FCA’s Director of Markets Policy and International, David Lawton, has spoken at the Financial Risk International Forum on systemic risk posed by investment funds to the financial system, and the regulatory changes that might limit these risks.

Mr Lawton identifies the ability to manage fund redemptions in an orderly way, particularly in the context of post-crisis market conditions, including liquidity, as a key funds vulnerability.

However, he also notes that funds show good practice at understanding and managing both the liquidity of their assets and the expected demand for redemption.

His conclusions are

It is possible to imagine a set of scenarios in which a trigger event (for example a sudden, unexpected increase in central bank rates) or losses at one fund could cause knock on effects for other firms and broader falling asset prices.  There could even be self-reinforcing factors that exacerbate this.

A key vulnerability being discussed is the ability to manage fund redemptions in an orderly way, particularly in the context of post-crisis market conditions, including liquidity.  I have said that FCA evidence shows that funds have demonstrated some good practice at understanding and managing both the liquidity of their assets and expected demand for redemption.  And the case is far from proven that market liquidity is now at low enough levels to be a dangerous exacerbating factor. Research from FCA colleagues is contributing to the debate on this point.

The picture of the systemic risks is still being drawn through the work of the FSB, IOSCO and others.

Banks, insurers, infrastructures, asset managers and others all interact, and can both exacerbate and mitigate risks and processes within the financial system, in many and complex ways. And don’t forget investors too. Ultimately, we mustn’t forget the purpose of these markets – to serve the needs of investors and it’s that message I’d like to leave with you today.

Read the full speech =  http://bit.ly/1MdcEaw