LONDON (Reuters) - Europe’s largest standalone asset manager is well prepared should policymakers’ worst fears about bond market liquidity come to pass, its head of public policy said as recent events focus attention on the potential for tighter regulation.
A collapse in some euro zone bond prices in recent weeks and expectation of rising U.S. interest rates in the coming months have spooked investors and raised concerns over the bond market’s ability to handle any rush for the exit.
Schroders’ Sheila Nicoll, however, told the Reuters Regulation Summit in London that regulators need too recognise that fund operators have several tools to help them withstand such market stress.
“We are equally worried about liquidity in the bond market ... but liquidity is something asset managers know about, it’s not something new,” Nicoll said.
“There is some exaggeration of the impact that it would have on the funds industry.”
The European Commission is talking to market participants about how to prevent a disorderly market reaction when interest rates start to rise, though no rule changes have yet been proposed.
In the meantime, Nicoll says, asset managers have a number of measures at their disposal to protect funds from mass withdrawals by investors.
Among them is the ability to hold a higher proportion of assets as cash, though this can hit returns. Other safeguards could include withdrawal limits, redemption fees, offering fund assets instead of cash.
If those steps proved inadequate, the last resort would be to suspend redemptions, though this carries significant reputational risk and is no long-term guarantee that investors will not pull out at the earliest opportunity.
Schroders manages 320 billion pounds ($504 billion) of assets on behalf of a range of retail and institutional clients, as well as offering wealth management services.
The company, Europe’s largest standalone asset manager by market capitalisation, is in contact with regulators over its plans to deal with reduced bond market liquidity.
“Regulators are asking us about this and what measures we have in place, but we always stress test,” Nicoll said.
“We stress test the liquidity of our funds and are able to ramp up as and when required.”
($1 = 0.6344 pounds)
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Additional reporting by Nigel Stephenson, Carolyn Cohn and Nishant Kumar; Editing by David Goodman