"Gates": A solution to address liquidity risk

At the end of 2021, Banque de France and the AMF published a study on funds’ liquidity management tools, highlighting in particular the so-called Gates mechanism. What is this about?

According to this study, only 7% of funds had Gates in 2020.

However, in 2018, the AMF asked asset management companies to use Gates to facilitate the management of liquidity crises in unitholders’ best interests.

This subject is becoming topical again in view of the tensions related to the COVID crisis.

What does this Gates mechanism consist of exactly?

In illiquid markets, it may be difficult to sell quickly at the best price without damaging the interests of the unitholders and the fund.

By introducing Gates, it is possible to temporarily spread redemption requests over several net asset values (NAV) as soon as they exceed an asset threshold, set out in the fund's documents of incorporation.

Figuratively, this mechanism works like the gates of a dam that channels outflows.

To avoid forced sales under poor price conditions, while allowing the fund to progressively meet redemption requests, the management company may decide to spread redemptions over several net asset values using Gates.

What is the regulatory framework of this liquidity management tool?

The conditions and procedures for setting up Gates are set out in the March 2017 AMF instruction.

This system complements other mechanisms such as:

• Redemptions in kind,

• Asset ring-fencing (so-called “side pocket”)

• Or the suspension of subscriptions/redemptions.

A fund that does not have such a mechanism could be totally blocked.

What information does a fund need to disclose to use Gates?

Four elements must be included in the fund’s documents of incorporation:

• Firstly, the mention of the possible use of Gates;

• Secondly, the trigger threshold. This is a percentage of net assets above which the management company may decide to block a portion of the redemptions;

• Thirdly, the maximum duration of the staggering. As for the threshold, the duration must be justified in relation to NAV frequency. In general, one month maximum for a daily NAV and three months maximum for a monthly NAV;

• Fourthly, the processing of remaining orders, which may be postponed or cancelled at the unitholder's discretion.

The introduction or modification of Gates in the prospectus of an existing fund must be approved by the AMF and then the subject of specific disclosure to unitholders, offering them the possibility of exiting the fund free of charge.

Christian de Beaufort
Market Infrastructures & Regulation, SGSS