The International Organization of Securities Commissions ("IOSCO") published two reports relating to liquidity risk management for collective investment schemes ("CIS"). The first provides recommendations for entities responsible for managing CIS operations (the "Recommendations Report"), and the other outlines good practices and other issues for future consideration (the "Good Practices Report"). The reports incorporate feedback from a consultation report published in July 2017.
The Recommendations Report (Recommendations for Liquidity Risk Management for Collective Investment Schemes) sets forth 17 recommendations and highlights three particular challenges:
- If a CIS offers daily dealing, it is important to ensure that other design features are significantly robust to ensure alignment of the daily dealing feature with the liquidity of assets of the CIS.
- Testing liquidity risk management strategy is important for a CIS to evaluate liquidity risk and its ability to respond to such risks.
- If a CIS has the ability to limit, defer or suspend redemption rights, it is still responsible for attempting to meet redemption demand in an orderly fashion.
IOSCO asserted that it is important for market participants to maintain strong risk management programs, and that securities regulators also must oversee these programs to reduce the possibility of adverse market effects when responsible entities mismanage a CIS liquidity.
The Good Practices Report (Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration) provides information meant to aid (i) regulators, by demonstrating how various jurisdictions regulate liquidity risk practices, (ii) industry members, by showing how tools previously have been used and how they can be used in the future, and (iii) investors, by identifying scenarios in which asset managers may be expected to use liquidity management tools.
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