The 2018 Liquidy Recommendations report has been introduced for the “constantly changing market environment for which those responsible for managing CIS must be prepared”.
In association with the Financial Stability Board (FSB), IOSCO issued 14 recommendations for the its 2018 report to emphasise the importance of ensuring the quality of day-to-day liquidity management where CIS’ are designed to have frequent dealing arrangements.
IOSCO states this updated approach “acknowledges that there is no ‘one size fits-all’ solution”.
Among the recommendations, IOSCO, stated: “The responsible entity should draw up an effective liquidity risk management process, compliant with local jurisdictional liquidity requirements.”
IOSCO explained that the liquidity risk management process, and its operation, is the fundamental basis of liquidity control within CIS’.
Another recommendation was that the responsible entity should conduct ongoing liquidity assessments in different scenarios, which IOSCO said should include fund level stress testing, in line with regulatory guidance.
IOSCO explained: “Stress testing can assess how the liquidity profile of, or redemption levels of, a CIS can change when faced with various stressed events and market situations. It is an important component of a responsible entity’s liquidity risk management process.”
It added: “Stress testing should support and strengthen the ability of the responsible entities in managing liquidity risk appropriately in the best interests of investors.”
Building on its 2017 Consultation on Collective Investment Schemes (CIS), and its 2013 Liquidity Report, IOSCO sent out a consultation with a closing date of 18 September 2017, to establish its 2018 Liquidity Recommendations. It received 25 formal responses.
The 2013 Liquidity Report, which took into account the lessons learned from the financial crisis of 2007-10, reflected the approach taken by member jurisdictions having responded to those events.