FR15/23 Anti-dilution Liquidity Management Tools – Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes

IOSCO published its Final Report on Anti-dilution Liquidity Management Tools: Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes. The report addresses liquidity risk and its management in OEFs during the Covid-19 induced market turmoil. It emphasizes the importance of effective liquidity risk management and the use of LMTs to mitigate investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs.
The report outlines the overall framework for the design and use of anti-dilution LMTs, including the types of anti-dilution LMTs, calibration of liquidity costs, and appropriate activation thresholds. It emphasizes the need for responsible entities to have appropriate internal systems, procedures, and controls in place for the design and use of anti-dilution LMTs as part of everyday liquidity risk management to mitigate investor dilution and potential first-mover advantage. The guidance also highlights the importance of governance and oversight of anti-dilution LMTs by fund/manager boards and depositaries.
Furthermore, the report emphasizes the significance of disclosure to investors about the use of anti-dilution LMTs. It suggests that responsible entities should ensure that liquidity risk and its management processes are effectively disclosed to investors and prospective investors. The disclosure should indicate the main purpose of anti-dilution LMTs, the constituents of the costs taken into account to calculate the adjustment factor, and differentiate between normal and stressed market conditions. The report also discusses the periodic ex-post disclosures of an OEF’s historical use of anti-dilution LMTs to help investors understand the potential cost implications of redeeming from and subscribing to an investment fund at different points in time.
The report addresses the barriers and disincentives to the implementation of anti-dilution LMTs, including the high cost of implementation, lack of data, issues with third parties, and investor attitudes towards funds that use specific kinds of anti-dilution tools. It acknowledges the need for more flexibility in the application of the guidance, recognizing that not all funds should be required to have anti-dilution LMTs and suggesting a long transition period.
In response to feedback from respondents, the report includes revisions to the proposed guidance, such as providing additional flexibility in the application of the guidance, clarifying the estimation of market impact, and repositioning the pro-rata slice approach as an example for liquidity cost calibration. The revisions aim to address concerns raised by commenters and incorporate more flexibility in the proposed guidance.