The peak global financial regulatory body has issued a new consultation on revised fund liquidity guidelines,
Updating a framework for open-ended funds first introduced in 2018, the latest International Organization of Securities Commissions (IOSCO) proposals lay out “robust parameters for asset managers to consider as they look to improve their liquidity management practices”, according to Christina Choi, investment management committee chair for the group.
Among 17 recommendations, the IOSCO plan released last week includes standardised methods for classifying fund assets as ‘liquid, less liquid and illiquid’ that in turn would influence redemption policies etc.
“Accordingly, the distinguishing factors across the three liquidity categories are whether an asset is (i) readily convertible into cash without significant market impact and (ii) whether this differs between normal and stressed market conditions,” the consultation says.
“In this regard, examples of quantifiable metrics include market depth, turnover and days to trade.”
But the wide-sweeping proposals also cover areas such as design and use of liquidity management tools (LMTs), investor disclosure, implementation and stress-testing.
“Responsible entities should always consider a broad set of LMTs, including anti-dilution LMTs, quantity-based LMTs and other liquidity management measures,” the IOSCO report says.
“Responsible entities should determine the most effective and suitable tools and measures for the [open-ended funds] OEFs they manage, considering the characteristics of each OEF, prevailing market conditions and other relevant circumstances.”
While IOSCO first tabled fund liquidity proposals in 2018, the issue jumped up the regulatory agenda following the failure of the flagship Woodford Investment Management product in 2019.
The body, which represents about 95 per cent of financial regulators across the world, has no legal jurisdiction but its recommendations tend to filter out through member organisations.
For example, the Financial Markets Authority (FMA) issued a fund liquidity guide in 2020 post the first IOSCO report before finalising an updated version earlier this year.
FMA chief, Samantha Barrass, wrote to fund managers last month defending the liquidity management measure after industry feedback suggested the guidelines were too restrictive.
Barrass says in the letter that the FMA guide “is not prescriptive and is applicable to a wide range of business models in the [managed investment scheme] MIS sector”.
Similarly, IOSCO says its updated fund liquidity guidance should not be viewed as a hard-line rulebook.
“Instead, it sets out key operational, design, oversight, disclosure and other factors and parameters that responsible entities should consider when LMTs and other liquidity management measures are used, with a view to promoting their greater, more effective and more consistent use,” the consultation says.
“As the OEF sector is very diverse, IOSCO acknowledges that there is no ‘one size fits-all’ approach to liquidity risk management and responsible entities are expected to exercise their sound professional judgement in the best interests of investors.”
Submissions are due by February 11 next year.