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Australia | Publication | August 2020
In response to recent market volatility and disruption, operators of retail investment funds and their boards have been reminded of their governance and conduct obligations in light of potential liquidity risks. In addition, the Australian Securities and Investments Commission (ASIC) has requested that responsible entities, as the operators of registered schemes (retail funds), assist the regulator with monitoring the situation by introducing notification measures. We briefly explore these obligations and what they may imply for both existing compliance measures as well as testing of operational and risk management systems.
In recent weeks the Australian and global markets have been impacted by the disruption caused by the current pandemic. This has played out in different contexts in asset management, but from a liquidity management perspective, it has been felt both at the underlying asset level and through trading operations. Certain asset classes and sectors have been more clearly affected such as retail, tourism and airlines. In addition, volatility in bond markets has caused certain unlisted bond funds to adjust their buy-sell spreads in order to cater for the pricing impacts. In the medium term, we may also expect to see investor-led changes to the patterns of applications and redemptions from investment funds as the broader economic effects of the pandemic play through. These factors all have the potential for a significant effect on the liquidity profile of certain investment funds.
In this context, ASIC published in April a letter to responsible entities which reminded them and their boards of some key statutory obligations:
In its letter to responsible entities, ASIC also emphasised some more specific expectations in terms of scheme liquidity:
In addition, ASIC has requested responsible entities provide notifications to ASIC in the event that any scheme becomes non-liquid or if a decision is made to suspend redemptions. This notification is separate to the statutory breach reporting obligations and so in that sense can be viewed as supporting ASIC’s monitoring activity in this area. It may also inform actions that ASIC takes in the future to assist responsible entities and members should issues arise.
Finally, ASIC in its letter reminded responsible entities that, should they be in a position where they have to declare a scheme as non-liquid for an extended period of time, it may be relevant to consider applying to ASIC for hardship relief. Subject to an entity satisfying the relevant criteria, ASIC can grant relief to facilitate partial investor access to funds in cases of hardship and also provide rolling withdrawal relief to responsible entities to simplify the procedure for periodic withdrawal offers.
In light of the above, there is a range of measures that responsible entities can and should be adopting to ensure that their operational and regulatory response to these developing market conditions are sufficiently robust to address liquidity issues. Key questions to ask may include:
We have already begun to see and advise on proactive steps being taken by a number of responsible entities, including upgrades to third party asset manager monitoring, reviews of board delegation and reporting processes as well as checks on current disclosure and constituent document terms. While it remains to be seen whether there will be a repeat of the unlisted scheme liquidity issues that arose in Australia during the global financial crisis, many of the lessons learned during that period will no doubt be relevant for the current and upcoming challenges faced by investment funds and their operators.
Nina Varumo is a freelance portrait and documentary photographer based in Stockholm. A recent project of hers Kvinnor till sjöss (‘Women at sea’) is on ongoing photo series highlighting the working life of female seafarers in order to change the stereotypical image of what and who is a seafarer.
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