IOSCO Publishes Principles of Liquidity Risk Management for Collective Investment Schemes

The International Organization of Securities Commissions ("IOSCO") published its final report of guiding principles for managing liquidity risk in a collective investment scheme ("CIS"). The report suggests ways in which a CIS can create, implement and monitor liquidity policies to ensure that the CIS meets its general redemption obligations. Specifically, the report makes the following recommendations:

1. When creating a new CIS, its sponsor must be able to demonstrate to its regulator that it can comply with applicable local liquidity rules (if they exist);
2. Where the CIS intends to invest in a high proportion of illiquid assets, it should be required to construct and implement a more rigorous liquidity management program;
3. The CIS should set liquidity limits that are proportionate to its redemption policies (e.g., a CIS with daily redemptions should hold fewer illiquid assets than a CIS with monthly redemptions);
4. Where no local liquidity law exists, the CIS's redemption policy should be consistent with its investment objectives and approach;
5. If a CIS intends to use tools to limit redemptions (e.g., gates, lockups, or side letters), how these tools will affect investors must be clearly disclosed in the offering documents;
6. In performing its liquidity risk management process, the CIS should consider its investment strategy, liquidity profile, and redemption policy on an ongoing basis to determine its effectiveness;
7. Finally, before investing, particularly into new asset classes, a CIS should consider the liquidity profile of the assets and their effect on the overall liquidity of the CIS.

View report in full here (links externally to IOSCO website).See also: Press Release.