Global regulators unveil revised rules to prevent liquidity mismatches in open-ended funds

investmentweek.co.uk:

The FSB and IOSCO, whose members pledge to implement agreed-upon regulations in their respective national guidelines, said they intend to evaluate by 2028 whether the changes address risks to financial stability.

In the final report, which incorporates feedback from the public consultation launched this summer, the regulatory bodies set out their revised policy rules to address the structural vulnerabilities from liquidity mismatch in open-ended funds.

«The goal of the revised FSB recommendations, combined with the new IOSCO guidance on anti-dilution LMTs, is a significant strengthening of liquidity management by OEF managers compared to current practices,» the FSB said. 

Regulators have been closely scrutinising the ability of open-ended funds to meet a surge of redemption requests during a market crisis, following the «dash for cash» in March 2020, when central banks had to step in and provide emergency liquidity to money market funds and other fund types to prevent widespread suspensions.

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The nine recommendations aim to enhance the oversight and management of liquidity risks in open-ended funds, promoting transparency, effective decision-making, and resilience in both normal and stressed market conditions.

One of the revised recommendations offers greater clarity on the redemption terms that open-ended funds could provide to investors, based on the liquidity of their asset holdings.

This would be achieved through a categorisation approach, the FSB said, where open-ended funds would be grouped depending on the liquidity of their assets, and funds in each category would then be subject to specific redemption terms expectations.

«Funds that