On February 1, 2018, the International Organization of Securities Commissions published its final report and recommendations on liquidity risk management for open-ended collective investment schemes. It has also published a report on good practices and considerations in open-ended fund liquidity and risk management. These reports follow the consultation run last year and constitute IOSCO’s final response to the Financial Stability Board Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities, published in January 2017, which called on IOSCO to review and revise its guidance, where appropriate.
The first report, Recommendations for Liquidity Risk Management for Collective Investment Schemes, sets out recommendations for managing the liquidity of CIS to ensure the protection of investor’s interests, including in stressed market conditions. The Recommendations are addressed to those responsible for liquidity risk management of CIS and to national regulators. There are 17 recommendations covering the CIS design process, day-to-day liquidity management and contingency planning. The report replaces IOSCO’s 2013 report on liquidity risk management for CIS.
The second report, Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration, aims to assist regulators, industry participants and investors. It provides information on how various jurisdictions regulate liquidity risk management, sets out best practices for liquidity risk management throughout the life cycle of a fund and describes the scenarios in which an asset manager might use certain tools to manage liquidity in funds. The Good Practices document is intended to provide entities implementing the Recommendations with a reference guide to assess their approach against those adopted by others.
IOSCO expects national regulators to promote the implementation of the 2018 Liquidity Recommendations but notes that the specific jurisdictional requirements will lead to varied implementation. IOSCO intends to assess implementation across jurisdictions in two to three years.
The 2018 Liquidity Recommendations are available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD590.pdf?_sm_au_=iVVHFMWksMD40nsR and the Good Practices Report is available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD591.pdf?_sm_au_=iVVHFMWksMD40nsR.
European Commission Confirms Reverse Distribution Not Permitted Under Money Market Funds Regulation
On February 5, 2018, the European Commission published a letter to the European Securities and Markets Authority in response to a query from ESMA on the interpretation of the Money Market Funds Regulation concerning “reverse distribution.” Reverse distribution involves the cancellation of fund units in certain market environments, notably where negative interest rates prevail.
ESMA had concluded, in its public consultation on its draft Implementing Technical Standards for the MMFR, that the reverse distribution mechanism (often referred to as “share cancellation” or “share destruction”) was not compatible with MMFR. ESMA’s final draft ITS therefore did not provide for information on the “destruction” of shares to be included in quarterly reporting to national regulators. ESMA received industry feedback to its consultation to the effect that reverse distribution is a common market practice, accepted by both national regulators and investors. ESMA sought legal advice from the Commission. The Commission’s response, dated January 19, 2018, confirms that reverse distribution is not compatible with the MMFR, and invites ESMA to issue guidance to ensure supervisory convergence on this issue.
The letter is available at: http://firds.esma.europa.eu/webst/20180119_Reply%20to%20Mr%20Maijoor%20on%20MMF.pdf.
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