FCA CP25/38: Enhancing Fund Liquidity Risk Management

What’s new?

On 9 December 2025, the Financial Conduct Authority (FCA) released Consultation Paper CP25/38 (the Consultation Paper) which aims to ensure authorised fund managers (AFMs) have the right tools and systems to effectively manage their fund’s liquidity. The Consultation Paper also includes a draft of the Collective Investment Schemes Sourcebook (Liquidity Management) Instrument 2026.

The proposals build on the International Organization of Securities Commissions (IOSCO) recommendations issued in May 2025.

A structural theme that runs through the Consultation Paper is that the FCA do not want to ban funds from holding less liquid securities outright, instead, it emphasises the AFM’s responsibility to ensure redemption terms and portfolio liquidity match in practice and to adopt tools and governance that support that outcome.

Our early view is that the response from the industry is likely to be constructive. The importance of robust liquidity frameworks for investor protection and systemic resilience is widely recognised. However, we would also expect the tone from certain parts of the industry to be cautious. The operational impact, calibration and data requirements (including those flowing from the removal of the “listed asset presumption” – see more below) could be significant for some funds and their managers.

Proposed changes

1. Promoting effective use of anti-dilution tools

Annual retrospective review of anti-dilution effectiveness

The FCA proposes a new requirement for AFMs to conduct an annual retrospective review of whether its anti-dilution mechanism has been effective, with supporting guidance on what the review should consider (choice of mechanism, calibration and appropriateness of how frequently it was applied, given portfolio and investor profile).

Calibrating anti-dilution tools

The FCA proposes new guidance to address supervisory findings that calibration is sometimes overly “standardised” across fund ranges. The FCA considers that for anti-dilution to work effectively, the tools should be calibrated to reflect both explicit and implicit liquidity costs of transactions in the underlying assets. The FCA proposes that AFM’s should:

• calculate explicit and implicit liquidity costs of a transaction by apportioning the scheme property pro rata across all unitholders and
• estimate the expected market impact on a transferable security’s price when required to sell significant quantities of that security to meet redemptions.

Definition of ‘dilution’

The FCA proposes to amend the definition of ‘dilution’ so that it refers to an ‘authorised fund’, rather than a ‘single-priced authorised fund’. The revised definition would apply to all authorised funds, including MMFs, this is consistent with CP23/28 which proposed to use the existing definition of dilution for the draft Money Market Funds Sourcebook (MMFS).

Dual-priced funds

As both single-priced and dual-priced funds face dilution risk when investors subscribe or redeem, the FCA proposes to make it explicit that the AFM’s responsibility to prevent dilution also applies for a dual-priced fund. This would bring an AFM of a dual-priced fund in scope of associated requirements relating to prospectus disclosures, record keeping, significant changes and informing unitholders.

Mandatory availability of at least one anti-dilution tool

Currently, an AFM of a single-priced authorised fund may use a dilution levy or a dilution adjustment (commonly referred to as swing pricing) – but the AFM may also choose neither. The FCA proposes to close that gap by requiring AFMs to have at least one anti-dilution tool available. This new requirement will apply to both UCITS and NURS (both single and dual priced) but not to Money Market Funds (MMFs) where the existing requirements will continue to apply.

Contents of the prospectus

As anti-dilution tools would no longer be optional for in-scope UCITS/NURS, the FCA proposes to amend the current requirement to disclose the choice of tools in the prospectus. Instead, AFMs would be required to set out the policies and procedures it has in place under COLL 6.3.7A.

2. UCITS and NURS – Strengthening liquidity risk management

Eligible market requirements

UCITS schemes and NURS must only invest in transferable securities and money-market instruments that are traded on a market which meets the tests in COLL 5.2.10R(2). These requirements include that the market is regulated, operates regularly, is open to the public and be sufficiently liquid.

Under the proposed new guidance COLL 5.2.10AAG, when an AFM is assessing a market against these tests, it should consider how those factors apply to the type of property in which it intends to invest in. The FCA explains that while a market may generally be liquid, specific securities traded on it could have limited secondary trading. Therefore, AFMs should consider asset-specific liquidity rather than overall market liquidity.

Removal of the ‘listed asset presumption’

Under COLL 5.2.7AR, a transferable security admitted to or dealt on an eligible market is presumed to be sufficiently liquid for UCITS and NURS funds. However, the FCA notes that this presumption is “overly simplistic” and an AFM should not presume that the liquidity of a transferable security would not compromise its ability to redeem units solely on the basis that the security is admitted to an eligible market.

The proposed change will require AFMs to carry out a case-by-case liquidity assessment for each transferable security which means that AFMs would no longer be able to presume that the liquidity of a transferable security is satisfactory solely on the basis that the security is admitted to an eligible market.

The proposed guidance provides that when assessing the liquidity risk of a transferable security, AFMs should consider:

• the volume of transactions in that security over a reasonable period of time
• the number and quality of intermediaries and market-makers for that security
• the opportunities available to buy or sell the security at any given time
• the fund’s holdings size compared to the daily volume of trades in that transferable security and
• the proportion of the fund’s assets represented by the security.

Recently issued securities – removal of derogation from eligible market test

The FCA proposes to remove a derogation that currently allows those UCITS/NURS within scope to hold recently issued but not yet admitted securities to an eligible market outside the unapproved securities limit (sometimes referred to as the “trash bucket”). The FCA’s concern is that the derogation creates unnecessary uncertainty about the acceptable liquidity profile of daily dealing retail funds and could allow exposures to assets that are not yet demonstrably tradeable.

To reduce cliff-edge effects, the FCA proposes a transitional provision for holdings that were compliant under the old rule immediately before commencement.

New guidance annexes

The FCA proposes to create two new guidance annexes in the Collective Investment Schemes Sourcebook (COLL). This will include:

• guidance on what an effective liquidity risk management system should cover (including dealing with non-redemption pressures) and
• an updated version of the liquidity stress testing guidance (ESMA).

The FCA proposes these annexes apply to AFMs of UCITS and NURS, while it will consider broader application to other AIFs in the planned 2026 AIFMD-related consultation.

3. Looking ahead

The Consultation Paper closes for comments on Monday 23 February 2026.

The Consultation Paper flags that liquidity risk management issues extend beyond UCITS/NURS and it signposts the separate 2026 consultation on AIFMD reforms, including further work on liquidity mismatch in certain types of authorised AIFs (the Consultation Paper mentions authorised property funds as an example area where mandatory notice periods may be consulted on).