ESMA Chairman Concerns for Forex Liquidity Risk

The President of the European Securities and Markets Authority (ESMA), Steven Maijoor, has particularly concerned about forex liquidity risk in the asset management sector. 

26 November, 2019 | AtoZ MarketsSteven Maijoor believes fund managers may be “flouting liquidity rules” because of the closure of the Woodford fund in Britain. That is designed to protect investors in case of massive withdrawals.

ESMA Concerns for Forex Liquidity Risk

Based on his concerns, he indicates that his agency will target this group, known explicitly as the EU-regulated fund. That is “Undertaking for Collective Investment in Transferable Securities (UCITS).” Andrew Bailey has already found that the redemption rules governing UCITS are “flawed.” But Maijoor wants to take audit measures as a first step and as a method of obtaining the facts. ESMA will require national regulators to apply a common approach in their different liquidity controls.

Maijoor made his remarks at a conference sponsored by EFAMA (European funds industry body), as several incidents have “challenged the UCITS label.” Therefore, to promote convergence and to promote consistent supervision of liquidity risks, ESMA will facilitate a standard prudential action on liquidity management by UCITS.

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LF Woodford Equity Income Fund

One of the events in question was the recent dismantling of the Woodford funds. In October, Neil Woodford has been ousted from its flagship LF Woodford Equity Income Fund. That will be closed to reimburse investors whose money has been stuck since June. The 3.8 billion-pound ($ 3.8 billion) fund, managed by Woodford. He is one of Britain’s most prominent fund managers. And he was suspended four months after the poor performance has increased customer demand to take back their money.

The Woodford fund allowed investors to make withdrawals daily. That was rather than having to wait until the end of a month or a quarter. Such restrictions generally give the fund manager time to liquidate assets in very poorly traded markets. Investors are usually unaware of buyback issues when investing in a fund. But in this case, the current estimate is that they could lose more than 1 billion pounds ($ 1.28 billion).

This is the era of near-zero and negative interest rates. The demand for high returns often encourages fund managers to climb higher in the risk pyramid to achieve the goals of an investment fund. The higher the risk, the lower the liquidity is a lesson. Many asset managers had pulled that pretty hard from the last financial crisis a decade ago. Woodword had gone way beyond the “EU cap on illiquid or hard-to-sell assets.” Woodword argued that its dubious assets resided on an exchange, but that it was little traded in Guernsey.

Maijoor concluded that listing on a qualifying market does not mean that all the particular securities of such a market are genuinely liquid. Liquidity controls should start in 2020.

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