The European Fund and Asset Management Association (Efama), the voice of the European investment management industry, has responded to the European Securities and Markets Authority’s (Esma) latest consultations on regulatory standards concerning liquidity management tools (LMTs).
These standards, part of the recent Alternative Investment Fund Managers Directive (AIFMD) and Ucits review, aim to support asset managers in handling liquidity pressures while safeguarding investors’ interests.
Calling Esma’s proposal “broadly positive”, Efama highlighted concerns about certain prescriptive elements in Esma’s proposals. The association stressed the importance of allowing fund managers greater discretion in selecting and activating LMTs, given the wide variety of fund types, investment strategies, and liquidity profiles. Managers, Efama argued, are in the best position to determine which tools will yield the best results for both funds and investors.
One specific concern raised by Efama is the potential requirement for managers to choose at least one anti-dilution tool and one quantitative LMT. It argued that this mandate could limit managers’ flexibility in tailoring liquidity management strategies to the unique needs of their funds.
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Efama also opposed the idea of fixed minimum thresholds for LMT activation, warning that such rigidity could worsen liquidity pressures during market stress. The association advocates for more adaptable calibration methods that suit individual fund strategies.
Regarding fund suspensions, Efama urged that this LMT remain a last-resort measure, activated only in exceptional circumstances. The association argued that such events are unpredictable and that managers should not be constrained by rigid definitions of these circumstances.
Zuzanna Bogusz, Efama regulatory policy advisor, commented: “The investment management sector has responded well to significant market stress in the past, for example, the large outflows experienced at the beginning of the Covid-19 pandemic. This proves the sector’s resilience and asset managers’ experience when facing unexpected market conditions. The unconstrained access to and use of a full list of liquidity management tools is imperative for continued, successful liquidity management in the future.”
Jo Burnham, a margin expert at derivatives analytics firm OpenGamma, echoed Efama’s concerns about the need for manager discretion, stating: “Liquidity management is not a one-size-fits-all approach. Fund managers are in the best position to make these calls because they understand the intricacies of their portfolios. To help them make the most informed calls, they need capital and liquidity risk management solutions to build in organisational resilience while minimising the cost of trading.”
