Global Regulation Tomorrow

On 14 December 2022, the Financial Stability Board (FSB) published its assessment of the effectiveness of the FSB’s 2017 recommendations on liquidity mismatch in open-ended funds (OEFs).

The assessment, which forms part of the FSB’s work programme to enhance the resilience of non-bank financial intermediation (NBFI), includes proposals for further policy work in this area.

The assessment makes the following findings:

• Authorities have made meaningful progress in implementing the 2017 FSB recommendations to address vulnerabilities in OEFs stemming from liquidity mismatch. Nevertheless, lessons learnt since their publication, including during the March 2020 market turmoil, have produced new insights into liquidity management challenges in segments of the OEF sector.
• While the FSB recommendations remain broadly appropriate, enhancing clarity and specifically on the policy outcomes the FSB recommendations seek to achieve would make them more effective from a financial stability perspective.
• The FSB’s analysis of available data suggests that there has been no measurable reduction in the degree of structural liquidity mismatch since the FSB’s recommendations were issued.
• The use of anti-dilution liquidity management tools (LMTs) increased during the height of the COVID-19 shock, but there appears to be material variation in swing factors across corporate bond funds using swing pricing.
• There remains room for greater uptake of LMTs, 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 and the International Organization of Securities Commissions will carry out follow-up policy work based on the assessment’s findings.