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Coronavirus - How can fund managers deal with market disruption? - UK

  • United Kingdom
  • Coronavirus - Country overview
  • Financial services and markets regulation
  • Financial institutions

23-03-2020

Introduction

In the wake of the Coronavirus outbreak, and the restrictions imposed to curb its spread, there has been significant market disruption.  As has been seen in some real estate funds, there may therefore be difficulties for fund managers in obtaining accurate prices to value funds.  It is feasible, though there has been no indication so far, that we may see runs on redemptions. 

The market disruption has also led to significant market volatility.  This may make it difficult to accurately value derivatives contracts.  Asset price volatility and the prospect of credit ratings downgrades may result in events of default or termination events being triggered or in calls for additional collateral.  In such circumstances, funds may need to rapidly consider their options and termination rights and how to exercise these.

See also our client briefing on the issues for property funds “Coronavirus - Considerations for property funds - UK”.

Fund managers’ tools to deal with market disruption

We set out below a reminder of the tools which UK authorised fund managers have at their disposal to deal with market disruption and the steps they would need to take to initiate emergency plans.

Tool

COLL rule

When can tool be exercised?

FCA approval required?

Comment

Fair value pricing (FVP)

6.3.6G

When the AFM believes there is no reliable price for a security available at the valuation point.

No.  The AFM can revert to its FVP policy in accordance with its terms and the fund’s prospectus.

The relevant team (and third party providers) should be prepared.

8.5.11R (for QIS)

There are no specific rules on FVP for QIS.

Declare a non-dealing day

6.2.16R

Where prospectus makes provision for a non-dealing day to be declared.

No, where the prospectus permits this.

In practice not a power appropriate to these circumstances and at short notice and without informing holders in advance.  Platforms in particular will require advance notice. Suspension would rather be used.

Deferred redemption

6.2.21R

For daily dealing funds and this is usually where redemptions at one valuation point exceed 10%.

No, if power included in instrument and prospectus.

In practice administrators may struggle to administer this effectively.

8.5.11R (for QIS)

There are no specific rules on deferred redemptions for QIS so reference should be made to the prospectus provisions if any.

Move to cash

5.5.3R

It is possible to hold cash to enable redemption of units. Cash is obviously also readily able to be valued.  However, holding cash across the whole portfolio is likely to be in breach of most investment policies.

No. If prospectus allows it – and such a provision in increasingly common.

The manager will also be actively reviewing the portfolio’s stock selection/asset mix.

Holding cash may prevent the fund managers from capitalising on market rises.

No specific COLL rule for QIS

Again, the investment policy will determine what is permitted.

Suspension of dealings

7.2

Where AFM with agreement of the depositary believes it is in the interests of all the holders in the fund.

No, but must inform the FCA as soon as possible and any overseas regulator if the fund is registered for sale overseas.

Notification must also be made to investors as soon as possible.

Firms should be considering their communications strategy in the event of suspension and a suspension review process to enable trading to begin as soon as possible.

8.6.3R (for QIS)

Where AFM in agreement with the depositary determines on reasonable grounds that there is good and sufficient reason in the interests of holders.

In specie redemptions

6.2.15R

Subject to provisions in prospectus as to when and how in specie redemption triggered.

No, but need depositary approval.

AFMs should review their in specie redemption policies to establish when these may be used; unlikely to be a practical tool for retail investors.

8.3.4R (for QIS)

Subject to provisions in prospectus.

If assets become illiquid, due to market closures or other reasons, it will not be possible for UK authorised funds to introduce side pockets or gating other than as set out above in relation to deferred redemptions.  It is generally considered that use of dilution mechanisms and redemption fees is not appropriate or practicable for managing large redemptions.

Although COVID-19 is an unprecedented event in recent times, and the extent of the associated immediate market disruption cannot be predicted, the regulatory expectation as ever is that that managers are as prepared as possible.

How Eversheds Sutherland can help

The Eversheds Sutherland team is experienced in advising clients on issues arising as a result of rapidly changing market events and how to deal with these.  If you require any advice, or have any questions, in respect of the potential implications of COVID-19 on the operation of your funds please speak to your usual Eversheds contact.

Eversheds Sutherland Coronavirus hub

Eversheds Sutherland is a full service global law firm.  To see our client briefings on the wide range of implications of the Coronavirus, visit our Coronavirus hub.