International regulators’ plans to make investment funds more resilient to liquidity shocks will be counter-productive and hamper managers’ ability to properly run their funds, according to European industry association Efama.
The association was reacting to the recently published framework from the Financial Stability Board (FSB) and International Organisation of Securities Supervisors (Iosco).
The framework itself was created in reaction to the numerous market shocks of recent years and the impact this has had on investment fund liquidity.
This framework includes “many aspects essential to proper fund liquidity management”, according to Efama. For example, it prioritises the primary role of the asset manager and the need to take a flexible approach to using liquidity management tools.
However, several recommendations “unduly restrict” fund managers, according to Efama. It cites the obligation for managers to pigeonhole their funds into three categories based on their liquidity – a step that would result in “lower-quality risk management”.
The association also highlights the proposed daily use of anti-dilution tools as “unnecessary” for funds invested in less liquid assets and advises against the proposed restrictions on quantity-based liquidity management tools.
Efama also states that the FSB/Iosco recommendations stem form “unfounded assumptions” instead arguing that spikes in liquidity demand during market stresses mainly originated from margin calls and not redemptions from investment funds, as shown in a recently conducted Bank of England scenario test.
“European asset managers should not categorise funds depending on their portfolio liquidity,” said Marin Capelle, EFAMA regulatory policy advisor. “They already conduct extensive liquidity stress tests which can be relied on when assessing the benefits of specific liquidity management tools.
“After a long review of the UCITS/AIFMD framework, introducing this type of fund categorisation in Europe would counter the EU’s simplification objective without any financial stability benefits,” said Capelle.
