Fund liquidity management

January 2026

Amidst a flurry of publications in December 2025, the FCA launched a consultation paper (CP25/38) with proposals to further enhance fund liquidity risk management arrangements for certain types of UK-authorised funds.

This article summarises the implications of the FCA’s proposals and shares perspectives on liquidity management best practice and practical next steps for fund managers.

Global context

Regulators have undertaken significant work on fund liquidity management in recent years.

At international level, IOSCO and the FSB started analysis and policy work following almost unprecedented market volatility at the onset of the Covid-19 pandemic.

This culminated in revised liquidity management recommendations and guidance from IOSCO in May 2025 and revised recommendations from the Financial Stability Board (FSB) in December 2023. In addition, the FSB has published recommendations in more specific areas, such as on non-banks’ preparedness for margin and collateral calls. The FCA itself played a key role in these projects.

Going beyond liquidity, there is a clear and increasing interest from securities regulators and central banks alike in the growth of the asset management sector, potential vulnerabilities and transmission mechanisms to wider financial services and the real economy. Most recently, this was illustrated by the launch of the Bank of England’s second system-wide stress test which will focus on private markets.

The FCA’s consultation (CP 25/38)

The FCA’s proposals follow on from the international work described above as well as its own supervisory findings and high-profile enforcement cases in this space.

The consultation aims to align the UK framework with IOSCO and the FSB's international recommendations and clarify the FCA's existing expectations. The proposals would largely apply to UK UCITS and Non-UCITS Retail Schemes (NURS) and centre around two topics:

Anti-dilution tools
Previous FCA and Bank of England work found that fund managers in some cases did not tailor anti-dilution tools to specific funds and that there was room for improvement across the board.

The more impactful changes proposed in this context include:
- Policies and procedures: Fund managers would be required to implement policies and procedures that govern how tools should be used to ensure all investors are treated fairly. These will need to cover specific points (e.g. how the fund manager will identify actual or potential dilution).
- Calibration of tools: These policies and procedures would need to take account of explicit and implicit liquidity costs of transactions and estimate price impact where a significant quantity of a security is needed to meet redemption requests (i.e. market impact).
- Review mechanism: Fund managers would need to assess retrospectively for each fund how decisions to apply anti-dilution tools ensured that all investors were treated fairly. This assessment would need to be done at least annually.
- Prospectus disclosures: The prospectus would need to explain the newly required policies and procedures.
Liquidity risk management
It is notable the FCA is not introducing a new liquidity bucketing or classification framework for funds (as set out by IOSCO and the FSB) but is instead emphasising the importance of the fund manager’s responsibility for mitigating liquidity risks of a fund's portfolio. It is also notable that the FCA is not proposing any rules or guidance for delegated portfolio managers.

The most significant proposals for fund managers on risk management touch on:
- The presumption of liquidity: Removing the ‘listed asset presumption’ for transferable securities admitted to or dealt in on an eligible market. Instead, the FCA would require a case-by-case analysis of each security's liquidity with specified factors to consider. This is likely to have a significant impact in terms of operational challenges and costs. Firms will need to consider inputs such as the quality of secondary market activity and how the asset may trade during times of increased market volatility. While aspects of this may be able to be reliably automated, an increased burden could fall on portfolio managers and the second line of defence.
- Conflicts: Conflicts are a high priority for the FCA more generally. The proposed new requirement to consider conflicts of interest, including between remaining and exiting investors, codifies more general existing FCA expectations. Although many managers will already be doing this in practice, it will likely require specific attention to ensure that conflicts are considered on a more systematic basis.
- Stress testing: The FCA will bring ESMA's 2020 guidelines into its Handbook as a new annex to COLL with small amendments. Changes would touch on the frequency of testing, making reverse stress testing a standard requirement, considering non-redemption-related pressures, and changes to the redemption coverage ratio. The new requirement for stress testing to be carried out at least quarterly is likely to represent an uplift for many firms compared to current practices.
- LRM guidance: A new COLL annex will bring together the key points from the FCA's various publications on liquidity management to date and its expectations (e.g. ensuring portfolio liquidity is consistent with the redemption policy). Most notably, this includes guidance that liquidity management tools should be calibrated based on a vertical slice or pro-rata sale of assets – something the FCA has previously stated but has not been codified in the Handbook.

