AMIC and EFAMA update their report on managing fund liquidity risk in Europe

22 January 2020

The updated report shows that since 2016, the EU regulatory framework has been further enhanced following the adoption of new rules and standards.

In light of recent idiosyncratic events, this AMIC/EFAMA report update is an opportunity to highlight that the UCITS regulatory framework clearly states that there should be no presumption of liquidity for listed securities and that it allows national competent authorities to oversee where hitherto unlisted securities held by a UCITS fund may be listed.

The report also describes how this new comprehensive framework has been tested under various market conditions and scenarios in a number of recent publications, which show that, overall, most AIFs and UCITS do not have significant liquidity mismatches and that a one-size-fits-all approach must therefore be avoided.

Finally, the report articulates four recommendations:

• Focus on supervision and enforcement of the current comprehensive EU rules: after several years dedicated to the development of new rules, the focus should now be on ensuring the effectiveness of the new framework via proper supervision and full enforcement of the rules, to the benefit of investor protection and financial stability. In this context, we support ESMA’s intention to ensure an effective and consistent implementation of existing liquidity provisions contained in the UCITS Directive.
• Make all IOSCO-suggested Liquidity Management Tools (LMT) available across the EU: despite progress being made since 2016, the full suite of LMT is not yet fully available across the EU. AMIC and EFAMA therefore encourage ESMA to work with national authorities to make LMT available to fund managers across all jurisdictions, and in this context, AMIC and EFAMA also welcome the upcoming assessment by IOSCO of local implementations of its liquidity risk management recommendations for investment funds.
• Improve transparency and managers’ knowledge of end-investors, to enhance LST and ease the management of potential redemption shocks: for fund managers, cost free access to data from distributors on underlying investors (investor profiles and shares/units) would be a great improvement for conducting LST, as required by ESMA Guidelines adopted in September 2019.
• Enhance market liquidity for corporate bonds and small & mid-cap stocks: this involves reactivating the critical function of market-making. Regarding corporate bonds, AMIC and EFAMA call on the European Commission to follow up on the policy  recommendations of its expert group on corporate bonds and, in particular, to repeal or at least phase in the implementation of the mandatory buy-in regime under CSDR, which could significantly hinder market liquidity as shown by a recent study released by ICMA.

Full press release on EFAMA

Full report on EFAMA

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