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Recommendation 8
The responsible entity’s liquidity risk management process must be supported by strong and effective governance
Recommendation 9
The responsible entity should effectively perform and maintain its liquidity risk management process
Recommendation 10
The responsible entity should regularly assess the liquidity of the assets held in the portfolio
Recommendation 11
The responsible entity should integrate liquidity management in investment decisions
Recommendation 12
The liquidity risk management process should facilitate the ability of the responsible entity to identify an emerging liquidity shortage before it occurs
Recommendation 13
The responsible entity should be able to incorporate relevant data and factors into its liquidity risk management process in order to create a robust and holistic view of the possible risks
Recommendation 14
The responsible entity should conduct ongoing liquidity assessments in different scenarios, which could include fund level stress testing, in line with regulatory guidance
Recommendation 15
The responsible entity should ensure appropriate records are kept, and relevant disclosures made, relating to the performance of its liquidity risk management process
Recommendation 16
The responsible entity should put in place and periodically test contingency plans with an aim to ensure that any applicable liquidity management tools can be used where necessary, and if being activated, can be exercised in a prompt and orderly manner
Recommendation 17
The responsible entity should consider the implementation of additional liquidity management tools to the extent allowed by local law and regulation, in order to protect investors from unfair treatment, amongst other things, or prevent the CIS from diverging significantly from its investment strategy
The IOSCO reports provide general guidance for local regulators to reflect in their own framework for funds. In the UK, the FCA response to its earlier consultation is therefore key. In this respect, it is important to note:
a) The report does not suggest that illiquid assets generally or specific types of illiquid assets should not be held in open-ended funds, even if those open-ended funds offer daily liquidity. This was a specific question raised in the FSB report. The IOSCO "Good Practice" guidelines do note that some countries require real estate to be held only in closed-ended funds;
b) For funds with managers based in the EU, most of the points covered in the IOSCO reports are areas also covered by the Alternative Investment Fund Managers Directive (AIFMD). As such, any extension of provisions will come down to detail rather than any broad new areas to cover. The AIFMD is itself under review as part of the EU Capital Markets Union project to 2019 (see here). We will keep this under review and provide updates.
