IOSCO published a statement explaining why the February 2018 liquidity risk management recommendations provide a comprehensive framework for regulators to deal with liquidity risks in investment funds. As per the statement, the recommendations on liquidity risk management are aimed to prevent liquidity and redemption mismatches from arising, rather than to mitigate problems once they occur. The domestic regulators should apply the recommendations in a prescriptive manner to manage specific or idiosyncratic liquidity risks. Securities regulators are expected to ensure effective implementation of the recommendations. Some domestic regulators have already adopted, or are consulting on, liquidity management regimes consistent with the recommendations. IOSCO intends to conduct a review beginning in 2020 to gauge how the recommendations have been implemented in practice.
The recommendations deal with the attendant benefits and risks when open-ended investment funds may exceptionally look to use other liquidity management tools (such as suspensions and swing pricing) in the face of untoward redemption pressures, including the need to treat investors fairly and to consider any broader market implications. The recommendations are unequivocal that—throughout the entire lifecycle of the fund (design, pre-launch, launch, and subsequent operations)—there should be an appropriate alignment between portfolio assets and redemption terms. The recommendations clarify that open-ended investment funds should not be managed in such a way that the investment strategy relies on any additional ex-post measures such as suspensions. These measures are not a substitute for sound liquidity risk management from the outset, so that the dealing frequency of units meets the anticipated liquidity needs of the fund under normal and foreseeable stressed market conditions.
The statement also highlights that, as some have suggested, pursuing a global “one size fits all” prescriptive approach would be impractical because this approach tries to match different asset classes, fund investment strategies, and redemption periods according to the universally applicable standards. This is because the fund management industry (compared to, for example, the banking sector) is extremely diverse. The recommendations on liquidity risk management do, however, contain practical, actionable principles that support the domestic regulators that may wish or need to pursue a prescriptive approach responsive to the nature of particular open-ended investment funds they supervise directly and/or specific characteristics of the local markets in which they operate. Domestic regulators may also need to address related conduct concerns—for example, the concerns that may arise from the way individual funds are managed or marketed, including the material disparities between legitimate investor expectations of liquidity (as per the disclosure materials or regulatory classification of a fund) and the reality.
Keywords: International, Banking, Securities, Liquidity Risk Management, Liquidity Risk, Open-Ended Investment Funds, Investment Funds, IOSCO
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