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• A number of respondents preferred limited disclosure of details regarding the calibration of anti-dilution
LMTs and thresholds for use, to prevent attempts by investors to “game the system.”
In addition, the Consultation Report included a section on barriers and disincentives to implementation of
anti-dilution LMTs. Key comments on this section included:
• Most respondents agreed with the identified list of barriers and disincentives, specifically highlighting
high cost of implementation, lack of data, issues with third parties, investor attitudes towards funds that
use specific kinds of anti-dilution tools, and lack of understanding or familiarity.
• They identified market structure and operational barriers as the most significant barriers or disincentives
to the implementation of anti-dilution LMTs. These entailed challenges with fund flow information,
availability of other data, and challenges in operationalising LMTs for third parties such as distributors,
intermediaries, and record keepers.
• To account for these challenges, respondents asked for more flexibility in the application of the guidance,
including recognition that not all funds should be required to have anti-dilution LMTs, and a long
transition period.
RESPONSES TO THE COMMENTS:
With the general support for proposed Guidance 1, 4, 5 and 6, no substantive change is considered necessary
to these points of guidance, other than some clarificatory changes to incorporate suggestions by respondents
and, in respect of misunderstandings by some respondents, to further explain IOSCO’s expectations on
activation thresholds, governance arrangements and disclosure.
The concerns that costs of implementing anti-dilution LMTs might outweigh the benefits due to barriers and
disincentives may be addressed by clarifying that the proposed guidance is intended to focus on mitigating
material dilution and by incorporating more flexibility in the proposed guidance as discussed below.
Regarding the strong opposition relating to the specifics of Guidance 2 and Guidance 3, C5 is adjusting the
proposed guidance as discussed below.
Guidance 2 (Types of Anti-dilution LMTs)
Key oppositions:
Many respondents objected to the proposed guidance that responsible entities should consider and use at least
one anti-dilution LMT for each OEF. Respondents noted, in particular, that anti-dilution LMTs might not be
appropriate for funds investing in very liquid assets with immaterial liquidity costs (e.g., large cap equity funds),
or real estate funds, where the redemption frequency is generally non-daily and other LMTs or measures are in
place (e.g., long notice periods, deferred settlements) and are more commonly used.
Changes:
C5 is revising Guidance 2 to read:
Guidance 2: As part of their liquidity risk management framework, responsible entities should consider and
use appropriate anti-dilution LMTs for OEFs under management (where appropriate as per the explanatory
text set out below) to mitigate material investor dilution and potential first-mover advantage arising from
structural liquidity mismatch in the OEFs they manage.
C5 is also revising the explanatory text to read:
The principle underlying the use of anti-dilution LMTs should be the fair treatment of both transacting and
existing/remaining investors with the objectives to mitigate material dilution and potential first-mover
advantage arising from structural liquidity mismatch in OEFs. Since the dilution risk differs between OEFs, the
application of appropriate anti-dilution LMTs to achieve these objectives may also differ between OEFs.
In this regard, responsible entities of OEFs, particularly those falling into Category 2 (less liquid) as described
under Revised FSB Recommendation 3, should consider and use such tools and should ensure that transacting
investors will bear the costs of liquidity associated with fund redemptions and subscriptions, in order to arrive
at a more consistent approach to the use of anti-dilution LMTs by OEFs. For Category 2 funds, there would be