Liquidity Management – what steps should funds be taking?

14-11-2019

Key Contacts: Kevin Murphy, Tara O’Reilly, Sarah Cunniff, Dara Harrington, Cormac Commins, Ian Dillon and Siobhán McBean

Click here to view the briefing in PDF format.

Following publication by ESMA of its final guidelines on liquidity stress testing in UCITS and AIFs (the “ESMA Liquidity Guidelines”) on 2 September 2019 (see our briefing available here) and recent industry communications issued by the Central Bank, it is clear that fund liquidity is set to remain a regulatory and supervisory priority at both domestic and EU level over the coming months.

In its letter issued on 7 August 2019, the Central Bank reminded industry that responsibility for liquidity risk management, which includes compliance with all legal and regulatory obligations in respect of the liquidity of each fund under management, rests with the boards of fund companies (funds and fund management companies (including self-managed investment companies)), individual directors and the relevant designated persons.

While the deadline for implementation of the ESMA Liquidity Guidelines is 30 September 2020, it is evident that the Central Bank expects fund companies and their boards to ensure that liquidity risk management is appropriately considered and addressed in the meantime.

With this in mind, what steps should fund companies and their boards be taking to ensure compliance with these liquidity requirements?

  • Prepare for the possibility of a Central Bank thematic review in relation to liquidity. Topics likely to be raised include:
    • how liquidity risk is monitored and details of the liquidity risk management framework;
    • how liquidity risk is assessed in the product design phase, including consideration of the profile of investors and a fund’s redemption policy, dealing frequency and liquidity risk management features (e.g., redemption gates, redemption charges and suspension provisions); and
    • escalation procedures to the board or relevant designated person in the event of a liquidity issue or event.
  • Review existing risk management policies to ensure that liquidity risk is adequately addressed.
  • On an ongoing basis, assess the liquidity position of each fund under management to ensure that the liquidity of the investment portfolio remains in line with that fund’s redemption policy, taking into account investors’ redemption demands and other relevant liquidity requirements. Boards should request regular, detailed reporting around liquidity.
  • Ensure that fund documentation is clear, accurate and consistent with legal and regulatory requirements around liquidity. Liquidity risk disclosures should be reviewed and updated if necessary.

We can assist fund companies to prepare an appropriate liquidity risk management framework to reflect these requirements.

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