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The Board of the International Organization of Securities Commissions (IOSCO) today published the report Findings of the Survey on Loan Funds, which describes how the market for Loan Funds has evolved in different jurisdictions and explains how regulators are addressing the risks associated with these funds.
The exercise is part of IOSCO´s on-going effort to build a robust, sustainable system of market-based finance.
Loan funds are a unique type of fund that represents a relatively small share of the global fund industry. Though they are different from traditional funds, they are increasingly becoming an important niche product to finance the real economy and are considered an alternative to traditional financial channels.
There are two types of Loan Funds: A Loan Originating Fund whose strategy allows it to grant, restructure and acquire loans; and a Loan Participating Fund that can acquire and restructure partially or entirely existing loans originated by banks and other institutions, either directly from the lender or on secondary markets. These funds comprise both open-ended and closed-ended funds, and are marketed to both retail and professional investors.
Based on the findings of an IOSCO survey, the report presents the current state of affairs regarding Loan Funds in various jurisdictions and identifies the following risks associated with these funds:
• Liquidity risk: loans are hard to value and, since they are also hard to trade, they are very illiquid assets;
• Credit risks: the risk of a default of the borrower;
• Systemic risks from excessive credit growth; and
• Regulatory arbitrage.
Despite the risks, many jurisdictions consider their general rules for funds to be sufficient to address the specificities of Loan Funds. Therefore, the report concludes that further work on Loan Funds is not warranted at this stage. It notes, however, that IOSCO will continue to monitor this segment of the fund industry with a view to possibly revisiting it for further work, depending on market developments.
