income fund. The Woodford fund was suspended in June, after it became overwhelmed by redemption requests from investors. One year on and investors are still awaiting their final pay-out. One year on and questions concerning the liquidity mismatches in open-ended funds still remain.
As discussed in previous blogs, later this year new FCA rules for open-ended funds investing in inherently illiquid assets enters into force. The new rules concern non-UCITS retail schemes (NURS) that invest in inherently illiquid assets. Although the new rules are relevant to anyone with an interest in open-ended investment funds that are likely to hold illiquid assets, here we will be focusing on the enhanced oversight of depositaries.
Fund liquidity problems witnessed in 2019 with Woodford and H2O Asset Management brought liquidity back into the spotlight. Since then, the focus hasn’t really faded on the issue of liquidity, and if anything, has intensified with the COVID-19 pandemic causing market volatility resulting in several more fund suspensions.
Although 2020 has already seen a number of initiatives intended to address liquidity risk, there are still more to come, with September due to be a particular busy month for risk management professionals.
With the recent market volatility caused by the COVID-19 pandemic, regulators across the EU and in some jurisdictions further afield have been banning short selling for varying periods. Although there are many who are sceptical of the benefits of short selling bans, several EU states including France, Italy, Spain and Austria had bans in place since March with Italy’s CONSOB opting for a ban until 18th June. Germany, along with Britain which still operates under EU rules, held back in imposing market wide bans.
Under the FCA’s Asset Management Market Study, the final report of which was published in June 2017, the City watchdog determined that price competition is weak in a number of areas of the industry.
Firms must have appropriate systems, controls and governance to oversee and manage liquidity risk. With the New Year well and truly underway, regulators across the globe have started publishing their priorities for the year ahead. Unsurprisingly, liquidity risk appears to be high up on most of their agendas
A number of key regulators including ESMA, the CBI and the FCA have reviewed the market for potential hidden “closet tracker” funds and published their findings, with a number of funds providing inaccurate information in their investor disclosure documents as regards investment strategy.
While the FCA’s Assessment of Value (AoV) process is a new development in the UK market, a similar requirement on mutual funds has been in place in the United States for considerable time. The approach in the United States provides some useful comparisons to the new UK regime. The US fund governance model requires under Section 15c of the US Investment Companies Act 1940 for US fund boards to conduct an assessment on the fund managers using a number of factors commonly known as the Gartenberg Principles.
Fund liquidity, like a mirage in the desert, can disappear in an instant if not monitored and managed correctly. Events throughout this year have brought fund liquidity to the forefront – as we approach the end of 2019, it is clear we haven’t seen the last of liquidity risk in the headlines.