Anti-dilution Liquidity Management Tools –
Guidance for Effective Implementation of the
Recommendations for Liquidity Risk Management for
Collective Investment Schemes
Consultation Report
The Board
OF THE
I
NTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS
CR03/2023
J
ULY
2023
iii
Foreword
The Board of the International Organization of Securities Commissions (IOSCO) has published
this Consultation Report with the aim of outlining guidance for the use of anti-dilution
liquidity management tools. The guidance is addressed to responsible entities to support the
greater use of anti-dilution liquidity management tools by open-ended funds to mitigate
investor dilution and potential first-mover advantage arising from structural liquidity
mismatch in OEFs.
How to Submit Comments
Comments may be submitted by one of the three following methods on or before 4
September 2023. To help us process and review your comments more efficiently, please use
only one method.
Important: All comments will be made available publicly, unless anonymity is specifically
requested. Comments will be converted to PDF format and posted on the IOSCO website.
Personal identifying information will not be edited from submissions.
1. Email
• Send comments to LMTGuidanceConsultation@iosco.org
• The subject line of your message must indicate ‘LMT Guidance – Consultation
Report.’
• If you attach a document, indicate the software used (e.g., WordPerfect, Microsoft
WORD, ASCII text, etc) to create the attachment.
• Do not submit attachments as HTML, PDF, GIFG, TIFF, PIF, ZIP or EXE files.
2. Facsimile Transmission
Send by facsimile transmission using the following fax number: + 34 (91) 555 93 68.
3. Paper
Send 3 copies of your paper comment letter to:
Damien Shanahan
International Organization of Securities Commissions (IOSCO)
Calle Oquendo 12
28006 Madrid
Spain
Your comment letter should indicate prominently that it is a ‘Public Comment on LMT
Guidance – Consultation Report.’
iv
QUESTIONS FOR CONSULTATION 1
EXECUTIVE SUMMARY 4
SECTION I – BACKGROUND 6
OEF LIQUIDITY RISK MANAGEMENT 6
LIQUIDITY MANAGEMENT TOOLS 7
DRIVERS FOR THIS PROPOSED GUIDANCE 7
OBJECTIVES AND SCOPE 8
SECTION II – DESIGN AND USE OF ANTI-DILUTION LIQUIDITY MANAGEMENT
TOOLS 10
OVERALL FRAMEWORK FOR THE DESIGN AND USE OF ANTI-DILUTION LMTS 10
ELEMENT (I) – TYPES OF ANTI-DILUTION LMTS 12
ELEMENT (II) – CALIBRATION OF LIQUIDITY COSTS 14
ELEMENT (III) – APPROPRIATE ACTIVATION THRESHOLD 20
SECTION III – OVERSIGHT OF ANTI-DILUTION LMTS BY FUND/MANAGER BOARDS
AND DEPOSITARIES 22
ELEMENT (IV) - GOVERNANCE 22
SECTION IV – DISCLOSURE TO INVESTORS ABOUT THE USE OF ANTI-DILUTION
LMTS 26
ELEMENT (V) – DISCLOSURE TO INVESTORS 26
SECTION V – OVERCOMING BARRIERS AND DISINCENTIVES TO IMPLEMENTATION
OF ANTI-DILUTION LIQUIDITY MANAGEMENT TOOLS 28
1
Questions for Consultation
A complete list of the questions for consultation is provided below. These same questions are
also included in relevant sections of the main body of the report. IOSCO invites comments
generally on the proposed guidance in this report, as well as views regarding the specific
consultation questions listed below and set out in the report. The consultation questions are
numerous and detailed, in order to solicit very targeted points of feedback that will be helpful
to consideration of the final guidance. Please note that answers to the specific consultation
questions are generally expected to be short and targeted, with supporting details where
requested or relevant.
Proposed Guidance 1 – Overall Framework
1. To what extent does the proposed guidance 1 help responsible entities to better integrate
the use of anti-dilution LMTs within their existing liquidity risk management framework?
Have all the critical elements been captured?
2. Do you agree with the proposed guidance 1 regarding the inclusion of anti-dilution LMTs
within the daily liquidity risk management framework that OEF managers should have in
place at all times?
3. Is this proposed guidance appropriate for all types of OEFs in its scope, and proportionate
for all types of responsible entities to implement? If not, please explain.
Proposed Guidance 2 – Types of Anti-Dilution LMTs
4. Has the proposed guidance identified all of the anti-dilution LMTs commonly used by
responsible entities? Are there any other LMTs that share the same economic objective of
passing on the liquidity cost to transacting investors, that could be included in this
guidance? If so, please describe them.
5. Are the identified anti-dilution LMTs described correctly? Do the features or characteristics
of the different tools vary or do they generally operate as described?
6. Do you support the proposed guidance 2? If not, in which cases do you think it could be
justified not to adopt at least one anti-dilution LMT in OEFs (other than ETFs and MMFs)?
What elements do you take into consideration to choose a specific anti-dilution LMT for
your OEFs ?
Proposed Guidance 3 – Calibration of Liquidity Costs
7. Have the components of the cost of liquidity, as described above, captured all the relevant
costs that should be considered when calibrating anti-dilution LMTs?
8. How does the cost of liquidity vary across different funds ? To what extent could we achieve
a more consistent approach to calibrating anti-dilution LMTs for similar funds, and what is
the best way to do so?
9. How can significant market impact be incorporated in the calibration of all of the proposed
anti-dilution tools? Please provide examples.
10. Can all of the components of the cost of liquidity (i.e., explicit and implicit transaction costs
including any significant market impact) be incorporated in all five anti-dilution LMTs as
set out in the discussion of Element (i) above? If not, what are the limitations to doing so
and how would you suggest improving the effectiveness of these anti-dilution LMTs?
2
11. To what extent can a subscription / redemption fee achieve the objective of addressing the
investor dilution issue and financial stability concern of OEFs by attributing the liquidity
costs to transacting investors? How could it be appropriately calibrated to achieve this
objective?
12. Do you see benefits in a tiered approach to attributing the cost of liquidity by using different
adjustment factors according to net fund flow, market conditions and characteristics of the
funds? Are there any operational difficulties? Any further comments thereto?
13. How could guidance on LMT calibration achieve a fair balance between (i) ensuring
investors have a clear expectation of the cost of liquidity they could be charged and (ii)
ensuring responsible entities have enough flexibility to attribute the overall cost of liquidity
at all times, especially under stressed market conditions?
14. Is the proposed approach regarding ranges of liquidity cost adjustment appropriate? If not,
how could it be improved?
15. Is the proposed expectation on the level of confidence and the sophistication of liquidity
cost estimations appropriate? If not, how could it be improved?
Proposed Guidance 4 – Appropriate Activation Threshold
16. What are the appropriate factors to consider in setting the activation threshold so that anti-
dilution LMTs will be activated for any subscription / redemption activities with material
dilution effect? How would you define ‘material dilution effect’? Why and how could it vary
across different funds?
17. Does the use of an activation threshold introduce the risk of trigger / cliff-edge effects? How
could trigger / cliff-edge effects be avoided? Could the tiered swing pricing address the
trigger / cliff-edge effect?
Proposed Guidance 5 – Governance
18. Do the proposed arrangements discussed above include all the essential elements regarding
governance and oversight arrangements in relation to the use of anti-dilution LMTs? Are
they proportionate to the differing size and complexity of responsible entities’ fund ranges?
19. Please describe any material factors of the governance and oversight arrangements which
have not been included.
Proposed Guidance 6 – Disclosure to Investors
20. Is the ex-ante information described above likely to be appropriate and effective in
explaining the use of anti-dilution LMTs to investors? What other information about
dilution, if any, might be helpful to investors before they invest in a fund?
21. What information can (and should) be disclosed ex-post to investors or the public, and at
what frequency, to enhance transparency without compromising the aims of the anti-
dilution LMTs or creating unintended consequences? Further, how soon should this
information be disclosed to investors?
22. Are there other risks than those described in this section attached to the disclosure of the
parameters used for anti-dilution tools?
3
Overcoming Barriers and Disincentives
23. Do you agree with the list of barriers and disincentives identified? Do you consider there
are others that are not covered?
24. In your view, what are the most significant barriers or disincentives to the implementation
of anti-dilution LMTs? What are your suggestions for possible solutions to mitigate or
overcome the barriers and disincentives to the implementation of anti-dilution LMTs?
25. For those OEFs facing significant barriers, what are the implications for their ability to
implement this guidance? Are adjustments needed to the guidance to account for this,
bearing in mind the objective to mitigate dilution for investor protection?
Other questions
26. Do you have any other comments on any guidance proposed in this document?
4
Executive Summary
In 2021, IOSCO and the FSB jointly analysed liquidity risk and its management in open-ended
funds (OEFs)
1
during the Covid-19 induced market turmoil. They found that while the ‘dash-
for-cash’ was a main driver of OEF redemptions and manager decisions to sell assets in March
2020, determining the materiality and economic impact of the liquidity mismatch vulnerability
contributing to the market stress is difficult. To the extent that proper asset valuation and use
of liquidity management tools (LMTs) do not remove the liquidity mismatch vulnerability,
redeeming investors may benefit at the expense of remaining investors. In parallel, IOSCO’s
Assessment Committee conducted a thematic review
2
completed in 2022 of the extent to which
participating IOSCO member jurisdictions implemented regulatory measures regarding the
key IOSCO Liquidity Risk Management Recommendations. In 2022, the FSB undertook an
assessment of the FSB Recommendations
3
regarding financial stability risks arising from
liquidity mismatch in OEFs in light of recent experience. The FSB noted in its assessment
report that there was material variation in how anti-dilution LMTs were used. Both the FSB
and IOSCO observed in their respective assessments that there is scope for greater uptake of
LMTs, in particular anti-dilution LMTs.
