European regulators are calling for action from fund managers amid concerns about liquidity in the investment fund sector in the face of future negative shocks.
The European Securities and Markets Authority (ESMA) published a report on Friday examining the ability of investment funds with significant exposures to assets such as corporate debt and real estate to deal with future liquidity and valuation shocks.
The report calls on fund managers to enhance their capacity to cope with future shocks.
“Concerns around the valuation of portfolio assets have clearly emerged, especially for real estate funds for which the crisis could have a more significant impact over the longer term,” the ESMA said.
As a result, it called on fund managers to “enhance their preparedness to potential future adverse shocks that could lead to a deterioration in financial market liquidity and valuation uncertainty.”
Among other things, the recommendations cover aligning funds’ investment strategy, liquidity profile and redemption policy; ongoing supervision of liquidity risk assessments and valuations; and increasing the availability of liquidity management tools.
Steven Maijoor, chair of the ESMA, reported that a coordinated supervisory exercise “revealed shortcomings that must be addressed in order to enhance funds’ preparedness to future shocks.”
“We have identified a number of priority areas that funds and supervisors should focus on to address potential liquidity risks in the fund sector. This will contribute to ensuring investor protection, orderly markets and financial stability,” he said.