The Board of the International Organization of Securities Commissions (IOSCO) has issued on 1 February 2018 its final recommendations for liquidity risk management for collective investment schemes (CIS).

The final report replaces the liquidity risk management framework contained in IOSCO’s 2013 report. It also constitutes the final step in IOSCO’s response to address potential structural vulnerabilities in the asset management sector identified by the Financial Stability Board (FSB) in January 2017, among them the potential liquidity mismatch between investments funds and redemption terms, and the management of leverage within investment funds.

This final report contains the following additional recommendations to the 2013 report:

• underlying liquidity should be considered throughout the entire life cycle of the fund, including at the initial design/pre-launch stage. When designing a product, managers should seek to understand the expectations of the targeted categories of investors in terms of liquidity risks and should also consider the liquidity of underlying assets to be invested in. (Recommendation 4)
• Additional liquidity management tools can be used to limit, or manage, redemption rights in instances of stressed market conditions, as appropriate and in compliance with applicable laws. (Recommendation 4 – 3^rd section, Recommendation 12 and Recommendation 17)
• Disclosure to investors should include periodic information regarding the relevant fund’s liquidity risk as well as information on the general approach that the CIS will take in distressed situations. (Recommendation 7)
• Reasonable efforts to understand one’s investor base and its historical redemption patterns should be made in order to build realistic stress scenarios. (Recommendation 13)
• Further guidance is given in relation to stress tests: scenarios should include both backward looking and forward looking hypothetical scenarios, they should be based on reliable and up-to-date information and could include various risks and factors such as credit rating downgrades or reputational risks. (Recommendation 14)
• Contingency plans should be established and periodically tested, to ensure any applicable liquidity management tool can be used when necessary, in a prompt and orderly manner. (Recommendation 16)

IOSCO has also simultaneously published a final report that provides practical information, comparative tables between jurisdictions and good practices regarding liquidity risk management, to supplement its recommendations.   

If you have any questions on this report, please contact Jennifer Wood.