Availability and use of Liquidity Management Tools in Irish-domiciled Investment Funds

The use of price-based liquidity management tools (P-LMTs) can mitigate first-mover advantage dynamics in funds with liquidity mismatches, as well as better allocate transaction costs across fund investors. A novel survey carried out by the Central Bank has found that these tools are widely available in Irish-domiciled investment funds, with 84% of funds having at least one such tool. Anti-dilution levies (ADLs) are the most commonly available P-LMT, followed by redemption fees and swing pricing. The survey also highlights that while P-LMT availability is relatively high, the use of these tools lag availability, with around one-third of funds using P-LMTs at least once over the 2022-2023 survey period. There is a lack of consistency in the application of P-LMTs, with the main determining factor behind the choice and use of specific tools appearing to be a desire for standardisation across all managed funds within a management company, as opposed to asset class-specific factors. Few of the funds surveyed explicitly incorporate the expected price movement as a result of the fund’s trading activity (an implicit cost known as market impact) in addition to the bid/ask spread, as recommended in the FSB/IOSCO recommendations and guidance. The inclusion of a specific market impact estimate was higher among funds trading in less liquid markets, where the bid/ask spread may not fully capture all implicit transaction costs.