Liquidity management highlighted as a key priority for funds investing in corporate debt and real estate by the ESRB

The importance of liquidity management for asset managers during the COVID-19 crisis has been reiterated at the EU level. The European Systemic Risk Board (ESRB) has published a statement setting out its recommendation to ESMA regarding liquidity risks in investment funds. 

This recommendation follows its announcement in April against the backdrop of the COVID-19, that it was focusing on five priority areas where coordination between local regulators would be key to ensure financial stability. One of these priorities is financial market liquidity and implications for asset managers.

The ERSB highlighted the pressure asset managers face given the difficult macroeconomic outlook. It also explained that there are additional vulnerabilities for funds which have short redemption periods but exposure to less liquid assets – this liquidity mismatch adds additional pressure on asset valuations in times of stress if managers sell assets over a short period of time to meet redemption requests.

The ERSB has identified two segments which it considers are at greater risk in this area and require greater scrutiny from a financial stability perspective. These are funds which have exposure to corporate debt and real estate. ESMA is therefore tasked with coordinating with local regulators to prepare a piece of supervisory work focused on these areas by the end of October.

In addition, the ERSB also issued a statement on the use of liquidity management tools where the ESRB emphasised the importance of the availability and timely use of liquidity management tools, especially in times of stressed market conditions. Such tools include anti-dilution levies, redemption fees, swing pricing, redemption gates and the suspension of redemptions.

ESMA has supported the ESRB recommendations, and asset managers with funds investing in corporate debt and real estate should be prepared for further regulatory scrutiny in this area.