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White Paper

Fund Liquidity Risk Control: Emerging Risks and Regulations Revisited

Liquidity risk remains a defining driver of risk in financial markets. The tightening of financial conditions globally has weighed on economic activity, while inflation remains very high. Structural vulnerabilities expose markets and participants to the risk that shocks to markets could be amplified by liquidity supply and demand imbalances.

The Asset Management sector has seen outflows and low performance across most fund types in 2022, as assets under management experienced their sharpest decline since the Global Financial Crisis. Maturity mismatches in Commercial Real Estate Funds persist, and the impact of the UK Gilt market turmoil on leveraged Liability-Driven Investment Funds in 2022 confirmed existing concerns over fund liquidity risk management and excessive leverage, as well as contagion risks, given strong systemic interconnections.

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, published the first Trends, Risks and Vulnerabilities (TRV) Report of 2023 on the 09th February 2023. In that, Verena Ross, Chair, said “The confluence of high risks across the ESMA remit and fragile market liquidity may test the resilience of the financial system against possible future shocks.”

In light of this, we revisited liquidity risk and regulations as they stand today and how these challenge the buy-side.  We are pleased to present the results of our findings in the form of a white paper.

This white paper examines the following topics:

  • Liquidity Classification

  • Asset Classification

  • Highly Quality Liquid Assets

  • Liquidity Risk

  • Liquidity Sources

  • Data Challenges with regards to Illiquid Assets

  • Emerging Liquidity Risks and Regulations

  • Technology Solutions