* Financial Conduct Authority to issue paper in new year
* Follows the suspension of many funds after Brexit vote
* Officials fear market contagion risk, threat to stability
* Other global regulators also turn focus to fund structures
By Carolyn Cohn, Simon Jessop and Huw Jones
LONDON, Nov 10 (Reuters) - British authorities areconsidering changing the rules governing commercial propertyfunds to prevent a repeat of the investor panic that followedthe country's vote to leave the European Union.
Big funds worth around 18 billion pounds ($22 billion) intotal were forced to suspend their activities after running outof ready cash when investors who feared property prices wouldcollapse demanded their money.
The financial regulator is expected to focus on how theindustry and its investors can be better protected during futureperiods of market stress. British and global authorities arealready concerned about the knock-on effects to other markets iffunds are forced to sell off assets quickly to try to meetredemption obligations.
The Financial Conduct Authority said a discussion paperwould be published in the new year, without giving details aboutthe reforms it is considering.
One option for the regulator could be to push asset managersaway from offering funds which allow investors to pull out moneyon any given day without notice, according to industry players.
This model is far removed from the nature of the underlyingassets being traded, as selling property can often take manymonths, a so-called 'liquidity mismatch'.
If the FCA chose to change this structure, it could to somedegree follow the example set by Germany after the financialcrisis when it introduced a minimum holding period of 24 monthsfor investments, and a notice period of 12 months for investorsto get their money back.
While that would be a particularly extreme change, theindustry sources said the FCA could instead make redemptionspossible only weekly, monthly or quarterly.
Megan Butler, director of wholesale supervision at the FCA,said the regulator was talking to property fund managers aboutthe suspension process as well as governance and oversight ofthese funds, which have grown popular among private individualsas well as pension funds and insurers.
"We encourage you to think carefully how you manage any longrun risks here, particularly around redemptions, if you haveclients looking for a quick exit," she told a conference hostedby the Wealth Management Association on Wednesday, adding that adiscussion paper would be published early in 2017.
John Cartwright, chief executive of Britain's Association ofReal Estate Funds, said it had also commissioned research intofund structure which would also be published early next year.
GLOBAL CONCERN
Liquidity mismatches have risen to the top of the agenda forregulators across the world after bond funds came under intensepressure to meet redemptions following big falls in pricesduring several period of market stress, including in the "tapertantrum" of 2013 when the U.S. Federal Reserve began taperingits massive asset-purchase programme.
Like the FCA, global regulators and central banks worry thatfinancial stability can be undermined by funds rushing to sellassets quickly to meet customer cash demands.
Among the funds to suspend trading after the Brexit votewere Henderson Global Investors' 3.9 billion pound UK PAIFProperty Fund and M&G Investments, which lifted the itssuspension on its multi-billion-pound property portfolio on Oct.21.
Marc Haynes, London-based senior vice president at realestate fund manager Cohen & Steers, said the daily dealingstructure of the industry had led to unrealistic expectationsamong many investors.
"You might have to restrict their investments or the onusneeds to be on the advisers to help them, so they understandwhat they are getting into."
Laith Khalaf, senior analyst at funds supermarket HargreavesLansdown, said regulators could potentially move the industry toa weekly dealing date, but that this was likely to be unpopularwith investors.
Other industry sources said longer lock-up periods could hitflows into funds and reduce the fees earned by the managers whorun them.
For some, suspensions were considered the fairest way totreat remaining and would-be investors in the funds, as opposedto writing down the value of the fund, which would have hurtinvestors who had no desire to exit.
Some have considered increasing cash reserves so they canprocess exit requests faster, but the drag on returns of parkingcash in this way is painful, particularly in the current lowinterest-rate environment.
($1 = 0.8188 pounds) (Additional reporting by Tina Bellon in Frankfurt; Editing bySinead Cruise and Pravin Char)
