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EU regulator calls for tighter rules around investment fund risks

The EU should tighten rules governing liquidity and leverage at investment funds, the European Systemic Risk Board has said.

The bloc's financial risk regulator recommended actions to control risk-taking by investment funds, with key risks seen arising from liquidity mismatches and the use of leverage in funds.

Mismatches between the liquidity of open-ended investment funds' assets and their redemption profiles could mean assets are sold at fire-sale prices in times of market stress, to meet redemption requests. This can have knock-on effects to other entities holding similar assets.

Risks from liquidity mismatches can be controlled by adopting "additional liquidity management tools, further supervisory requirements and tighter liquidity stress-testing practices," the regulator said.

A harmonized reporting framework and better use of existing options to set leverage limits can curb risks from leverage, it said.