Liquidity tools in UCITS and special funds

2021-06-01 | Funds Reports Markets

Finansinspektionen concludes in a new report that fund managers need access to additional tools to manage liquidity risks in Swedish UCITS and special funds. We consider there to be a certain type of swing pricing that could be used already today. The report outlines a suggestion for how to regulate this and other liquidity management tools in legislation and regulations. FI takes the position that Swedish UCITS only need to be open for redemptions once a week. We suggest that the funds instead only need to be open for redemptions twice a month.

In the appropriation directions for 2021, the government commissioned Finansinspektionen to assess the need for additional liquidity management tools on the Swedish fund market. Finansinspektionen was also tasked with assessing the conditions necessary to implement such tools in Sweden and present suggestions on how such a regulation should be constructed. The results are now presented in the report Liquidity tools for UCITS and special funds.

Finansinspektionen has assessed three tools

Finansinspektionen has reviewed three liquidity management tools for Swedish UCITS and special funds

  • swing pricing
  • anti-dilution levies
  • redemption gates.

Finansinspektionen takes the position that these tools are necessary and there is sufficient cause to allow managers of UCITS and special funds to use them. Finansinspektionen is also of the view that the conditions for using these tools should be regulated in legislation and related regulations. The report contains suggestions on the construction of such regulation.

Some tools allowed today

Finansinspektionen considers Swedish fund-related legislation to already allow managers to apply anti-dilution levies. Such fees are levied on investors when they subscribe or redeem units or shares to cover costs associated with the purchase and sale of underlying assets. The legislation also allows for a certain type of swing pricing, which in the report is called adjusted sale and redemption price (justerat försäljnings- och inlösenpris). With this method, the price of the units is adjusted upwards or downwards depending on the fund's net flows. As with anti-dilution levies, this method aims to cover the costs of the fund associated with the purchase and sale of underlying assets.

The method deviates from another type of swing pricing, which in Swedish is called adjusted net asset value (justerat fondandelsvärde), whereby the value of the fund is adjusted. Finansinspektionen has previously concluded that adjusted net asset value is not allowed according to Swedish fund-related legislation. Finansinspektionen makes no other assessment in its report.

Access to additional tools

Finansinspektionen is of the view that fund managers should also be allowed to use redemption gates. Redemption gates allow managers to temporarily suspend redemption requests that exceed a predetermined threshold (for example, a certain percentage of the NAV of the fund).

Suggestion to lower redemption frequency

In its report, Finansinspektionen also raises the issue of redemption frequency of Swedish UCITS, that is, how often the funds are open for redemptions. It is our assessment that that the Swedish fund legislation allows Swedish UCITS to be open for redemptions once a week, but we suggest that the funds only need to be open for redemption twice a month.

Redemption arrangements and notice period

Lastly, we raise some questions regarding the regulatory framework around redemption arrangements for UCITS and special funds and suggest that this be further regulated. We also suggest that fund managers be allowed to use notice periods, that is, to require that investors give a certain advance notice to fund managers when redeeming their units. We suggest a regulation for both UCITS and special funds.