On 26 May 2025, IOSCO published its Final Report on Revised Recommendations for Liquidity Risk Management for Collective Investment Schemes ('CIS'), alongside its Implementation Guidance.
The Final Report includes 17 recommendations across six sections:
- CIS Design Process
- Liquidity Management Tools and Measures
- Day-to Day Liquidity Management Practices
- Stress Testing
- Governance
- Disclosures to Investors and Authorities.
The Revised Recommendations for Liquidity Risk Management for CIS replace IOSCO’s 2018 Liquidity Risk Management Recommendations for CIS. The key revisions are:
- Revised Liquidity Recommendation 3 incorporates the categorisation approach, through which responsible entities should ensure that the OEF’s investment strategy and the liquidity of its assets should be consistent with the terms and conditions governing fund unit redemptions both at the time of designing an OEF and on an ongoing basis;
- Revised Liquidity Recommendation 6 emphasises that responsible entities should consider and implement a broad set of anti-dilution LMTs, quantity-based LMTs and other liquidity management measures to the extent allowed by local law and regulation for each OEF under their management, in both normal and stressed market conditions as part of robust liquidity management practices;
- Revised Liquidity Recommendation 7 specifies that responsible entities should consider and use anti-dilution LMTs to mitigate material investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs they manage. Such tools should impose on subscribing and redeeming investors the explicit and implicit costs of subscriptions and redemptions, including any significant market impact of asset sales to meet those redemptions; and
- Revised Liquidity Recommendations 6 and 17 reflect observations on quantity based LMTs and other liquidity management measures, which are supplemented by the Implementation Guidance for more detailed guidance.
The Implementation Guidance supplements the Revised Recommendations with more detailed guidance and good practices to support effective implementation.
Background
AREF sent its response on 11 February 2025 to IOSCO's 3 month consultation on Revised Recommendations for Liquidity Risk Management for Collective Investment Schemes (“CIS”) (the ‘Revised LRM Recommendations’), especially for open-ended funds.
Originally published in 2018, IOSCO’s Liquidity Risk Management (LRM) Recommendations were published in response to the FSB’s 2017 Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities that aimed to address structural vulnerabilities from liquidity mismatch in open-ended funds. The Revised LRM Recommendations take into consideration the FSB’s revised Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds (“Revised FSB Recommendations”) from December 2023, as well as recent market events such as the COVID-induced market volatility and those following the war in Ukraine.
The proposals consisted of 17 recommendations organised into a revised structure with six sections, namely the CIS Design Process, Liquidity Management Tools and Measures, Day to-Day Liquidity Management Practices, Stress Testing, Governance and Disclosures to Investors and Authorities. The key proposed revisions to the LRM Recommendations correspond to the targeted revisions from the Revised FSB Recommendations and can be grouped into four main areas:
- Categorising open-ended funds (OEFs) based on the liquidity of their assets
- Encouraging investment managers to implement a broad set of liquidity management tools (LMTs) and other liquidity management measures.
- Emphasising the importance of anti-dilution LMTs to mitigate material investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs.
- Incorporating new guidance on quantity-based LMTs and other liquidity management measures.
The Revised LRM Recommendations were accompanied by a consultation on the Guidance for Open-ended Funds for Effective Implementation of the Recommendations for Liquidity Risk Management (“Implementation Guidance”). This sets out technical elements focusing on open-ended funds, such as the determination of asset and portfolio liquidity and considerations relating to the calibration and activation of LMTs and other liquidity management measures.
AREF's response was overseen by the Public Policy Committee.
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