Ireland calls for review of fund liquidity after March 2020 crisis

Ireland’s central bank has called on asset managers to “critically” review their practices to avoid a repeat of an episode at the height of the coronavirus crisis during which dozens of funds seized up.

The Central Bank of Ireland, the regulator of the country’s €3tn fund sector, has instructed all asset managers with operations on the island to carry out a detailed review of their liquidity management processes to improve safeguards for investors.

“Fragilities identified in certain sectors of the funds industry need to be addressed,” said Derville Rowland, financial conduct director-general at the Central Bank of Ireland in a speech on Wednesday.

Severe problems affecting European corporate bond, property and money market funds, which erupted last March, threatened to escalate into a broader systemic crisis. It was only averted after the introduction of massive emergency support measures by central banks. 

Ireland is one of Europe’s most important investment hubs with many of the world’s largest asset managers choosing to domicile funds in Dublin, allowing them be sold across the EU.

The CBI’s actions are likely to be followed by other national European regulators as part of an EU-wide effort to address the liquidity problems suffered by a variety of investment funds when the pandemic escalated in early 2020.

The issues across Europe’s €1.4tn money market fund sector in March 2020 were triggered when companies made a dash for cash in response to the announcement of lockdown measures, while investors also found themselves unable to withdraw money from some corporate debt funds and UK property funds.

“Parts of the funds sector did not play a role in absorbing shocks, but rather in transmitting and amplifying the stress,” said Rowland, speaking on Wednesday at the annual conference of the Irish Funds association.

The CBI has already issued 35 risk mitigation programmes where specific liquidity issues were identified after questioning 273 managers.

A letter sent this week by the CBI called on to Irish domiciled managers to consider how their liquidity risk management frameworks and fund structures should be adapted to take account of the increase in investor withdrawals seen during the market turmoil last year.

Most European mutual funds, known as Ucits, offer daily liquidity, which allows investors to withdraw their money at any time they choose. But some funds make large allocations to assets that can be hard to sell, such as property. A rush by investors for the exit in a crisis sometimes forces a fund manager to lock up customers’ cash.

More than 80 European investment funds managing assets of more than $40bn were forced to suspend in March 2020, according to Fitch Ratings.

The CBI also called for the establishment of a new European macroprudential framework for investment funds in order to improve safeguards for investors.

“The absence of such a macroprudential framework for investment funds remains, in our view, a key omission in the European regulatory toolkit,” said Rowland.

New restrictions, including limits on leverage and measures to address liquidity mismatches, should be considered to strengthen the fund sector’s resilience to future shocks, according to the CBI.

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