Investor protection and financial stability concerns could arise when transacting investors in
OEFs do not bear the costs of liquidity associated with fund subscriptions/redemptions, which
disadvantages existing / remaining investors. Anti-dilution LMTs can address these concerns
by passing on the costs of liquidity to transacting investors by adjusting the price at which they
transact. These tools form an important part of an overall liquidity risk management
framework for OEFs.
In particular, the greater inclusion of anti-dilution LMTs in OEF constitutional documents,
4
and their greater and more consistent use in both normal and stressed market conditions were
specifically highlighted in the FSB assessment as having relevance and benefits to ongoing
efforts to support global financial stability.
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, IOSCO is
proposing in this Consultation Report the following guidance to responsible entities:
1. Responsible entities should have appropriate internal systems, procedures and controls
in place at all times in compliance with applicable regulatory requirements for the
design and use of anti-dilution LMTs as part of the everyday liquidity risk management
of their OEFs to mitigate investor dilution and potential first-mover advantage arising
from structural liquidity mismatch in OEFs.
1
An OEF is a registered / authorized / public collective investment scheme (CIS) which provides
redemption rights to its investors from its assets, based on the net asset value of the CIS, on a regular
periodic basis during its lifetime - in many cases on a daily basis, although this can be less frequently.
Please note that money market funds and exchange-traded funds have been excluded from the scope of
open-ended funds covered by this proposed guidance due to their unique characteristics.
2
https://www.iosco.org/news/pdf/IOSCONEWS671.pdf
3
https://www.fsb.org/2022/12/assessment-of-the-effectiveness-of-the-fsbs-2017-recommendations-on-
liquidity-mismatch-in-open-ended-funds/
4
These include fund prospectuses, other offering documents and other documents accessible to investors
on an ex-ante basis before they make their investment decisions.
5
2. As part of their liquidity risk management framework, responsible entities should
consider and use at least one appropriate anti-dilution LMT for each OEF under
management to mitigate investor dilution and potential first-mover advantage arising
from structural liquidity mismatch in OEFs.
3. Anti-dilution LMTs used by responsible entities should impose on subscribing and
redeeming investors the estimated cost of liquidity, i.e., 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. Independently of the
anti-dilution LMT used, responsible entities should be able to demonstrate to
authorities (in line with the authorities’ supervisory approaches) that the calibration of
the tool is appropriate and prudent for both normal and stressed market conditions.
4. If responsible entities set thresholds for the activation of anti-dilution LMTs, those
thresholds should be appropriate and sufficiently prudent so as not to result in any
material dilution impact in the fund.
5. Responsible entities should have adequate and appropriate governance arrangements
in place for their liquidity risk management processes, including clear decision-making
processes for the use of anti-dilution LMTs.
6. Responsible entities should publish clear disclosures of the objectives and operation
(including design and use) of anti-dilution LMTs to improve awareness among investors
and enable them to better incorporate the cost of liquidity into their investment
decisions and mitigate potential adverse trigger effects.
IOSCO invites comments generally on this proposed guidance, as well as views in response to
the consultation questions set out in the report (see also the preceding section for full list of
consultation questions). Following the public consultation period, IOSCO will develop a final
report for publication late in 2023.
6
Section I – Background
OEF Liquidity Risk Management
Liquidity risk management is critical to the orderly functioning of OEFs and to safeguarding
the interests of and protecting investors. Effective liquidity risk management also plays an
important role in reducing systemic risk by, inter alia, dampening the financial market effects
possibly resulting from OEF liquidity demand during normal as well as stressed market
conditions.
OEFs generally offer short-term (often daily) liquidity to their investors, notwithstanding that
the liquidity of fund investments varies across different OEFs and over time for any particular
fund. Some fund investors may overestimate the liquidity of the assets held by the funds in
which they invest, and may not expect the additional cost or difficulty associated with funds
exiting their positions or rebalancing their portfolios, particularly in stressed market
conditions.
Generally, investors in an OEF will subscribe to (enter) or redeem from (exit) the fund at the
net asset value (NAV) per share or unit.
5
However, the NAV may not always reflect the explicit
and implicit costs of transactions
6
associated with adjusting the portfolio of the fund in
response to the subscription or redemption. As such, the costs of providing liquidity to
transacting investors may be borne by those remaining in the fund, as the value of their
holdings can be diluted by the transaction costs. Investor protection concerns could arise when
exiting investors do not bear the true costs of asset liquidation, and remaining investors are
disadvantaged.
From a financial stability perspective, concerns arise when investors in OEFs could be
incentivised by ‘first mover advantage’ dynamics stemming from the open-ended structure.
7
OEFs that invest in less liquid assets and have short redemption periods may be subject to
larger liquidity mismatches, particularly during periods of market stress. Investors in these
OEFs may be incentivised to redeem shares / units ahead of others if they anticipate that other
fund investors will redeem shares and that remaining investors will bear the associated
transaction costs. Although it is difficult to quantify and determine the materiality, a first-
mover advantage may give rise to excess redemptions, and OEFs’ sales of portfolio assets to
5
The subscription or redemption request will typically be made prior to a defined dealing deadline or
dealing cut off, after which there will be a valuation point when the assets in the fund will be valued and
the NAV per share determined. The valuation might not yet represent transactions in the underlying
investments of the OEF necessary to fulfil the subscription or redemption request.
6
These costs are further explained in Section II (ii) of the document.
7
This proposed guidance is intended to address the investor dilution issue and financial stability
concerns originating from the potential first mover advantage dynamics stemming from the OEF
structure. There is some evidence that a first mover advantage may also exist at market-wide level
stemming from wider market dynamics and may not be unique to OEFs. These findings indicate that
first mover advantage may be driven by competition for finite asset market liquidity among different
types of investors that hold overlapping portfolios that may lead to investor dynamics on fund
redemptions that are similar to those potentially motivated by first mover advantage stemming from
the OEF structure. This proposed guidance does not intend to address these issues. See, Stahel (2022),
Strategic Complementarity among Investors with Overlapping Portfolios
.
7
meet excess redemptions may contribute to greater market volatility and additional pressure
on asset prices.
To address these investor protection issues and financial stability concerns
8
it is important that
responsible entities
9
have a detailed framework with systems and controls in place to
operationalise effective liquidity risk management at all times. In this respect, existing liquidity
management tools used for investor protection can also mitigate financial stability risks.
Liquidity Management Tools
LMTs are various techniques and tools available to responsible entities to aid in the
management of OEF liquidity needs and risks. This proposed guidance focuses on a subset of
LMTs, referred to hereafter as anti-dilution LMTs,
10
that aim to pass on the estimated costs of
liquidity associated with fund subscriptions / redemptions to the subscribing / redeeming
investors by adjusting the price at which they transact. These tools form an important part of
an overall liquidity risk management framework for OEFs.
There are specific features of anti-dilution LMTs that address the investor dilution issue and
may also make them a useful tool for addressing the potential first mover advantage dynamic.
First, properly calibrated anti-dilution LMTs can impose on redeeming investors the explicit
and implicit costs of portfolio transactions, including any significant market impact caused by
asset sales to meet redemptions. This action protects remaining investors from dilution impact
and also mitigates potential first-mover advantage at its source. Second, anti-dilution LMTs
may be suitable for use in both normal and stressed market conditions. Incorporating anti-
dilution LMTs in the daily operation of a fund and ‘normalizing’ their use, as opposed to using
them only in times of stress, helps avoid a ‘cliff-edge effect’. Appropriate disclosure to investors
of anti-dilution LMTs’ objectives and operation may also enhance their effectiveness by
guarding against potential ‘stigma’ or reputational concerns.
Drivers for this Proposed Guidance
The FSB Policy Recommendations to Address Structural Vulnerabilities from Asset Management
Activities (FSB Recommendations), published in 2017, include several policy recommendations
to address the risks to global financial stability arising from structural liquidity mismatch in
OEFs. In 2018, IOSCO published a final report on Recommendations for Liquidity Risk
Management for Collective Investment Schemes (IOSCO LRM Recommendations),
supplemented with a set of related good practices published as Open-ended Fund Liquidity and
Risk Management – Good Practices and Issues for Consideration (IOSCO Good Practices).
In March 2020, many OEFs experienced liquidity pressure and valuation challenges, facing
large redemption requests and deteriorating market liquidity triggered by the flight to safety
and ‘dash for cash’. In 2021 and 2022, IOSCO’s Assessment Committee conducted a thematic
8
These dynamics have been a focus of regulatory attention for some time. See, for example, the Bank of
England (BoE) Financial Stability Report, dated December 2019. Available at:
https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/december-2019.pdf
9
Responsible entities in this guidance generally refer to the entity / entities responsible for the overall
operation of the OEF and in particular its compliance with the legal / regulatory framework in the
respective jurisdiction (e.g., the fund manager or the fund board).
10
As the anti-dilution tools adjust the final price received or paid by investors, the tools are also known as
price-based tools.
8
review of the extent to which participating IOSCO member jurisdictions had implemented
regulatory measures regarding the key IOSCO LRM Recommendations. The results were
published in a final Thematic Review on Liquidity Risk Management Recommendations on 16
November 2022 (IOSCO LRM Review). In 2022, the FSB undertook an assessment of the FSB
Recommendations regarding financial stability risks arising from liquidity mismatch in OEFs
in light of recent experience. The results were published in a final Assessment of the
Effectiveness of the FSB’s 2017 Recommendations on Liquidity Mismatch in Open-ended Funds in
December 2022 (FSB OEF Assessment).
