August 31, 2023

Submitted via email to: [email protected] – subject line: Response to LMT Guidance – Consultation Report

Damien Shanahan
International Organization of Securities Commissions (IOSCO)
Calle Oquendo 12
28006 Madrid
Spain

RE: IOSCO Consultation Report, July 2023 “Anti-dilution Liquidity Management Tools – Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes.” (CR03/2023)

Mr. Shanahan:

The Securities Industry and Financial Markets Association (“SIFMA”)1 and the Asset Management Group of SIFMA (“SIFMA AMG”)2 appreciate the opportunity to provide comments to IOSCO’s July 2023 Consultation Report on proposed guidance for liquidity risk management tools (“LMTs”) used by open-end collective investment schemes.

IOSCO’s proposed guidance recognizes key design elements. In some markets, funds already have the ability and choose to make use of LMTs. IOSCO’s Consultation Report recognizes some of the reasons why funds make use of LMTs. Not all LMTs are the same and not all markets can accommodate LMTs.

We believe there are also opportunities to improve the guidance and make tailored LMTs more effective and implementable. Separately, we are submitting a response to the July 2023 Financial Stability Board Consultation Report that reflects similar themes as our responses to the IOSCO Consultation.

I. General Observations

SIFMA and SIFMA AMG recognize the need for open-end mutual funds to effectively manage liquidity risk, material dilution risk, and act in the interest of shareholders. With the wide breadth of funds with different managers, perspectives on strategies and investment decision-making, instruments and asset classes, and shareholder bases, it is critical to allow funds to retain the ability to make investment and product design decisions for themselves.

Funds manage liquidity, transaction costs, and the risk of dilution every day. Transaction costs directly erode performance. As fund managers are primarily judged on performance by investors and Boards, the natural built-in incentives influence behavior. Likewise, funds manage liquidity risk and balance the need to meet shareholder redemptions with the desire to invest in assets that produce returns for shareholders.

Funds clearly disclose their investment objectives and provide ongoing reporting to shareholders, allowing investors to make informed decisions regarding whether to invest, how much to invest, and when to make changes. In a competitive market with a wide variety of options, shareholders make their own investing choices or rely on the assistance of financial advisors to help guide them.

If there is reason for additional regulatory measures to address liquidity and the risk of material dilution, we encourage data-driven and incremental measures that balance actual costs and potential benefits, preserves the role of the fund manager as the party best positioned to know their specific facts and circumstances, and avoids prescriptive frameworks build on estimates and data limited by artificial precision. Our thoughts and suggestions below further amplify these themes in response to questions asked in the IOSCO Consultation.

As a threshold matter, we agree that the scope of the Consultation should exclude exchange traded funds and money market funds. We also agree that the scope should be limited to public collective investment schemes rather than private fund vehicles. Private funds have very different investor profiles, use cases, distribution mechanisms, and regulatory regimes that limit public disclosure and communications.

II. Executive Summary

The following themes are woven through our responses:

• Funds and investment managers are best positioned to manage liquidity and make assessments of appropriate measures. Funds are not homogenous – “one size fits all” solutions will not effectively adapt to unique facts and circumstances.
• Any anti-dilution efforts must focus on material dilution or the risk of material dilution and should not be employed in ordinary market conditions. Anti-dilution measures must avoid becoming a penalty for those redeeming or subscribing.
• Regulatory authorities should not prohibit any credible alternatives or mandate particular measures. Funds must have latitude to assess and tailor measures considering potential benefits for shareholders and the associated costs, burdens, and challenges.
• Liquidity management tools must be operationally feasible and cost effective to implement and maintain. Simple and stable tools that use existing workflows, timelines and technology will be more feasible than complex and dynamic tools. Expensive measures will impose more costs than benefits, particularly on shareholders.
• In the absence of commonly agreed methodologies to identify and measure material dilution, any regulatory guidance or mandate must acknowledge the imprecise nature of estimates when funds seek to impose actual liquidity costs on redeeming or purchasing shareholders.
• Estimates of transaction costs via a pro-rata slice assumption might be feasible for regulators seeking a consistent or objective methodology, but any guidance should acknowledge and emphasize that such calculations are estimates with inherent limitations. Funds may not trade via pro-rata slices in practice.
• There are no credible, repeatable, and objective means of precisely measuring implicit costs through “market impact” or “slippage.” The number of dynamic market factors involved – particularly for fixed-income instruments – makes such estimates inappropriate inputs for assessing actual costs to shareholders.

1 SIFMA is the leading trade association for broker-dealers, investment banks, and asset managers operating in the U.S. and global capital markets. On behalf of our members, we advocate for legislation, regulation, and business policy affecting retail and institutional investors, equity and fixed income markets, and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (“GFMA”).

2 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds. For more information, visit http://www.sifma.org/amg.