It is not just the FCA that is looking at liquidity risk, which has become a global issue as market conditions have gotten tougher; the Financial Stability Board and the International Organization of Securities Commissions have also recently published proposals for further guidance on liquidity management tools.
Robert Jeffree, chief executive of Omnis Investments, an investment manager and ACD, says: “Liquidity management is really important. Being an ACD, it's a daily process based on full information. That's the real advantage of doing liquidity management as an ACD.
“We have followed through on the portfolios live within our funds. We carry out liquidity monitoring based on assumptions linked to normal market conditions. We also do stressed market conditions.
“We have a quarterly report up to the board on our liquidity processes, and we review our parameters and our guidelines on a quarterly basis as well. So it's one of our key activities of an ACD. "
Jackson says that at Yealand, liquidity testing is undertaken for each security within a fund’s portfolio on a daily basis using the Funds-Axis investment risk and compliance platform.
Additionally, Yealand currently uses two benchmarks: 30 per cent market participation rate and 15 per cent market participation rate, which results in identifying a level of liquidity for each security, and this is aggregated to give a rating per fund.
Jackson adds: "Additionally, securities are monitored for liquidity timeframes, ie the number of days to realise the investment. Both factors are combined to give a percentage rating and placed in a liquidity bucket. If liquidity falls below the parameters set out in the risk management policy, then engagement will occur with the investment manager and action taken to address liquidity risk immediately if necessary.
"We assess the fund’s expected liquidity demands, and a key element of ensuring this is having sufficient liquidity to meet shareholder redemption requests by understanding what shareholder demand is likely to arise in the future.
"Prior to investing in any non-vanilla securities, investment managers will engage with us for our view, and dependant on the type of security this will also be reviewed by our investment committee and discussed with the depositary.
"One of our key considerations is the liquidity of the security. We also apply soft limits to less liquid securities, where appropriate, to ensure a fund remains within the investment limit rules in a volatile market."
As a result of the Link/Woodford saga, the relationship between an ACD and its investment manager has come under more scrutiny from the FCA.
There are a number of different routes by which an ACD and investment manager end up working together.
