The International Organization of Securities Commissions (IOSCO) published the consultation paper titled “Recommendations of Liquidity Risk Management for Collective Investment Schemes”, which seeks to address structural vulnerabilities arising from asset management activities, as part of its mission to protect investors and mitigate systemic risk in global financial markets. IOSCO also published another consultation paper that provides practical information, examples and good practices regarding open-ended fund liquidity risk management, to supplement its recommendations.
The consultation paper on the recommendations builds on the guidance set out in IOSCO´s 2013 report “Principles of Liquidity Risk Management for Collective Investment Schemes (CIS)”. It also addresses the structural vulnerabilities identified by the Financial Stability Board (FSB) regarding liquidity risk management in the asset management industry in its final recommendations published in January 2017.
The FSB asked IOSCO to take forward the recommendations regarding the mismatch between fund investments and redemption terms for open-ended funds.
IOSCO´s consultation paper on the recommendations proposes revisions that supplement the 2013 liquidity report with additional recommendations and detailed guidance on several issues, including those highlighted in the FSB report. Topics covered in the consultation paper include disclosure to investors, the alignment between asset portfolio and redemption terms, availability and effectiveness of liquidity risk management tools and fund level stress testing. In addition, IOSCO includes additional recommendations on contingency planning and requests specific public comments on issues affecting exchange traded funds.
The consultation paper on good practices “Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration” is intended to assist regulators, industry as well as 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 practice for liquidity risk management throughout the entire life cycle of a fund. For investors, this document outlines scenarios in which the investor could expect an asset manager to use liquidity management tools to manage liquidity issues in certain funds.
Comments on these two consultation reports should be submitted on or before Monday 18 September 2017.