What’s a liquid asset? Bank of England will say in July

FILE PHOTO: FILE PHOTO: A view of The Bank of England and the City of London financial district in London, Britain
FILE PHOTO: The Bank of England and the City of London financial district in London, Britain, November 5, 2020. REUTERS/John Sibley

March 26, 2021

By Huw Jones

LONDON (Reuters) – Britain’s financial regulators will sketch out by July which assets are “liquid” enough for to be included in funds that offer cash back to investors on a daily basis, the Bank of England said on Friday.

Some UK property funds offering daily redemptions are still suspended since markets suffered huge volatility last March when economies went into lockdown to fight the pandemic, with longer redemption periods now inevitable.

Strains in money market funds also emerged at that time, and global regulators are due to make proposals for reform in coming months, with European Union regulators on Friday moving early to set out their thoughts.

“To support that international work, the Financial Policy Committee will set out in the next Financial Stability Report its view on how a liquidity classification could be developed and an approach for how more consistent and complete swing pricing could be developed in order to promote financial stability,” the Bank of England said on Friday.

Swing pricing refers to a charge imposed on investors who want cash back in times of stress.

Regulators say daily redemptions are not practical during market turmoil in funds with illiquid assets that cannot be quickly sold without huge discounts, creating further volatility.

The BoE and the Financial Conduct Authority published findings on Friday from their survey of open-ended funds, saying they showed that consistent and more realistic classification of the liquidity of funds’ assets is an “essential first step” to ensuring funds can address mismatches between asset liquidity and redemption terms.

The survey also found that swing pricing was being inconsistently applied across funds, and that many fund managers appeared to have overestimated the liquidity of fund portfolios, even after the experience of the stressed period in March 2020.

Funds that hold highly illiquid, infrequently traded assets might not be able to implement swing pricing effectively and therefore longer redemption periods may be needed, the FPC said.

Bank of England Funds Survey Graphic – https://fingfx.thomsonreuters.com/gfx/mkt/jbypradkqve/Bank%20of%20England%20Funds%20Graphic.PNG

(Reporting by Huw Jones, editing by Larry King)