FMA swings behind tougher fund liquidity rules

NZ licensed fund managers look set for more stringent liquidity compliance duties including better use of risk management tools such as ‘swing pricing’ under new draft guidance published by the Financial Markets Authority (FMA) last week.

The proposed FMA framework follows the results of a survey of 51 NZ managers last year that identified “gaps” in the liquidity arrangements in the sector as well as global regulatory developments.

According to the regulator, the draft guidance updates a 2020 version in three key ways including a heavier emphasis on the fact that “having, and overseeing, effective LRM [liquidity risk management] is a legal obligation of MIS [managed investment scheme] managers and Supervisors respectively”.

In addition, the FMA guide says managers and supervisors will have to “do more” in both monitoring liquidity and having tools to limit associated risks “in normal and stressed market conditions”.

• The NZ regulatory draft measures are also informed by the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB) open-ended fund liquidity proposals tabled in July this year.
• Both global financial bodies tackled the fund liquidity issue from slightly different angles in a coordinated approach to a perceived growing risk to investors: the FSB paper set out clear fund liquidity definitions while IOSOC targeted disclosure and the use of appropriate liquidity management tools (LMTs).

“IOSCO’s recommendations focus on anti-dilution LMTs and bundle their previous guidance into higher-level elements, providing five critical elements of an LMT framework covering: the types of anti-dilution LMTs to be used; appropriate calibration of liquidity costs; appropriate activation thresholds; governance; and disclosure to investors,” the FMA draft says.

“We have integrated these recommendations into this guidance.”

The regulatory language around the use of LMTs has certainly hardened in the 2023 edition, morphing from a suggestion that licensed NZ managers “should consider the implementation of liquidity management tools” to the requirement that they:

“… will have a range of appropriate LMTs readily available to deploy in specific circumstances, including where redemption obligations cannot be met in the ordinary course of business. This ensures the scheme operates in the best interests of investors and supports equitable treatment of scheme participants.”

Submissions on the FMA fund liquidity proposals are due by November 10.

Fund liquidity rose up the global regulatory agenda in the wake of closure of vehicles managed by former star UK manager Neil Woodford in 2019. Woodford faced redemption issues after a flood of withdrawal notices uncovered a huge exposure to a small number of illiquid stocks in his flagship fund.

The UK Financial Conduct Authority (FCA) has since beefed-up fund liquidity requirements and is poised to go further with a mooted investigation of the increasingly popular – and less liquid – private markets investment sector.

According to media reports, the FCA has slated a review of private market asset valuations, which follow a more bespoke approach than  in listed arenas, amid growing worries that higher interest rates might trigger a crisis in the sector as debt refinancing becomes more expensive.

The UK regulatory probe of private markets would likely “entail investigating who within a company is held accountable for valuations, how information about those assessments is sent to the appropriate management committee and board, and what other governance practices are in place”, according one media outlet.