The International Organization of Securities Commissions published today the final report on Principles of Liquidity Risk Management for Collective Investment Schemes, which contains a set of principles against which both the industry and regulators can assess the quality of regulation and industry practices concerning liquidity risk management for collective investment schemes (CIS).
Good liquidity risk management is a key feature of the correct operation of a CIS. Its fundamental requirement is to ensure that the degree of liquidity that the open-ended CIS manages will allow it, in general, to meet redemption obligations and other liabilities. The principles of liquidity risk management published today provide details on how compliance with this requirement can be achieved.
Since the outbreak of the global financial crisis, the issue of liquidity has been a major concern for regulators. However, the discussions on regulatory reform have tended to focus more on the importance of liquidity in the banking sector than in other sectors. These principles have been designed to address the specificities of liquidity risk management in the context of the operation of a CIS.
They are structured according to the time frame of a CIS's life. They start with principles that should be considered in the design (pre-launch) phase of a CIS. They then outline the principles that should form part of the day-to-day liquidity risk management process.
To deal with the exceptional circumstances where a liquidity problem may lead a CIS to temporarily suspend all investor redemptions, IOSCO has published, in January 2012, a report on Principles on Suspensions of Redemptions in Collective Investment Schemes.
Generally, the principles aim to reflect a level of common approach and to be a practical guide for regulators and industry practitioners. They are addressed to the entity/entities responsible for the overall operation of the CIS, and in particular its compliance with the legal / regulatory framework in the respective jurisdiction but do not provide directly applicable standards to firms. When being implemented, the principles have to be transposed taking into account the local regulatory framework.