Dear CEO letter: Liquidity Management Multi-Firm Review [pdf]

The Financial Conduct Authority, FCA, has issued a Dear CEO Letter addressed at asset managers as regards their liquidity risk management practices and overall liquidity risk management framework. Specifically, the letter summarizes the key findings from a recent review of such practices which are also described in detail in a concurrently published press release (please see EventID 21955 in this context for more information). The letter also sets out the key expectations of the regulator in this context (also included in EventID 21955) and briefly summarizes its upcoming steps.
#### Observations
In brief, the FCA noted that many firms did not adequately prioritize managing liquidity risks, and discussions around liquidity issues were often reactive and isolated. There was a lack of standardization in stress testing methodologies, and some firms used a less conservative approach to stress testing that could distort the view of portfolio liquidity. Most firms lacked adequate processes for the fair treatment of investors in terms of fund prices, particularly during high redemption phases, and several firms applied the one-size-fits-all approach to setting swing pricing thresholds and redemption prices.
#### Expectations as regards liquidity risk management
In brief, the FCA calls for clear accountabilities and governing bodies with expertise, who receive timely information about risk, including liquidity risk. Governance arrangements should oversee liquidity risks and have established lines of responsibility and escalation. Firms are urged to utilize available tools to improve liquidity risk management, ensuring proper oversight and consistent decision-making processes. When facing redemptions, asset managers should meet regulatory requirements and treat exiting and remaining investors fairly while considering the asset mix used for redemption purposes. Also, the FCA calls for collaboration between service providers and asset managers to ensure operational systems are efficient and scalable, particularly during times of market stress. Lastly, firms are expected to conduct liquidity stress testing diligently and use liquidity management tools appropriately.
#### Next steps
To conclude, the FCA states that, at the current stage, it is not proposing any changes to the requirements for asset managers. However, it also acknowledges that international standards may evolve, and it may consider consulting on adjusting liquidity management rules and guidance to align with updated global standards in the future. Also, the FCA will take into account this letter in its future supervisory work.