ALFI responds to the IOSCO consultation on the Guidance for Open-ended Funds for Effective Implementation of the Recommendations for Liquidity Risk Management

On 11 November 2024, the IOSCO launched a consultation on the Guidance for Open-ended Funds for Effective Implementation of the Recommendations for Liquidity Risk Management.

Originally published in 2018, IOSCO’s Liquidity Risk Management 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. The accompanying Implementation Guidance, also for consultation, 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.

Among others, ALFI response highlights:

• The limitations of a categorical approach;
• The importance of acknowledging for the non-exhaustiveness of the list of tools and measures proposed by IOSCO;
• The relevance of a principle-based approach governing the use of LMTs;
• The key distinction between ex-post review and back-testing;
• The impact of specific requirements on the effective use of the tools (e.g. gating with thresholds and non-executed order processing);
• The diversity of liquidity determinants and resulting model risk; and
• The review of the modelling assumptions proposed for stress-testing.

View the ALFI response.