The Financial Stability Board (FSB) and International Organisation of Securities Commissions (IOSCO) are recommending open-ended fund managers charge fleeing investors a redemption fee.
In two separate consultation reports published today (5 July), the regulatory bodies proposed a set of policy recommendations to address the structural vulnerabilities from liquidity mismatch in open-ended funds and enhance the resilience of non-bank financial intermediation.
The FSB's consultation and IOSCO's guidance on anti-dilution liquidity management tools (LMTs) aim to mitigate the potential first-mover advantage arising from structural liquidity mismatch in open-ended funds by passing on costs of liquidity associated with redemptions and subscriptions to investors.
IOSCO's guidance identifies five anti-dilution liquidity management tools: swing pricing, valuation at bid or ask prices, dual pricing, anti-dilution levies and subscription/ redemption fees.
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Meanwhile, the FSB's recommendations call for greater clarity on the redemption terms that open-ended funds could offer to investors, based on the liquidity of their holdings.
The proposals include a bucketing approach, where open-ended funds would be grouped into different categories depending on the liquidity of their assets, with funds in each category subject to specific expectations in terms of redemptions terms and conditions.
Another proposal would require fund managers to produce clearer public disclosures on the availability and use of liquidity management tools in normal and stressed market conditions to enhance investor awareness on the objectives and operation of anti-dilution LMTs.
The FSB's revised recommendations, combined with the new IOSCO guidance, aim to achieve a "significant strengthening" of liquidity management by open-ended fund managers compared to current prices.
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IOSCO secretary general Martin Moloney was cited in a Financial Times report saying there is a "substantial portion" of the funds industry with significant illiquid assets.
"There are certain obvious candidates," he said. "If you think about the turnround time to get rid of the property asset, that is very long, that is months, and if you are offering somebody daily redemption with an asset on the other side that takes months to release, there clearly is a timing problem."
Moloney said the subscription and redemption fees are about imposing on the redeeming investor a cost, which "we have long since recognised arises when somebody redeems from the fund".
He added that the two authorities are seeking to provide "a more coherent and systematic approach around the world to ensure that those investors that are leaving pay the full cost".
