Regulators Propose Policies for Managers of Open-Ended Funds

Two global financial regulators published policies designed to strengthen liquidity management by managers of open-ended funds (OEFs).

The Financial Stability Board (FSB) has published revised recommendations for financial regulatory and supervisory authorities, while the International Organization of Securities Commissions (IOSCO) has released guidance on the design and use of anti-dilution liquidity management tools (LMTs) by OEF managers, the organizations said in a Wednesday (Dec. 20) press release.

The FSB recommendations address vulnerabilities resulting from liquidity mismatches in OEFs and outline regulatory and supervisory frameworks to address them, according to the release.

For example, the recommendations clarify the redemption terms that OEFs can offer to investors based on the OEF asset holdings’ liquidity, the release said.

“Swift and consistent implementation of these recommendations is critical to addressing financial stability risks arising from liquidity mismatch in OEFs,” FSB Chair Klaas Knot said in the release.

The IOSCO’s guidance promotes greater, more consistent and more effective use of anti-dilution LMTs by setting out operational, design, oversight, disclosure and other factors that should be considered by responsible entities when using these tools, per the release.

For example, the estimated cost of liquidity, including transaction costs, should be imposed upon subscribing and redeeming investors, the release said.

“The FSB and IOSCO have worked closely together to deliver a comprehensive policy package designed to strengthen open-ended fund managers’ liquidity management to improve investor protection and support financial stability,” IOSCO Chair Jean-Paul Servais said in the release.

OEFs and money market funds, which are also regulated by FSB and IOSCO, are part of a nonbank financial intermediation (NBFI) sector that includes almost half of global financial assets, Reuters reported Wednesday.

Due to its size and role in the economy, this sector has been dubbed “shadow banking,” the report said.

The two organizations plan to focus on leverage as they continue to scrutinize nonbanks in 2024, according to the report.

In another action, the FSB released a proposed regulatory framework for cryptocurrency in July, saying that all countries should apply the regulations.

The proposed regulations would require crypto platforms to segregate customer funds from their own assets and delineate functions to prevent conflict of interest.