News 22/09/23

Pay ongoing attention to sufficient LMTs and correct AIFMD reporting

The Dutch Authority for the Financial Markets (AFM) calls on Dutch fund managers to ensure they have sufficient and appropriate liquidity instruments for investors of every kind. The AFM also stresses the importance of correctly reporting to the AFM when adapting liquidity management tools (LMTs) by alternative investment funds (AIFs).

In brief

• Fund managers urged to pay ongoing attention to sufficient and appropriate LMTs
• Not all alternative investment funds correctly report use of LMTs
• AFM and DNB reiterate recommendations concerning LMTs and AIFMD reporting

This call is set out in a sector letter addressed to Dutch fund managers by the Dutch Central Bank (DNB) and the AFM. It follows an investigation carried out by the AFM in 2022 into the number and composition of LMTs per unit fund among all Dutch fund managers.

Fire sales of assets

Fund managers have a responsibility to manage liquidity risks within unit funds. While most funds include provision for three or more LMTs, there are also funds that are without any LMT. This can prevent their temporary closure in case of acute market stress, for example. This in turn can result in asset fire sales, which then adds to the stress in the market. The investigation also shows that not all alternative investment funds are correctly reporting the use of LMTs to the AFM.

Earlier investigation into LMTs

An earlier investigation conducted by the AFM on behalf of ESMA in 2020 found that not all unit funds had sufficient LMTs available. The AFM asked the fund managers to examine whether the available LMTs were sufficient and fully matched to the fund's characteristics.

Reiterated recommendations

The AFM and DNB reiterate their earlier recommendations. More specifically, the research findings call for fund managers to take the following actions:

1. The AFM and DNB call on fund managers to regularly review their liquidity management practices and, where necessary, provide appropriate LMTs by amending the prospectus.
2. Changes to the prospectus should be notified to the AFM and investors. The sector letter includes guidelines on how fund managers should inform the AFM regarding the availability and use of LMTs.
3. The AFM expects fund managers of AIFs to include the active LMTs in their AIFMD reporting and correct any discrepancies.