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IOSCO has now followed up its recommendations with a consultation paper called “Guidance for Open-ended Funds (OEFs) for Effective Implementation of the Recommendations for Liquidity Risk Management”. Quite a mouthful and the 64-page document is not a short read, but I think it is a worthwhile one for MIS managers, particularly those contemplating or already investing in illiquid private market assets.
Several of IOSCO’s original recommendations provide a salutary reminder of considerations regarding holding illiquid, or “less-liquid” asset classes in OEFs (noting that KiwiSaver, notwithstanding its long-term retirement saving focus is "OEF-like" in that members can switch funds within a scheme, or transfer to another scheme) at short notice.
A key IOSCO recommendation is that an “OEF’s investment strategy and the liquidity of its assets should be consistent with the terms and conditions governing fund unit subscriptions and redemptions, both at the time of designing an OEF, and on an ongoing basis.”
Of interest was a reference in the document to the concept of a Long-Term Asset Fund (LTAF) which is a new category of OEF in the UK which is specifically authorised by the FCA and designed to invest in long term assets (e.g. infrastructure, PE and VC, real estate, private debt etc). LATFs are legally required to have notice periods and to maintain a "prudent spread of risk", they are required to be valued on at least a monthly basis and the expectation is that redemptions would be met from the sale of a representative sample of the investment portfolio (i.e. not just from the bits you can sell, or cash).
This last point is a very important one as in times of liquidity stress and/or valuation uncertainty it’s the “illiquid” bit that causes the problems and options for an OEF to adhere to the “sale of a representative sample” expectation in the face of significant redemptions, outside of fund suspension or side pocketing, can narrow very quickly – this is not theoretical, it happened during the GFC in NZ and elsewhere, and it’s happened in other jurisdictions.
IOSCO continues to recommend managers have a playbook, something we at Mosaic have also encouraged, to plan out scenarios and how they might respond, noting that the source of a liquidity crisis can be driven by factors other than "the market" with IOSCO noting that asset valuation difficulties, cyber incidents, fraud, a political crisis, or natural disaster, could all potentially contribute.
So, although lengthy, I think it's a worthwhile read.
