A Comparative Review of U.S. and International Fund Liquidity Regulation Through the Lens of IOSCO’s Recommendations for Liquidity Risk Management

The following introduces the authors’ article appearing in the Journal of International Banking Law & Regulation 

The U.S. Securities and Exchange Commission in October 2016 adopted a formal liquidity risk management rule (Liquidity Rule) and related disclosure regime for U.S. registered open-end investment companies (mutual funds and exchange-traded funds). The Liquidity Rule and disclosure requirements, hailed by U.S. regulators as part of a “comprehensive five-part plan to enhance the regulation of the risks arising from the portfolio composition and operations of funds and investment advisers,” were one of many fund liquidity regulations taking shape globally. 

This article provides a review of global regulatory developments in the years preceding the Liquidity Rule’s adoption, as well as a detailed comparison of the elements of the U.S. liquidity risk management and disclosure regime with key features of the Board of the International Organization of Securities Commissions’ “Recommendations for Liquidity Risk Management for Collective Investment Schemes” (IOSCO Recommendations). The article also includes comparisons with certain aspects of liquidity risk management regulations and guidance from the Hong Kong Securities and Futures Commission, UK Financial Conduct Authority, French Autorité des Marchés Financiers, and Ontario Securities Commission. Through this comparative review, the article explores similarities and differences among U.S. and international regulators’ means of addressing shared policy concerns. 

The IOSCO Recommendations and the U.S. liquidity risk management and disclosure regime share several themes and are consistent in many respects. However, in some cases, they diverge in emphasis, as summarized below: 

• The IOSCO Recommendations and the Liquidity Rule share a focus on liquidity risk assessment and are in agreement over many of the particular considerations relevant to this assessment. Notably, the IOSCO Recommendations emphasize considerations pertinent to whether a strategy is appropriate for an open-end structure. 
• The IOSCO Recommendations and the Liquidity Rule each contemplate classifying the liquidity of fund holdings. However, the Liquidity Rule’s focus on this feature is conspicuously greater than that of the IOSCO Recommendations. 
• The IOSCO Recommendations suggest portfolio limitations related to liquidity risk management, but on this score the IOSCO Recommendations are not as prescriptive as the Liquidity Rule’s requirements relating to a highly liquid investment minimum or the 15% limit on illiquid investments. 
• The IOSCO Recommendations devote substantial attention to stress testing as an important liquidity risk management tool. In contrast, under the Liquidity Rule, stress testing is permissive and only lightly discussed in SEC guidance. 
• The IOSCO Recommendations also devote attention to contingency planning and liquidity risk management tools (e.g., in-kind redemptions, swing pricing, suspensions of redemption, side letters, lock-ups), only some of which are available under U.S. regulations. 

Despite shared policy goals, different regulatory regimes emphasize differing elements of liquidity risk management, including differing degrees of emphasis concerning classifying the liquidity of portfolio investments, explicit portfolio limitations, stress testing, contingency planning and liquidity risk management tools. 

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