Liquidity Dilemma Needs A Regulatory Response

A few high-profile fund suspensions have recently driven the focus back to market liquidity and how this can affect the ability of funds to meet certain redemption scenarios. Despite ample liquidity at the macro level, some areas of strain remain at the micro level and could worsen in case of a material deterioration of economic conditions, a recession or a spike in volatility.

Some markets are highly vulnerable to a low-liquidity environment due to their dependence on foreign capital inflows and their concentration on trades, where the risk of an impact on market prices is high if asset sales have to be executed in a short period. In addition, some exceptional events such as Brexit could increase the pressure on market liquidity.

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