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Addressing systemic risks associated with market-based finance activities - Resilience of the EU financial sector in the global context

Liquidity risk in AM should neither be overlooked nor overestimated

By Bompaire Frédéric - Head of Public Affairs, Finance and Strategy, Amundi

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Risk management is at the heart of the asset management: we all know that there is no free lunch and return implies risk. The objective of a fund manager is clearly to offer the best return for a given level of risk or, conversely, to limit risk for a given level of expected return. In both cases it is a matter of finding the best risk/return couple. The regulation has for long now identified risk management as a specific activity which must be conducted independently from the portfolio management team within an asset management company.

Liquidity risk is among the major risks that asset managers face. Liquidity is offered to unit’s holders who can redeem immediately when the fund will have to gain liquidity through sales on the market, what may require some time and, hence, temporarily modify the liquidity profile of the fund. AIFMD introduced a special mention of liquidity risk, requiring it to be monitored. The proposed MMF regulation includes provisions aiming at avoiding the risk of run that prompts “fire sales” and capital losses for investors.

Liquidity risk is not unmanageable.

But liquidity risk is not unmanageable. First, mutual funds allow for a compensation between in and out-flows at each subscription date. Second, unit holders are totally aware that the liquidity of the underlying assets may vary and that it will reflect in the NAV of the fund; as a consequence, a sound valuation policy is key to liquidity management. Third, there are several tools that enable management of liquidity risk: IOSCO listed 25 different ones of which 7 most popular mechanisms. They are swing pricing, redemption fees, anti-dilution levy, redemption gates, redemption in kind, side pockets and suspension of redemptions. Among those, most helpful is the possibility to gate excessive redemptions and we think it could, to be more efficient, be coupled with a decision to adapt the periodicity of redemption dates. The supervisory role of National Competent Authorities when one of those tools is activated is most important to ensure full investor protection.