CSSF steps up fund monitoring to prevent liquidity squeeze

Photo by Rostyslav Savchyn on Unsplash

European regulators are trying to prevent a liquidity crisis caused by excessive outflows from investment funds in the wake of the coronavirus crisis. The CSSF has joined other European regulators in asking asset managers for large amounts of information about their ability to repay investors.

French and German financial regulators are asking for daily updates on outflows from open-ended funds, while stock market watchdogs in Luxembourg and Ireland have also stepped up their oversight, the Financial Times reported on Monday.

Our sister publication Fondsnieuws already reported last week that the Dutch regulator AFM  had introduced an obligation for asset managers to report on the use of specific instruments to promote liquidity. 

The subject has drawn the attention of regulators as investors  fled investment in droves in March as the coronavirus crisis hit asset prices.

Some 76 investment funds with 40 billion dollars of assets under management could not immediately respond to redemption requests in March, according to research by Fitch Ratings. These funds - mainly UK real estate funds and Scandinavian high-yield bond funds - had to temporarily halt trading.

The measures taken by the French and German regulators followed a warning from the International Monetary Fund (IMF). The fund warned last week that asset managers could come under additional selling pressure if market conditions were to deteriorate further, calling on regulators to ensure that fund managers make full use of liquidity management tools.

So in Germany and France, custodians and asset managers now have to submit daily information on fund subscription and redemption rates. In Luxembourg, a weekly questionnaire needs to be filled in, while Ireland asks market participants to 'inform' the regulator in good time if their funds are to take steps to prevent a liquidity crisis. 

Commenting on the divergent measures, Julie Patterson of KPMG told FT that the operational burden of running an investment fund has increased enormously as a result. 'The amount of work is enormous. Regulators want to know sooner when a fund is in trouble.' According to Patterson, supervisors do this in an attempt to prevent funds from suddenly having to close.