IOSCO, FSB consider fund liquidity risk reforms

Global policymakers, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) are planning a public consultation on proposed reforms to the regulation of investment fund liquidity risk — an ongoing issue that was highlighted by the market stress that arose with the onset of the pandemic in March 2020.

The FSB and IOSCO said that they will both be publishing consultation papers on liquidity risk management in early July, and they will be jointly hosting a public event on July 12 at the Central Bank of Ireland to launch those deliberations.

IOSCO’s paper will set out its recommendations for investment funds to use liquidity management tools to mitigate investor dilution, and the risk of certain investors enjoying first-mover advantages due to funds’ structural liquidity mismatches — the problem that arises when funds offer short-term redemptions but hold the bulk of their assets in long-term vehicles.

When the pandemic hit and market stress spiked, some funds had trouble meeting redemptions, and the need to sell assets to meet the demand for redemptions put added pressure on markets and asset values — intensifying market stress and risks to financial stability.

Policymakers have attempted to address these risks with requirements for funds to better marry the liquidity of their holdings with the terms they offer investors when it comes to redemptions.

The FSB paper will detail proposed changes to its policy guidance for regulators to ensure they are adequately addressing the structural vulnerabilities that can arise from liquidity mismatches in investment funds.

The regulators said that their papers are intended to work together to address regulatory concerns that were exposed during the pandemic-drive market stress.

The joint public hearing will give industry firms and investors an early opportunity to provide feedback on the proposals, with written comments to be accepted until early September.

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.