International Organization of Securities Commissions (IOSCO) has published a review assessing the implementation of selected recommendations that were issued in 2018 to strengthen the liquidity risk management practices for collective investment schemes (CIS) globally.
The review found that larger jurisdictions show a high degree of implementation of regulatory requirements, consistent with the objectives of the recommendations.
The review also identified some challenges to dealing frequency, dealing arrangements and disclosure practices.
Jean-Paul Servais, IOSCO’s Board Chairman and Chairman of the Belgium FSMA, commented on the findings saying:
- “Effective liquidity management is crucial to safeguard the interests of investors, to maintain the orderliness and robustness of collective investment schemes and markets, and to reduce systemic risks. Effective liquidity management, therefore, contributes to financial stability.
- IOSCO will continue to engage with the industry, its members, and other international bodies to ensure that sound liquidity management practices are implemented.”
More on the findings: For day-to-day liquidity management, the review found that some jurisdictions may need to improve the process of identification of a liquidity shortage before it occurs and provide more guidance on aligning the investment strategy, liquidity profile and redemption policy.
Other related areas that may warrant further attention include data availability and third-party providers of liquidity metrics.
Concerning contingency planning, the review found that jurisdictions should further address the availability of liquidity management tools and supplement the current rules and regulations to include requirements that are more specific regarding the use of such tools.
Additionally, the review found that responsible entities (i.e., asset managers) have a high degree of implementation of the Recommendations at the level of policies and practices.
Weaknesses exist: While all large global responsible entities described practices that were consistent with the Recommendations, improvement might be needed by smaller and less-resourced entities concerning their liquidity disclosure provisions in their CIS design process.
Some weaknesses were also identified in operationalizing contingency plans and activation of liquidity risk management tools.
Sharon Kelly, Chair of the IOSCO Assessment Committee and Senior Analyst, Quebec AMF, said:
- “The work of the Assessment Committee is critical to IOSCO and its members. Unless implemented, issuing international standards remains ineffective.
- “The findings from the review indicate that IOSCO Recommendations in this area are broadly well implemented. We nevertheless call on both jurisdictions and responsible entities to address the remaining shortcomings identified in our report.”
He noted that the findings from the review have informed the FSB’s assessment of the effectiveness of the FSB’s 2017 policy recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds.
