Global financial markets have continued to sell off in recent days as fears surrounding COVID-19 continue to mount. Against this backdrop, asset managers’ focus has inevitably shifted to liquidity management processes and business continuity arrangements.
Global concerns have grown since the outbreak of COVID-19, rattling investors and markets worldwide. This has led to a steady flow of redemption requests from investors, triggering asset managers to update their liquidity management processes and stress test portfolios in order to ensure that fund portfolios are sufficiently liquid in order meet redemptions.
Gating mechanisms could prove particularly useful in order to cope with heavy redemption flows; indeed, if faced with liquidity problems, market players – UCITS management companies and AIFMs alike – ought to consider introducing gating mechanisms in fund offering documents in order to allow themselves headroom to limit redemptions to a particular percentage of NAV on any given dealing day. This will allow managers to stem potential runs, whilst allowing themselves time to re-balance portfolios to deal with liquidity risks in the interim.
On 10 March 2020, the MFSA communicated that it expects regulated firms (including asset managers) to take all reasonable measures in order to have appropriate contingency plans in place to be able to deal with the current outbreak. In light of the foregoing, and the outbreak in general, asset managers ought to consider:
(1) revisiting business continuity arrangements to ensure that they are sufficiently detailed and comprehensive to deal with pandemics of this nature or other unforseen and similarly disruptive events, for that matter;
(2) adequately documenting (including through board minutes and file notes) decisions taken in order to ensure business continuity in view of the present circumstances – the MFSA is likely to comprehensively scrutinise these in future compliance visits.
Should you require any assistance in this regard, please contact Andrei Vella (firstname.lastname@example.org), Andrew Caruana Scicluna (email@example.com), Giuseppe Gigante (firstname.lastname@example.org) or Michael Buhagiar (email@example.com).