IMF calls for fund reforms to avoid severe cash outflows during market tensions

Fund Regulatory Updates

Fundamental reforms are needed to strengthen investment funds to avoid a repeat of the financial market turbulence triggered by the coronavirus pandemic, the IMF said on Friday.

Central banks were forced to intervene aggressively to restore order after sharp price drops in financial markets in Q1 2020 were amplified by massive sell-offs by fund managers, who ditched stocks and obligations when their customers rushed for the exit.

“We need to strengthen the resilience of investment funds to preserve financial stability and better protect markets and economies against crippling capital outflows,” said Tobias Adrian, IMF director of monetary and capital markets.

Along with proposals for a range of new liquidity management tools for asset managers, the IMF said policymakers should consider changing the current rules that allow investors to make daily withdrawals of almost any type. mutual funds.

Investors could still withdraw their money with just one day’s notice from funds that have invested in the most readily tradable assets, including sovereign bonds and large publicly traded companies. But the so-called unqualified daily transactions would no longer apply to funds that invest in less liquid asset classes, such as high yield corporate bonds, emerging market debt and real estate.

The IMF said matching the frequency of redemptions to the types of assets held could be “particularly useful” in managing investors’ expectations for liquidity.

He also suggested that asset managers should make greater use of swing pricing, when investors who wish to immediately buy back a fund in a time of market stress are hit by a reduction in the value of their holdings. Swing pricing can reduce the first-mover advantage that an investor gets if they sell before other sellers push prices down.

The Investment Company Institute, a trade body for U.S. asset managers, said it disagreed with the IMF’s finding that regulated funds amplified market tensions in March 2020.

“We don’t know of any convincing evidence of this. The turmoil of March 2020 was brought on by investors of all stripes – not just investors in regulated funds – seeking liquidity in the face of unprecedented uncertainty caused by the emerging global pandemic, ”ICI said.

Amin Rajan, chief executive of asset management consultancy Create Research, said regulators had grappled with liquidity and day-to-day trading issues for mutual funds for at least two decades without success. These problems were compounded by a narrowing of investor time horizons, which blurred the line between speculation and investing.

“More and more retail investors are participating in the financial markets, but they are not pursuing long-term buy and hold strategies. They are speculators who run at the first shot. It’s very unsettling, ”said Rajan.

Rule changes are the responsibility of national regulators, but the IMF plays an important role in coordinating the policies of supervisors globally. Its investment fund proposals are supported by the International Organization of Securities Commissions, the global standard-setting body for the world’s securities supervisors, the European Securities and Markets Authority (Esma), a pan-European regulator , and the Bank of England.

Natasha Cazenave, Executive Director of Esma, said that an internationally consistent approach to supervisory standards was needed because of the “growing interconnection” between investment funds and the broader financial ecosystem, including including emerging markets.

“Investment funds should act as shock absorbers and not as diffusers of shocks. The investment fund industry has tripled in size over the past decade and poses risks to global financial stability, ”Cazenave said.

“Policymakers worked together to make banks safer after the global financial crisis more than ten years ago. Now we need to do the same for investment funds, ”said Kristalina Georgieva, Managing Director of the IMF.

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