The FSB OEF Assessment noted that there was material variation in how anti-dilution LMTs
were used. The FSB and IOSCO observed in their respective FSB OEF Assessment and IOSCO
LRM Review that there is scope for greater uptake of LMTs. The greater inclusion of anti-
dilution LMTs in OEF constitutional documents, and their greater and more consistent use in
both normal and stressed market conditions to pass on the explicit and implicit costs of
redemptions (including any significant market impact of asset sales) to redeeming investors,
were specifically highlighted in the FSB OEF Assessment as having relevance and benefits to
ongoing efforts to support global financial stability.
11
In particular, the FSB OEF Assessment
suggested that the proper use of anti-dilution LMTs is critical for OEFs investing in less liquid
assets to continue to offer daily dealing.
12
Taking into consideration the outcomes of the reviews, IOSCO and the FSB committed to carry
out follow-up policy work to enhance the effectiveness of the IOSCO LRM Recommendations,
IOSCO Good Practices and FSB Recommendations, each in close consultation with the other.
Specifically, the FSB is in parallel undertaking targeted revisions to the 2017 FSB
Recommendations in 2023 and IOSCO committed alongside this to the development of this
detailed guidance on anti-dilution LMTs in 2023. Following finalization of the revisions to the
FSB Recommendations, IOSCO will revisit the IOSCO LRM Recommendations, IOSCO Good
Practices and this proposed guidance as needed in 2024.
Objectives and Scope
This proposed guidance aims to support effective implementation of the IOSCO LRM
Recommendations related to the use of anti-diluton LMTs (i.e., Recommendations 1, 4, 7, 11, 12,
14, 16 & 17). It covers the design and use of anti-dilution LMTs by OEFs; the oversight by fund
boards, managers’ boards or depositories; disclosure to investors; and overcoming barriers to
effective implementation. It draws on (i) existing relevant policy recommendations, including
the IOSCO LRM Recommendations, the FSB Recommendations and the IOSCO Good
Practices; (ii) a review of recent academic literature; (iii) the observed good practices of
jurisdictions where funds currently use anti-dilution LMTs; and (iv) engagement with industry
stakeholders and academics through roundtables and other outreach.
Responsible entities have the primary responsibility and are best placed to manage the liquidity
of their OEFs. As such, the proposed guidance neither prescribes a specific calibration for each
anti-dilution LMT nor specifies which tool should be used or when. Instead, it sets out key
operational, design, oversight, disclosure and other factors and parameters that responsible
11
In this regard, the FSB OEF Assessment noted that, based on available data, there was a wide variation
in how some anti-dilution LMTs (e.g., swing pricing) were applied during the COVID-19 shock in 2020.
12
See related proposed revisions to FSB Recommendations. Addressing Structural Vulnerabilities from
Liquidity Mismatch in Open-Ended Funds – Revisions to the FSB’s 2017 Policy Recommendations.
9
entities should consider when LMTs are used, with a view to promoting their greater, more
effective and more consistent use. As the OEF sector is very diverse, there is no ‘one size fits-
all’ solution regarding liquidity risk management, including the use of anti-dilution LMTs.
Responsible entities are expected to exercise their sound professional judgement in the best
interests of investors.
Reference to and discussion of relevant IOSCO LRM Recommendations will be included
throughout this proposed guidance to help illustrate how the proposed guidance can support
effective implementation of the IOSCO LRM Recommendations.
While quantity-based LMTs
13
and other liquidity management measures, such as suspensions,
redemption gates, in-kind redemptions, side pockets and borrowing are not the focus of this
proposed guidance,
14
responsible entities should always consider a broad set of LMTs,
including anti-dilution LMTs, quantity-based LMTs and other liquidity management
measures. Responsible entities should determine the most effective and suitable tools for the
OEFs they manage, considering the characteristics of each OEF, prevailing market conditions
and other relevant circumstances.
Lastly, as the structural features and liquidity management practices of exchange-traded funds
(ETFs) and money market funds (MMFs) distinguish them from other OEFs,
15
the following
guidance is not applicable to ETFs and MMFs.
13
Quantity-based LMTs operate by reducing the liquidity obligations of OEFs through delaying /
deferring payments to investors. They are in practice a more exceptional form of intervention.
14
As discussed above, following finalization of revisions to the 2017 FSB Recommendations, IOSCO will
revisit the IOSCO LRM Recommendations, IOSCO Good Practices and this proposed guidance on anti-
dilution LMTs as needed in 2024. This work may include consideration of revised recommendations or
further guidance regarding quantity-based and other LMTs not covered by this proposed guidance.
15
For example, see IOSCO (2021), Exchange Traded Funds Thematic Note - Findings and Observations
during COVID-19 induced market stresses at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD682.pdf.. See, also, IOSCO (2023), Good Practices
Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds, Final Report at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD733.pdf.
10
Section II – Design and Use of Anti-Dilution Liquidity Management Tools
Overall Framework for the Design and Use of Anti-Dilution LMTs
Proposed Guidance 1: Responsible entities should have appropriate internal systems,
procedures and controls in place at all times in compliance with applicable regulatory
requirements for the design and use of anti-dilution LMTs as part of the everyday
liquidity risk management of their OEFs to mitigate investor dilution and potential
first-mover advantage arising from structural liquidity mismatch in OEFs.
As discussed above, when investors enter or exit an OEF, fund managers have to invest the
capital received (in the case of net subscriptions) or access liquidity by selling assets to meet
redemptions (in the case of net redemptions). Unless fund managers attribute the associated
explicit and implicit transaction costs to subscribing or redeeming investors, remaining fund
investors may suffer dilution, as the NAV per share or unit may be reduced by the amount of
the transaction costs incurred.
To mitigate material dilution and to protect remaining investors, responsible entities should
attribute the explicit and implicit transaction costs to entering or exiting investors with the use
of anti-dilution LMTs to adjust the fund NAV or the final price to be paid / received by
transacting investors. Anti-dilution LMTs also mitigate the potential risk, in particular under
stressed market conditions, that investors may exit funds preemptively in order to receive a
higher NAV that does not take into account the higher cost of liquidating the most illiquid
assets within the OEF. This is particularly critical for daily dealing OEFs investing in less liquid
assets, which could experience reduced liquidity under stressed market conditions.
To achieve the above, responsible entities should establish a detailed framework, as part of an
OEF’s overall liquidity risk management process and compliant with applicable regulatory
requirements, to support the design and effective use of anti-dilution LMTs in both normal
and stressed market conditions. The critical elements of such a framework include:
(i) the types of anti-dilution LMTs to be used;
(ii) appropriate calibration of liquidity costs (including a pre-set mechanism to exceed any
disclosed ranges of price adjustment factors if necessary);
(iii) appropriate activation thresholds;
(iv) governance; and
Relevant LRM Recommendation(s)
Recommendation 1: The responsible entity should draw up an effective liquidity risk management
process, compliant with local jurisdictional liquidity requirements.
Recommendation 16: The responsible entity should put in place and periodically test contingency
plans with an aim to ensure that any applicable liquidity management tools can be used where
necessary, and if being activated, can be exercised in a prompt and orderly manner.
Recommendation 17:
The responsible entity should consider the implementation of additional
liquidity management tools to the extent allowed by local law and regulation, in order to protect
investors from unfair treatment, amongst other things, or prevent the CIS from diverging
significantly from its investment strategy.
11
(v) disclosure to investors.
Responsible entities should fully consider these elements and put in place corresponding
internal systems, procedures and controls. By doing so, the framework should enable fund
managers to methodically design their anti-dilution LMTs, estimate the liquidity costs, and
evaluate circumstances for activating such tools in both normal and stressed conditions, as
part of the day-to-day liquidity management of the OEFs they manage. The governance and
ongoing review process would help ensure the selected anti-dilution LMTs are used as intended
and provide information for future enhancements to their use. Appropiate disclosure to
investors on the objectives, design and use of anti-dilution LMTs would enhance their
awareness of these aspects and enable them to better incorporate the costs of liquidity into
their investment decisions.
In addition, responsible entities should be able to demonstrate to authorities (in line with the
authorities’ supervisory approaches) how the above-mentioned framework is implemented,
including how anti-dilution LMTs are and will be used.
Valuation is extremely important because an OEF must redeem and sell its units or shares at
its NAV. Stale valuations may contribute to first mover advantage. For example, in a scenario
of declining values of a fund’s assets, if the fund’s NAV does not adjust to fully reflect those
declines in value, investors may seek to redeem before that adjustment is made.
16
Independently of whether and how an anti-dilution LMT is to be applied, to ensure that the
price quoted to an investor for redeeming / buying a unit or share is fair, responsible entities
should calculate a NAV that represents the fair value of the assets the fund holds and in
accordance with local regulations.
In this regard, IOSCO published the Principles for the Valuation of CIS in May 2013 with an
objective to treat investors fairly.
17
If responsible entities cannot be confident that the assets
are valued fairly or cannot reasonably estimate the cost of liquidity for these assets, especially
in stressed market conditions, the use of quantity-based LMTs and other liquidity management
measures (applied in accordance with local regulations), such as side pockets, suspensions,
longer notice or settlement periods or reduced redemption frequencies, may be more suitable
than the use of anti-dilution LMTs.
