AMF provides update on French fund sector use of liquidity management tools
The French market regulator – the AMF – has published an update on the use of liquidity management tools by the French fund sector.
Context: Liquidity management tools aim at ensuring fair treatment of unit-holders in times of stress to help protect investors and they also make it possible to limit the destabilizing consequences of liquidity shocks on the financial markets.
French fund liquidity practices: Historically, the AFM notes that French funds were poorly equipped with mechanisms to cap redemptions (gates) and with anti-dilution tools (swing-pricing or anti-dilution levies).
- To facilitate the adoption of these tools by French funds, the AMF introduced a transitional period during which gates could be introduced by simply informing unitholders by any means, subject to compliance with certain terms and conditions.
- This transitional period ended on 31 December 2023 for most types of fund.
- The standard prospectus templates have also been revised to include specific information on the risks associated with the absence of gates.
Anti-dilution tools: In the case of management companies that have not introduced anti-dilution tools for some of their funds, they have to declare the reasons to the AMF, provide a statement acknowledging the risks involved, and are required to reassess regularly the need to introduce these tools.
Growing adoption in open-ended funds: Analysis of the prospectuses of funds domiciled in France shows that there is widespread adoption of gates and swing-pricing in open-ended funds.
- A large proportion of funds accessible to retail investors have taken advantage of the transitional period, which has simplified the introduction process for gates and anti-dilution tools in fund prospectuses.
- When considering the population of undertakings for collective investment in transferable securities (UCITS) and general-purpose investment funds (FIVGs), the AMF found that gates accounted for 66% of net assets at end-2023 (compared with 17% at end-2022) and anti-dilution tools accounted for 45% of net assets (compared with 23% one year earlier).
Illiquid assets: Regarding open-ended funds specializing in less liquid asset classes such as real estate and private equity, the AMF finds that gates are now present in all retail real estate collective investment schemes (OPCIs) and all open-ended venture capital mutual funds (evergreen FCPRs).
Wider EU regulatory context: As part of the EU review of the UCITS and AIFM Directives published in March 2024, which will have to be transposed into national law by April 2026, all European open-ended UCITS and AIFs will have to have at least two liquidity management tools by 2026.
- For money market funds, the requirement will be for a single liquidity management mechanism.
- The recent development in the availability of liquidity management tools by French funds is considered a head start for the future requirements on funds in the EU.
CFTC approves final rule on margin adequacy, treatment of separate accounts by FCMs
The U.S. Commodities Futures Trading Commission (“CFTC”) approved a final rule to implement requirements for futures commission merchants (“FCMs”) related to margin adequacy and the treatment of separate accounts of a customer.
In more detail: The final rule applies to all FCMs with respect to their customers, a margin adequacy requirement like the one applicable to derivatives clearing organizations in Regulation 39.13(g)(8)(iii). It also permits clearing and non-clearing FCMs to treat the separate accounts of a single customer as accounts of separate entities for purposes of the new margin adequacy requirement, and sets forth risk-mitigating requirements based on the no-action conditions in CFTC staff letter 19-17.
Timeline: The compliance date for FCMs that are members of a DCO as of the date of publication of the final rule in the Federal Register is 180 days after such date of publication, while the compliance date for all other FCMs is 365 days after such date of publication.
Dubai confirms amendments to its prudential rulebook
Following the ending of the consultation period on a number of proposed legislative changes, the Dubai Financial Services Authority (DFSA) has announced that two new prudential rulemaking instruments were confirmed by its Board.
Accurate risk appetite statement: The first instrument (No. 390) introduces a new requirement for firms to produce and maintain an accurate risk appetite statement and comes into force on 1 April 2025. Guidance includes:
- The Authorized Firm should ensure that the level of aggregate risk that it is willing to assume allows it to manage its risks prudently in normal times and in a way that allows it to withstand periods of stress. The level of aggregate risk should include both quantitative and qualitative elements, as appropriate, and encompass a range of measures. These should be expressed in terms that are clear enough for all levels of management to be able to understand the trade-off between risks and profits.
- The DFSA expects that the risk appetite statement also outlines actions to be taken when risk limits are breached, including disciplinary actions for excessive risk-taking, escalation procedures and Governing Body notification.
Interest rate risks in the Non-Trading Book: The second instrument (No. 391) introduces more wide-ranging amendments regarding the management of interest rate risks in the non-trading book. This instrument comes into force on 1 January 2026. Enhancements include:
- An Authorised Firm must immediately notify the DFSA if any evaluation suggests that, as a result of the change in interest rates, the economic value of the firm would decline by more than 15%, rather than 20%, of its Capital Resources.
- Measuring Non-Trading Book interest rate risk: An Authorized Firm with balance sheet positions in different currencies must measure its risk Exposures in each currency that accounts for more than 5% of its total Non-Trading Book assets or liabilities.
- Frequency of measuring Non-Trading Book interest rate risk must carry out those evaluations no less frequently than quarterly.
- The DFSA may also take other supervisory action, including requiring the Authorized Firm to reduce its IRRBB Exposures (for example, by hedging), raise additional capital, set constraints on the internal risk parameters used by the Authorized Firm or improve its risk management framework.
ESMA completes annual update of MMF stress testing guidelines
The European Securities and Markets Authority (ESMA) has issued final updated guidelines on stress test scenarios for Money Market Funds (MMFs). The guidelines are required to be updated annually to take account of recent market developments and in particular the current risk assessment of both ESMA and the European Systemic Risk Board (ESRB).
Stress testing is a key element of the EU Money Market Funds Regulation (MMFR), with fund managers required to test:
- liquidity levels,
- credit and interest rate risks,
- redemption levels,
- widening/narrowing spreads among indices to which interest rates of portfolio securities are ties, and
- macroeconomic shocks.
The 2024 update focuses particularly on stress emanating from geopolitical risk and its macroeconomic consequences. Fund managers are expected to consider significant volatility and related widening spreads as part of their scenarios.
The majority of the guidelines, however, remain unchanged. This notably contains redemption scenarios modelled on those seen in early 2020, which ESMA deems to be ‘still appropriate’ as a stress test.
The final guidelines will now be translated, after which national supervisors within the EU will have two months to comply.
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