The in-force obligation
FUND 3.6.3R(1)(a) requires an AIFM to employ an appropriate liquidity management system and procedures enabling it to monitor the liquidity risk of each AIF it manages other than an unleveraged closed-ended AIF. It states no contents, no frequency and no owner, and FUND 3.6 sets no review cadence: FUND 3.7.6R requires review of the risk management systems with appropriate frequency and at least annually, and FUND 3.6 has no counterpart. FUND 3.6.4G points to articles 46 to 49 of the level 2 regulation, which the Handbook does not reproduce.
Currency
Articles 46 to 49 were not read at source. Read and date the current text before drafting against them.
The 2023 multi-firm review
Across 14 firms examined on governance, stress-testing methodology, redemption processes, tools and valuation, the building blocks were usually in place but lacked coherence as a full process and were not always embedded in daily activity. Most firms fell short in some aspect; a minority had inadequate frameworks and received detailed feedback for remedial plans.
Many attached insufficient weight to liquidity risk in their oversight arrangements, and challenge and escalation were insufficient in volatile conditions. Board discussion, and the reporting behind it, fell short of what the FCA expected, with liquidity raised only on an exception basis.
Source status
Professional summaries of the FCA's 6 July 2023 letters to chief executives and AFM boards.
Framework contents under the draft rule
Medium and large UK AIFMs would also review the system's effectiveness periodically, a large AIFM at any material change and at least annually, and would look through a holding in another open-ended fund to that fund's asset liquidity rather than its stated redemption terms, unless the units are actively traded on an investment exchange.
Proposed, not law
Draft ALTS 7.2.4R; CP26/28 7.28 to 7.30, 7.32. Consultation closes 14 October 2026, implementation envisaged 2028.
The monitoring obligation
Draft ALTS 7.2.6R resolves the monitoring duty into one continuing assessment and four supporting ones.
| Assessment |
|---|
| Asset liquidity in the market relative to the AIF's redemption terms, regularly |
| Timeframe to liquidate without a significant price discount, and sensitivity to other market risks or factors |
| Where relevant, trading volume and price or spread sensitivity of individual assets, in normal and exceptional conditions |
| For an open-ended AIF, the investor base profile, including each investor's size relative to the AIF |
| Where exposure to inherently illiquid assets is significant, the distinct risks: long dealing periods, and a price materially different from the valuation |
Conflicts between redeeming and remaining investors
No in-force AIFM conflicts provision reaches two groups of investors inside the same fund, the division a gate or suspension creates. Draft ALTS 7.2.12R would require a small UK AIFM of an open-ended AIF, in addition to SYSC 10, to identify, manage and monitor conflicts arising or foreseeably arising between investors who wish to redeem and those who wish to retain, and between investors whose differing rights of participation require liquidity decisions about those rights.
Draft ALTS 7.2.9R would require tools to be used when that is in the best interests of the AIF and its investors. Draft ALTS 7.2.10G adds that the rule requires an authorised UK AIFM to consider whether a proposed action might adversely affect market stability and integrity, and to avoid it.
Proposed, not law
Draft ALTS 7.2.9R, 7.2.10G, 7.2.12R.