Liquidity standards for investment funds will benefit asset managers by curbing repetitional risk while adding incremental compliance cost, says Moody’s Investors Service in a report published Tuesday.
The International Organization of Securities Commissions (IOSCO) last week published a set of recommendations to address liquidity risk management practices for open-ended collective investment schemes (CIS), designed to enhance investor protection, ensure fund liquidity, and reduce systemic risk.
“The recommendations call for stringent liquidity risk management processes that should be tailored to the liquidity of collective investment schemes’ underlying assets, the investor base and the schemes’ redemption frequency,” Moody’s says.
IOSCO expects local regulators to adapt the recommendations in their own markets over the next couple of years, the report says, and firms should benefit once the industry adopts the reforms.
“The industry’s adoption of these recommendations would be credit positive for asset managers because it will reduce managers’ exposure to liquidity shortfalls that can significantly damage firms’ brand reputation,” the report says.
In particular, the biggest benefit of the recommendations would be better alignment between the liquidity of funds’ assets and the liquidity terms offered to the fund clients.
“Big asset-liability mismatches in open-end funds pose potential liquidity risks for fund products and potential reputational risk for fund sponsors, particularly in stressed market conditions when investor redemptions typically increase,” the report says.
While the reforms will increase compliance costs for asset managers, believes that the added cost will be marginal for the firms it rates because they have already bolstered their risk and reporting processes in response to other regulatory initiatives.
“We expect only a mild effect on large asset managers’ bottom line,” the report says, and in the long run, the reforms should help firms increase earnings stability and lower reputational risk.