On 18 July 2019, the International Organization of Securities Commissions (IOSCO) published a statement that explains why its 2018 Liquidity Risk Management Recommendations (2018 LRM Recommendations) provide a comprehensive framework for regulators to deal with liquidity risks in investment funds.
The statement follows recent media coverage of liquidity problems that have recently affected some investment funds and the comments made by the UK Financial Policy Committee (FPC) in the Bank of England’s Financial Stability Report which discusses potential mismatches between the liquidity of fund assets and redemption terms offered by funds to their investors. In particular the FPC stated that: “This is a global issue. For that reason, the FPC supported the Financial Stability Board’s 2017 recommendation that funds’ assets and investment strategies should be consistent with their redemption terms. However, subsequent work by IOSCO did not prescribe how this should be achieved.”
IOSCO concludes its statement by commenting that the 2018 LRM Recommendations are directed at preventing liquidity and redemption mismatches from arising in the first place, rather than just mitigating problems as they crystallise. It also adds that they deal with attendant benefits and risks when open-ended investment funds may exceptionally look to use other liquidity management tools in the face of untoward redemption pressures, including the need to treat investors fairly and to consider any broader market implications. They also allow domestic regulators to apply the recommendations in a prescriptive manner to manage specific or idiosyncratic liquidity risks.
IOSCO intends to conduct an assessment exercise beginning in 2020 which will review how the 2018 LRM Recommendations have been implemented in practice.