Proposals to force open-ended investment funds to hold more liquid assets to cope with a surge in redemptions are “fundamentally flawed” and would bump up costs for investors, asset managers said on Tuesday.
The global Financial Stability Board (FSB), which coordinates financial rules for G20 countries, and the IOSCO global umbrella body for securities watchdogs have proposed tougher rules for investment funds to increase their resilience to market shocks.
Central banks had to inject liquidity into markets during the COVID-19 pandemic when some funds struggled to meet redemption calls, but funds have argued that other parts of the market were also facing difficulties.
The FSB proposes that funds are placed in one of three “buckets” to reflect the liquidity of their assets. IOSCO, meanwhile, has proposed that every fund has an “anti-dilution” tool to deal with liquidity demands.
Asset managers, however, rejected the proposals in their responses to a public consultation on the matter.
“In our view, this framework would add unnecessary complexity to liquidity risk management and, ultimately, result in higher costs for end-investors with little benefit,” European funds industry body EFAMA said in a statement on Tuesday.
The EFAMA also pointed out that the plan does not cover other market participants that play an important role, such as brokerdealers, insurance companies and pension funds.
Forcing every fund to have an anti-dilution tool would be an “excessive requirement” for some funds, EFAMA added.
Britain’s Investment Association (IA), which represents asset managers, said the FSB should take a more holistic view when assessing the liquidity of assets held in funds.
“The ‘three bucket’ approach also lacks clarity and will not provide the robust framework we all seek,” IA said in a statement.