Global securities regulators are proposing a set of principles for both regulators and the industry to follow in managing liquidity risk for collective investment schemes, such as mutual funds.
The Technical Committee of the International Organization of Securities Commissions (IOSCO) Thursdau published a consultation paper outlining a set of 15 principles that the financial industry, and its regulators, can use to assess the quality of regulation and industry practices relating to liquidity risk management for collective investments.
While liquidity has been a “major concern” for regulators in the wake of the global financial crisis, so far, regulatory reform has focused primarily on the banking sector. The report stresses that the asset management sector has specific characteristics that must be kept in mind when devising policy there, too.
“Good liquidity risk management is a key feature of the correct operation of a [collective investment],” it notes, “as the right to redeem units/shares is a defining characteristic of open-ended schemes.”
Indeed, the report says that the fundamental requirement of liquidity risk management is to ensure that funds are able to meet their redemption obligations and other liabilities. “The principles of liquidity risk management provide details on how compliance with this requirement can be achieved,” it says.