Global standard setters call for open-ended funds to enhance their liquidity risk management tools and apply them more consistently

Published: 05 July 2023

Tags:

The Financial Stability Board (“FSB”) and the International Organization of Securities Commissions (“IOSCO”) have today published consultation papers on the use of liquidity management tools (“LRMs”) in open-ended funds (“OEFs”).

The consultation papers call for increased and more uniform use of LRMs in OEFs, including:

  • explicit fees for subscribing and redeeming investors in OEFs with less liquid assets such as real estate
  • guidance on defining ‘liquid’, ‘less liquid’ and ‘illiquid’ assets
  • longer notice periods for investors in some funds
  • enhanced information for investors on the existence and use of liquidity management tools

The consultations reflect the FSB’s continued concern that in periods of market stress OEFs can cause financial stability risks from firesales of assets caused by redeeming investors. FSB’s concerns have to a large extent been prompted by daily-dealing OEFs investing in assets such as corporate bonds.

Throughout this work AIMA has made it clear that perceived risks in one type of OEF should not be read across to all other types. Further, uniform application of LRMs across funds with differing assets, strategies, dealing periods and types of investors is inappropriate and very likely to be counter-productive. The managers of individual funds are best placed to understand when such tools should be applied. We are pleased to note that FSB and IOSCO are not pursuing a ‘one-size-fits-all’ approach.

The FSB consultation, Addressing Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds – Revisions to the FSB’s 2017 Policy Recommendations, and the IOSCO consultation, Anti-dilution Liquidity Management Tools – Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes, both propose to enhance existing recommendations already made on this issue in 2017 and 2018 respectively. Both consultations close on 4 September 2023.

FSB and IOSCO are holding a joint event in Dublin on 12 July 2023 to discuss the consultations. AIMA will be attending the event and will respond to both consultations.