Fund liquidity risk management: a challenge for Asset Managers


In response to the AMF's requirements concerning liquidity management tools, Societe Generale Securities Services (SGSS) provides its asset manager clients with a range of services.

Liquidity management mechanisms

The Gates mechanism helps to avoid suspension of the fund

In exceptional circumstances, the implementation of liquidity mechanisms recommended by the French securities regulator, AMF (Autorité des Marchés Financiers), means that forced sales under poor price conditions can be avoided while allowing the fund to progressively meet redemption requests, or even, as a last resort, to avoid suspension.

With the implementation of this redemption capping mechanism called Gates, redemption requests can be temporarily spread over several net asset values (NAV) as soon as they exceed an asset threshold.

Fund constituent documents must provide for:

  • The option of activating Gates.

  • The activation threshold, i.e. the percentage of the fund's net assets above which redemptions are blocked. The use of Gates must be justified with regard to the frequency of the Collective Investment Undertakings’ (CIU) NAV, its management approach and the liquidity of the assets it holds.

  • The maximum duration for applying Gates.

  • Unexecuted orders may be carried forward to the next NAV or cancelled if the fund documents so provide.

Swing pricing or Anti-Dilution Levies distribute the extra costs incurred

In addition to Gates, mechanisms of swing pricing and Anti-Dilution Levies address the additional costs of readjusting the fund's assets: these two mechanisms allow the management company to pass on to the unitholder (incoming or outgoing) the cost of the portfolio readjustment necessary to manage the volume of subscriptions/redemptions. It is in the way these costs are allocated that the differences lie.

Swing pricing is the mechanism for adjusting a fund's NAV upwards (in the event of a net subscription) or downwards (in the event of a net redemption). The adjustment does not take the form of a commission. The objective is to maintain a single value for the application of subscription/redemption orders at all times, while at the same time ensuring that the cost of portfolio readjustment  is not borne in any way by the units held in the fund.

The mechanism must be set out in the fund's prospectus and be subject to governance within the portfolio management company:

  • for the determination of application thresholds: subscription or redemption level from which a swing is applied to the valuation

  • swing factors: level of variation applied to the valuation. The factor depends on the average liquidity of the securities held by the fund and the costs of selling or acquiring these securities.

In contrast, under the Anti-Dilution Levies or ADL mechanism, the costs of portfolio readjustment are still passed on to the subscribed and redeemed units by means of entry and exit fees. This practice may be used to charge the outgoing or incoming unitholder for the sale or purchase costs incurred by the fund when the portfolio is readjusted, without adjusting the net asset value. This mechanism leads to the application of fees, which may differ from one day to the next, by the parties involved in the transmission of the order.

For the final choice of the anti-dilutive method, it seems important to take into account the problems posed by the methods considered.

New requirements of the AMF doctrine

On 6 October and 24 November 2022, the AMF published two updates to its doctrine DOC-2017-05, strengthening requirements on the functioning of liquidity management tools in funds. (*) Until now, the AMF's doctrine has not provided a framework for the use of swing pricing or Anti-Dilution Levies by asset management companies.

These amendments provide for new obligations in the regulatory documentation of funds, in the absence of the introduction of a redemption request cap mechanism (Gates) and/or of a mechanism to offset or reduce the costs of portfolio readjustment borne by all unitholders during subscriptions and redemptions (swing pricing or ADLs).

Asset management companies that do not introduce a liquidity management mechanism in the regulatory documents of their funds must:

  • declare the reasons for this and provide the AMF with a statement acknowledging the risks incurred by the fund and its investors,

  • regularly check, as part of liquidity stress tests, the validity of the analysis that led them not to introduce one of these tools.

These new requirements apply now for new funds and no later than 31 December 2023 for existing funds, when these new or existing funds do not have these mechanisms in their regulatory documents.

SGSS offers a range of services to manage liquidity risks

Because liquidity management tools are extremely useful in times of crisis, SGSS offers a range of services and, to this end, has automated the processing of Gates and swing pricing mechanisms to meet the needs of fund managers, both in AIFs and UCITS.

With this in mind, SGSS has decided to implement a tailored prevention tool that monitors in real time the management of liabilities and the liquidity risk of funds called Fund Alerts.

This digital solution enables fund managers to swiftly activate a commercial or regulatory action plan by being informed of the progress of any transaction before it closes, as well as the fund inflows/outflows as soon as it closes, receiving the information in real time. 

According to criteria defined by the fund manager, Fund Alerts proposes four different alerts:

  • An alert at the close of the subscription-redemption orders, according to a percentage or amount threshold determined by the fund manager in SG Markets, which allows them during periods of high tension:

  • to monitor inflows/outflows and implement risk prevention measures

  • to implement regulatory measures, such as activating Gates or swing pricing

  • An alert at the close of the subscription-redemption orders, linked to the materiality threshold. An alert is sent to the manager when the fund approaches or reaches the materiality threshold.

  • Two real-time alerts on redemption orders and subscriptions received enabling a commercial action plan to be implemented if necessary.

With the notifications provided by Fund Alerts, the manager can react quickly and be notified as soon as possible that he must implement the liquidity mechanism(s) defined in the fund’s prospectus.

Discover more about our Fund Distribution solutions and Fund Alerts.

Morgane Séveno, Product Manager Fund Distribution France & Trustee and Christian de Beaufort, Public Affairs and Regulation, SGSS

16 October 2022: The AMF updates its doctrine to facilitate the introduction of liquidity management tools | AMF (
224 November 2022: The AMF supplements its doctrine on liquidity management tools | AMF (