IOSCO Publishes Principles of Liquidity Risk Management for CIS

The International Organisation of Securities Commissions (ISOCO) has published its final report on the ‘Principles of Liquidity Risk Management for Collective Investment Schemes’ (CIS). The set of industry best practice guidelines from the securities regulator collective is intended to ensure good liquidity risk management and to mitigate against a CIS ever having to temporarily suspend all investor redemptions.

The fundamental requirement of ISOCO’s new liquidity risk principles is to ensure that the degree of liquidity that the open-ended CIS grouping manages will allow it to meet redemption obligations and other liabilities in future. Financial market participants can follow the step-by-step compliance guidelines. 

Since the outbreak of the global financial crisis, the issue of liquidity has been a major concern for regulators. However, the discussions on regulatory reform have tended to focus more on the importance of liquidity in the banking sector rather than in other sectors, such as CIS, which attract other finance professionals. These latest ISOCO principles have been designed to address the specificities of liquidity risk management in the context of the operation of a CIS and to spread ISOCO’s net wider.

They are structured according to the time frame of a CIS’s life, starting with the principles that should be considered in the design (pre-launch) phase of a CIS, moving through to the principles that should form part of the day-to-day liquidity risk management process. The principles are addressed to the entity or entities responsible for the overall operation of the CIS, but when implemented the principles have to be transposed into the local regulatory framework.

The new guidelines follow-on from ISOCO publication in January 2012 of its earlier ‘Principles on Suspensions of Redemptions in Collective Investment Schemes’- both are designed to try to offer enhanced protection.

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