U.K. Asset Managers Should Be Subject to Stress Tests, BOE Says

  • Financial Policy Committee sees risks if liquidity drops
  • Bank of England publishes Financial Stability Report

Bank of England financial-stability officials led by Governor Mark Carney backed plans to stress-test investment funds as part of their assessment of vulnerabilities in the U.K. financial system.

U.K. open-ended investment funds, which manage $1.3 trillion of assets, offer short-term redemptions to investors while buying longer-dated assets, which may prove difficult to sell if liquidity drops. The BOE’s Financial Policy Committee said on Tuesday that the first test will assess the resilience of markets to large fund redemptions.

“Their continued investment in less-liquid assets has reinforced the risk that large-scale investor redemptions could result in sales of assets by funds that might test markets’ ability to absorb them,” the committee said in its Financial Stability Report. “This could impair market liquidity, which is already fragile.”

Liquidity might be be tested if sterling corporate bonds fell 10 percent, which could reduce net purchases by more than 4 billion pounds ($6 billion), the BOE estimated. That’s almost one third of monthly market turnover and would exceed the amount asset managers predicted their funds could liquidate within a month.

The FPC also wants to get a better idea of the use of leverage by funds because there is no standardized measure of derivatives use by the funds, according to the report.

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