Fund liquidity is a crucial topic for the European Securities and Markets Authority, as expressed in a recent speech by chairman Steven Maijoor in which the regulator-of-regulators promised more stringent supervisory activity on the subject in every European Union country next year.

Maijoor was speaking at the EFAMA Investment Management Forum in Brussels. He promised further action in a circumlocutory way, vowing to orchestrate a campaign for the EU's national competent authorities or NCAs to carry out.

"ESMA will facilitate a common supervisory action on liquidity management by UCITS. This is an exercise under which EU NCAs will agree to simultaneously conduct supervisory activity in 2020 on the basis of a common methodology to be developed together within ESMA. This initiative, and the related sharing of practices across NCAs, should represent a significant supervisory effort which is expected to help ensuring consistent application of EU rules on UCITS liquidity management and ultimately enhance the protection of investors across the EU."

A fund is said to be 'liquid' if it can sell off its assets (stocks, bonds etc) without much trouble if it suddenly has to meet redemption calls from investors. The EU Eligible Assets Directive of 2007 presumes that any transferable securities that are admitted or dealt in on a regulated market are liquid, but ESMA realises that this might not be the case sometimes. The directive, moreover, bans a UCITS (Undertaking for the Collective Investment of Transferable Securities) from making such an assumption if it knows of such a problem with this-or-that security.

ESMA, incidentally, published some guidelines regarding liquidity stress testing in UCITS and alternative investment funds on 2nd September. These are to come into force on 30 September next year.

No other ESAs involved

Maijoor's evocation of co-ordination suggests that ESMA might be about to launch the new campaign in tandem with the European Banking Authority (which has now finished its move to La Defence, a banlieu outside the Peripherique of Paris) and the European Insurance and Occupational Pensions Authority, which together with ESMA constitute the three "regulators' regulators" that give orders to national authorities such as the Financial Conduct Authority and the Autorité des Marchés Financiers. This is not the case, however; an ESMA spokesman told Compliance Matters: "This has nothing to do with the other two. It's all ours."

Maijoor also hinted that ESMA wanted various rules on the subject to change: "In the context of heightened attention for UCITS fund liquidity risks, questions have been raised regarding the adequacy of the existing regulatory regime and whether additional rules are needed."

Again, his spokesman said that this was not the case: "It's not our role. The European Commission has to ask first for our advice."

Nevertheless, in his speech Maijoor looked forward to ESMA tightening its grip on the NCAs as time went on.

Woodford and H2O

Taking care not to mention any names, Maijoor referred to the cases of Woodford and H2O as the warning signs that set his agency on its path towards further action.

"Two events affecting UCITS recently have drawn attention to liquidity risk. In one case, the manager decided to suspend redemptions following sustained outflows. In the other case, investors raised concerns over potential illiquid bonds exposures. Although both episodes did not turn into systemic events in the end, they have raised some concerns about UCITS and the label itself has been publicly questioned since then."

In June H2O issued a press release that stated: "H2O confirms that it is considering medium-term solutions to re-organise its holdings in non-rated corporate bonds, in order to eliminate entirely any liquidity concerns in H2O's UCITS funds. H2O has no plans to transfer these bonds to another investment vehicle. In the meantime, H2O sees value in these bonds and will not dispose of them at the current discounted price."

The rise of ESMA

ESMA is still expanding. It consists of 250 people, with probably another 100 contractors. In the next 18 months the agency plans to add a further 150, bringing its headcount up to 400 by the end of 2021. This is a result of a review of the ESAs by the European Parliament and Commission. Most people at ESMA are French; it is not required to draw its staff equally or proportionally from amongst the nations of the EU. The second largest national group are Italians. Staff come mainly from national regulators, but there are others from the private sector, the European Commission and other places. ESMA's address changed last month to 201-203 Rue de Bercy, 75012 Paris.

The ESAs have nowhere near the same headcount as the largest national regulators in the EU. According to a very pro-EU think tank in Brussels called CEPS, the FCA in 2016 had 7,786 employees; BaFin, Germany's regulator, had 13,774; the Italian regulator had 7,587; and the French AMF had 13,229. Meanwhile, the European Banking Authority had 189 (the ESMA spokesman thought that today's figure was 150) and EIOPA had 139.

The ESMA spokesman explained: "We're bigger than the EBA and EIOPA because we're a regulator; we're only the direct supervisor for a small number of firms, but we do supervise some. We're magnitudes bigger than the other ESAs. We regulate Europe's 26 credit-rating agencies, which obviously include Standard & Poor's, Moody's and Fitch (not counting their national subsidiaries) directly and have done since 2011. They are mainly non-European firms because 92% of the credit rating agency market is still American. We also directly regulate trade depositories."