18
The remainder of Section II – Design and Use of Anti-Dilution LMTs focuses on elements
(i) to (iii) of the framework, while Section III – Oversight of Anti-Dilution LMTs and
Section IV – Disclosure to Investors About the Use of Anti-Dilution LMTs discuss
elements (iv) and (v) respectively. While the framework as described above is expected to be
applicable to all responsible entities in principle, some of the critical elements may vary
according to the nature of each OEF. Further details on such variations are provided below.
16
For further information see, for example, IOSCO Best Practices Standards on Anti Market Timing and
associated Issues for CIS, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD207.pdf
17
IOSCO Principles for the Valuation of Collective Investment Schemes, available at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD413.pdf
18
See related proposed revisions to FSB Recommendations. Addressing Structural Vulnerabilities from
Liquidity Mismatch in Open-Ended Funds – Revisions to the FSB’s 2017 Policy Recommendations.
12
Questions for the Public Consultation
1. To what extent does the proposed guidance 1 help responsible entities to better integrate
the use of anti-dilution LMTs within their existing liquidity risk management framework?
Have all the critical elements been captured?
2. Do you agree with the proposed guidance 1 regarding the inclusion of anti-dilution LMTs
within the daily liquidity risk management framework that OEF managers should have in
place at all times?
3. Is this proposed guidance appropriate for all types of OEFs in its scope, and proportionate
for all types of responsible entities to implement? If not, please explain.
Element (i) – Types of Anti-Dilution LMTs
Proposed Guidance 2: As part of their liquidity risk management framework,
responsible entities should consider and use at least one appropriate anti-dilution
LMT for each OEF under management to mitigate investor dilution and potential first-
mover advantage arising from structural liquidity mismatch in the OEFs they manage.
IOSCO has identified five anti-dilution LMTs adopted by OEFs in different jurisdictions
globally. IOSCO’s LRM Recommendations noted that anti-dilution levies and swing pricing,
“may be considered particularly appropriate where the fund invests in assets where investors may
perceive an advantage in redeeming first. By ensuring that costs of transactions required to meet
redemption requests are borne by the redeeming investors, these tools provide assurance to
remaining investors and remove a potential incentive for investors to redeem.” The IOSCO Good
Practices also addresses anti-dilution LMTs, covering swing pricing, anti-dilution levies, and
valuation according to bid or ask prices.
19
Further to these, IOSCO has also identified dual
pricing and subscription / redemption fees as additional anti-dilution LMTs. Each of these anti-
dilution LMTs provides for liquidity costs to be passed to transacting investors; the calculation
of liquidity costs is further discussed in Element (ii) below.
• Swing pricing: refers to a process for adjusting a fund’s NAV (typically calculated at mid-
price) by applying a swing factor that reflects the liquidity cost stemming from net
subscriptions or redemptions. All investors pay or receive the same swung price.
• Valuation at bid or ask prices: refers to an asset valuation procedure that switches from
valuation at mid-price to valuation according to bid or ask-price, depending on the
direction of net fund flows. Accordingly, the NAV is calculated based on bid-price when
19
Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD591.pdf
p. 22-30.
Relevant LRM Recommendation(s)
Recommendation 1: The responsible entity should draw up an effective liquidity risk management
process, compliant with local jurisdictional liquidity requirements.
Recommendation 17: The responsible entity should consider the implementation of additional
liquidity management tools to the extent allowed by local law and regulation, in order to protect
investo
rs from unfair treatment, amongst other things, or prevent the CIS from diverging
significantly from its investment strategy.
13
there are net outflows and based on ask-price when there are net inflows (a threshold may
be set out). All investors pay or receive the same price.
• Dual pricing: refers to the calculation of two NAVs per valuation point. One way of
implementing dual pricing is to calculate one NAV which incorporates assets’ ask prices
and the other NAV which incorporates assets’ bid prices. Subscribing investors pay the NAV
calculated using ask asset prices; redeeming investors receive the NAV calculated using bid
asset prices. Another way of implementing dual pricing is to set an ‘adjustable spread’
around the fund’s NAV under which assets are priced on a mid-market basis, with a bid
price at which the fund redeems shares and an offer price at which the fund issues new
shares. The difference between these two prices is known as the spread as estimated by the
responsible entity, which could be dynamic to reflect the liquidity costs at prevailing
market conditions.
• Anti-dilution levy: refers to a process whereby a variable levy / fee for the benefit of the
fund is added to, or deducted from, the fund’s NAV (typically calculated at mid-price),
increasing the final price paid by subscribing investors or decreasing the price received by
redeeming investors, to effectively pass on the liquidity cost. The levy can be based on the
fund’s net flows and the same levy may be applied to all subscribing / redeeming investors
or, where possible, based on an individual investor’s in / outflows and charged to each
investor accordingly.
• Subscription / redemption fees: refers to a process whereby a fixed levy / fee is added to
/ deducted from the fund’s NAV in case of subscriptions / redemptions.
20
The fee is charged
to the transacting investors for the benefit of the fund
21
to cover the cost of liquidity. This
tool may be particularly appropriate for funds that invest in assets that have fixed
transaction fees, such as real estate agency fees or notary fees, and / or for funds that have
low-variation transaction costs.
While anti-dilution LMTs generally attribute the estimated cost of liquidity to transacting
investors by either adjusting the fund NAV or the final price to be paid / received by transacting
investors, they vary in terms of calibration and responsiveness to the changes in market
situations. As such, some anti-dilution LMTs may need to be adjusted or supported by other
anti-dilution LMTs to account for larger liquidity costs, including any significant market
impact expected to arise in changing market conditions, particularly in stressed market
conditions.
20
The use of this type of fees for the benefit of the fund to cover the cost of liquidity is more common in
the case of redemption. This may be because the fund has an obligation to honor redemption payments
within a limited timeframe, whereas the time available for the fund manager to manage portfolio
acquisitions to reduce potential dilution from subscriptions is more flexible. However, in the case of a
large subscription, which may bring material dilution impact to the fund, anti-dilution LMTs such as a
subscription / redemption fee should be used to attribute the cost of liquidity to the transacting
investors to protect the interest of remaining investors.
21
In some cases, subscription / redemption fees charged to investors may be retained by the fund
managers or the intermediaries. Subscription / redemption fee structured in this manner is not
regarded as an anti-dilution LMT as it does not mitigate the dilution impact on the existing / remaining
investors in the fund resulting from the liquidity costs incurred by the subscribing / redeeming
investors.
14
More specifically, subscription / redemption fees should be adjusted upward to account for
larger liquidity costs or adjusted based on a tiered approach corresponding to the amount of
net fund flows (akin to a tiered swing pricing approach as described on p.19 below). In addition,
jurisdictional differences in OEF regulations, the operational environment and the distribution
channel
22
may have a bearing on whether each of these tools is available or operationally
feasible in a particular jurisdiction.
With respect to the above consideration, responsible entities should consider and use at least
one anti-dilution LMT for each of the OEFs they manage, with a view to imposing on
subscribing (in the case of net inflows) and redeeming investors (in the case of net outflows)
the estimated cost of liquidity in both normal and stressed market conditions.
23
Subject to the
guidance as set out in Element (ii), the selected anti-dilution tools may have to allow for
adjustments or to be supported by other anti-dilution LMTs in stressed times to cater for
different market conditions. Responsible entities are also expected to pass the benefit of the
spreads, fees or levies arising from application of anti-dilution LMTs to the OEFs.
24
Questions for the Public Consultation
4. Has the proposed guidance identified all of the anti-dilution LMTs commonly used by
responsible entities? Are there any other LMTs, that share the same economic objective of
passing on the liquidity cost to transacting investors, that could be included in this
guidance? If so, please describe them.
5. Are the identified anti-dilution LMTs described correctly? Do the features or characteristics
of the different tools vary or do they generally operate as described?
6. Do you support the proposed guidance 2? If not, in which cases do you think it could be
justified not to adopt at least one anti-dilution LMT in OEFs (other than ETFs and MMFs)?
What elements do you take into consideration to choose a specific anti-dilution LMT for
your OEFs ?
Element (ii) – Calibration of Liquidity Costs
Proposed Guidance 3: Anti-dilution LMTs used by responsible entities should impose
on subscribing and redeeming investors the estimated cost of liquidity, i.e., 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.
Independently of the anti-dilution LMT used, responsible entities should be able to
demonstrate to authorities (in line with the authorities’ supervisory approaches) that
22
For example, some fund managers expressed that, when a fund is distributed by a third party (e.g., fund
platform), applying anti-dilution levies may be more operationally burdensome, compared to swing
pricing, because the third party would have to correct the price provided to fund investors by adding
the anti-dilution levy to the fund NAV.
23
The expectation is that responsible entities should have appropriate internal systems, procedures and
controls in place that enable the use of at least one anti-dilution LMT as part of the day-to-day liquidity
risk management of the OEFs they manage, even if such tool(s) would not always be in use.
24
See UK FCA Asset Management Market Study (April 2018) for discussion of box profits at
https://www.fca.org.uk/publication/policy/ps18-08.pdf
15
the calibration of the tool is appropriate and prudent for both normal and stressed
market conditions.
Anti-dilution LMTs should pass on the estimated cost of liquidity to transacting investors.
Fund managers have to estimate those liquidity costs to be incorporated in anti-dilution LMTs
because the adjustment of the portfolio as a result of the net fund flow on a particular day may
not take place before the calculation of the fund’s NAV for that day. This guidance seeks to
provide a common framework to calculate such cost to promote a more consistent approach
on the use of anti-dilution LMTs for funds with similar characteristics.
