New Rules for Asset Managers to Meet Investor Cash Calls

Global regulators have announced stricter rules for open-ended investment fund managers to better handle investor cash calls without relying on central bank support.

Global regulators have announced new, stricter rules for managers of open-ended investment funds in an effort to ensure that they are better equipped to meet investor cash calls during times of crisis, without relying on emergency liquidity from central banks. This move comes in response to the challenges faced by the sector during the COVID-19 lockdowns in March 2020, when central banks had to intervene to prevent money market and other types of funds from freezing due to a surge in cash withdrawals.

The open-ended funds sector, which is valued at over $40 trillion globally, has been under scrutiny as it struggled to raise cash quickly during the economic downturn. While the industry has argued that various segments of the market were severely stressed at that time, regulators have been working to address the vulnerabilities and prevent similar situations in the future.

The reforms, released by the G20's Financial Stability Board and the International Organization of Securities Commissions (IOSCO), aim to eliminate the "first mover advantage," where investors leaving a fund are in a less disadvantageous position compared to those who choose to remain. The new rules require redemption terms to reflect the time it would take to sell assets in a fund, in order to avoid a liquidity "mismatch." For instance, property funds that were offering daily redemptions had to suspend them due to the challenges of quickly selling property assets.

The FSB has introduced "buckets" to categorize whether funds can offer daily redemptions, while IOSCO has provided more flexibility in using liquidity management tools (LMTs) and has specified the aim of imposing "fair and reasonable transaction costs" that are deducted from redemptions. These changes are expected to be increasingly used by funds mainly invested in less liquid assets that typically take more time to sell.

Both the FSB and IOSCO have committed to assessing the effectiveness of these changes in addressing financial stability risks by 2028. The new rules, which have undergone public consultation and received some tweaks in the final recommendations, are aimed at strengthening the resilience of open-ended investment funds and ensuring greater protection for investors during times of crisis.

The new rules introduced by global regulators for open-ended investment funds are designed to address the liquidity challenges faced by the sector during times of crisis and to prevent similar situations in the future. By requiring redemption terms to reflect the time it would take to sell assets in a fund and providing more flexibility in using liquidity management tools, the reforms aim to enhance the resilience of the sector and protect the interests of investors. More!