IOSCO consults on anti-dilution LMTs in Open-Ended Funds

What’s new?

On 5 July 2023, IOSCO published a consultation report in which it sets out a detailed guidance to support greater and more consistent use of anti-dilution liquidity management tools (LMTs) in open-ended funds (OEFs).

The proposed guidance would cover the design and use of anti-dilution LMTs by OEFs including:

• calibration of liquidity costs and appropriate activation thresholds
• oversight of LMTs by fund boards, managers’ boards or depositories
• disclosure to investors
• overcoming barriers to effective implementation.

The consultation period closes on 4 September 2023.

What is IOSCO proposing?

The guidance contained in the consultation report would require responsible entities to

• have appropriate governance arrangements (including clear decision-making), internal systems, procedures and controls in place at all times as part of the everyday liquidity risk management of their OEFs
• consider and use at least one appropriate anti-dilution LMT for each OEF under management to mitigate investor dilution and potential first-mover advantage
• impose on subscribing and redeeming investors the estimated cost of liquidity
  • such costs may include explicit or implicit transaction costs of subscriptions or redemptions, including any significant market impact of asset purchases or sales to meet those subscriptions or redemptions
  • independently of the anti-dilution LMT used, responsible entities would need to demonstrate to authorities that the calibration of the LMT is appropriate and sufficiently prudent for both normal and stressed market conditions
• set appropriate and sufficiently prudent thresholds where these are set for the activation of anti-dilution LMTs
• publish clear disclosures of the objectives and operation (including design and use) of anti-dilution LMTs to improve awareness among investors.

Next steps

IOSCO’s proposed guidance on anti-dilution LMTs should be read alongside the FSB’s proposals to revise its liquidity-related Recommendations on which we reported here.

Both reforms are taking place against the background of growing regulatory concern around liquidity mismatches – see, for example, the FCA’s recent Dear CEO letter to Asset Managers, which we covered here.