Consultation response: The Riksbank supports measures to reduce liquidity risks in the fund sector
News, Consultation responses In its consultation response, the Riksbank mainly supports the proposals in the interim report "A stronger fund market". The Riksbank would like to emphasise in particular the importance of introducing the proposals that improve the conditions for better liquidity management in the fund sector, such as introducing requirements for fund management companies and alternative investment fund (AIF) managers to select liquidity management tools, as well as reducing the requirements for redemption frequency and introducing the possibility of a notice period in mutual funds. Furthermore, the Riksbank considers that potential risks to mortgage borrowers and financial stability, as a result of new EU rules for mortgage funds, need to be manageable in order for mortgage funds to continue to be allowed to operate in Sweden.
New liquidity management tools strengthen financial stability
Some funds – especially corporate bond funds – have a clear mismatch between the liquidity of their assets and fund units, especially in stressed market conditions. It is therefore a positive step to now introduce legal requirements for fund management companies and AIF managers to apply at least two tools to mitigate liquidity risks in mutual funds and open-ended AIFs, such as redemption gates, swing pricing and anti-dilution levies. The Riksbank also encourages fund management companies and AIF managers to choose more than two tools, when needed, and to calibrate them in a way that ensures they can handle extreme conditions.
Notice period for mutual funds effectively reduces liquidity risk
The inquiry proposes changes to the rules on redemption frequency and notice periods in mutual funds, with the aim of improving the match between the funds' redemption possibilities and liquidity profile. The Riksbank supports the Inquiry's proposal to reduce the minimum redemption frequency to two days per month and to make it possible to introduce a notice period in these funds. However, the Riksbank proposes that the maximum notice period be set at ten banking days, instead of five, as proposed by the inquiry, at least for corporate bond funds. This is in line with the standard in many other EU countries. The Riksbank also points out that conditions, and where necessary IT systems, need to be changed at the premium pension fund platform and at the occupational pension companies' selection centres to improve the chances that the increased flexibility in redemption frequency and notice period will be used in practice.
Potential stability risks in mortgage funds must be manageable
The Swedish mortgage market is dominated by a few banks. The Riksbank therefore welcomes the emergence of new participants that contribute to increased competition and lower risks as a result of greater diversification. However, this presupposes that the participants are subject to appropriate regulation. The new EU regulatory framework for mortgage funds that is to be introduced into Swedish law could entail significant risks for both mortgage borrowers and financial stability. The Riksbank therefore considers that a prerequisite for allowing mortgage funds to operate in Sweden in the future is that there are sufficient possibilities to reduce such potential risks. The Riksbank also proposes a number of measures that need to be taken to ensure that potential risks can be satisfactorily limited, such as Finansinspektionen limiting the possibility for mortgage funds to use financial leverage and the Government requesting further macroprudential measures in future EU negotiations to be able to limit the liquidity risks in these funds.