Protecting long-term investors from material dilution is a legitimate objective, however, EFAMA doubts that the FSB draft proposals on structural vulnerabilities in the open-ended fund (OEF) sector and the IOSCO ones on anti-dilution liquidity management tools (LMTs) would increase the resilience of the OEF sector. In our view, this framework would add unnecessary complexity to liquidity risk management and, ultimately, result in higher costs for end-investors with little benefit.

Marin Capelle, Regulatory Policy Advisor at EFAMA, stated: “EFAMA’s recent publication on Open-Ended Funds & Resilient Capital Markets demonstrates that the regulatory focus on OEFs over the last decade is based on a number of questionable and unproven assumptions. These are that there would be a ‘structural liquidity mismatch’ and a ‘first-mover advantage’ in OEFs investing in less liquid assets. According to the two international standard-setters, both of these would drive ‘excess sales’ during periods of stress. In light of their analytical shortcomings, it is essential that the FSB and IOSCO take sufficient time to consult stakeholders in order to redefine a problem for which additional regulatory requirements could be justified.”

While both standard-setters are correct in identifying proper liquidity management as a crucial element for the viability of the OEF sector, we demonstrate in our responses to these consultations that the approach taken by both the FSB and IOSCO would be counterproductive in a number of respects:

• The FSB proposes a liquidity bucketing requirement that is a burdensome and inaccurate approach to determining the LMTs that different OEFs should use;
• IOSCO proposes that every OEF have at least one anti-dilution tool (ADT). This would be an excessive requirement for OEFs that experience low levels of dilution, as well as for OEFs that use certain quantity-based LMTs; and
• The FSB and IOSCO both propose that asset managers consider implicit transaction costs that apply to their OEFs – including the ‘market impact’ that these OEFs may have on market prices when they sell their assets. While we believe that asset managers should consider these costs when evaluating the level of dilution in their OEFs, for the time being it is often difficult, if not impossible, to estimate these. Moreover, these costs are not relevant to all OEFs. For instance, many OEFs trade sufficiently below the market participation rate, thereby avoiding market impact altogether.

Moving forward, EFAMA believes that the FSB should continue to promote the availability of a broad set of anti-dilution and quantity-based LMTs for use by asset managers, in both normal and stressed market conditions. Equally, IOSCO will also play a critical role in developing principle-based LMT guidance that will hopefully contribute to cross-jurisdictional convergence over the medium to long-term. In Europe, ESMA is due to further develop regulations and guidelines to define available LMTs, provide guidance on the use of these tools, and specify how asset managers should disclose information on these tools to end-investors. The IOSCO Guidance will certainly be a reference for the European supervisory authority when it starts to work on these rules.

- ENDS -

Note to editors :

• Find out more about our report on systemic risks in open-ended funds here.
• Read our response to the FSB consultation here and IOSCO consultation here.

For further information, please contact:

Hayley McEwen

Head of Communication & Membership Development

Tel: +32 2 548 26 52

Email: Hayley.McEwen@efama.org