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* BoE's Cunliffe warns some funds may prove illiquid in
* Says markets appear to have underprices risk of
By David Milliken
LONDON, July 17 Investment funds focused on
emerging economies or high-yield debt may be unable to return
investors' money promptly if turmoil hits markets, the Bank of
England's financial stability chief warned on Thursday.
Many investment funds promise to redeem investors' shares
within a day or two. But BoE Deputy Governor Jon Cunliffe said
this may not be realistic when trouble strikes less liquid
markets and droves of investors want to cut their losses.
"Market participants and investors will not always be able
to sell what they want, where they want, and when they want,"
Cunliffe told a conference hosted by the Financial Reporting
Council, a body that promotes corporate governance standards.
He said markets appeared to have underpriced the risk of
investments proving illiquid, and that funds needed to have
clearer discussions with investors about whether it was
realistic to redeem shares quickly under all circumstances.
Investment funds have up to now been seen as posing few
risks to financial markets, because they usually do not borrow
money and operate a range of strategies.
But Cunliffe - who is responsible for financial stability at
the BoE - said illiquidity was an issue in any market where a
small number of investment funds or hedge funds pre-dominated,
and cited emerging markets and high-yield bonds as areas where
this may be a problem.
"Investment funds can pose risks to financial stability.
They very often offer same- or next-day redemptions despite
holding assets for which secondary-market liquidity can be
uncertain," he said.
"(This) could disrupt systemically important markets."
Speculation last year that the Federal Reserve would slow
the pace at which it pumped money into the U.S. economy caused a
brief rout in emerging market assets, and Cunliffe said it was
hard to predict what the consequences would be when global
monetary policy started to tighten in earnest.
Some 4.5 trillion pounds ($7.7 trillion) of assets were
managed in Britain at the end of 2012, according to the
Investment Management Association, an industry body. Blackrock
, Legal & General, Prudential's M&G unit
and State Street are major players.
($1 = 0.5844 British Pounds)
(Reporting by David Milliken Editing by Jeremy Gaunt)