Room for development remains in UCITS liquidity management
The 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).
Anna Mäkipeska, Market Supervisor, and Kristian Nihtilä, Senior Policy Advisor. Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030 (weekdays 9.00–16.00).
Finanssivalvonta, or the Financial Supervisory Authority (FIN-FSA), is the authority for supervision of Finland’s financial and insurance sectors. The entities supervised by the authority include banks, insurance and pension companies as well as other companies operating in the insurance sector, investment firms, fund management companies and the Helsinki Stock Exchange. We foster financial stability and confidence in the financial markets and enhance protection for customers, investors and the insured.
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