Existing rules are enough for managers to cope with the current liquidity situation, according to a joint report from the International Capital Market Association (ICMA) and the European Fund and Asset Management Association (EFAMA).
Requirements included in two pieces of European legislation create a “robust liquidity management framework” for the continent’s fund managers, the report stated.
“It is clear that the existing EU regulations and tools available in most European jurisdictions prove both comprehensive and appropriate for liquidity management.”Fixed income assets have become less tradable since the financial crisis as stringent capital requirements on banks have caused many to cease their market-making activities.
This development could hurt more than just bond fund managers, commentators have warned: An analysis by AllianceBernstein last year indicated that risk parity strategies could incur heavy losses if a major selloff occurs.
However, ICMA and EFAMA argued that both the Alternative Investment Fund Management Directive (AIFMD) and the Undertaking for Collective Investments in Transferable Securities (UCITS) contain sufficient provisions for liquidity management.
The AIFMD requires managers to conduct regular stress tests to ascertain their portfolios’ resistance to a liquidity crisis. UCITS rules require managers to “formulate forecasts and perform analyses” for new investments in order to understand each new holding’s contribution to “portfolio composition, liquidity, and risk and reward profile.” Stress tests and scenario analyses are also required.
In addition to prescribed liquidity management processes, ICMA and EFAMA said there were several “non-legislative” options for asset managers to ensure their portfolios did not become untradeable. These include redemption fees, temporary restrictions on redemptions, and “in-kind” redemptions. The latter allows large investors to redeem assets rather than cash, removing the need to trade.
“Through documenting the currently available requirements and tools it is clear that the existing EU regulations and tools available in most European jurisdictions prove both comprehensive and appropriate for liquidity management in both normal and exceptional circumstances and were positively tested throughout various market conditions,” the report said.
The two associations encouraged managers to make greater use of extra tools and data outside of the rules prescribed by regulators.
Related: Risk Parity’s Liquidity Challenge & Bond Managers ‘Averse’ to Holding Cash Despite Liquidity Fears