Instead of gradually redeeming fund units, fund managers may need to resort to a deferment of repayment in view of a distressed situation where there might be no other choice.
The measure of deferred repayment is generally used to satisfy investors who redeem their units in the face of insufficient liquidity (cf. Article 110(1)(d) of the Collective Investment Schemes Ordinance, CISO: "large-scale redemptions which may significantly endanger the interests of the other investors"). On the one hand, this mechanism may avert "fire sales" which devalue the units held by the remaining investors. On the other hand, it does not restrict the valuation of the fund or prevent new subscriptions. Having said that, new subscriptions tend to remain a hypothetical scenario as prospective investors must be informed of the payment deferral before subscribing to units.
A second, less common case concerns valuation challenges, i.e. "where a market which serves as the basis for the valuation of a significant proportion of the fund’s assets is closed or if trading on such a market is restricted or suspended" (Article 110(1)(a) CISO). As a rule of thumb, this is the case when assets that cannot be valued make up more than 10% of the fund assets. Where a valuation of the fund after redemption and therefore publishing of an NAV is not possible, repayment can be temporarily put on hold. Received redemption requests will then only be processed once the first NAV is published after the lifting of the deferment. While the uncertainty on the markets due to the COVID-19 pandemic initially raised liquidity concerns, valuation problems could follow further downstream if the crisis were to worsen and market fluctuations increase further.
It should be noted that the scenario involving "political, economic, military or other emergencies" (Article 110(1)(b) CISO) is not per se applicable to the COVID-19 pandemic, despite being an international health crisis. Knock-on effects from the pandemic may, however, lead to a political or economic emergency, providing a further justification for a payment deferral.
Beyond falling under one of the above cases, this mechanism generally also requires a basis in the fund regulations. It is therefore subject to the same challenges as outlined in the section on gating as a special form of postponing redemptions. In exceptional cases FINMA may, however, grant a payment deferral for funds whose regulations do not contain such a provision. This exception can only be invoked if a deferral is in the interest of all investors, i.e. if a payment deferment is necessary to satisfy redemption requests and in order to avoid "fire sales", which would reduce the investment value for the remaining investors.
While payment deferments are technically speaking a milder measure than gating (as the redemption of fund units remains possible for all investors), a deferral of repayment nonetheless impairs the "open-end" principle of open collective investment schemes. But it provides fund managers with additional room to manoeuver difficult circumstances.
However, the potential adverse signalling effects of such a measure is more significant than in the gating scenario. In practice, a payment deferment is often seen as a death sentence for a particular fund. The current widespread nature of potential liquidity problems may assuage investors’ doubts and be deemed acceptable nonetheless if adequately communicated.
Should a fund manager decide to implement such a payment deferral (by means of a formal resolution), both the auditor and FINMA must be informed without delay, while investors are to be notified in an appropriate manner.