The stress testing obligation
FUND 3.6.3R(2) requires stress tests regularly, under normal and exceptional liquidity conditions, for each fund that is not an unleveraged closed-ended AIF. No frequency and no method are stated. Articles 46 to 49 of the AIFMD level 2 regulation carry the detail.
Asset illiquidity and atypical redemptions must be modelled together, with the obligations the fund cannot defer: margin and collateral calls, drawdowns to underlying vehicles and financing.
Reverse stress testing is named nowhere in FUND 3.6 or FUND 3.7, and is a discipline a firm adopts rather than a Handbook requirement.
Results reach the FCA under FUND 3.4.3R(5), with the percentage of assets subject to special arrangements arising from their illiquid nature and the current risk profile.
Proposed, not law
CP26/28's draft ALTS rules would state what a liquidity stress test has to cover, including at 7.3.14R(3)(b) that asset illiquidity and atypical redemption requests are simulated together, and at 7.3.14R(4) that the AIFM must act in line with the best interests rule in response. Implementation is intended for 2028.
Fair treatment between redeeming and remaining investors
Every liquidity decision moves value between leaving and remaining investors.
SYSC 10.1.24R requires an AIFM to take all reasonable steps to avoid conflicts of interest and, where they cannot be avoided, to manage, monitor and where applicable disclose them, so as to prevent them adversely affecting the funds and their investors and to ensure the funds are fairly treated.
No in-force AIFM conflicts provision names the conflict between two groups of investors in the same fund, which is what a gate or suspension creates. The fair treatment limb and the duty to avoid, manage and monitor are the hooks. CP26/28's draft rules would name that conflict.
An investor told before the others that a gate is coming obtains preferential treatment that no constituting instrument discloses.
Activating a liquidity management tool
EU law
Under Directive (EU) 2024/927, suspension and side pockets sit outside the two tools selected under Article 16(2b) and may be activated only in exceptional cases where circumstances so require and where justified having regard to investors' interests. Article 16(2c) makes activation of any selected tool conditional on its inclusion in the fund rules or instruments of incorporation.
Six entries in the decision file can only be written before or during the event.
- The classification. Which tool, whether it is one selected into the fund rules or one outside that selection, the clause relied on, and for a suspension or side pocket the finding that the case is exceptional and activation justified in investors' interests.
- The information the decision-maker held, timestamped: the redemption position, the liquidity position and the pricing position on any affected asset.
- The alternatives refused, with what each would have done and why it was not used.
- Who decided, under what authority, the quorum present and any dissent.
- The fair-treatment analysis, saying which way value moved and why that was defensible.
- The review interval and its owner, set in the activation decision itself.
On an authorised fund, COLL 7.2.1R(1) lets the manager suspend only with the depositary's prior agreement, and requires suspension without delay if the depositary so requires.
Notification timings
EU law
Article 16(2d) sets three timings. Suspension: notify without delay, on activation and on deactivation. Tools 2 to 8 on the Annex V list: notify without delay, but only where the activation or deactivation is not in the ordinary course of business as envisaged in the fund rules. Side pockets: notify within a reasonable timeframe before activating or deactivating, the only clock running ahead of the event, and it carries no stated period.
COLL 7.2.1R fixes the sequence for an authorised fund. The manager, or the depositary where it required the suspension, must inform the FCA immediately with the reason, then confirm in writing as soon as practicable. Unitholders must be notified as soon as practicable after the suspension commences, in a notification drawing particular attention to the exceptional circumstance, clear, fair and not misleading, and saying how to obtain further information. The manager must publish, by website or other general means, sufficient detail to keep unitholders informed, including the likely duration where known.
Outside the authorised fund rules, no in-force UK rule requires investors to be told at the time a tool is activated. FUND 3.2.5R reaches the same facts periodically, with no stated frequency.
Review and restart of a suspension
A suspension may continue only for as long as it is justified having regard to unitholders' interests, and must cease as soon as practicable after the exceptional circumstances have ceased. The manager and depositary must formally review it at least every 28 days and inform the FCA of the results and of any change to the information given on suspension. Restart is a two-step filing: inform the FCA of the proposed restart, then confirm by notice immediately afterwards.
Every deal accepted during the suspension, and every deal outstanding before it, is priced at the first valuation point after dealing restarts. An additional valuation point must be declared as soon as possible after restart where the fund operates limited redemption arrangements and a valuation point was affected.
Record-keeping and the individual standard
FUND 3.6 contains no record-keeping requirement. What compels the file for an unauthorised fund is the conduct rule, the conflicts rules, the stress-testing rule and the periodic disclosure rule.
The duty of responsibility in section 66A of the Financial Services and Markets Act 2000 reaches a senior manager who did not take the steps a person in that position could reasonably be expected to take. The requirements it reaches include those imposed under the AIFM Regulations 2013.
Alongside this module
Where this subject is covered elsewhere in the course.