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The European Systemic Risk Board (ESRB) has today published a Recommendation on action to address systemic risks related to liquidity mismatches and the use of leverage in investment funds. The ESRB considered a number of risks that may stem from the increasing role played by investment funds in financial intermediation and could result in the amplification of any future financial crisis. Mismatches between the liquidity of open-ended investment funds’ assets and their redemption profiles could lead to “fire sales” to meet redemption requests in times of market stress, potentially affecting other financial market participants holding the same or correlated assets. Leverage may amplify the impact of negative market movements.
The Recommendation, which takes into account...
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