Liquidity Agreement Finance

The competent issuer`s decision to enter into a liquidity contract provides for a maximum duration of the contract, including extensions, which must be in line with the objectives pursued. Shares acquired for the execution of a liquidity contract can only be used for future disposal in another transaction. The maximum time to complete the liquidity contract, including any possible extensions, may not exceed 12 months. In the market, liquidity has a slightly different meaning. The market for a stock is considered liquid if the shares can be sold quickly and the sale has little influence on the share price. In general, this means where the shares are traded and how interested investors are in the business. Another way to assess the liquidity of a company`s stock is to consider the spread of the company. For liquid stocks like Microsoft or General Electric, the spread is often only a few cents – well less than 1% of the price. For illiquid stocks, the spread can be much larger and represent a few percent of the trading price.

[11] All offers that are not executed for the purpose of executing the liquidity contract and that are not the result of transactions made by or above FI`s own portfolio are taken over in third-party portfolios by discretionary management. Market practice increases the likelihood that investors will find an equivalent with legitimate objectives in low-liquidity stocks, without investors taking additional risk. (Information repealed on November 9, 2017 as a result of the application of liquidity contracts by CMVM as a recognized market practice) A comparison of assets with or without a liquid secondary market is one example. The liquidity discount is the promised return or expected return on these assets, such as the difference between newly issued U.S. Treasury bonds versus current cash of the same maturity to maturity. First-time buyers know that other investors are less inclined to buy non-operating treasury bills, so newly issued bonds have higher prices (and therefore lower yields). [Citation required] An act of replacing a less liquid asset against a more liquid asset is called liquidation. Often, liquidation involves selling less liquid assets for cash. The liquidity of an asset may vary depending on the situation.

An asset can be sold more easily at one location than at another location or at different times of the year. The liquidity of an asset can be measured using the frequency of transactions in comparable assets. Before negotiating under the liquidity contract, the issuer must, as essential information, disclose the details of the contract with the financial intermediary on the following information: (i) the identification of the intermediary; (ii) the liquidity and securities made available to the financial intermediary; (iii) the maximum amount of shares that can be accumulated in the portfolio for the performance of this contract; (iv) the relevant market and relevant market share; and v) the expiry date of the contract.