Liquidity Cost Components
The estimated cost of liquidity is generally defined as the transaction costs expected to be
incurred by the fund to buy / sell a pro-rata slice of all assets in the portfolio, including the less
liquid assets.
25
This does not mean a fund manager will always need to buy / sell a pro-rata
slice, as fund managers need to make appropriate judgements to determine what the actual
trading strategy should be in the best interest of all investors as a whole. This calculation
approach aims to treat investors fairly by promoting a consistent approach in estimating the
cost of liquidity irrespective of the actual assets that would be transacted or used to meet
subsriptions / redemptions. .
In this regard, the liquidity costs are comprised of two components, namely explicit transaction
costs and implicit transaction costs. The latter includes potential market impact.
Explicit Transaction Costs
These are transaction costs that are explicitly charged to a fund for its acquisition or disposal
of assets. They include brokerage fees, trading levies, taxes and settlement fees. They are
generally stable in amount and quantifiable in advance of the transactions.
Responsible entities should be able to identify the types of explicit transaction costs that are
applicable and calculate their approximate amount with a high level of certainty for each asset
by using, for example, previous transactions, contractual arrangements they have in place with
brokers, and referring to third parties, where appropriate, for confirmation.
Implicit Transaction Costs
25
There are however cases where using a pro-rata approach to estimate the transaction cost is not
possible: for example, for OEFs that allocate a significant proportion of their AUM in inherently illiquid
assets, such as real estate OEFs and private equity OEFs. In these cases, a long notice period with a pre-
determined discount of the NAV unit price to be received by redeeming investors, could be envisaged to
protect remaining investors and reduce the risk of fire sales and first mover advantage.
Relevant LRM Recommendation(s)
Recommendation 16: The responsible entity should put in place and periodically test contingency
plans with an aim to ensure that any applicable liquidity management tools can be used where
necessary, and if being activated, can be exercised in a prompt and orderly manner.
Recommendation 17:
The responsible entity should consider the implementation of additional
liquidity management tools to the extent allowed by local law and regulation, in order to protect
investors
from unfair treatment, amongst other things, or prevent the CIS from diverging
significantly from its investment strategy.
16
These are transaction costs incurred indirectly upon acquisition or disposal of assets by a fund,
with the bid-ask spread and market impact (to be discussed next) being the key components.
These costs may vary depending on, among others, the asset in question and underlying market
conditions. For example, bid-ask spreads may range from less than 10 basis points for some
developed market equities in normal times, to more than 5% for high-yield corporate bonds in
stressed market conditions.
In addition, the transparency of bid-ask spreads may vary across assets and their trading
venues. For example, the bid-ask spreads for assets that are traded in centralized exchanges
(e.g., stocks and futures) tend to be more stable and transparent. The bid-ask spreads for assets
that are traded OTC (e.g., corporate bonds) may fluctuate more and may be less transparent.
When the information sources that responsible entities use to determine bid-ask spreads
become less reliable or unavailable, particularly in stressed market conditions, they should use
their professional judgement, trading experience and best efforts to arrive at a reasonable
estimate, which should be typically larger than the costs incurred during normal times, and
aim at a fair treatment of all investors.
Overall, depending on the OEF’s underlying assets and market conditions, responsible entities
should source bid-ask spread information from the relevant commercial data bases, directly
from broker dealers, and / or use estimations based on comparable assets and / or historical
data, with a view to obtaining reasonable inputs to calibrate anti-dilution LMTs. Some
responsible entities use pricing models when the market price is not available. However, those
models should be used with caution and be adjusted as appropriate to reflect generally larger
liquidity costs under stress.
Significant Market Impact
Market impact is another implicit transaction cost incurred, in addition to bid-ask spreads,
when a fund takes / supplies liquidity from / in the market to complete the trading necessary
to meet a net fund flow. For example, when the transaction by an OEF is large in size relative
to the market liquidity, part of the transaction may be executed outside the market ‘screen
price’ and ‘move’ the market price because it takes up a considerable depth of immediately
available liquidity (i.e., ‘on-screen’ liquidity).
26
A reasonable input for the estimation of market impact could be to analyse previous
transactions under similar market conditions to compare the difference between the price of
the transaction when the order was placed (i.e., the original market ‘screen price’) and the final
executed price. The difference between screen price and final price after reflecting all execution
costs is sometimes referred to as ‘slippage’. For example, for certain fixed income securities that
do not trade regularly, the screen price is rather an invitation to trade than an executable price.
More generally, there could be a considerable difference between screen price and actual
transacted price in stressed market conditions.
Responsible entities should include significant market impact in the calculation of the cost of
liquidity when calibrating the anti-dilution LMTs. In order to do so, an assessment (e.g.,
slippage assessment) is needed before the sale / purchase is made, taking into account the size
26
See, for example, ALFI Swing Pricing document, update 2022, p.14 at:
https://www.alfi.lu/getattachment/3154f4f7-f150-4594-a9e3-fd7baaa31361/app_data-import-alfi-alfi-
swing-pricing-brochure-2022.pdf.
17
of the transaction, asset class, market structure and the prevailing market conditions.
Responsible entities should use their best efforts to make estimates based on analysis of
previous transactions (in consultation with subject matter experts such as their trading desks)
or relevant market data / models.
Once the market impact is estimated, fund managers should assess the materiality of the
impact and whether it is appropriate to incorporate it in the calibration of the anti-dilution
LMT, according to their own pre-set framework. Overall, the calibration of market impact is
an iterative process due to the complexities involved and the forward-looking nature. It is
expected to be improved over time based on experience gained by the fund managers and
regular reviews to refine the calibration.
Questions for the Public Consultation
7. Have the components of the cost of liquidity, as described above, captured all the relevant
costs that should be considered when calibrating anti-dilution LMTs?
8. How does the cost of liquidity vary across different funds? To what extent could we achieve
a more consistent approach to calibrating anti-dilution LMTs for similar funds, and what is
the best way to do so?
9. How can significant market impact be incorporated in the calibration of all the proposed
anti-dilution tools? Please provide examples.
How Different Anti-dilution LMTs Incorporate the Cost Components
All anti-dilution LMTs adopted should aim to attribute the cost of liquidity to transacting
investors by including the explicit and implicit costs (including any significant market impact)
mentioned in the previous section. In principle, there should not be any caps or restrictions
that prevent anti-dilution LMTs from achieving this objective. Therefore, the calibration of
anti-dilution LMTs should be adjustable when needed, even if a normal range of adjustment
factors / fees is disclosed or set.
By design, the swing factor of swing pricing and the anti-dilution levies are often adjustable on
a regular basis. As such, they are able to incorporate both the more stable explicit transaction
costs and any implicit transaction costs that are contingent on market conditions, including
significant market impact. Therefore, they are useful anti-dilution LMTs for OEFs that invest
mainly in assets with market-contingent liquidity costs. However, responsible entities may
need the relevant expertise and operational set-up to enable their use.
Dual pricing (based on bid or ask prices) or valuation at bid / ask are more useful to OEFs that
invest mainly in assets whose liquidity costs are mainly comprised of the bid-ask spread, as the
fund’s adjusted NAV would already reflect that spread in normal times. However, any
significant market impact or explicit transaction costs, would need to be accounted for
separately, either by additional adjustment to the NAV or via other (anti-dilution) LMTs.
Alternatively, if dual pricing is designed with the ‘adjustable spread’ approach as explained in
Element (i), this would enable dual pricing to be more dynamic and reflect liquidity costs at
prevailing market conditions, akin to swing pricing or anti-dilution levies. That said, this may
require a similar level of expertise and operational set-up for implementation.
For subscription / redemption fees, the liquidity cost calibration tends to be more static than
the other anti-dilution LMTs identified by IOSCO and they are hence more appropriate to
capture explicit transaction costs that are known beforehand and any implicit costs that are
18
stable. Subscription / redemption fees may well be useful for OEFs that have constant or low-
variation transaction costs in normal market conditions. In any case, subscription / redemption
fees should be calibrated conservatively (i.e., set at higher levels) and should allow upward
adjustments in response to changing market conditions, particularly during stressed times, to
reflect the higher cost of liquidity.
27
These attributes are crucial to achieving the objectives of anti-dilution LMTs (i.e., to mitigate
dilution and potential first mover advantage), especially when used by daily-dealing OEFs that
mainly invest in less liquid assets. Otherwise, managers should adopt another anti-dilution
LMT in combination with subscription / redemption fees or adopt quantity-based LMTs or
other liquidity management measures under stressed market conditions.
Questions for the Public Consultation
10. Can all of the components of the cost of liquidity (i.e., explicit and implicit transaction costs
including any significant market impact) be incorporated in all five anti-dilution LMTs as
set out in the discussion of Element (i) above? If not, what are the limitations to doing so
and how would you suggest improving the effectiveness of these anti-dilution LMTs?
11. To what extent can a subscription / redemption fee achieve the objective of addressing the
investor dilution issue and financial stability concern of OEFs by attributing the liquidity
costs to transacting investors? How could it be appropriately calibrated to achieve this
objective?
Disclosed Ranges of Liquidity Cost Adjustment
Some responsible entities may disclose a normal range of liquidity cost adjustment (e.g., a
range of swing factors or anti-dilution levies) to be applied, which may help set the expectation
on anti-dilution LMTs’ effect and may satisfy a regulatory disclosure requirement in some
jurisdictions. While such disclosure is beneficial to investor communication and may also help
reduce the incentive to redeem due to first mover advantage, the range should not be regarded
as a cap or restriction that would prevent anti-dilution LMTs from achieving their objectives
to pass the relevant liquidity costs to transacting investors.
