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:
- 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);
- 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;
- 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);
- Where no local liquidity law exists, the CIS’s redemption policy should be consistent with its investment objectives and approach;
- 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;
- 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;
- 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.