FCA asks Authorised Fund Managers to review their liquidity management arrangements

The Financial Conduct Authority has published a letter sent by the Head of its Asset Management Department to the Chairs of Authorised Fund Managers in relation to good practices for effective liquidity management.

The letter stresses that ‘AFMs’ are responsible for ensuring effective fund liquidity, even where Investment Management has been delegated to another person. Notwithstanding the fact that Open-Ended Funds are not always able to liquidate assets sufficiently quickly in response to increased Redemption Requests from Investors, the ‘FCA’ notes that Firms can prevent this leading to harm through suitable Portfolio Composition, effective Fund Governance (including by Independent Directors), understanding their Investor Base and Investors’ Redemption Rights, and using Liquidity Tools appropriately, especially in times of Market Volatility and Stress.

The letter also refers to its 30 September 2019, Policy Statement on ‘Illiquid Assets and Open-Ended Funds’ (PS19/24), which set out measures to strengthen the Regulatory Framework in this area. Despite PS19/24 focusing on non-UCITS retail schemes, the FCA emphasises that Firms should recognise that ‘Effective Liquidity Management’ is an irreducible, core function for all Open-Ended Funds’. Whilst the new rules do not come into force until September 2020, it states that Fund Managers (and Depositories) may wish to consider whether it would be in Investors’ interests to adopt some of the measures, such as ‘Improved Liquidity Management’, prior to the implementation date, provided these do not conflict with the Rules in place before then.

The letter requests that Chairs:

  • Consider their regulatory obligations on Portfolio Composition, Asset Eligibility and Liquidity Management, as outlined in the ‘Collective Investment Schemes’ Source book.
  • Review their Liquidity Management arrangements against the 2016 ‘FCA’ ‘Good Practice’ Paper and improve them where necessary, to ensure that they comply with the applicable requirements for Liquidity Management and valuation under ‘FCA’ Rules and directly applicable European regulation.
  • Furthermore, it asks them to review the International Organisation of Securities Commissions’ 2018 Liquidity Recommendations and consider to what extent their own arrangements mirror these.


Asset Management / Fund Management Firms and those Firms which have an Asset Management Function, are advised to raise this letter to their Senior Management /
Executive Teams and Board level of both the Fund and the Investment Manager, with reference to Risk and Compliance Teams.

They should review their Liquidity Policies and Procedures and Risk Appetite, to ensure they are proportionate, ‘fit for purpose’ and reflect ‘Best Practice’.

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