UK Conduct Regulator Discusses Enhanced Liquidity Requirements for UCITS08/06/2019Andrew Bailey, the Chief Executive of the U.K. Financial Conduct Authority, has written to Lord Myners of the House of Lords concerning the establishment of U.K. requirements for liquidity standards for Undertakings for Collective Investment in Transferable Securities (UCITS) that are more stringent than existing EU requirements. Andrew Bailey's letter was prompted by Lord Myners' query as to whether the U.K. government has ever formally reviewed the case for imposing more stringent requirements or whether it must abide by the requirements in the EU UCITS Directive.
Andrew Bailey acknowledges that the UCITS Directive is minimum harmonizing and therefore that the U.K. would be permitted to impose stricter requirements upon U.K. established UCITS. However, he also observes two key drawbacks to imposing such requirements. Firstly, the requirements could only be imposed upon UCITS established in the U.K., and not those established in the European Economic Area. This would limit the protection afforded to investors as EEA entities could continue to offer their services in the U.K. in accordance with the UCITS Directive. Secondly, imposing stricter liquidity requirements may not be effective in ensuring liquidity standards. Instead, Andrew Bailey suggests that instead of adopting a stronger version of the existing approach, adopting a different standard would be more effective and cites the U.S. Securities and Exchange Commission, which provides a general indication of liquidity of a fund's assets. The U.S. has a purposive test of liquid status supported by governance, systems and control requirements, which requires fund managers to allocate assets to liquidity buckets based on the predicted time it would take to sell the assets.
Going forward, the FCA will be working with the Bank of England to consider the relationship between funds' redemption terms and asset liquidity.
View Andrew Bailey's letter.
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