Since the outbreak of the Iran war, investors have had to contend with extraordinary volatility, giving rise to situations where many want to make redemptions at the same time. This has meant fund managers have had difficult decisions to make balancing the needs of those withdrawing funds with those who wish to remain invested. On top of this the transfer agencies, who have to deliver these trades, have been put under considerable stress meeting client instructions
While we might hope for calmer markets there is another driver that will keep liquidity and order management at the top of fund manager and transfer agent agendas.
On 16 April, this year, the first wave of the European Securities and Markets Authority (ESMA)’s new liquidity management rules came into force. Initially these affect new funds launching to market. However, from April 2027 they will also apply to existing alternative investment funds and UCITS funds.
These rules are designed to reduce liquidity mismatch and protect investors in times of market stress. For example, managers of open-ended funds will be required to use at least two liquidity management tools (LMTs) from a pre-determined list including options like fund gating and swing pricing.
The new rules show that regulators are taking note of the rising popularity of more illiquid fund structures. With hybrid and illiquid assets now more widely available to retail investors through long-term asset funds (LTAF) and European long-term investment funds (ELTIF) product wrappers, it’s never been more important to set expectations around liquidity management.
How we think about the problem
We know our clients need a solution to meet new industry regulations and manage their funds’ liquidity in real time. Currently, liquidity issues are handled manually but, with tougher market conditions now more likely to cause liquidity events, the industry desperately needs an automated solution.
To help fund managers meet these challenges, Bravura Solutions has been working on a tool designed to make these decisions easier. But before we get into the detail, let’s briefly explain how we differentiate liquidity management and order management.
Liquidity management allows for central oversight of a fund manager’s actual and forecasted cash flows and assets, with real-time access for the current business day and future settlement dates.
Order management is about the steps a fund manager can take if liquidity thresholds are broken and active management is needed. Action they can take includes gating of funds, partial order filling, or deferring parts of orders into the future. Order management is the central place where orders are maintained, cancelled, amended, split or merged – whatever the fund manager sees as appropriate.
The feedback we have had from our clients is that it makes logical sense and is helpful to think about liquidity and order management in this way.
So, what is our solution? In phase one, our new module will provide fund managers with real-time information about their funds’ liquidity position. And where they are at risk of breaching their pre-determined limits, our tool flags this immediately so the fund manager can take action.
Through a digital dashboard view, fund managers will see a graphical representation of liquidity by class, fund or fund group; ability to maintain liquidity thresholds as a percentage of AUM, and instant notifications if these thresholds are breached. Regulators expect good liquidity governance so, where a liquidity event has occurred, our tool’s accurate reporting will make disclosure easier.
The order management element of our new tool will automate often error-prone manual processes to allow simple and speedy pro-rata gating of a class, fund or group for the current business period. Fund managers and transfer agents will be able to execute partial order fills – or enact mass order cancellations where necessary.
The second phase: forecasting
Looking forward to phase two, we will be developing the module further with the option for full gating for both traditional and alternative funds, as well as other options to maintain liquidity. Liquidity management visibility will also be extended to future periods, and some order management tasks automated. Bravura is exploring the potential of AI as a liquidity forecasting tool which, will be able to map liquidity patterns more accurately based on historical data and current market conditions.
With early and accurate insight, fund managers will be able to take action to maintain fund liquidity, stay compliant, and protect investors in increasingly challenging market conditions.
