The Board of the International Organization of Securities Commissions (IOSCO) has issued today final recommendations that seek to improve liquidity risk management practices of open-ended collective investment schemes (CIS) as part of its mission to protect investors, ensure fair and efficient financial markets and reduce systemic risk. IOSCO has also simultaneously published a final report that provides practical information, examples and good practices regarding open-ended fund liquidity risk management, to supplement its recommendations.
The final report, Recommendations for Liquidity Risk Management for Collective Investment Schemes, sets out IOSCO’s recommendations to entities responsible for managing the liquidity of CIS (responsible entities) to ensure that liquidity is managed to safeguard and protect the interests of investors, including in stressed market conditions. In addition to its recommendations to responsible entities, the final report includes IOSCO’s additional guidance to securities regulators to promote good liquidity management practices for CIS.
The final report replaces the liquidity risk management framework contained in IOSCO´s 2013 report Principles of Liquidity Risk Management for Collective Investment Schemes. 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) that could impact financial stability, and, has been prepared in light of the FSB’s Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities” recommendations published in January 2017.
Drawing on feedback from its consultation in July 2017, IOSCO has built on its previous framework by re-affirming and enhancing previous guidance. It has also supplemented its earlier work with additional recommendations: notably, the consideration of underlying liquidity throughout the entire life cycle of the fund (design, pre-launch, launch and ongoing daily operation); the alignment between asset portfolio and redemption terms; availability and effectiveness of liquidity risk management tools; fund level stress testing; detailed guidance on disclosure to investors; and additional recommendations on contingency planning.
In publishing the final report, IOSCO is also reiterating its belief that in the first instance, the best line of defense against any structural vulnerabilities that could potentially develop into extended market dislocations and financial instability is for responsible entities to have robust liquidity risk management programs. Securities regulators also have important roles in encouraging and overseeing the development and execution of these programs to help minimize the possibility of adverse effects on markets when responsible entities do not properly manage a CIS’ liquidity.
IOSCO expects securities regulators to ensure the effective implementation of the recommendations and promote their application by responsible entities. IOSCO intends to assess implementation across relevant jurisdictions in two to three years’ time. The final report on good practices Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration, is intended to assist regulators, the industry, and investors. For regulators, the paper can act as a reference guide that illustrates how various jurisdictions regulate liquidity risk practices within their remit. For the industry, the examples describe where, when and how certain tools have been used in the past and how they can be used in the future. Additionally, the report describes good practices for liquidity risk management throughout the entire life cycle of a fund. For investors, this document outlines scenarios in which an asset manager may use liquidity management tools to manage liquidity issues in certain funds.