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IOSCO reports on open-ended funds
The responsible entity should draw up an effective liquidity risk management process, compliant with local jurisdictional liquidity requirements
The responsible entity should set appropriate liquidity thresholds which are proportionate to the redemption obligations and liabilities of the CIS
The responsible entity should carefully determine a suitable dealing frequency for units in the CIS
The responsible entity should ensure that the CIS’ dealing (subscription and redemption) arrangements are appropriate for its investment strategy and underlying assets throughout the entire product life cycle, starting at the product design phase
The responsible entity should consider liquidity aspects related to its proposed distribution channels
The responsible entity should ensure that it will have access to, or can effectively estimate, relevant information for liquidity management
The responsible entity should ensure that liquidity risk and its liquidity risk management process are effectively disclosed to investors and prospective investors
Apologies in advance, this is all a bit geeky...
The International Organization of Securities Commissions (IOSCO) has published two documents "Recommendations for Liquidity Risk Management for Collective Investment Schemes” (see here) and "Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration” (see here).
The recommendations are an update to IOSCO's 2013 report "Principles of Liquidity Risk Management for Collective Investment Schemes" ("2013 Liquidity Report") and are issued as IOSCO's response to the G20 countries’ Financial Stability Board (FSB)'s report from January 2017, "Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities".
A key area addressed in the FSB report was the possible liquidity mismatch between fund investment assets and redemption terms and conditions for fund units. Work on the FSB report started in March 2015 and with almost comic timing, it published its proposed policy recommendations for public consultation on 22nd June 2016, the day before the EU referendum vote in the United Kingdom. The liquidity challenges faced by open-ended retail property funds in the aftermath of the EU referendum result (see our report here) prompted an FCA investigation after which they published in February 2017, a discussion paper, “Illiquid assets and open-ended investment funds: DP17/1” (see here). Although responses were submitted by 8th May 2017, the outcome of this is still awaited.
So, to the IOSCO report. It is itself the outcome of a consultation conducted from July to September 2017 and covers all forms of funds, covering all underlying asset classes in every jurisdiction. As such, it is very broad bush in its proposals. The report makes 17 general recommondations for collective investment schemes (CIS), which are discussed in the report.