The International Organization of Securities Commissions (IOSCO) has published its final report setting out its findings following a survey on loan funds.  There are two types of loan funds: a loan originating fund whose strategy allows it to grant, restructure and acquire loans; and a loan participating fund that can acquire and restructure partially or entirely existing loans originated by banks and other institutions, either directly from the lender or on secondary markets. These funds comprise both open-ended and closed-ended funds, and are marketed to both retail and professional investors.

The IOSCO report describes how the markets for loan funds has evolved in different jurisdictions and explains how regulators are addressing the risks associated with these funds. Risks include:

  • liquidity risk: loans are very hard to value, and since they are also hard to trade, they are very illiquid assets;
  • credit risks: the risk of a default of the borrower;
  • systemic risks from excessive credit growth; and
  • regulatory arbitrage.

Despite the risks, many jurisdictions consider their general rules for funds to be sufficient to address the specificities of loan funds. The report concludes that further work on loan funds is not warranted at this stage, however IOSCO will monitor this segment of the fund industry with a view to possible revisit it for further work.

View IOSCO final report on loan funds survey, 20 February 2017

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