Regulatory divergence

As discussed in KPMG in the UK’s recent article on upcoming trends, regulatory fragmentation and divergence is likely to increase into 2026, and fund liquidity is another example of this.

As the FCA consults on its proposals for UK authorised fund managers, the EU has already finalised new rules, standards and guidelines on liquidity management tools. EU UCITS Man Cos and AIFMs will need to comply with this relatively prescriptive approach from 16 April 2026 as part of the AIFMD II package. Another example of divergence is likely to arise from potential changes to the EU’s UCITS Eligible Assets Directive where ESMA has proposed to remove the presumption of liquidity for listed assets.

While in both cases the overall policy goals are similar, there will be differences in the detail for managers operating in both jurisdictions to navigate and implement in day-to-day operations. In the interest of scale and efficiency, firms will want to align their operating models and processes with both sets of requirements.

Implications and next steps for fund managers

Although these proposals are subject to feedback before the FCA makes its final rules, the consultation serves as useful reminder that fund liquidity management remains an important area of FCA focus.

From experience, KPMG in the UK’s perspectives on leading practice in this context include the following:

Governance:
- Clear ownership and allocation of responsibilities across teams is essential.
- The FCA has noted that dedicated, separate liquidity committee structures and frameworks are best placed to manage liquidity risks. These should be paired with sufficient in-house risk management expertise, clearly documented escalation protocols and insightful and decision-useful MI.
- Overall governance arrangements should facilitate a seamless end-to-end liquidity management process that incorporates liquidity considerations at every stage of the product lifecycle within BAU. This should range from fund launch to stress testing and ongoing calibration of anti-dilution tools.

Operating model: Firms benefit from a global operating model that adopts a common process but can meet regulatory requirements in all jurisdictions that the group operates in. This can deliver a coherent approach to risk management across jurisdictions.
Pre-trade controls: Given the removal of the listed asset presumption has been proposed both by the FCA and by ESMA, firms should consider starting to develop processes and controls that will support asset-by-asset liquidity assessments at pre-trade. While automated pre-trade controls will be key to this, evidencing that the assessment is a core part of a portfolio manager’s investment decision making will also be key.
Consumer Duty: The approach to risk management and anti-dilution tools should be fully consistent with the Consumer Duty, including within the product design process and ongoing portfolio management. The Duty is an important tool in the FCA’s supervisory toolkit and firms should ensure that their approach will prevent foreseeable harm and that they can monitor their investors’ outcomes.
Selection, calibration and activation of tools: New or revised policies and procedures should clearly articulate how anti-dilution tools are chosen and managed. Dilution thresholds and factors should be regularly reviewed with reference to the FCA’s requirements and market conditions, and relevant committees should be kept up to date.
Stress testing: The FCA has been clear that UK managers should already be compliant with ESMA’s 2020 guidelines. The approach to stress testing should be based on clearly documented and appropriate assumptions for plausible scenarios, with results regularly communicated to relevant governance structures.

Conclusion

The FCA considers that its proposals should not require fund managers to make significant changes to their existing practices and will not result in portfolio adjustments in the short term. However, these measures will clarify its expectations and firms will need to make adjustments in response.

Liquidity risk management permeates every aspect of an asset manager's business with stakeholders across front, middle and back-office functions. Now is an ideal time for firms to take stock of their liquidity management arrangements if they have not done so recently and put themselves on a solid footing ahead of the publication of the policy statement later this year.

We can assist with independent reviews of your liquidity management framework and operating model, or with designing and implementing enhancements and changes. If this would be beneficial, please get in touch.