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Asset managers are confronted with more rigorous regulations concerning investor cash calls.


    Global authorities unveiled more stringent regulations on Wednesday for supervisors of open-ended investment funds. The aim is to guarantee their capacity to fulfill investor withdrawal requests during crises without relying on emergency funds from central banks.

These regulations come as a response to the scrutiny faced by open-ended funds, a sector with a global value exceeding $40 trillion. Central banks had to step in during the COVID-19 lockdowns in March 2020 to prevent money market and various funds from freezing due to a sudden surge in demand for cash.

These measures are designed to enhance the resilience of the funds and ensure they can navigate financial challenges without causing disruptions. The focus is on preventing a repeat of the liquidity issues experienced during the initial phases of the COVID-19 pandemic.

Back in the heat of the COVID-19 crisis, funds found themselves struggling to generate cash rapidly. The industry has contended that various segments of the market faced significant stress during that challenging period.

Now, in response to these challenges, the G20's Financial Stability Board and IOSCO, a global group overseeing securities regulators, have introduced reforms. Their goal is to eliminate what's known as the "first mover advantage," where investors leaving a fund are in a less precarious position than those who choose to stay.

The newly implemented rules, shaped through public consultations with some adjustments in the final recommendations, stipulate that redemption terms must align with the time it would take to liquidate assets in a fund. This measure is designed to prevent a liquidity "mismatch" that could create further instability.

During the tumultuous period, property funds, in particular, were grappling with the challenge of meeting daily redemption requests. Some even had to temporarily halt these redemptions due to the complexities involved in swiftly selling off property assets.

In addressing these issues, the Financial Stability Board (FSB) has introduced a system of "buckets" to classify whether funds can feasibly provide daily redemptions.

The FSB, responding to feedback from the public consultation, has made efforts to clarify the categorization approach and introduce more flexibility for authorities in implementing the framework within their respective jurisdictions, as stated in an official statement by the FSB. This move aims to bring more clarity and adaptability to the regulations governing fund redemptions.

The Financial Stability Board (FSB) has outlined that liquidity management tools (LMTs), a requirement for asset managers, will see increased utilization, especially by funds heavily invested in less liquid assets that typically take more time to sell.

IOSCO, in alignment with these developments, has emphasized providing greater flexibility in the application of LMTs. Furthermore, it has specified the goal of imposing "fair and reasonable transaction costs," which would be deducted from redemptions.

Both the FSB and IOSCO, whose members commit to adhering to agreed-upon rules in national handbooks, have committed to evaluating whether these changes adequately address financial stability risks by the year 2028. This assessment reflects their dedication to ensuring the effectiveness and resilience of the regulatory measures implemented.

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