Global Trustee and Fiduciary Services Bite-Sized Issue 1 2024

Global Trustee and Fiduciary Services Bite-Sized | Issue 1 | 2024 7 QUICK LINKS BENCHMARKS REGULATION CSDR CYBERSECURITY DEFI DIGITALISATION DORA ELTIF FSB FUND LIQUIDITY MONEYMARKET FUNDS OPERATIONAL RESILIENCE SUSTAINABLE FINANCE/ESG ASIA EUROPE IRELAND NORTH AMERICA UNITED KINGDOM The Revised FSB Recommendations are addressed to financial regulatory and supervisory authorities. They set out the key objectives for an effective regulatory and supervisory framework to address vulnerabilities arising from liquidity mismatch in open-ended funds (OEFs). Combined with the IOSCO LMT Guidance, these recommendations aim to achieve a significant strengthening of liquidity management by OEF managers compared to current practices. To address structural liquidity mismatch in OEFs, the Revised FSB Recommendations provide greater clarity on the redemption terms that OEFs can offer to investors, based on the liquidity of the OEF asset holdings. This would be achieved through a categorisation approach, where OEFs would be grouped depending on the liquidity of their underlying assets (e.g., liquid, less liquid, illiquid). OEFs in each category would then be subject to specific expectations in terms of their redemption terms and conditions. Authorities should set expectations for OEF managers to use a mixture of quantitative and qualitative factors when determining the liquidity of OEF assets in normal and stressed market conditions within the context of their domestic liquidity frameworks. The Revised FSB Recommendations seek to achieve (i) greater inclusion of anti-dilution LMTs in OEF constitutional documents and (ii) greater use of, and greater consistency in the use of, anti-dilution LMTs in both normal and stressed market conditions. To support these objectives and ensure more effective liquidity risk management practices, the IOSCO LMT Guidance provides detailed guidance on the design and use of anti-dilution LMTs by OEF managers. The IOSCO LMT Guidance aims to support the greater use of anti-dilution LMTs by OEFs to mitigate investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs. The IOSCO LMT Guidance sets out key operational, design, oversight, disclosure and other factors and parameters that responsible entities should consider when anti-dilution LMTs are used, to promote greater, more consistent, and more effective use of these tools. Furthermore, anti-dilution LMTs used by responsible entities should impose on subscribing and redeeming investors the estimated cost of liquidity. This encompasses the explicit and implicit transaction costs of subscriptions or redemptions, including any significant market impact of asset purchases or sales to meet those subscriptions or redemptions. Looking ahead, IOSCO will consider how to further operationalise the Revised FSB Recommendations through amendments to the 2018 IOSCO Recommendations and supporting good practices, as needed. Link to Revised FSB Recommendations here Link to IOSCO LMT Guidance here MONEY MARKET FUNDS ESMA Updates the Parameters and Methodology for MMF Stress Testing On 19 December 2023, the European Securities and Markets Authority (ESMA) published its Final Report on the Guidelines on stress test scenarios under theMoneyMarket Funds Regulation (MMFR). The Final Report combines an update of the methodology to implement the scenario related to the hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF, with the annual calibration of the risk parameters. Based on feedback received from stakeholders as part of ESMA’s January 2023 consultation, the revised methodology includes parameters reflecting the liquidity stress affecting the money market and a new risk factor to simulate the additional impact of asset sales under stress market conditions. This takes the form of a price impact representing the additional cost incurred by selling a large amount of securities in a market with few buyers. The 2023 parameter update reflects the prevailing sources of systemic risk identified for the financial system, against the background of a prolonged period of low growth, elevated inflation and higher interest rates. The severity of the parameters of the stress test scenarios in relation to hypothetical movements of the interest rates materially increased compared to the 2022 Guidelines, while other scenarios have been updated with a degree of severity similar to the previous exercise.