Liquidity Crisis? We Can Cope, Say Managers

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.

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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.

Sovereign wealth funds (SWFs) and public pensions are seeking to improve their data and technology capabilities, according to a report by State Street.

Currently, just over half of these institutions believe they effectively use technology to support investment operations, the survey of 25 SWFs and 25 government pension funds found.

Additionally, 36% said they have trouble integrating data with their existing operational systems.

SWFs were slightly more confident about their technological capabilities, with 60% saying they use technology effectively, compared to 44% of public pensions.

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To bridge the technology gap, 78% of SWFs and pensions said they plan to hire or train employees to develop more advanced in-house capabilities. Nearly two-thirds said they are looking to develop talent in technology, with the same proportion planning to build talent in the area of data management and analytics.

“The leaders are investing in their IT capabilities and developing sophisticated analytical applications to facilitate their digital and IT capabilities,” said Jan Muysken, global head of sovereign wealth and investment funds at PricewaterhouseCoopers.

SWFs in particular are investing in technology through human capital, with 76% planning to hire and develop talent in data management and 72% in technology.

Pensions, meanwhile, are having to focus more of their talent development efforts on risk and compliance, due to facing greater regulatory concerns.

But both SWFs and pensions said they will focus on strengthening cybersecurity measures over the next year, with 84% of pensions and 72% of SWFs citing it as an area in need of improvement.

Other technology priorities included data warehousing capabilities, advanced scenario modeling, and engaging third-party providers.