The events over the weekend culminated in HSBC rescuing Silicon Valley Bank’s (SVB) UK arm, underwriting deposits and averting an operating cash crunch for affected customers.
Although SVB was not considered a systemically relevant bank, the rescue pre-empted potential contagion within the technology start-up sector in the UK. This would have left alternative fund managers (including venture capital firms), their portfolio companies and investors exposed to default risk and potential losses.
As the Kroll Institute’s Global Chief Economist Megan Greene points out, SVB’s debacle is just another example of increased market volatility and associated risks that lie ahead.
This is also a topic which the Financial Conduct Authority (“FCA”) touched on in its most recent alternative asset management letter in which it highlighted that “increased market volatility and rising interest rates [leads to] several new coexistent risks for alternative asset managers”. These events pose challenges to market integrity, and the letter reminds firms of the need to maintain robust risk and liquidity management processes. Concurrently, the Bank of England has recently indicated an aspiration to stress test the shadow banking sector which includes private equity and hedge funds.
With an immediate crisis averted, the ongoing impact from SVB’s default becomes a valuation, volatility and liquidity issue— three areas of material interest for UK regulators, including the FCA. We expect these events to drive a renewed emphasis from the FCA’s Wholesale Asset Management supervisors in the following areas:
- General market liquidity conditions, with an emphasis on recently affected asset classes
- Investor behavior and redemption activity
- Liquidity policies and liquidity management tools
- Counterparty risk management
- Portfolio valuation (notably for hard-to-value, illiquid and unlisted assets)
- Robustness of firms’ wind down plans
FCA authorized asset managers should ensure their internal processes and controls covering these areas remain appropriate and up to date. In addition, our US team shared further considerations for asset managers registered with the US Securities and Exchanges Commission (SEC) which would also be relevant for FCA authorized firms.
Where FCA authorized asset managers, as well as the funds they manage or their investors, have been materially affected by the SVB events—they should consider their obligations under Principle 11 and the need to inform the FCA where appropriate. If you would like to discuss any of these issues, our team of regulatory and compliance experts is ready to assist you. In addition, Kroll has deep expertise across valuation, financial advisory, related disputes, forensic investigations (both financial and regulatory), forensic accounting, monitorships, cyber investigations, rescue financing and M&A advisory.