Investors in open-end funds should be given a price discount when redeeming assets to ensure fair outcomes for both redeeming and remaining investors, the U.K. Financial Conduct Authority and Bank of England recommended following a review.
The FCA and BOE endorsed a model recently adopted by the Securities and Exchange Commission that mitigates liquidity mismatch between funds' assets and firms' funding liquidity of liabilities, which could create redemption constraints when firms' are over-invested in illiquid assets.
The review identified that redeeming investors should receive a price for their fund units that reflects the discount needed to sell the required portion of a fund's assets, the Bank of England said.
Redemption notice periods should last as long as needed to sell the required portion of a fund's assets without discounts beyond those captured in the price received by redeeming investors, the bank added.
The FCA and BOE will will now consider how these principles could be implemented in 2020, as regulators agreed the mismatch between redemption terms and the liquidity of some funds' assets creates systemic risk.
In a recent high profile case, a suspension of trading by London-based Woodford Investment Management of its £4.3 billion ($5.5 billion) equity income fund prevented a U.K. local authority pension fund, the £6.4 billion Kent County Council Pension Fund, Maidstone, from redeeming its £263 million investment despite concern about the falling value of the investment.