Therefore, where such parameters are disclosed, responsible entities should put in place
mechanisms to allow a larger adjustment beyond the disclosed ranges if necessary to
sufficiently cover the costs of liquidity (including any significant market impact), particularly
in stressed market conditions. An example would be to include a clause in the fund
documentation that explicitly states that the ranges of liquidity cost adjustment could be
exceeded on an exceptional basis.
Expectations on the Level of Confidence and Sophistication of Estimations
As bid-ask spreads and market impact cannot be calculated definitively ex-ante, the overall
cost of liquidity to be incorporated in anti-dilution LMTs is expected to be estimated on a best-
effort basis. Under normal market conditions, the cost of liquidity could usually be estimated
with a high level of confidence. Under stressed market conditions, transaction costs may
27
Conservatively calibrated subscription / redemption fees could be effective in mitigating potential
dilution impact in OEFs. Such practice may also be useful in jurisdictions where there are operational
hurdles to obtaining timely fund flow information for assessing dilution impact to be incorporated in
anti-dilution LMTs.
19
become more unpredictable and econometric models may not be fit for purpose. In such cases,
it would be appropriatee for responsible entities to rely on expert judgement to account for
uncertainty based on available information.
Independently of the type(s) of anti-dilution LMT(s) used, responsible entities should be able
to demonstrate to authorities that their calibration is appropriate and prudent for both normal
and stressed market conditions, taking into account the best interests of investors. This should
be supported by a strong liquidity risk management framework, which should include periodic
back-testing and strong governance.
The degree of sophistication of the estimation is expected to be commensurate with the fund’s
overall portfolio profile, such as fund size, complexity of strategies, types of asset classes and
their market liquidity, investment sectors, redemption terms and conditions of the OEF, as
well as the overall liquidity risk management framework.
28
Responsible entities should also
document how judgement and discretion were applied and review their models regularly to
continuously improve their estimations. The review should take into account experience of
past stress events as well as the results of liquidity risk assessments and stress testings.
Examples of Good Practices
Calculation of Significant Market Impact
Market impact could be calculated for each asset in the portfolio (i.e., bottom-up approach),
using previous transaction data to model the calculation. Back-testing is used a posteriori to
enhance the accuracy of that model over time.
Alternatively, in particular when under stress or when adequate data is not available, the
discounts required by the market in asset sales may be estimated based on a representative
sample of assets which, in the case of fixed income, could be done by type of asset (e.g., public
or private debt, sector, rating, priority level, etc.) or, in the case of equities, could be based on
information from transactions carried out or observed in the market for similar volumes
(especially through block transactions).
In the early stages of adopting an anti-dilution tool, fund managers could start by relying on
simple models to estimate the implicit costs, including the market impact, then gradually move
to more advanced models using their historical transactional data.
When using dual pricing, estimated transaction costs for buying and selling can be applied to
the respective bid and ask valuations, so it should be possible to adjust these to include the
market impact estimates.
Tiered Swing Pricing Approach
Some managers use a tiered swing pricing approach by pre-setting and applying a progressively
increasing swing factor based on the net fund flow amount and market conditions. For
example, when the net fund flow is less than x% of the OEF’s NAV, the swing factor to be
28
For clarity, it may be appropriate for a large OEF or an OEF with a complex investment strategy /
portfolio to use a simple calibration model for their anti-dilution tools, if such a model is consistent
with the OEF’s overall portfolio profile, liquidity risk management framework and local regulatory
guidance.
20
applied is set to be less than y%. When the net fund flow exceeds x%, the swing factor will be
adjusted upward accordingly to an appropriate level (which is higher than y%). The same
mechanism could apply based on market conditions (e.g., market volatility). This approach
facilitates a clear and systematic implementation of anti-dilution mechanisms while taking
proportionality into account.
Questions for the Public Consultation
12. Do you see benefits in a tiered approach to attributing the cost of liquidity by using different
adjustment factors according to net fund flow, market conditions and characteristics of the
funds? Are there any operational difficulties? Any further comments thereto?
13. How could guidance on LMT calibration achieve a fair balance between (i) ensuring
investors have a clear expectation of the cost of liquidity they could be charged and (ii)
ensuring responsible entities have enough flexibility to attribute the overall cost of liquidity
at all times, especially under stressed market conditions?
14. Is the proposed approach regarding ranges of liquidity cost adjustment appropriate? If not,
how could it be improved?
15. Is the proposed expectation on the level of confidence and the sophistication of liquidity
cost estimations appropriate? If not, how could it be improved?
Element (iii) – Appropriate Activation Threshold
Proposed Guidance 4: If responsible entities set thresholds for the activation of anti-
dilution LMTs, those thresholds should be appropriate and sufficiently prudent so as
not to result in any material dilution impact in the fund.
Recognising that OEFs provide investors with the benefits of collective investing, investors in
OEFs should also collectively bear the reasonable costs of investing via such vehicles. As such,
they should expect to share transaction costs as well as other costs of the OEF as long as such
costs are not disproportionate. In this regard, while proper procedures are expected to be put
in place to enable the use of anti-dilution LMTs as part of the ongoing liquidity management,
such LMTs are not necessarily expected to be activated at all times.
It is appropriate for responsible entities to set different levels for the activitation of anti-
dilution LMTs for each OEF they manage. The activation threshold should be set appropriately
and prudently so as not to result in any material dilution impact in the fund if it is set too high,
taking into account factors such as the OEF’s AUM size and portfolio characteristics (including
the investment strategy and asset liquidity), estimated cost of liquidity (as defined under
Element (ii) above), investor profile and historical fund flows. If it is set too low, it can create
unnecessary costs for both transacting and remaining investors and increase the volatility of
the OEF’s NAV.
Relevant LRM Recommendation(s)
Recommendation 8: The responsible entity’s liquidity risk management process must be supported
by strong and effective governance.
Recommendation 16: The responsible entity should put in place and periodically test contingency
plans with an aim to ensure that any applicable liquidity management tools can be used where
necessary, and if being activated, can be exercised in a prompt and orderly manner.
21
For example, some OEFs may adopt a partial swing pricing mechanism, which is activated only
when net subscriptions or net redemptions are greater than a pre-determined threshold. This
threshold can also be based on the cumulative flows registered in a pre-determined period. In
that case, the swing adjustment will be activated the day when the cumulative flows exceed
that threshold. The activation thresholds in respect of net fund flows for OEFs investing in less
liquid assets should be set more conservatively, compared to OEFs investing in more liquid
assets, as less liquid assets usually involve relatively higher liquidity costs.
Another type of partial swing pricing is the tiered swing pricing model, where the OEF’s NAV
is adjusted based on multiple pre-determined thresholds and factors. Depending on the pre-
defined inflow / outflow threshold breached, the OEF applies a different swing factor. OEFs
may use different factors for subscriptions and redemptions or have several differently tiered
factors, depending on the asset class, fund size and market conditions. The tiered approach
potentially reflects the trading curve better by taking into account different potential dilution
impacts when trade sizes vary. In addition, it may help to reduce the opportunity for some
investors to try to ‘game’ the use of swing pricing, as smaller fund flows can also trigger its use.
The tiered approach also facilitates the use of swing pricing during the whole life of the fund
from its inception, and under both normal and stressed market conditions (also see the Box
above for example).
Both approaches can be applied when using other anti-dilution LMTs such as anti-dilution
levies.
Alternatively, an activation threshold can be set in terms of the estimated liquidity cost of the
assets in which the OEF invests. For example, in times of market stress and when that
estimated liquidity cost exceeds a pre-determined level, the anti-dilution LMT will be activated
independently of the total amount of flows.
The appropriateness of the activation threshold for each OEF should be subject to ongoing
review, taking into account changing market conditions. For example, some OEFs may adjust
their activation threshold (even reducing it to zero) during market stress to account for the
increase in estimated liquidity costs and apply the anti-dilution LMT independently of the
amount of flows.
Questions for the Public Consultation
16. What are the appropriate factors to consider in setting the activation threshold so that anti-
dilution LMTs will be activated for any subscription / redemption activities with material
dilution effect? How would you define ‘material dilution effect’? Why and how could it vary
across different funds?
17. Does the use of an activation threshold introduce the risk of trigger / cliff-edge effects? How
could trigger / cliff-edge effects be avoided? Could the tiered swing pricing address the
trigger / cliff-edge effect?
22
Section III – Oversight of Anti-dilution LMTs by Fund / Manager Boards
and Depositaries
Element (iv) - Governance
Proposed Guidance 5: Responsible entities should have adequate and appropriate
governance arrangements in place for their liquidity risk management processes,
including clear decision-making processes for the use of anti-dilution LMTs.
The LRM Recommendations 8, 15 and 16 highlight the importance of governance for an
effective liquidity risk management process, for example by establishing independent
oversight, appropriate escalation procedures, periodic review and proper recordkeeping. The
same applies to the effective use of anti-dilution LMTs. In particular, responsible entities
should regularly review and refine the factors applied in the calibration of anti-dilution LMTs
against the characteristics of an OEF, expected redemption patterns and prevailing market
conditions so that the use of anti-dilution LMTs is effective in achieving the intended
objectives. Responsible entities should incorporate the following guidance into the governance
arrangements of the OEFs they manage.
Governance Committee
The responsible entity should have adequate and appropriate arrangements for internal
governance of the use of anti-dilution LMTs. The objective is to ensure that anti-dilution LMTs
are applied in accordance with the internal procedure and that extraordinary decisions to
reflect changing market situations can be made in a timely and efficient way, especially in a
stressed situation, taking into consideration external stakeholders such as fund administrators
and distributors.
