Following global policymakers’ efforts to address fund industry liquidity risks, which were exposed by financial market panic arising with the pandemic, European regulators are consulting on funds’ liquidity management tools.
The European Securities and Markets Authority (ESMA) launched a new consultation on proposed guidance and technical standards on liquidity risk management by investment funds.
The proposed guidance and standards follow the introduction of rule changes designed to “mitigate potential financial stability risks” and to promote harmonization of liquidity risk management in the investment fund sector, ESMA said.
“These new rules being proposed are in line with the latest global standards provided by the [Financial Stability Board] and [the International Organization of Securities Commissions], and will contribute to the strengthening of the EU regulatory and supervisory regime for investment funds,” said Verena Ross, chair of ESMA, in a release.
The consultation launched on Monday aims to facilitate the implementation of the new requirements.
Among other things, it seeks to define calculation methodologies and activation mechanisms for funds’ liquidity tools — such as redemption gates, redemption fees, swing pricing and anti-dilution charges — and provides guidance to fund managers on how to select and calibrate these tools, given funds’ investment strategies, liquidity profiles and redemption policies.
It also clarifies the use of specific tools such as “side pockets,” which currently varies widely, ESMA said.
The proposals aim to make “fund managers better equipped to manage the liquidity of their funds, in preparation for market stress situations,” ESMA said.
“By having the right implementing rules in place, we can make the EU framework for investment funds both more resilient and more efficient, supporting the development of attractive, effective and stable EU capital markets,” Ross said.
The deadline for feedback on the consultation is Oct. 8. ESMA said it aims to finalize its technical standards and guidance by April 16, 2025.