In December 2023, the FSB published its Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds. This incorporates feedback from the public consultation in July 2023 (see details below). It addresses some of the concerns raised by AREF and others and is much more principle-based. It provides local regulators room for manoeuvre in how they regulate in this area.
The revised recommendations supersede Section 2 of the FSB’s 2017 Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities. The revised recommendations form part of the FSB’s work programme on non-bank financial intermediation (NBFI) and should be read in conjunction with the IOSCO Guidance on Anti-Dilution Liquidity Management Tools (LMTs).
Background
In January 2017, FSB published Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities which incorporated Recommendations on Liquidity Mismatch in Open-ended Funds. These aimed to:
-
strengthen regulatory reporting and public disclosure to facilitate assessment of liquidity risk in OEFs;
-
promote liquidity management both at the fund design phase and on an ongoing basis;
-
widen the availability of LMTs and use of LMTs in stressed market conditions; and
-
promote fund-level and system-wide stress testing.
IOSCO operationalised most of the FSB Recommendations through its 2018 Recommendations for Liquidity Risk Management for Collective Investment Schemes and a set of related Good Practices for Open-ended Fund Liquidity and Risk Management.
In 2022, as part of its work programme to enhance the resilience of non-bank financial intermediation, the Financial Stability Board (FSB) produced an assessment of the Effectiveness of the FSB's 2017 Recommendations on Liquidity Mismatch in Open-ended Funds (2022 Assessment Report)
On 5 July 2023 the FSB published a Consultation report responding to the findings of the 2022 Assessment Report and proposed revisions to relevant parts of the FSB's 2017 Recommendations on Liquidity Mismatch in Open-ended Funds.
The goal of the revised FSB Recommendations, combined with proposed new IOSCO guidance on anti-dilution LMTs, was a significant strengthening of liquidity management by OEF managers compared to current practices. However, AREF's Public Policy Committee had some profound concerns regarding some of the recommendations in the FSB and IOSCO consultation reports. With the Committee's assistance, AREF submitted responses to both the FSB and IOSCO's consultation reports on 4 September 2023. The response to the FSB consultation report can be found here.
,
Author
