Fund sector liquidity risk a growing concern: FSB

Amid growing concerns about the shadow banking sector, the Financial Stability Board (FSB) is calling for action to beef up liquidity management at open-ended investment funds.

The global policy group published a report that examined the implementation of its recommendations, which were issued back in 2017, to address liquidity concerns among open-ended funds. Those recommendations included measures that aimed to strengthen regulatory reporting and public disclosure of liquidity risk in the fund sector, to encourage the adoption of liquidity management tools, and to promote stress testing, among others.

Today’s report found that, while progress has been made at adopting those proposals, “there has been no measurable reduction in the degree of structural liquidity mismatch since the FSB recommendations were issued.”

Moreover, the market turmoil — which arose in March 2020 with the onset of the pandemic — highlighted new concerns about liquidity management issues in the global fund sector.

FSB also warned that as the sector has grown, the systemic risks that accompany these liquidity challenges have risen.

“There remains room for greater uptake of [liquidity management tools], in particular anti-dilution tools that are intended to pass on the cost of liquidity to redeeming shareholders in both normal and stressed market conditions,” the FSB said.

But FSB suggested that “cost, competitive or reputational concerns, as well as operational hurdles,” have discouraged fund managers from using these tools.

Additionally, the FSB said that regulators face challenges in obtaining the data required to adequately monitor liquidity mismatches in the fund sector.

Given its concerns, the FSB said that it will undertake further work, along with the International Organization of Securities Commissions (IOSCO), based on the report’s findings.

This work will involve revising their policy recommendations in this area, including the development of detailed guidance on the design and use of liquidity management tools; enhancing the availability of data for financial stability monitoring; and promoting the use of stress testing.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.