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Canadian Securities Regulators Offer Liquidity Risk Guidance for Investment Funds

The Canadian Securities Administrators (CSA) today published guidance intended to help investment fund managers develop and maintain effective liquidity risk management frameworks for investment funds.

For the purposes of this guidance, liquidity risk is the risk that a fund is unable to satisfy redemption requests without having a material impact on the remaining securityholders. A fund must be able to sell the underlying portfolio assets within a reasonable amount of time, in an orderly manner to satisfy redemption requests. Analysts say liquidity risk can increase when the liquidity of portfolio assets held by an investment fund does not match the redemption terms and conditions offered to its investors. In recent years, the management of this potential liquidity mismatch has been a key focus for regulators internationally and the asset management sector.

“Taking a preventative and proactive approach to liquidity risk management is critical to ensuring such risks are appropriately managed,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. “We are publishing this guidance to support investment fund managers in their ongoing development and maintenance of robust, effective liquidity risk management frameworks,” Morisset said.

The guidance contemplates normal and stressed market conditions, such as the global financial crisis in 2008 or the COVID-19 pandemic, and is based on existing regulatory requirements. It also recognizes that liquidity risk management is not “one-size-fits-all.” Investment funds vary in size, structure, investor base and other fund characteristics, and what may be considered a material risk for one fund may not be material for another.

While the guidance is intended for investment funds that are subject to National Instrument 81-102 Investment Funds, CSA said many of the practices and examples outlined may be relevant to other investment funds.

According to the Regulators, under securities legislation, investment fund managers must establish and maintain an effective liquidity risk management framework and exercise due care, skill and diligence in managing the liquidity of their funds.

The CSA said it encourages investment fund managers to consult the global liquidity risk management recommendations developed by the International Organization of Securities Commissions (IOSCO). These recommendations are designed to help fund managers respond to stressed market conditions, they said.

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