Open-ended fund managers are facing tighter rules to ensure that they are liquid enough to manage mass withdrawals during times of trouble.
The Financial Stability Board (FSB) and the IOSCO are planning to implement rules which would require more transparency when assessing the risk of a fund, including categorising the investment vehicles based on how liquid or illiquid they are.
Under the proposed changes, funds would have to reflect in its redemption terms how long it would take to sell assets to avoid slipping into dangerous levels of illiquidity.
There is also to be a tighter focus on how funds operate Liquidty Managament Tools (LMTs) such as pricing arrangements, suspension of redemption rights and notice periods, especially for those with less liquid assets.
Klaas Knot, chair of the FSB, said in a statement: “A key part of [the changes] is a strengthening of the framework around the use of LMTs at a global level. Swift and consistent implementation of these recommendations is critical to addressing financial stability risks arising from liquidity mismatch in OEFs.”
Funds were forced to be supported by central banks back in 2020 in what was coined the “dash for cash” after the beginning of COVID lockdowns led to large withdrawals from funds.
Some property funds, which had promised investors daily redemptions, were forced into quick fire sales of assets, at less-than-ideal valuations, to remain liquid during the runs.