FRANKFURT (Reuters) – The Financial Stability Board (FSB), an international risk watchdog, plans to issue new recommendations on the liquidity of certain investment funds, after several episodes of stress in recent years, linked to this problem, have threatened to extend to the financial sector as a whole, declared its president, Klaas Knot, on Thursday.
“We will soon issue recommendations to address liquidity risks in open-ended funds,” Klaas Knot, head of the FSB and governor of the Dutch central bank, said in a speech on Thursday.
Investors in open-ended investment funds can redeem their shares quickly – often daily – even though the fund often holds assets whose liquidity is not comparable, creating a mismatch in times of high stress.
Many open-ended funds, particularly those holding fixed income securities, faced significant redemption pressure in early 2020 as the financial system struggled to cope with the impact of the pandemic.
Central banks then implemented emergency purchase programs for bond securities in order to ensure liquidity and avoid a collapse of the financial system.
The FSB’s recommendations are not binding but constitute essential guidelines for local regulators, who establish binding rules.
(Report by Balazs Koranyi, Corentin Chappron, edited by Kate Entringer)
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