Fund managers may face guidance on managing liquidity

According to the IOSCO report, the most common tools for managing liquidity include redemption fees, redemption gates, and the ability to suspend redemptions; along with risk management and internal control requirements. As well, open-ended funds are generally subject to regulatory requirements dealing with fund leverage, asset concentration, investor concentration, restrictions on illiquid investments and short-term borrowings, the IOSCO report notes.

Notwithstanding the existence of these sorts of tools, IOSCO’s policy committee on investment management is also considering developing additional guidance on liquidity risk management, including guidance on stress testing, the IOSCO report says.

Stress testing is in use in a number of the jurisdictions covered in the report, but not Canada. The IOSCO report notes that, in Canada, liquidity management requirements include concentration restrictions, illiquid investment restrictions, fair value requirements, and leverage restrictions, among other regulatory provisions.

According to the IOSCO report, regardless of the tools that fund managers use to manage liquidity, regulators found that they generally disclose their approach to liquidity management upfront to investors. And, the report notes that funds have generally been responsible in their liquidity management through the types of assets they invest in. “Consequently, much of the responsibility for invoking liquidity management tools begins with the funds,” the IOSCO report says.

The IOSCO report also found that asset managers generally have a fiduciary duty to investors, and that they have typically activated liquidity management tools when they are in the best interests of fund shareholders.