To achieve that, the internal governance arrangements should include at least the following
elements: (i) objective criteria (e.g., activation thresholds) for the application of anti-dilution
LMTs; (ii) methodology, including calibration,
29
of anti-dilution LMTs; (iii) parties involved
(e.g., senior management, risk management, administration, etc.), their respective functions
and responsibilities as well as how these parties should be coordinated; (iv) sources of
information and data used; (v) controls to be carried out (including reviews on the use of anti-
dilution LMTs) and their frequency; (vi) documentation of recommendations and decisions
29
The calibration should set out how all relevant explicit and implicit costs of subscriptions / redemptions
(including any significant market impact of asset purchases / sales) should be taken into account.
Relevant LRM Recommendation(s)
Recommendation 8: The responsible entity’s liquidity risk management process must be supported
by strong and effective governance.
Recommendation 15: The responsible entity should ensure appropriate records are kept, and relevant
disclosures made, relating to the performance of its liquidity risk management process.
Recommendation 16: The responsible entity should put in place and periodically test contingency
plans with an aim to ensure that any applicable liquidity management tools can be used where
necessary, and if being activated, can be exercised in a prompt and orderly manner.
23
made about the use of anti-dilution LMTs and the basis of them; (vii) escalation processes and
(viii) oversight by the governing body.
These arrangements should be commensurate with the portfolio profile (e.g., fund size,
complexity of strategies, types of asset classes, investment sectors, etc.) of the funds under
management and be properly documented. The governance framework should also foresee
adequate approval levels for the internal procedure to ensure there are no unwanted or
inappropriate modifications.
In this regard, an internal governance committee, bringing together the various parts of the
business that have an interest in fund pricing, would be appropriate for most responsible
entities. Such a committee might be dedicated to oversight of anti-dilution LMTs, or it might
have broader responsibilities (e.g., for oversight of all aspects of liquidity risk management or
have responsibility to seek fair outcomes for investors).
The exact composition of any internal governance committee should be appropriate to the size
and organization of the responsible entity, bearing in mind any potential conflicts of interests,
and the characteristics of the OEFs managed by it.
30
If the portfolio manager is not a member
of the committee, the responsible entity should have a process in place to keep the portfolio
manager informed of decisions about the use of anti-dilution LMTs and to require the manager
to give proper weight to them when making investment decisions.
Skills, Knowledge and Data
The internal governance committee should ensure that persons of suitable seniority, who
individually or collectively possess adequate skills and knowledge, are involved in decisions
about the use of anti-dilution LMTs.
The internal governance committee should have an informed understanding of, or reliable data
about, all relevant aspects of the OEFs under management by the responsible entity to support
its recommendations / decisions, for example:
• The liquidity profile of the portfolio of each fund, in particular its exposure to less liquid or
illiquid assets based on the analysis of relevant factors such as volumes traded, days to
trade, valuation certainty and the number of intermediaries that quote bid / ask prices;
• The investor profile of the fund(s);
• Historical and predicted inflows / outflows of cash;
• The current state of the market(s) for the assets held, including current bid-ask spread
information, executed prices and differences with quoted bid-ask prices;
• Assessments of the ability to execute transactions in underlying instruments, in terms of
likely market impact of transacting in average / above-average lot sizes;
• Liquidity stress testing data; and
• Operational readiness to apply or adjust relevant anti-dilution LMTs, both for the
responsible entity itself, its delegates / agents, and others in the distribution network.
30
The oversight arrangements are expected to be commensurate with the operations of the responsible
entity including its size and nature of the OEFs (e.g., their size and complexity) it manages. In some
cases, the oversight may be performed by an individual.
24
Committee Recommendations and Decisions
Recommendations and decisions of the internal governance committee should be appropriate
for each OEF under management, having regard to its individual profile (e.g., investment
strategy, investor profiles, nature, size and complexity) and circumstances. This may result in
different factors / calibrations being applied to different OEFs in different situations.
All recommendations and decisions made by the internal governance committee on the use of
anti-dilution LMTs should be properly documented. For example, the responsible entity
should keep a record of the days on which the adjustment to the NAV was made or should have
been made, the basis and the supporting documentation of the decisions adopted (whether or
not the adjustment factor was finally applied).
Review and Escalation Processes
The internal governance committee should conduct both ex-ante and ex-post reviews on the
use and calibration of anti-dilution LMTs on a sufficiently frequent basis and in a documented
manner, having regard to the frequency of dealing in shares / units. For example, risk
management procedures should set a minimum frequency at which arrangements will be
reviewed. The responsible entity should consider whether to specify, in its procedures,
thresholds for trigger events that would automatically trigger an escalation or cause a review
to be carried out, e.g., a market movement above a certain percentage, or a dealing order above
a certain percentage of fund assets.
Ex-ante reviews could enable LMTs to reflect frequent changes in market conditions, dealing
trends and portfolio investment decisions. There should be an escalation process in
circumstances when liquidity is becoming more stressed, to ensure that oversight
arrangements are promptly stepped up. Contingency plans (e.g., specific operational
arrangements for stressed market conditions) should also be in place and tested periodically
to ensure LMTs can be used in a prompt and orderly manner.
Ex-post reviews of decisions / recommendations against data (i.e., back-testing) could enable
senior management to assess how effective LMTs were in practice and to make informed future
decisions on the use of anti-dilution LMTs (including the calibration of adjustment factors and
whether actual dilution occurred). Such ex-post reviews could include, for example:
• An assessment of the execution quality of transactions in portfolio assets carried out
following a particular dealing point,
31
comparing the adjustment factors (which reflect the
cost of liquidity) with the actual dealing prices achieved with a view to improving estimates
of market impact for future trading;
• An assessment of the implementation of anti-dilution LMTs during the fund valuation
process, for example, by reviewing the causes for anti-dilution LMT related NAV errors:
incorrect swing factors, prices swung in the wrong direction, failure to apply a swing where
the criteria for doing so were met, etc. with a view to improving implementation
effectiveness;
31
Thereby, risk management may be able to leverage from work done and data gathered from other
departments, in particular, best execution checks on trades performed by compliance.
25
• Comparisons of portfolios, pre- and post-execution of significant investor redemptions,
with particular focus on the portfolio’s ‘bucket’ of least liquid assets and the pricing thereof,
to treat redeeming and remaining investors fairly.
Reporting to Senior Management or Board
The oversight process should result in adequate and timely management information being
produced and reported to the senior management / board of the responsible entity. The board
should consider this information and appropriately address any weaknesses that have been
identified.
The content and amount of management information to be produced and the arrangements
for who considers it should be decided in a proportionate way, taking account of the size of the
responsible entity, the characteristics of the OEFs it manages (e.g., their size and complexity)
and the levels of management within its corporate structure. Such arrangements should
however ensure that the most senior level of management explicitly considers liquidity risk
management processes on a periodic basis, making use of relevant management information
when doing so, in order to satisfy itself that the processes are adequate and are operating in
the best interests of the funds and their investors. This might also be done with review reports
from the internal audit function.
Depositary and External Auditor Roles
Where an external third party, such as a fund depositary or external auditor, has duties of
oversight of the responsible entity’s valuation, pricing and dealing processes, they should
periodically review the effectiveness of the processes put in place for the use of anti-dilution
LMTs.
A depositary or auditor may have a role in independently checking the calculation of unit prices
and / or the relevant governance framework, for example to ensure that they are calculated
within parameters set by national regulation. It is not expected that these third parties would
need to carry out additional real-time checks at each dealing point in line with these
recommendations, but rather on an ex-post basis. The review might be done through direct
testing of samples or a review of the responsible entity’s own back-testing controls.
The resulting report of findings should be considered by the responsible entity’s board
alongside internal management information. It may be useful for such reports to be shared
with the responsible entity’s regulator.
Questions for the Public Consultation
18. Do the proposed arrangements discussed above include all the essential elements regarding
governance and oversight arrangements in relation to the use of anti-dilution LMTs? Are
they proportionate to the differing size and complexity of responsible entities’ fund ranges?
19. Please describe any material factors of the governance and oversight arrangements which
have not been included.
26
Section IV – Disclosure to Investors about the Use of Anti-dilution LMTs
Element (v) – Disclosure to Investors
Proposed Guidance 6: Responsible entities should publish clear disclosures of the
objectives and operation (including design and use) of anti-dilution LMTs to improve
awareness among investors and enable them to better incorporate the cost of liquidity
into their investment decisions and mitigate potential adverse trigger effects.
LRM Recommendation 7 sets out guidance on disclosure related to the general LRM process
as well as the design, use and implications of LMTs. Transparency of anti-dilution LMTs is
important to investors and careful consideration is needed on the extent and timing of
information to be provided to them, to strike an appropriate balance between transparency
and the efficacy of the tool. It is important that the level of transparency is appropriate (i) to
help investors better incorporate the liquidity cost into their investment decisions and (ii) to
avoid any unintentional counter-productive effect (e.g., any trigger effects which may lead to
pre-emptive redemptions by investors or any actions taken by investors to game the
mechanism and thereby reduce the effectiveness of the anti-dilution LMTs). This is relevant
both in terms of investor protection and financial stability.
