Since the financial crisis, policymakers, the asset management industry and various observers have paid considerable attention to liquidity risk management. In January 2017, the Financial Stability Board (FSB) asked the International Organization of Securities Commissions (IOSCO) to review its existing guidance (published in 2013) to address the potential liquidity mismatch between fund investments and the terms and conditions for redemptions of open-ended collective investment schemes (CIS). Responding to that request, IOSCO conducted a review of regulatory standards among its members, a study of industry practices and held a public consultation in 2017 on potential enhancements to its policy recommendations.
On February 1, 2018, IOSCO published its final report, Recommendations for Liquidity Risk Management for Collective Investment Schemes (2018 Report). The 2018 Report, which focuses on open-ended CIS, re-affirms IOSCO’s prior guidance and includes new recommendations on:
- Consideration of underlying liquidity throughout the entire lifecycle of the fund (design, pre-launch, launch and ongoing operations);
- Alignment between asset portfolio and redemption terms;
- Availability and effectiveness of liquidity risk management tools;
- Fund level stress testing;
- Disclosure to investors; and
- Contingency planning.
The 2018 Report also includes examples of what IOSCO considers to be best practice, descriptions of regulatory approaches in a wide range of developed and emerging markets, and extensive references to related policy studies. This information may be of interest to chief compliance officers and ultimate designated persons.
Although IOSCO’s standards do not have the force of law, IOSCO “expects securities regulators to ensure the effective implementation of the recommendations and promote their application by responsible entities.” Accordingly, we can expect Canadian securities regulators to take action, at the policy and/or supervisory levels, if they conclude that the IOSCO standards exceed Canadian standards in any significant way.