The Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO) have jointly proposed that open-ended fund managers implement redemption fees for withdrawing investors.
In their separate consultation reports released on July 5, the regulatory bodies outlined policy recommendations to address liquidity mismatches and strengthen non-bank financial intermediaries.
The FSB’s consultation and IOSCO’s guidance on anti-dilution liquidity management tools (LMTs) aim to address the advantage enjoyed by early redeemers due to liquidity mismatches in open-ended funds. The suggestions include passing liquidity costs associated with redemptions and subscriptions on to investors.
IOSCO’s guidance identifies five anti-dilution LMTs: swing pricing, valuation at bid or ask prices, dual pricing, anti-dilution levies and subscription/redemption fees.
Simultaneously, the FSB’s recommendations call for clearer redemption terms based on asset liquidity. Open-ended funds would be categorised according to liquidity, with each category subject to specific expectations for redemption terms and conditions.
Another proposal urges fund managers to provide transparent public disclosures on the availability and usage of liquidity management tools in normal and stressed market conditions, enhancing investor awareness of anti-dilution LMTs.
Combining the FSB’s revised recommendations with IOSCO’s guidance aims to strengthen liquidity management by open-ended fund managers.
Martin Moloney, IOSCO’s secretary general, was cited in a Financial Times report that acknowledged the presence of illiquid assets in the funds industry, highlighting the timing challenges associated with redeeming funds holding assets like property that take months to sell.
Moloney stated that redemption fees aim to impose costs on withdrawing investors, ensuring they bear the full expenses of their actions while establishing a consistent global approach.
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