Asset managers face tougher rules on investor cash calls

By Huw Jones

LONDON (Reuters) – Global regulators published tougher rules on Wednesday for managers of open-ended investment funds to ensure they can meet investor cash calls in a crisis without the need for emergency liquidity from central banks.

Regulators have been scrutinising the ability of open ended funds, a sector worth over $40 trillion globally, after central banks had to intervene to stop money market and other types of funds freezing in the face of a “dash for cash” when economies went into COVID-19 lockdowns in March 2020.

Funds could not raise cash fast enough, though the industry has argued that many parts of the market came under severe stress at that time.

The reforms from the G20’s Financial Stability Board and IOSCO, a global umbrella group for securities watchdogs, aim to end so-called first mover advantage or investors leaving a fund being less worse off than those who remain.

The rules, which had been put out to public consultation, with some tweaks in the final recommendations, say that redemption terms must reflect how long it would take to sell assets in a fund to avoid a liquidity “mismatch”.

Property funds, for example, were offering daily redemptions and some had to suspend them given the difficulty of selling property quickly.

The FSB sets out “buckets” to categorise whether funds can offer daily redemptions.

“In response to the public consultation, the FSB sought to clarify the categorisation approach and provide more flexibility to authorities in implementing the framework in their respective jurisdictions,” the FSB said in a statement.

The FSB said the liquidity management tools (LMTs) that asset managers must have would be increasingly used by funds mainly invested in less liquid assets that typically take more time to sell.

IOSCO said it has provided more flexibility in using LMTs, and has specified that the aim is to impose “fair and reasonable transaction costs” that are deducted from redemptions.

The FSB and IOSCO, whose members commit to applying agreed rules in national handbooks, said they will assess by 2028 whether the changes have sufficiently addressed financial stability risks.

(Reporting by Huw Jones; Editing by Tomasz Janowski)