FCA publishes findings from liquidity management frameworks review

FCA has published findings from its multi-firm review of liquidity management frameworks.

It sought to understand what improvements have been made since its November 2019 letter to AFMs detailing good practice in liquidity management, and what weaknesses remained.  Although the review focussed on AFMs, FCA expects asset managers/managers of AIFs to consider the findings for their business too.


With few exceptions, FCA observed that firms did not attach sufficient weight to managing liquidity in their frameworks and governance structures. In many cases, liquidity risks were flagged only on an exceptions basis, resulting in committees discussing the issues in isolation where a wider context would be of benefit. Good practices included:

  • Focus on liquidity management at the top of the organisation;
  • Documented protocols for escalating issues and increase governance frequency during volatile market conditions;
  • Creating a liquidity ‘playbook’;
  • Detailed liquidity reporting, including trends of redemptions and ‘change flags’ on the evolution of liquidity buckets;
  • Willingness to challenge investment managers about their funds’ liquidity and the composition of portfolio transactions undertaken to meet redemptions; and
  • Building consideration of longer notice periods of redemption tenors for funds with a high proportion of less liquid assets into product governance.

Liquidity stress-testing

Firms’ LST methodologies varied from sophisticated in-depth models to basic tick-box exercises. Many used the less conservative approach of assuming the most liquid assets would be sold first, creating a false sense of security and affecting portfolio compensation if executed.

Where results suggest that no or few funds ever fail tests, FCA suggests firms should consider whether thresholds and triggers are not challenging enough to reflect volatile and stressed market conditions. Good practices included:

  • Full application of the ESMA guidelines;
  • Using a ‘pro-rata’ methodology to calculate liquidity bucketing and stress testing;
  • Genuinely challenging and updating the firm’s internal or external models;
  • Testing of multiple scenarios for redemptions; and
  • Increased scrutiny of liquidity assumptions of least liquid buckets.

Redemption processes

Most firms did not go far enough to ensure investors were treated fairly, particularly in a stressed scenario. Many only had a trigger for enhanced governance at a large redemption threshold. Good practices included:

  • Appropriate internal trigger processes capturing larger and cumulative smaller redemptions, with appropriate thresholds without reliance on third party administrators;
  • Considering interests of the remaining investors, especially where the fund holds less liquid assets;
  • Pre- and post-redemption testing to ascertain how liquidity has been impacted by redemption;
  • Alternative solutions to meet sudden large redemptions in funds with a concentrated portfolio and/or investor base; and
  • Thorough end-to-end testing or ‘war gaming’ to simulate large redemptions.

Liquidity management tools

Thresholds for volumes of redemption orders to trigger swing pricing in fund ranges were often the same across all funds, notwithstanding different underlying asset classes. Likewise, thresholds for applying swing pricing for very similar funds were often very different between one firm and another.

There was potential over-reliance on third-party administrators for swing price calculations, and an absence of back testing on firms’ own executed pricing. Good practices included:

  • Calculating thresholds, applying anti-dilution tools and pricing adjustments on a fund-by-fund basis;
  • Incorporating market impact cost into swing factor calculation methodology;
  • Back testing executed prices; and
  • Providing information about swing pricing changes in management reporting.


Valuation processes were reasonably robust, but internal challenge to valuations was rare. Most funds had limited exposure to fundamentally illiquid positions, and had processes to prevent these types of assets entering portfolios. Good practices included:

  • Independent Valuation Committees in the firm’s governance framework, with management information provided to boards oversighting liquidity practices;
  • Analysis and challenge of valuations at committee level, with less liquid buckets subjected to line-by-line interrogation;
  • Tracking performance of third-party valuation services; and
  • Processes to ensure fundamentally illiquid assets are unable to enter open ended funds with short redemption periods.

FCA expects firms to review their liquidity management arrangements, and consider the application of its findings together with the accompanying Dear CEO letter

Laura Wiles