Investors should be given enough information prior to investing in the OEF to enable them to
have a good understanding of the implications of anti-dilution LMTs, which facilitates
investors’ incorporation of liquidity costs into their investment decisions. Investors subscribing
to or redeeming from the OEF should be aware in broad terms of the liquidity profile of the
portfolio and be prepared to bear the liquidity cost associated with portfolio transactions and
passed on to them through the use of anti-dilution LMTs.
The relevant OEF constitutional document (such as the prospectus) should disclose the anti-
dilution LMTs that may be applied, the basis on which they may operate and the objective and
implications of the mechanisms. The disclosure should indicate that the main purpose of anti-
dilution LMTs is to facilitate fair treatment of investors by protecting the ones that remain
invested from bearing the costs generated by the subscription and redemption activities of
others. In particular, the fund documents should set out details of the constituents of the costs
taken into account to calculate the adjustment factor, including the calculation or estimation
basis. The disclosure may also differentiate between the contexts of normal and stressed
market conditions.
Some OEFs disclose a range of adjustment factors, in particular those applicable under normal
market conditions, to facilitate investors’ understanding of the potential implications of anti-
dilution LMTs or to satisfy disclosure requirements in some jurisdictions. This benefits investor
communication and may discourage any potential first mover advantage. However, such a
range should not limit the ability of anti-dilution LMTs in sufficiently passing on liquidity costs
to transacting investors. In this regard, where a range of adjustment factors is disclosed, to the
extent permitted in relevant jurisdictions and OEF constitutional documents, disclosures
should also state that such a range may be exceeded to allow for changes, if necessary, to reflect
Relevant LRM Recommendation(s)
Recommendation 7: The responsible entity should ensure that liquidity risk and its liquidity risk
management process are effectively disclosed to investors and prospective investors.
27
higher liquidity costs in changing market situations. The circumstances under which such a
range may be exceeded should also be disclosed.
Periodic ex-post disclosures of an OEF’s historical use of anti-dilution LMTs may (i) help
investors understand the potential cost implications of redeeming from, and subscribing to, an
investment fund at different points in time; and (ii) enhance the ability of oversight by
authorities or other stakeholders. Such periodic disclosure could be included in the investment
fund’s annual or semi-annual financial statements or websites. Consideration is also required
of what information should be disclosed to investors at the time they submit a subscription or
redemption request and after such a request has been executed.
However, there may be concerns that the disclosure in public reports of the actual adjustment
factors that have been used by OEFs could result in stigma effects or front-running which may
jeopardize the effectiveness of anti-dilution LMTs. For example, a manager may anticipate that
the adjustment factors applied historically will become a selection criterion for investors,
which may incentivise applying an arbitrarily low factor that does not appropriately reflect the
full cost of liquidity. Disclosing a range of thresholds and factors that have been used, rather
than specific figures, or delayed disclosure after application, could help to mitigate this risk.
Examples of Good Practices
Guides and / or FAQs could supplement legal disclosure to provide information in a language
accessible to all investors.
The prospectus disclosures should provide for the possibility to go beyond the disclosed ranges
of adjustment factors under certain, predefined conditions. In exceptionally stressed market
conditions, fund managers may wish to set a temporary anti-dilution factor that goes beyond
the ranges disclosed in the prospectus. In this case, communication should be made to
investors through the usual communication channels, such as the ordinary notice to investors,
through the fund’s internet website, or another way as disclosed in the prospectus.
32
A fund manager may also publish the average swing factors applied for all their funds in their
website in the previous year.
Questions for the Public Consultation
20. Is the ex-ante information described above likely to be appropriate and effective in
explaining the use of anti-dilution LMTs to investors? What other information about
dilution, if any, might be helpful to investors before they invest in a fund?
21. What information can (and should) be disclosed ex-post to investors or the public, and at
what frequency, to enhance transparency without compromising the aims of the anti-
dilution LMTs or creating unintended consequences? Further, how soon should this
information be disclosed to investors?
22. Are there other risks than those described in this section attached to the disclosure of the
parameters used for anti-dilution tools?
32
Based on the CSSF experience of the Covid-driven market turbulence in the year 2020. please refer to
the CSSF’s FAQ on swing pricing available at
https://www.cssf.lu/wp-
content/uploads/FAQ_Swing_Pricing.pdf
28
Section V – Overcoming Barriers and Disincentives to Implementation of
Anti-dilution Liquidity Management Tools
Responsible entities should put in place measures to enable LMTs that are permitted under
applicable laws and regulations to be used promptly and in an orderly manner. However, there
are some challenges and disincentives associated with the use of anti-dilution LMTs. These can
be grouped into two types: negative perceptions regarding the use of anti-dilution LMTs and
market-wide structural or operational barriers to their use.
Negative Perceptions
There may be ‘stigma’ / reputational / commercial concerns as the design and implementation
of anti-dilution LMTs could impact negatively the relationship between managers and their
investors.
Under normal market conditions, it has been raised that OEFs implementing such tools could
face difficulties in attracting new investors for two main reasons:
33
• First, some investors fear that they might be penalised more than warranted by the
imposition of existing liquidation costs. To some extent, certain investors, particularly retail
investors, may also perceive liquidation costs as extra costs and therefore prefer not to
invest in funds implementing anti-dilution LMTs.
• Second, dilution adjustment in fund prices can increase an OEF’s tracking error (when
compared to a benchmark / index) and make the fund prices more volatile.
Thus, such ‘stigma effect’ may discourage an OEF from implementing anti-dilution LMTs if its
peers do not.
Market-wide Structural and Operational Barriers
The second type of barrier relates to costs and operational challenges in the employment of
anti-dilution LMTs:
• Fund managers are likely to face costs to implement anti-dilution LMTs, especially during
the initial design and preparation phase. Besides some ongoing fixed costs, for instance
those charged by fund administrators, auditors or data providers, fund managers may face
upfront costs related to the development of anti-dilution LMTs (model developments, IT
costs to automate processes).
• The use of certain anti-dilution LMTs may require the cooperation of third parties, such as
fund administrators or accountants. These parties may not have the expertise or the
resources enabling a proper implementation of the anti-dilution LMTs. This may also result
in an increase in operational risks, attached to the activation of anti-dilution LMTs: while
these risks could be reduced by automation of managers’ processes, they may still occur
from the activities performed by third-party entities they engage.
• In some jurisdictions, the inclusion and use of certain anti-dilution LMTs, despite their
availability, may face market-wide operational barriers such as the need for substantial
reconfiguration of current distribution and order-processing practices in order to have
33
See the Financial Conduct Authority Occasional Paper 48, May 2019. Available at:
https://www.fca.org.uk/publication/occasional-papers/occasional-paper-48.pdf
29
reliable net fund flow data as an input to the calculation of liquidity cost. Intermediaries
may not communicate fund flows to the fund managers until after the responsible entity
has calculated the NAV of the OEF, meaning that the fund managers may have to determine
the NAV (including whether to apply swing pricing) before knowing the inflows and
outflows with reasonable certainty. The current processes of intermediaries therefore
introduce delay or complexities in implementing anti-dilution LMTs in these jurisdictions.
• Apart from a lack or delay of fund flow data, there may also be a lack of relevant data (e.g.,
reliable bid-ask spread information). These barriers make the calculation of dilution
adjustment factors particularly challenging.
• Operational issues are more likely to surface under stressed market conditions, as fund
managers may face the need to recalibrate their anti-dilution LMTs at a more sustained
pace (for instance, recalculating the dilution adjustment factors and sharing it with fund
administrators).
Potential Solutions
If OEFs adopt at least one anti-dilution LMT and the investor disclosures are enhanced, the
above-mentioned negative perceptions could be alleviated. Some managers are of the view that
proper use of anti-dilution LMTs have potential benefits on the OEF’s performance. It is
expected that the use of these LMTs will become market practice which will result, with time,
in standarisation and automatisation of processes.
34
This could also reduce some of the
operational barriers such as operational costs and operational risk associated with manual
processes.
In addition, responsible entities could adopt other measures to facilitate the greater use of anti-
dilution tools, for example:
• further investor education to raise awareness about the role of anti-dilution LMTs and the
rationale in favour of their appropriate use;
• closer communication with intermediaries and service providers such as administrators in
designing anti-dilution LMTs to enable effective implementation of such tools; and
• ongoing review of the use of anti-dilution LMTs to inform possible improvements to their
effectiveness over time.
Close communication and engagement between responsible entities and authorities may also
help to identify any potential issues (e.g., regulatory hurdles) that may prevent effective use of
LMTs, and facilitate formulation of solutions to such issues.
Nevertheless, market-wide barriers such as certain market structures or lack of appropriate
systems of fund service providers would be more difficult for individual fund managers to
overcome. These would require complex solutions to be implemented by parties other than
fund managers.
34
For example, over the years Luxembourg’s industry body, ALFI, has attempted to standardize swing
practices, enabling its consistent application and leading to a relatively high adoption rate. The 2022
survey is available at
https://www.alfi.lu/getattachment/8417bf51-4871-41da-a892-
f4670ed63265/app_data-import-alfi-alfi-swing-pricing-survey-2022.pdf
30
Questions for the Public Consultation
23. Do you agree with the list of barriers and disincentives identified? Do you consider there
are others that are not covered?
24. In your view, what are the most significant barriers or disincentives to the implementation
of anti-dilution LMTs? What are your suggestions for possible solutions to mitigate or
overcome the barriers and disincentives to the implementation of anti-dilution LMTs?
25. For those OEFs facing significant barriers, what are the implications for their ability to
implement this guidance? Are adjustments needed to the guidance to account for this,
bearing in mind the objective to mitigate dilution for investor protection?
26. Do you have any other comments on any guidance proposed in this document?
