Recent international guidance puts a renewed focus on matching fund portfolios, redemption arrangements and operational tools without making assumptions about investment performance.
Why liquidity management is a structural issue
Open-ended investment funds generally provide investors with redemption rights on defined terms. Yet the assets they hold can differ in how easily they may be sold at a reasonable price. When redemptions and portfolio liquidity are poorly aligned, a fund may face additional costs and operational strain, especially in stressed markets.
In May 2025, the International Organization of Securities Commissions (IOSCO) published revised liquidity risk management recommendations for collective investment schemes and separate guidance for open-ended funds. The documents update prior international recommendations and address how fund design and liquidity-management practices should work together.
Liquidity begins with product design
IOSCO’s guidance for open-ended funds looks beyond the mechanics of meeting a redemption request. The starting point is whether a fund’s investment strategy, assets and intended dealing terms are compatible. This assessment should take account of the conditions under which assets can be converted to cash and of the operational capabilities required to do so.
That principle does not imply that every open-ended fund must hold the same assets or use the same dealing arrangements. It calls for a risk-based assessment. Funds differ in investment mandate, investor base, transaction frequency and the depth of markets for their holdings.
Tools, governance and fair treatment
Liquidity management includes routine monitoring, stress testing, cash-flow planning and policies for allocating transaction costs. Tools available under applicable legal frameworks may help managers address changing redemption conditions. Their availability and design vary by jurisdiction and fund structure.
As summarised by Luxembourg’s financial regulator in its notice on IOSCO’s May 2025 publications, the revised recommendations were developed in the context of earlier Financial Stability Board work on liquidity mismatch. The emphasis is on implementation practices that support orderly fund management and the fair treatment of investors, not promises that redemption can always occur without cost.
Information for institutional oversight
Boards and oversight functions need reporting that separates several questions: which assets are considered liquid, how assumptions are tested, how redemption patterns are observed and which decisions require escalation. A single headline liquidity percentage cannot describe all the risks arising from asset concentration, market depth or stressed selling conditions.
Clear documentation matters for the same reason. A fund should be able to explain how it assesses liquidity, what role each tool plays and how decisions are governed. Investors and counterparties can then understand the arrangement within the terms of the relevant fund documents.
A framework, not an investment signal
The IOSCO materials are supervisory and operational guidance. They do not rank investment products or provide a basis for predicting fund returns. Their importance lies in the discipline of aligning portfolio construction, liquidity assumptions and investor dealing terms throughout the life of a fund.
References
1. IOSCO — Revised Recommendations for Liquidity Risk Management (May 2025)