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.