On Thursday 5 September, the European Securities and Markets Authority (ESMA) presented a framework for national supervisors to scrutinise the behaviour of the harmonised investment fund industry in the European Union in the event of a financial crisis, whose total assets under management increased from €6,200 billion to €9,300 billion between 2007 and 2018.
ESMA observed the industry's behaviour in the event of a financial crisis, during which a significant number of investors would reduce or even withdraw their holdings in a fund over a very short period of time ('redemption shock').
"The results show that overall, most funds are able to cope with such extreme but plausible shocks. However, pockets of vulnerabilities are identified, especially for High Yield (HY) bond funds", the European authority said in a statement. Up to "40%" of these high-yield bond funds may experience a liquidity shortfall in the event of a market shock.
In June, asset manager Neil Woodford's fund was suspended by the UK supervisor due to its inability to meet investors' redemption requests while ensuring that it could make daily repayments.
Further, the ESMA simulation framework shows the impact of the funds’ liquidation on financial markets, as funds need to sell assets to meet investors’ redemptions, thereby exerting downward pressure on assets prices. The results show that the overall price impact is limited for most asset classes, as sales by funds are only a fraction of aggregate trading volumes. Again, the impact would be greatest on high-yield funds.
See the operational framework: http://bit.ly/2lxAAhR (Original version in French by Mathieu Bion)