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UPDATE 1-UK backs off banning illiquid assets in open-ended funds
February 8, 2017 / 12:25 PM / in 10 months

UPDATE 1-UK backs off banning illiquid assets in open-ended funds

(Adds detail, industry comment)

By Huw Jones and Carolyn Cohn

LONDON, Feb 8 (Reuters) - Britain’s financial watchdog has decided against a shake-up of open-ended funds, concluding that changes such as a ban on them holding illiquid assets would do little to make them safer.

Commercial property funds worth about 18 billion pounds ($23 billion) had to suspend activities temporarily in the aftermath of Britain’s vote to leave the European Union, prompting the Financial Conduct Authority (FCA) to review open-ended funds, which can issue or redeem shares at any time.

The funds ran out of cash when investors who feared property prices would collapse demanded their money back, triggering calls for a reform and for a ban on such funds holding illiquid assets like property.

“We do not intend to ban open-ended funds holding illiquid assets or prevent retail investors from acquiring units in open-ended property funds,” the FCA said on Wednesday.

Such changes would end up raising costs and having a negative effect, it added in a discussion paper in which it said it was open to ideas on how the “tools” available to fund managers might help them better manage the liquidity of funds that offer regular dealing but hold illiquid assets.

“A ban on this kind of product would have been overkill,” Laith Khalaf, senior analyst at funds supermarket Hargreaves Lansdown, said, adding that regulators would be looking for some compromise on liquidity.

Liquidity mismatches have risen to the top of the agenda for regulators across the world after bond funds came under intense pressure to meet redemptions following big falls in prices during recent periods of market stress.

The FCA said one possible approach could be to require a manager of a fund holding illiquid assets to ensure a diverse investor base, to prevent one investor or group of investors from acquiring more than a specified proportion of the fund.

There could also be a cap on the proportion of the portfolio that could be held directly in illiquid assets, the FCA said.

There could also be guidance on the use of liquidity ‘buckets’ so that funds face limits on the proportion of assets that could be sold for cash within a specific timeframe.

Another option would be to introduce so-called “anti-dilution” safeguards, meaning a discount on the amount of money handed back to investors who want to exit quickly. ($1 = 0.7996 pounds) (Editing by Mark Potter and Alexander Smith)

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