Room for development remains in UCITS liquidity managementThe Financial Supervisory Authority (FIN-FSA) considers that there remains room for improvement in procedures related to UCITS liquidity management. Management companies are responsible for ensuring an adequate level of liquidity risk management for UCITS, both in normal and extraordinary market conditions. The purpose of liquidity management is to ensure that the fund is able to pay, at a predetermined date, redemption orders made by investors to the fund. Finnish UCITS, however, did not experience significant shortcomings in their liquidity during the market conditions caused by the coronavirus pandemic in spring 2020.
Liquidity risk management in UCITS is important for management companies to be able to redeem units in a fund at the unitholder’s demand, in accordance with the rules of the fund. In order to fulfil this obligation, management companies must identify, measure, monitor and manage UCITS’ liquidity risk.
The FIN-FSA has identified shortcomings in procedures pertaining to UCITS managers’ liquidity risk management as well as related documentation and internal reporting. Management companies continue to have room for development in UCITS liquidity risk management so that the funds would be better prepared for challenging market conditions in the future. In particular, the importance of liquidity risk management is emphasised in funds investing in less liquid assets.
In the challenging market conditions brought about by the coronavirus pandemic in spring 2020, UCITS were faced with large redemptions but they overcame without significant liquidity issues. However, some funds investing in corporate bonds were forced to halt subscriptions and redemptions in the spring due to an exceptionally high level of uncertainty involved in the valuation of corporate bonds. It should be borne in mind, though, that the challenging market situation of spring 2020 was relatively short-lived.
The findings made by the FIN-FSA require actions to be taken by management companies to develop their liquidity risk management further, and it will monitor the progress of these actions.
In 2020, the FIN-FSA carried out two thematic reviews concerning liquidity risk management in investment funds. Both thematic reviews were part of pan-European supervisory initiatives coordinated by the European Securities and Markets Authority (ESMA).
Supervision release: ”Room for development remains in UCITS liquidity management” and the attached supervision letter. (in Finnish and in Swedish)