According to the data gathered, the FPC said: “surveyed funds expected to be able to liquidate over one day roughly three times estimated dollar corporate bond market turnover; and second, redemptions from their funds would need to exceed the severest level seen since 2007 in order to test liquidity in sterling corporate bond markets.”
The FPC highlighted three other areas of possible concern: the possibility that incentives might be created for investors to try to redeem investments ahead of others (which it termed First mover advantage); the offer of short-term redemptions might have encouraged investors to invest more in less liquid assets than they otherwise would have (procyclical behaviour); and the exacerbating effects of leverage.
However, it said, it believes these risks to be minimal and is satisfied that fund managers have satisfactory firm-level liquidity management practices. In the case of the leverage question, judged the “risks from financial, or ‘balance sheet’ leverage to be contained”.
However, as a result of its study, it supports the FCA’s intention to assess investor awareness of the liquidity risks associated with investment funds in its forthcoming market study. It added that in the short term the inclusion of open-ended funds into system wide stress testing will include a desk-based simulation exercise to assess the resilience of markets to large-scale fund redemptions.
