Global securities regulators are defending their approach to liquidity risk management in the investment fund sector.

In response to concerns about the adequacy of its guidance in this area, the International Organization of Securities Commissions (IOSCO), the umbrella group of global regulators, issued a statement defending its principles-based approach to liquidity risk.

IOSCO noted that some funds have recently been afflicted by liquidity problems, and that a recent report from the Bank of England highlights potential mismatches between funds’ asset liquidity and their approach to investor redemptions.

“These developments have led some to question whether [IOSCO’s work in this area] adequately address risks in open-ended investment funds which could disadvantage investors or lead to broader financial system contagion,” it said.

However, the group insisted that its policy in this area does “in fact, provide a comprehensive framework for regulators to deal with liquidity risks in investment funds.”

IOSCO said that its guidance is “unequivocal that, throughout the entire lifecycle of the fund (design, pre-launch, launch and subsequent operations), there should be an appropriate alignment between portfolio assets and redemption terms.”

It also defended its principles-based approach to regulation in this area, rather than setting prescriptive global standards for fund liquidity.

“It would be impractical to pursue, as some have suggested, a global ‘one size fits all’ prescriptive approach which tries to match different asset classes, fund investment strategies and redemption periods according to universally applicable standards,” it said. “This is because the fund management industry (compared to, for example, the banking sector) is extremely diverse.”

The group maintained that its policies do “contain practical, actionable principles” that regulators could use to develop a prescriptive approach to fund liquidity if needed in their local market.

“Domestic regulators may also need to address related conduct concerns, such as those which may arise from the way in which individual funds are managed or marketed, including material disparities between legitimate investor expectations of liquidity and the reality,” it said.

IOSCO said that it intends to examine how its policy recommendations have been implemented by local regulators in practice, starting in 2020.