INTERNATIONAL: IOSCO Seeks Consultation on Principles for CIS Redemptions

Tuesday March 8 2011

Fund-Axis would like to highlight the recent report published by the Technical Committee of (IOSCO) inviting regulators, the industry, market participants and other interested party to give their opinions in relation to the drafting of principles for management of the suspension of redemptions in open-ended collective investment schemes. To that end IOSCO has created a set of draft principles which it has set forward in the report “Principles on the Suspension of Redemptions in Collective Investment Schemes” as per the link below;

 Principles on the Suspension of Redemptions in Collective Investment Schemes

 Fund-Axis would encourage the asset managers of open-ended CIS to definitely peruse and consider the principles as currently set out by IOSCO and where they feel necessary to offer an opinion on the re-drafting of the principles as currently set out as it is likely that the final report created by IOSOC will influence future legislation and interpretation by regulators. Fund-Axis can assist asset managers in discussing and exploring any concerns they may re: the implications of the principles as currently set out and also assist in the drafting of any response to IOSCO. If you require our assistance you can reach a member of the Fund-Axis team on the contact details at the end of this article.

 The consultation period is open for comments until 30 May 2011.

 Overview of the Principles

The principles generally cover all types of open-ended CIS which offer a continuous redemption right, and apply irrespective of whether they are offered to institutional or retail investors. They are addressed to those entities responsible for the overall operation of the CIS and thus for the implementation of the principles. The delegation of activities may not be used to circumvent the principles and there should be compliance with the principles, whether activities are performed directly or through a third party.

Draft Principles on the Suspension of CIS Redemptions

1.       Management of liquidity risk

 1.1.    The responsible entity should ensure that the degree of liquidity of the open-ended CIS it manages allows it in general to meet redemption obligations and other liabilities.

 1.2.    Before and during any investment, the responsible entity should consider the liquidity of the types of instruments and assets and its consistency with the overall liquidity profile of the open-ended CIS. For this purpose, the responsible entity should establish, implement and maintain an appropriate liquidity management policy and process.

2.       Criteria/Reasons for the suspension

 2.1.    Suspension of redemptions by the responsible entity may be justified only in exceptional circumstances provided such suspension is in the best interest of all unitholders within the CIS or if the suspension is required by law.

3.       Decision to suspend

3.1.    The responsible entity should have the operational capability to suspend redemptions in an orderly and efficient manner.

 3.2.    The decision by the responsible entity to suspend redemptions, in particular the reasons for the suspension and the planned actions should be appropriately:

 3.2.1. documented;

3.2.2. communicated to competent authorities and other relevant parties;

3.2.3. communicated to unitholders.

4.       During the suspension

 4.1.    During the suspension of the redemptions, the responsible entity should generally not accept new subscriptions. Subscriptions cannot be accepted if a reliable, meaningful and robust valuation of the assets is not possible.

 4.2.    The suspension should be regularly reviewed by the responsible entity. The responsible entity should take all necessary steps in order to resume normal operations as soon as possible having regard to the best interest of unitholders.

 4.3.    The responsible entity should keep the competent authority and unitholders informed throughout the period of suspension. The decision to resume normal operations should also be communicated immediately.

 Implementation of the principles may vary from jurisdiction to jurisdiction, depending on local conditions and circumstances. 

Should you wish to contact the author to discuss any of the , implications of the above in more detail, please email info@fund-axis.com